Megan Part II

Ahhh... found this very interesting comment on my posting on Megan .

Anonymous said...
Boh tiok boh tiok ;)Well, I beg to differ

1. DVD and CD are different entity compare to pendrive/thumb-drive. DVD meant also for movie & media industries, which thumb-drive can't replace. And DVD storage capacity is ~4GB, way much bigger storage than a thumb drive. These are the things that a thumb drive can't replace. You won't see people "burn" movie into thumb drive and play it in your home DVD player right? I would say DVD is not losing it's edge here, yet is gaining popularity across the world replacing CD. Face the fact, almost every computer nowadays does come with a DVD-R/W drive, is a clear sign that DVD is popular. I was in US during the Thanks Giving week, look at the elctronic stores, many customers are grabbing a 100pcs DVD with them. Few yrs ago, you only see people grabbing CDs.

2. Regarding the huge debt/borrowing from MEgan, it is necesary to expend the current production line capacity to tap for DVD growth. Furthermore, they are into producing DVD that fit the next generation of DVD standard (maybe BluRay or HD DVD).

3. I think Megan earn about 40cents per DVD. Anyone knows it's annual production capacity? Then you can calculate and predict it's future earning...

Megan, still has hope!

Here are some of my differing opinions again. And again, i would like to state that opinions and views will always differ, hence i do not expect anyone to accept my views and neither am i here to insist that my views are totally flawless. Or perhaps, these are just my mere mumblings and bumblings.....

Regarding point 1. Technology is simply ever changing. New and more innovative creations are truly endless. Can a product last forever? Lasting forever equates to the term sustainable competitive advantage that ultimately protects the investor. Ah, this sounds rather complicated but in layman term, the investor would probably be much better if he knows that the product the company sells can lasts for a while. It would be a terribly handicap if the mentioned product has a time frame limit imposed on it. As quoted many times before: "Time is the friend of the wonderful business, the enemy of the mediocare".

Megan Media used to sell storage devices such as the VHS. It has since moved to CD and CD-R and more recently its forte is the DVD and DVD-Rs.

I will admit that i had mentioned previously in a rather cheap manner, a rather cheap shot on Megan, the handiness of the new gadgets like thumb drives.

Yes, thumb drives and pendrives still cannot compete with DVD in areas such as burning of movies.

However, thumb drives/pendrives are but a media storage device. It is small and it is handy and it represents competition to the media storage industry such as discs. And how about devices such as the ipod and mp3 player? Don't it represent competition to disc manufacturers in terms of music storage and playback? Correct me if i am wrong but don't the younger generation find it much more easier to record music into their ipod and mp3 player than burning them on a disc? And isn't it more hip and trendy to be seen with an ipod?

In short, wasn't it just recently that disc storage was the dominant media storage device? Now we have the pendrive/thumbdrives competing for the data storage usage while the ipod/mp3 player competes for the music storage. So is it not correct to say that these competition is a huge concern to disc manufacturers such as Megan?

Which comes to the issue of Megan's loans issue.

Here is a snippet (in blue italics) from the daily Edge dated July 2004.

Megan Media to increase DVD-R production by 13.5m
Megan Media Holdings Bhd can produce an additional 13.5 million units of digital versatile disc recordable (DVD-R) in Malaysia every month from its current local production of 1.5 million units when it completes its expansion plan by the middle of next year.
The company had constructed a new factory next to its existing facility in Subang that could accommodate up to 27 new production lines, Megan Media executive chairman Datuk Adam Harun said.
The new lines cost a total of US$162 million (RM615.60 million) or US$6 million each. Each line can produce up to 500,000 units of DVD-R a month. They will be funded via borrowings, internal funds and cash calls.

As can be seen from the article above, Megan had to incur huge loans to the tune of rm615 million to install new lines in order to produce these DVD-Rs.

Well, this is not a problem if the product has a sustainable competitive edge. What if it doesn't? Remember the issues of new device storages? Who would have imagined the immense popularity of the current ipod craze? Who are we to say that innovation in techonology will not create a new product that might challenge DVDs?

Now back to the issue of Megan's borrowings.

Its last quarterly earnings showed it had borrowings totalled some rm634 million. An increase of rm41.88 million the previous quarter.

Let's put aside the issue of the DVD for a minute.

Let's consider Megan's business for a while.

Sales dropped.
Net profit dropped. (from 21.1 to 12.9 million)
Net profit magin dropped. (current net profit margin is now only 5%)

From a business perspective, wouldn't one be worried?

Then consider this.

Trade receivables increased.
Net borrowings increased by a whopping 41.8 million.
And worse of all, the company's piggy bank is depleting.

How would you rate such a business?

Do you rate this as a sign of a wonderful business?

or would you rate it as a business which is clearly struggling?

Now put the technology issue of the media storage devices such as DVD into perspective.

Is it not a worry?

Then put the debt issue into perspective.

Do you think it was wise for the company to borrow soooooo much money when the company product is sooooo competitive (supported by the fact that net profit is declining at an alarming rate. Worse still, it is said that ASP (average selling price) keeps dropping), a business which has difficulties in collection of debts (seen by the rising trade receivables) and most of all borrowing soooo much money in an industry which is simply too capital intensive? (A company with debts over rm634 million. A debt which is increasing at an alarming rate. )

Can one truly say that this is NOT an issue?

Was it justificable and does it made business sense to borrow sooooooo much money to make sooooooooo little money?

From a business perspective, would you really want to buy a business like this?

Lastly, what's the biggest worry?

What if the DVD is not as laku? Is this not possible in the technology intensive business? Remember the rm600 million loan taken to finance new DVD production lines as mentioned in the Edge article?

The last quarterly earnings has already showed sign of weakness so is it wise to discount this issue?

Don't you think the huge loans represents a huge handicap?

Don't you think investing alone is risky enough?

So why invest in a company which has such a huge handicap?

** edit - here is Megan's nice little pix - many thanks to Charging Bull. You can refer to his blog posting: here