Star River Electronics Singapore - an Analysis on Cd Rom Manufacturing

Star River Electronics

Star River Electronics Ltd. is a large manufacturer and supplier of CD-ROMS based in Singapore. It was founded as a joint venture between an Asian venture capital firm, New Era Partners and Starlight Electronics Ltd, UK. It has enjoyed a great deal of success in the past, due in large part to their excellent reputation for producing high-quality discs. But due to recent emerge of Digital Video Disks (DVDs) Star River Electronics does need to face some problems. The conditions got worsen with the recent resignation of their former CEO. The new CEO Adeline Koh needs to face these problems. Digital Video Disks (DVDs) are expected to cut into the CD-ROM market in the very near future, but with 5% of their sales coming from this area. Star River needs capital expenditures to increase their capacity in this sector. To finance this expenditure, they can use either debt or equity. Also, a new packaging machine which would cut down on labor and overhead costs has been proposed, and Star River needs to know whether to approve the purchase now, or wait three years, where new equipment would have to be purchased to handle the projected growth rates. Finally, a weighted average cost of capital needs to be estimated for the firm, which will help to answer this question of whether to wait or buy this equipment at the present time. In order to ensure the continuation and financial stability of Star River Electronics Ltd. chief executive officer Adeline Koh must convince the Company's banker, to grant an extension on the Company's loan as the Company stands to improve its performance through DVD production and possibly, the purchase of new packaging equipment.

Currently the financial health and recent financial performance show some areas of strengths and concerns. After, reviewing the income statement sales on average have grown by 13.8%, while total operating expense grew by 15% from 1998-2001. I believe production cost is the main reason total operating expense increased rather administrative expenses whose total growth rate is much lower when compared to production cost (17% vs 13%). Net earnings only grew 13% in the same time period and return on equity was average.Lastly, the Quick Ratio of the company is very small and shows liquidity issues which can be a major concern for investors and lenders. Overall, when evaluating the income statement it seems to show that sales while growing cannot keep pace with operating expenses.

Also, when comparing the company to other there competitors it seems to me that Star Electronics is a lower half of the overall sales growth. Wintronics and STOR-Max who's revenues come from mostly CD or DVD sales have a much higher growth rate over the next five years than Star 15.7% and 21.3%. The companies D/E ratio, was higher when compared to industry peers, signaling that the company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense. Other issues I see when looking at the financial statements are a higher inventories to COGS which was as high as 119.30% in the last year. What it shows is that the inventory that they are creating is becoming outdated before they are able to sell it. Lastly, the current ratio has been growing at a steady pace over the past years which indicate that the company is becoming more able to pay its current obligations.

Next, forecasting the financial statements for the next two years I used the following information and assumptions:

* Sales growth at a 15%

* Operating expenses increasing 13% yearly

* Accounts receivable and inventories would grow by 10%

* Cash would increase by 15%

* Accounts payable and other accrued liabilities increase 5%

* Keep current dividends the same

* Income taxed at 24.5%

* Interest expense is for short-term debt and long-term debt: 6.53%

* The new equipment costs are paid throughout the next two years

* Short term bank loan increased by 10%

See Exhibit 1,2,3

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