10/20/2006 12:00 am EST
Editor, China Strategy and Asia Edge
Global maverick Robert Hsu can always be
counted on to bring the excitement of international investing to Money Show
attendees. And one of his recent recommendations has all the earmarks of another
potential winner...
"Over the past 10 years, the fourth quarter has been the
best time to own Asian technology stocks, and I expect this year to be true to
form as new products bolster demand that is already stronger than usual because
of holiday shopping.
"I am
recommending Diodes (DIOD
NASDAQ), an exciting tech play.
Before Keh-Shew Lu, a 25-year Texas Instruments veteran, became CEO last year,
Diodes was a leader in "discrete" devices--low-cost, small, single-use chips
that go into computers, cell phones, digital cameras, flat-panel displays, and
other consumer products. Last year Lu pushed Diodes into new markets, more in
the direction of analog chips, which command a higher average selling price than
digital chips and sport a better growth margin.
"Its unique niche is standard to low-end, commodity-like
analog chips, which are a lot cheaper to produce and can be assembled faster and
cheaper. With two chip assembly plants in China, Diodes benefits from China's
low-cost, large-scale production capabilities.
"Diodes can use the same materials to assemble and
package both its analog and discrete chips, which are still
a significant part of the business, resulting in lower costs than many of its
rivals.
"Diodes serves over 150
customers worldwide, including Honeywell, LG, Logitech, Motorola, Quanta
Computer, Samsung, and Hon Hai Precision Industry, the parent company of one of
our other holdings, Foxconn (FXCNF).
"Diodes reported strong growth in its latest fiscal year.
China and Taiwan comprise the bulk of net sales, contributing 32% and 28%,
respectively, followed by the U.S. at 25% and Europe, where it is actively
looking to expand, at 3%-4%. Over the past three quarters, earnings have risen
from 10% to 41%, while sales grew from 8% to 63% in the past four quarters. I'm
expecting earnings to grow an impressive 40% in 2006, 24% higher than in 2005.
"Diodes recently raised its
third-quarter revenue guidance about 12%. Given all of this good news, DIOD has
doubled in the last year. It has a trailing P/E ratio of 30. However, when you
factor in projected earnings growth, its forward P/E ratio is an attractive 18.
"The stock reached a 52-week
high in mid-September on increased revenue guidance before pulling back on
profit-taking. I believe it is consolidating at current levels before making its
next run in this seasonally strong fourth quarter.
"Buy DIOD under
$45.
I'm targeting 35% gains in a three-month timeframe."
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