While people in the US has been focusing on Lehman’s ‘unexpected’ loss and its ‘unexpected’ need to raise capital, Vietnam’s stock market has declined more than 20 days in a row.  Since there’s a trading band of +/- 2% on the index, the index decreases ~1.5% every day since May.

When stock market started to decline since last Oct. for Vietnam, a lot of people instead went to speculate on the real estate market.  Now with interest rate very high, and talk of currency devaluation intensified, the real estate market has been frozen as well.  In short, the banking system, currency, and economy of Vietnam is under severe strain, and Asian countries are talking about the Vietnam market every day now.

As mentioned before, I believe the situation presents great investment opportunities.  Nonetheless, it’s very dangerous to try catching a falling knife, but close observation and monitoring of the situation will one day signal reversal of the trend, leading to good investment opportunity.

While people in the US are debating how high inflation really is, Vietnam’s inflation is >20% compared with last year in both April and May.  To combat high inflation rate, interest rate in Vietnam is now ~14%, and while the real estate frenzy in Vietnam maybe cooling down, the stock market has essentially crashed.  Basically, the stock market tripled its value from 2006 to late 2007, but then lost 60% of the value from late 2007 till now in about half a year.  The market Domestic investors are now disgusted and totally given up with the stock market, and it’s mainly foreign institutions that are buying up shares now.

The situation may seem dire in Vietnam, and there are in fact many risks involving its banking systems, sovereign debt repayment, currency fluctuations, etc., but I believe this is mainly the growing pain of a developing country forging forward towards capitalistic economy.  Hot money has flowed too quickly into the country, and domestic investors are new and inexperienced in the capitalistic market,  and caught up in the frenzy.  Nonetheless, Vietnam’s companies are still growing  30-50% annually, and Vietnam is attracting manufacturers from all over Asia to open shops there.  Also, as China’s labor costs keeps rising, many manufacturers are migrating from China to Vietnam, since Vietnam’s cost is still very cheap in comparison.   Vietnam also has a very young population in comparison with its neighboring countries, and Vietnamese is a hard working crowd.

As domestic investors flee the Vietnam stock market, I believe this is an excellent chance for foreign investors to step in and buy this dip.  Nonetheless, it’s not easy for foreign investors to buy Vietnam’s shares, and there’s not a lot of investment vehicles to easily invest in Vietnam (e.g. there’s no single focus mutual fund or ETF on Vietnam).

To read more on news in Vietnam, the following link is a good start:

http://english.vietnamnet.vn/news/

Since the last post about Sony, Sony’s stock had a swing between $40/share to $50, basically going from ~$43/share to $50/share and dropped to $40/share and now back to $50/share today.

As mentioned, the reason I believe in Sony is because Blu-Ray had become the de facto standard of HD storage media. With this, I believe Sony will continue to see improvement on its Playstation unit, and the future benefits will be huge. However, one should realize that Sony is more than just Playstation, and there are many factors affecting Sony’s results:

• Sony/Ericsson cell phone unit - it’s not doing well lately, and will likely see further squeeze from RIM/iPhone, etc.
• TVs - It can be losing ground to lower price competitors, but Sony seems to be addressing this.
• Computers - no major short-term or long-term challenge in this area other than Apple, but this is nothing new.
• Sony’s Media - its picture and music unit seems to be doing ok.
• Others - Sony has many other businesses such as Sony Financial Holdings (an insurance company). In today’s environment, one never knows how a financial company will do.
• Exchange rate - Sony’s recent plunge to $40/share coincides with Yen’s appreciation over USD. USD can certainly plunge again, although lately it has firmed up a bit.

Therefore, beware of the various factors when one considers Sony as an investment.

A lot of financial news happened in the EDA industry since the last post.  PDF Solutions have reported worse than expected results, and the stock fell from $5.6/share to $4.3/share on April 15.  Volume spiked, analysts downgraded, and hopes were dashed.  Cadence posted on April 23 Q1 loss instead of profits, but its stock was not affected much.  Magma dropped a bomb on itself on May 1, offering grim fiscal Q1 guidance, and its stock promptly dropped ~30% from ~$9.5/share to ~$7/share.  Therefore, Magma has unwillingly joined the ‘cut-in-half’ EDA crowd.

While PDFS had dropped a lot after their earnings announcement, its stock has since climbed steadily back, and is currently at $5.22/share.  CDNS is now at $11.12/share, and MENT is at $10.14/share.

Of Cadence, Mentor, PDF Solutions, and Magma, I have participated in the equity play in Cadence, PDF, and Mentor, although I am already out of Mentor since the put I wrote never got exercised.  The reason I invested in CDNS and PDFS are as follow:

Of Cadence, I am basically assuming CDNS is experiencing its normal business cycle of over-aggressive accounting to under-delivering, its normal swing between $20+/share to ~$10/share.  I believe that CDNS will still stay in business for a long time, and will continue its all-you-can-eat model, and once in a while will gobble up smaller EDA companies.  Of PDF Solutions, I think it will experience difficult business environment since almost their customer base is shrinking, but has intrinsic value worthwhile to speculate that it has the potential to pop on better business environment, or possible acquisition.

Also, as crazy as it may sound, if one is to speculate on EDA stock price cycle, now is a good time since you can now ‘diversify’ on multiple ‘cut-in-half’ EDA stocks, instead of having concentrated risk on just one, which can always turn out to have specific product/business/execution problems and end up sinking the specific company.  This way, it’s more a strategy to speculate on an industry rather than a single company.

Of the other two ‘cut-in-half’ companies, Mentor and Magma, I am actually hearing good things on Mentor about its Sierra Design unit.  I will actually consider buying Mentor, or write more puts for the stock.  For Magma, it has fallen to a point attractive enough for an acquisition, just for the big guys to take out a competitor and be able to firm up pricing a bit.  However, as many in the industry can tell you, Magma will be hard to swallow due to management mentality, and it can either be a difficult acquisition, or a much higher premium has to be paid, making acquisition not as likely at this point.  Nonetheless, I have considered writing puts on the stock, but the volume is just too low on the options, with the bid/ask price too high.  In any case, I will monitor the stock and may pull the trigger at some point of time.

* Appendix - diversification

When upper management sells their own company’s stock, they always use ‘diversification’ to justify it.  If that’s really true, people should sell at both good and bad times, and timing of their own stocks should not matter at all.  However, consider the following, and observe the timing:

• Mentor insiders ‘diversify’ until Aug 07, ~$14/share.
• PDF Solutions insiders ‘diversify’ until Feb 08, ~$8/share.
• Magma insiders ‘diversify’ until Feb 08, ~$10/share.
• Cadence insiders are true to the diversification strategy, still ‘diversifing’ in Feb 08 after its stocks plunged.  And for this, I am considering writing options on CDNS.

ANSYS (ANSS) annouced that it would acquire Ansoft (ANST) for $832 million on March 31, a 30% premium over ANST’s closing price the previous day.  ANST has ~$100 million revenue, and thus the acquisition is done at ~8x sales.  It seems to me a rather pricey acquisition, and I question the synergy behind it.  But since it’s not my money I’m paying up, it does not really matter to me.

Therefore, in less than two weeks, two EDA companies (SYNP and ANST) will vanish from public trading soon.  10 years ago, there were more than a dozen publicly traded EDA companies, and now I can count them with one hand.  If someone had aspired to be a financial analyst covering the EDA industry, it would have turned out to be a really bad career choice.

Just saw the news that Synopsys bought Synplicity for $227 million, a 50% premium over its closing price of $5.3/share.   So the number of publicly traded EDA companies continue to shrink, and thankfully there’s no more rumor of private equity firms taking EDA companies private (as if they would!…).

I actually bought SYNP a month ago ~$4.15/share, but sold it a few days ago to lock in a 25% return.  After the selling, I was wondering why SYNP was holding on to its price while all markets were tanking.  I guess SNPS now gives us the answer.   Could have made much better return if waited a few more days, but then again, if I can predict that well, I would rather having bought puts on Bear Sterns early last week!

A lot had happened in the past week: USD tanked, Bear Sterns was essentially given away to JP Morgan, and Fed just cut another 75 bps this morning. Nonetheless, none of these really changed the picture of the EDA sector much, so that will be another blog entry to come. For now, let’s turn the focus back on the EDA sector.

In my last entry I mentioned PDFS enterprise ‘cash value’. Please understand that they are not just ‘cash’ but consist of ‘cash’ cash, short term securities, and account receivables. However, one of the things that people found out these days is that ‘cash’ may not be what it seems. Also, if your clients go bankrupt, it would be hard to get any money on your receivables. Nonetheless, I don’t think PDFS is in any liquidity crunch, and none of their clients are fly-by-night semiconductor manufacturers (as if there’s any now given how costly it is to build or maintain a fab), so EVEN if they have ‘non liquid’ cash right now, their cash position should be fine as time pass.

Also, in my last blog entry, I mentioned only the enterprise ‘cash’ value for PDF stock, but mentioned nothing about their earnings. This is actually deliberate, as I am not counting on PDF doing any great business in the short term or even long term. That does not mean that earnings are not important. They are actually very important. It’s just that I don’t want to paint a picture that makes the readers of this blog believe that I have clear ideas of what their earnings can be or will be. That’s a question that’s best for readers to find out themselves. To do that, one can get analysts’ reports, or do their own analysis from the company reports. Nonetheless, people should remain highly skeptical of what analysts write, as they are mere projections, and projections only. One can pick up all kind of analyst reports on Bear Sterns in the past few months, and I can guarantee you that none of them ever projected it to be $2/share. Similarly, if you read analysts reports when PDFS was at $15/share a little more than a year ago, I sincerely doubt that they projected that PDFS would be at ~$5 today.

With that said, why would someone invest in PDFS then? For me, it’s the enterprise value that gives them the buffer to weather the current rough environment in the semiconductor industry, and the expertise they have in the DFM area. As long as they can stay in business, and that DFM is getting more important for designs, and that PDFS management do not make too many mistakes (like blowing their cash away), PDFS has a fighting chance to see its stock goes higher. I don’t know how high it can go, but I would not be surprised to see it going to $7/share (~40% higher than today, but still a tad below its rapid drop from $8/share to $6/share in one day). Of course, it can also go a lot higher, or cut to its enterprise value (or much below that). However, I think the chance for it to go higher is good, although I have no idea when that will be, or what will trigger that.

This brings us back to the other two cut-in-half stocks, CDNS and MENT. These two do not have as good as the ‘enterprise cash value’ as PDFS, but they have product franchises that people are unlikely to switch in the near future. CDNS has place-and-route, simulation, and many more, while MENT has great DRC and PCB franchises.

CDNS, along with SNPS, are currently the only two vendors that can provide an all-you-can-eat product mix, all the way from front-end design to back-end design and beyond, for semiconductor vendors. People might criticize this pricing model, but this is a great model for CDNS and SNPS to shield themselves from more agile and innovative smaller companies, while in the same time allowing them to purchase smaller rivals. In a downturn, this pricing model is particularly attractive to large clients and hurtful for smaller EDA vendors. Engineers might love smaller vendors with more innovative tools that make their jobs easier, but in a downturn, unless those tools can provide very significant differentiation and benefits, it would be very difficult to justify purchasing a new tool versus getting something from the salad bar that CDNS or SNPS provide which might not be the best tools, but could somehow get the job done.

The all-you-can-eat model is a potent model that only CDNS and SNPS have, and that defines the intrinsic value of CDNS. Also, CDNS has gone through this cut-in-half cycle many times now, and if the rumor was true that they depleted their revenue due to their talk with private equity (I have no idea if this was true, and have no way to verify it), they can gradually build that up again although it will take time.

Like PDFS, I have no idea how CDNS can turn things around or what they would do for growth. However, at ~$10/share, I think it could be a good bet that they are close to a bottom, and if semiconductor industry becomes healthier, they can at least ride the tide and get a better pricing, like ~$12.5 (mid way between the one day drop from $15 to $10). Again, it can go much higher, or much lower, and only time will tell.

The last cut-in-half stock is MENT, and to me it’s the hardest to assess the risk/reward potential. MENT has a great DRC franchise which provides it with steady and growing revenue. However, MENT had not been able to grow much more beyond that in the last few years. Also, unlike CDNS, it cannot offer a buffet style product mix, which is a disadvantage in the eyes of large semiconductor clients. Furthermore, if the DRC franchise somehow comes under furious attack, MENT does not have many other growth areas to buffer the blows it may suffer. From that perspective, the risk is therefore potentially higher for MENT.

Nonetheless, the DRC had been a great franchise, and there’s no imminent threat that I know of that MENT currently faces which might displace Calibre in the near term. MENT also has many smaller products which have potential, although they do not currently provide as much meaningful revenue and growth like DRC for MENT. In addition, financially it does not have nearly half of the stock price in cash as PDFS does, and it has quite a bit of long term debt as well. (Not that these should matter at all if MENT continue to excel in business)

The strategy I have for MENT was to write puts at $7.5, which means that I am fully willing to hold MENT if it ever falls below that. This allows me to get the premium from the puts, but does not give me the upside if MENT stocks continue to advance. It will be much better if I can write puts at $5, but I don’t get any good premiums from that, though. I am however, quite comfortable with the current strategy.

An upcoming part IV will conclude the EDA subject.

Since my last entry on EDA, Synopsys has reported earnings, and the results was quite good. Compared with the cut-in-half crowd, i.e. CDNS, MENT, and PDFS, this should show that the problems for the cut-in-half crowd were mostly company related, not a dramatic change in the industry. There might be many structural problems for the EDA industry, but it does not just suddenly get worse and overwhelm all candidates in the industry. If that’s the case, Synopsys would not be able to escape it.

Almost all the cut-in-half companies had experienced the ‘cut-in-half’ phenomenon before, and so industry followers should not be too scared by this, and as long as there’s no sudden change to the entire industry (e.g. silicon has just been replaced by a new material, and all design methods have changed; or semiconductor companies suddenly form a new consortium, and vow not to buy software from EDA vendors anymore; or a new startup is on the horizon and will nullify the entire design methodology from front-end to back-end, and affect all the cut-in-half crowd, etc.), the companies could just be repeating their previous cycles.

The EDA industry has many problems, with the biggest problem in growth of the entire industry revenue base. However, this is an industry that won’t go away as semiconductor companies are not keen on setting up their own shops to replace the EDA vendors. Except for the FPGA vendors, it just does not make sense for most semiconductor companies to have an internal EDA group to design software so customers can use their chips. Even for FPGA vendors, they depend greatly on EDA companies to help them design their own chips.

For the cut-in-half crowd, the most interesting one to me is PDFS. In time of crisis, the best thing to look into is the balance sheet. In this case, PDFS has a strong balance sheet. Ignoring all else, and using only total current asset to account for its asset base, and subtracting all liabilities, PDFS has > $60 million. Assuming the absolute worst case that PDFS will not get any revenue (i.e., $0) in subsequent quarters, and assuming that it will spend the same amount as in last year, PDFS will still be able to survive for at least 1 more year. Basically, the amount is ~$2.25/share in (cash - liability), assuming no significant dilution in the future. Current share price is $4.81.

Another intrinsic value for PDFS is the DFM expertise it has. It’s always difficult to find good employees, no matter if you are looking for a design engineer, a nurse, or a maid. However, in the DFM space, even mediocre workers are hard to come by. There’s just not many people who has experience in semiconductor manufacturing yet wanted to work in the EDA industry. And while the DFM space has promised for quite some time that the time will come for great need for DFM but yet not there, it’s certainly closer to that point than a few years ago with 45mm fab now being built and operated. This pool of experienced employees are therefore of good value to large EDA vendors such as CDNS and SNPS, or to semiconductor equipment companies, or semiconductor manufacturing companies.

While it’s easier to establish a floor price for a stock, it’s much harder to say when is the best time to sell. That highly depends on how much risk one is willing to take, the overall environment at that time, and what one think is the fair value for a stock, and that’s different for different people of different personality and faith.

Some will argue that PDFS will go lower, or we can wait until the stock price comes down to the cash value of the stock, as it happened with Numerical Technologies before, and it’ll be better to buy at that time. That may very well be, but it does not have to be either. In hindsight, we will all be able to say what’s the best price of entry, but without knowing the future, it will only come down to whether one wants to take the risk or not. I am currently averaging down, but only time will tell if that’s a right decision.

My last blog entry stated that Sony had won, but I really wasn’t expecting Toshiba would surrender so soon.
Toshiba to announce HD-DVD pull-out

Sony stock has now risen ~2-3% in Japan after the news, but there are still plenty of skeptics abound on PS3.

Sony’s PS3 Outsells Microsoft’s Xbox 360–But Will That Last?

Most of the skeptics focused on a few things:

• PS3 are bought mostly for playing Blu-ray disc
• PS3 does not have any hit title

However, as I mentioned, there are tons of obstacles for new HD content storage media to emerge, but there are practically no obvious barrier of entry for PS3 to have a hit title.

In addition, now that all media companies will promote Blu-ray along with any newly released DVD, Sony does not have to be the only company to promote Blu-ray, and can divert more marketing dollars towards PS3 gaming promotion.

Every few years we get presented with the opportunity from various EDA companies as their stock prices got cut in half.  This is particularly prominent for Cadence, as every CEO since Joe Costello have seen their stock price drop in half in a matter of a few months.  The difference, of course, was that Joe Costello then went out and bought millions worth of Cadence stock with his personal account, a phenomenon that I have not seen since.  To me, that’s leadership.

However, usually these stocks drop in half due to individual company’s problem.  What’s different this time is that a few of them got cut in half in the approximate time frame of each other, as in the case of Cadence, Mentor Graphics, and PDF Solutions.

We never know how these companies will do in the future, and I do not know why people bought at twice their prices of today, maybe from recommendation of some analysts who put out ‘buy’ or ‘overweight’ at the time and now downgraded them to ‘hold’ or ‘underweight’.

I do not know if people will ever push them back to their prices where they once were, or if people are going to dump more of the stock.  However, from the trading pattern of PDFS on Feb 13, someone was trying to liquidate their position early in the morning, and sent the stock down promptly from 5.4 to 4.6.  However, after that selling, the stock quickly recovered to 5.2 and above.  It seems to me that some weak hands are now shaken out of PDFS at least for the time being.

I am now long on most of these ‘cut-in-half’ stocks, or have written puts with the intention to buy the stocks if it hits that price.  Why I do this?  That would be another blog entry.