Strengths
- Good numbers and better than Brady’s (better NPM, ROE, ROA, div yield, lower PE than industry)
- Barriers to entry – stringent requirements; strong relationship with clients (Seagate, Maxtor, HP, WD) and clients want reliability; established track record
- Integrated capabilities and production facilities
- 70% repeat customers
- Management holds around 40% of company
- Experience of management – chartered company through many crises including the recent Thailand flood; would have experienced many challenges over the years and learnt from it
Weakness
- Heavy dependence on HDD sector (56% in FY2010. Out of this, 36.5% – die-cut parts)
Opportunities
- RFID
- Merger and acquisition – can acquire smaller companies and can also be acquired by bigger boys (founder owns 32% of company and it 62 years’ old); IR said private equity funds have approached Adampak but management not selling as right price not quoted; can be acquired by bigger boys like Brady which wants to expand into Asia
- Expansion into non-electronics sector
- Rise of emerging economies (China and India) – need for cheaper HDDs even if SSDs take over
- Samsung & Seagate merger and WD & Hitachi merger – able to provide for more players
Threat
- HDD decline – but SSD has huge limitations like high volatility and servers still need HDD
- USD risk – over long-term, this will be naturally hedged
- Natural disaster in Thailand – Seagate’s and WD’s shipping forecast has increased though.
Mar 02, 2012 @ 11:04:53
I would beg to defer on your last “strength” point – The bargaining power of Adampak vs its suppliers (3M) and customers (seagate and WD; I’m listing the major ones only) should be quite weak.
3M certainly don’t need Adampak as its converter as there would be lots of people lining up to take over the latter’s position if needed. Furthermore, the sales from 3M to Adampak in the overall scheme of things is negligible, but Adampak NEEDS 3M products if their customers want 3M.
Seagate and WD certainly have backup suppliers if they needed them. On the otherhand, 50% of Adampak’s sales goes to these 2 giants. Adampak would need to kow tow to them, not the other way round.
Mar 02, 2012 @ 11:23:02
Hi weeysim,
Thanks for visiting my blog and your comments!
You have a point there. It’s quite true that the suppliers/buyers can leave anytime they want if Adampak doesn’t do a good job. However, having worked with Adampak for so many years and having built a sustainable relationship and after knowing how each other work, there’s a small strength in there. Seagate and WD can change suppliers anytime they want as they are the giants but if Adampak is doing a good job and the rest of the suppliers are not really tested, I don’t think the HDD players would want to go around wasting resources and sourcing for other suppliers. Furthermore, the cost of sales with regards to die-cut and labels for the HDD players is very small. It’s not wise to spend more money looking for other suppliers if Adampak didn’t screw up big time.
Mar 07, 2012 @ 20:45:53
Hi,
the relationship between Adampak and Seagate / WD may be good, but when it comes to the crunch what happens? Consider this – If adampak is making losses due to competition, can it raise its prices for Seagate and WD to reduce its losses? If adampak is the only one raising prices, Seagate/WD definitely not agree.
Conversely, if seagate / WD is making losses (due to a downturn for its industry for e.g.) can it demand adampak to reduce its prices and share the pain? If adampak refuses, can seagate / WD turn to its backup suppliers (I am quite sure they won’t rely only on 1 supplier source) for lower prices? If adampak refuses (and its competitors accept) do you think they will ever get back into “relationship” with seagate/WD?
Mar 08, 2012 @ 12:27:36
Hi weeysim,
Thanks for your questions. It makes me think more of Adampak and question my beliefs.
What you have said is very true. This is the risk businesses carry if it has one or two major customers that contribute to a significant portion of the revenue. If things turn sour, the business might be hit. HDD contributes to almost 50% of Adampak’s revenue. I’m sure of this 50%, a huge percentage is contributed by WD/Seagate. Having said this, Adampak has been supplying to WD/Seagate for so many years already. It’s a long-term supplier-customer relationship. Thus, there’s a small premium attached to this. I know anytime things can turn sour anytime, just like in any relationship, but with a prudent and competent management, things can be averted.
Competition wise, there are two other competitors, namely Brady and Zephyr. Brady is based in US and Zephyr is a private company in Singapore. You can read up more on competition at http://joe-ong.blogspot.com/2008/08/analysis-of-adampak-pte-ltd.html. The blogger has done a comprehensive analysis of Adampak.
If there’s a downturn in the HDD sector, just like the recent Thailand flooding case, the whole industry will suffer including the suppliers. This was what happened last year and was reflected in Adampak FY2011′s results. As the major customers take a hit, Adampak will take a hit too as there isn’t much supply. I don’t think Adampak will refuse to reduce its price. It will just have to reduce the price to prevent losing a major customer. But downturns and upturns are part of a business cycle and one must be willing to sit through such cycles when investing in businesses. During a downturn, if the fundamentals are still intact, one can invest more at a lower price.
Having said all these, the positivities overweigh the negativities so Adampak looks like a viable business.
Pls keep this debate going as I would like to hear ur views. Thank you.
Anyway, are u invested in Adampak?
Mar 08, 2012 @ 21:41:53
Using Michael Porter’s framework, Adampak’s competitive advantage in terms of its suppliers and customers is weak. We can talk relationship all we want (many businesses like to boast about their relationships), but at the end of the day, who call the shots in a relationship? Probably the one with lesser to lose.
The risk in a business where it has only few large customers is not merely the financial impact that may happen if the business relationship turns sour. Even if relationship appears fine, the huge customers will simply have more leverage in any bargaining. And have no doubt, they will use this leverage.
Mar 09, 2012 @ 09:34:12
Hi weeysim,
I overlooked that part. Thanks for pointing out the flaw in my thinking. Cheers!