Are You Aware Of An Important Risk with This High-Flying Stock?

Electronics manufacturing services provider Valuetronics Holdings Limited (SGX: BN2) has been a great stock to own for investors over the past two years.

From a price of S$0.295 on 18 March 2014, the company’s shares are now 51% higher at a price of S$0.445. The gain looks even stronger when compared against the 6% decline that Singapore’s stock market bellwether, the Straits Times Index (SGX: ^STI), has suffered in the same period.

But while Valuetronics has been a rewarding stock to own these past two years, current and prospective investors in the company may want to be aware of an important risk that the firm’s facing – the risk of high customer concentration.

In Valuetronics’ fiscal 2014 (fiscal year ended 31 March 2014), it clocked HK$2.43 billion in total revenue. But, just two customers had collectively accounted for over HK$1.54 billion in revenue that year. Put another way, Valuetronics had depended on merely two customers for nearly two-thirds (62%) of its sales in fiscal 2014.

There was a slight improvement in fiscal 2015. In that year, three customers had contributed a total of HK$1.66 billion in revenue, representing 68% of Valuetronics’ total haul of HK$2.43 billion. But, a case of depending on just three customers for two-thirds of your business can hardly be considered as being diversified.

Customer concentration risks can be painful when they bite. The U.S.-listed sapphire glass manufacturer GT Advanced Technologies is a great example of why that’s so. The company had to file for bankruptcy back in late 2014 when its products couldn’t meet the requirements of iPhone maker Apple Inc. At that time, GT Advanced Technologies had depended on Apple for the majority of its revenue.

To be clear, I’m not saying that Valuetronics’ business is in any imminent grave danger. The company still has a great balance sheet, with HK$682 million in cash on hand and zero debt.

But, I consider Valuetronics as facing a high level of customer concentration risk given that it is counting on only a handful of customers (you can literally count its major customers using only the fingers on one hand) for way more than half its business. That’s something investors may want to keep in mind when looking at the company.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing owns shares in Apple Inc.