Grande ambitions

Most retired accountants look forward to a life of golf and peace and quiet. Not Christopher Ho. Instead, he decided to forego retirement, and start a business in the late 1980s.

"I am an accountant, a beancounter," says Ho, sitting in a room decked with plasma TVs, stereos and MP3 players. This is a meeting room in Grande Holdings Kwun Tong HQ in Hong Kong and these are the some of the products of his listed company.

It is a company that many investors have barely heard of, but will know a lot more of soon. At a recent UBS conference designed to highlight "Little Acorns", Ho presented his company and was afterwards told by UBS bankers that with a HK$4.2 billion market capitalization they had been mistaken to classify Grande as a little acorn at all.

This is an acorn that has its eyes firmly set on one day being included in the Hang Seng Index, and following in the footsteps of other growth companies such as Yue Yuen Industrial.

Indeed, like Yue Yuen and Techtronic (which we profiled last December when its stock was HK$7 and is now around HK$22) it is a Hong Kong company with a superb China story to tell.

And as with FinanceAsia magazine's cover story in September - which profiled families and their dividend income -Ho epitomizes the very same trend. "Dividends are the most important thing to me," says the man who owns 302 million of Grande's 402 million issued shares.

"We have declared dividends every year since 1990," he says, "otherwise I have no means to survive."

He also concurs with another conclusion of the article, that there is nowhere better than Hong Kong to be an owner-entrepreneur. Thanks to the tax regime (there is no dividend tax) 82.5 cents out of every dollar flow straight to an owner's pocket. "We pay out about one third of our profits as dividends and that will continue. If we make more money we declare more dividends. The company has a 3-4% dividend yield."

Indeed, in the most recent first half results, dividends rose to 10 cents a share from 9 cents. First-half profit was up, hitting HK$141 million from HK$117 million in the first half of 2002.

CLSA has a year-end profit forecast for the company of HK$466 million and expects the 2004 number to be even higher at HK$620 million.

The company was founded as an original equipment manufacturer, but what has sparked the company's phenomenal recent growth has been its move into branded goods and to focus very heavily on building those brands in China.

Like Techtronic, its model has been to buy old, but distressed, Japanese brands, restructure them, and then refocus production in low-cost China.

The company moved into branded goods in 1999 and has bought three Japanese brands: Akai, Sansui and Nakamichi. Akai is probably the best known and occupies a middle market position in much the same way as Sansui. Nakamichi occupies a premium position with a long and distinguished history in acoustics and electronics.

The other brand Grande owns is at the other end of the scale completely. Kawa is a TV manufacturing brand in China that goes head-to-head with TCL, Konka and Chang Hong. The strategy here is to target rural buyers with a guarantee that the TV will have a 100% turn-on rate (ie it will work) - quite an important consideration when you cart a TV a 100 miles from a city back to your village.

The company has 12,000 employees and as Ho notes: "Our product range goes from large plasma TVs and home entertainment systems to MP3 players."

The greatest growth is in branded goods, but the OEM division is still a key part of the business. Here the company has key clients such as Toshiba, Samsung, JVC and Sharp and has focused on higher-end products. It recently consolidated its OEM factories in China into a single facility at Zhongshan.

The company stopped making low end hi-fi components for Sony to focus on more profitable opportunities such as LCD projectors and DVD recorders. Grande is the sole source supplier, for example, for Toshiba in LCD projectors.

China is the key to the business's success. Put simply, you can make 100,000 LCD projector units a lot cheaper there than in Japan. "We are benefiting from customers shifting their production from Japan and elsewhere into China," says Ho, who adds, "Costwise, Japan cannot compete with China. Companies will continue to shift into China. It is a big problem for Japan. Unions will be up in arms. We may even see labour unrest situations similar to Korea."

Ho refers to his OEM business as a bread and butter area. It is a steady business, but with limited growth as the likes of Toshiba and Sharp basically dictate the margin.

Hence the move to being a branded goods producer himself and therefore being able to improve his margins. This has been a key year for that strategy since the restructurings of Akai and Nakamichi were finally completed in early 2003. That done, the firm has been particularly aggressive about building retail distribution for them globally, but particularly in China.

"By the end of the year you will see 6500 outlets for our branded products in China," says Ho. "That's from zero two years ago."

At the moment the company's branded goods division gets roughly one third of its sales from the US, one third from Europe and the remainder in Asia. However, Ho says China is where the real growth will be: "Yes. We will double our turnover in China in 2004, and then will double it again in 2005. China will be 20% of our branded distribution, at least. China is a very big market for us."

"The market in China will offer unique opportunities that cannot be duplicated anywhere else. That's why we are building brands. People in China are very brand conscious. They like foreign brands. They think they are higher quality. However, because of import duties, Sony and Toshiba are selling at a very high price. We are in a unique position. We are in the middle. We don't pay import duties, but are perceived to be a Japanese brand. We control Japanese companies, which in turn have established subsidiaries in China."

Ho, who was a former senior partner at Ernst & Young, says an area of phenomenal growth in China will be in flat panel TVs - the core product being 42 inch plasmas. Grande sources the panels from Panasonic and then does its own design (Nakamichi's design has a similar flair to Bang & Olufsen).

"Worldwide sales of plasma this year are 700,000. Next year it will be 1.6 million. So there is a tremendous increase in the demand. It will be a very big product in China - for the high end consumers. Of the 1.6 million sold, China will comprise 160,000 - making it the second biggest market after the US, if the European economy stays flat."

The company uses Shu Qi, the well known Taiwan-born actress, to endorse its products in China, and will also use Hong Kong actor Louis Koo next year. In India, it uses Bollywood stars to promote the Sansui brand and sponsors the Bollywood Awards Ceremony. It will launch a Miss Sansui beauty contest in China next year.

If emerging markets such as China, India and Russia offer the best growth potential, the company still has a strong focus on core consumer markets such as the US.

"Other than the period of the Iraq war, I feel the US economy has been quite strong, especially in the fourth quarter. We have been shipping like mad to the US. We went into a deal with Circuit City to sell a plasma at $2999, and shipped 10,000 of those."

Ho says the move into the branded goods area has transformed the group's margins and will continue to do so.

"We are looking to double our turnover in branded distribution in the next two years. With the explosion in demand for flat panel products, I think that will give us a unique opportunity. The margin in these products is much better."

Margins have grown from just over 1% to what he predicts will be 4% by year end.

Other news that should interest investors is the financial services division. This unit has the franchise to do money changing in Hong Kong's MTR and at key spots such as the Lo Wu border crossing. This he says is "non-core" and will be sold before the end of the year.

Clearly this is a company with a story to tell, and given much of it is China-related it should be a story investors are interested in hearing. In order to improve the liquidity in the stock, Ho authorized CLSA to place 15% of the company's stock in a $76 million placement this summer.

However, to avoid dilution Ho put in $25 million of his own money to subscribe to the offering. Clearly, this is a story that he firmly believes too.