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One of the most common question I get is “How do you generate your investment ideas?” The truth is ideas can come from the most unexpected places. This is a story of how I come about one of my ideas and the source of my idea is actually my children.

Toys R Us has been a regular visit for me since I have become a parent. As I purchase more and more toys for my kids, I realized that there is a brand that I have been buying quite regularly as most of its toys are quite educational in nature and very well thought out.

The brand is Vtech, a little bit research done on the company, I realized that Vtech is actually an Asian brand, manufactured by Vtech Holdings Ltd (303:HK). And the initial interest has begun.

A quick check on the company, I found that the company has been quite a consistent grower, consistently generating higher revenue, higher income and most importantly, higher free cash flow for the past five years.

The company actually has more than the toy manufacturing business, it is the world largest manufacturer of residential phones and owns a large contract manufacturing business.

I know what you are thinking, residential phone? Really?

Yes, but its residential phone is its legacy business and the company has since diversify away from the dying residential phone business and moving into more niche products such as conference phones, hotel phones, baby monitors and other specialized telecommunication products. In a way, it shows that the company is willing to change with times and not a dying enterprise. Its contract manufacturing is stable and growing.

From an investment point of view, the company is giving a dividend of more than 6% at the time of my research and I do feel the dividend was very sustainable. Overall, the company seems like a very stable slow grower with increasing dividends in the future.

There you have it, besides leaving Toys R Us with a new Vtech toy, I ended up investing in Vtech Holdings as well. I envision the day when I will buy more toys for my kids or even grandkids with the dividends I will get from Vtech Holdings in the future.

There you have it, idea generation can come from anywhere, the key is to stay alert and be open to new opportunities lying around. So the next time you go for a holiday and stay in a hotel with wonder bed and ate in the restaurant opposite the hotel for dinner. Remember to check the website that you book your trip, the airline you took, the hotel that you stayed in, the brand of the bed and the name of the restaurant, I am sure one or more of them are product and services of listed companies.

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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Stanley Lim’s personal capacity and do not in any way represent those of his employer and other related entities. Stanley Lim owns Vtech Holdings Ltd

4 COMMENTS

  1. Interesting article Stanley, thank you.

    I’d be keen to know what you believe Vtech’s competitive advantage is over rivals, and whether you believe this to be enduring.

    Cheers
    Paul

    • Hi Paul,

      Thanks for the reply, as for the competitive advantage of Vtech, I think the main key factor here is distribution.
      Because the toys and phone industry is a very competitive one.
      At the most basic, the standard of their toys is definitely among the top brands such as leapfrog and Hasbro. That is a comforting factor, meaning that their toys business is not as easily threaten as compared to weaker brands.
      However, Vtech has established great sales and distribution channel all over the world, both for its toys and phone business, thus this is where the value of the company is. It can easily channel more products into its network to boost its revenue and profit.
      This is actually what the company has been doing with their R&D efforts, they actually launch a large number of new products every year.
      Lastly, because the company has 3 segment of business, it provide some kind of stability for its revenue compared to pure play companies.
      Thus overall, I am quite comfortable the 6% yield is sustainable.
      Hope that answers your question.

      Stan

      • Thank you Stanley for the additional insight.

        I was investigating another Chinese manufacturer Sitoy Group (Code 1023) and noted that they believe that they have competitive advantages of:
        * High level of craftmanship in production
        *Well developed supply chain and logistical facilities,
        culminating in reliable and quality products being made and distributed.

        Perhaps some of these characteristics also apply to Vtech Holdings ie. supply chain and logistical (cost) advantages of being well established and of large scale?

        Cheers
        Paul

        Disclaimer:
        I own neither Vtech Holdings nor Sitoy Group

        • Thanks Paul for the information on Sitoy, I will try to take a look into it and maybe write something on it soon.
          Cheers

          Stanley

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