12 insider buys so far this year…
This small-cap stock has all the earmarks of a winner!


by Siu-Yee Ng

It’s no surprise that many companies are exporting jobs to Asia. The labor pool is well educated and, most importantly, cheap.

Companies are outsourcing their billing and accounting services to places like the Philippines and India. And of course many companies manufacture their goods in China.

What I’ve found this month is a company with a market cap of only US$41 million, trading below book value, and with an increase in trading volume that has made the stock hit a 52-week high. These are all signs of a winning stock.

Its manufacturing plant is located in China. Worried about the impact of SARS? It shouldn’t be a factor. Manufacturing in China remains robust, and with a 78% market share for its products in Great Britain alone, this company looks ready to explode.

Christmas in July?

Zindart Limited (ZNDT:NASDAQ) is a turnkey manufacturer, which means it does everything for its customers—component outsourcing, product engineering and design, model and mold making, manufacturing, assembling and packing the product. Its one-stop shop helps increase efficiency while lowering costs for its customers.

Zindart is known for its high-quality die-cast, injection-molded and paper products. These isn’t just rinky-dink stuff. If you’ve ever seen the company’s die-cast collectibles, you’ll know that they require a significant degree of engineering and hand assembly expertise to produce.

The company also manufactures collectible holiday ornaments and toys and, through its acquisition of Hua Yang, hand-made books, specialty packaging and other paper products.

Okay, we’re just now heading into summer, isn’t it too early to position ourselves for the holiday buying spree? Not at all. Let me tell you why.

You see, Zindart’s products are not only for the holiday season. Collectibles appeal to nostalgic baby boomers year round. And don’t forget they make books that children just adore. Think about the number of parents that gave in to their children’s tantrums… not just at Christmastime.

Zindart’s operating divisions include Corgi Classics Limited, Hua Yang Printing Holdings Company and Zindart Manufacturing. Corgi Classics Limited produces a high quality line of die-cast replica items sold in the United States and in the United Kingdom, where Corgi holds a 78% market share.

Money to burn

You’ve most likely seen Zindart’s products before. It manufactures a wide range of die-cast metal collectible scale model replicas of contemporary automobiles, such as Mercedes Benz, BMW, Corvette

and Mustang; trucks, planes, farm implements and construction equipment, like John Deere and Caterpillar; and classic cars, like the 1932 Cadillac, the 1964 Aston Martin and the 1956 Ford Thunderbird.

As a matter of fact, I recently bought one for my father-in-law, whose new hobby is collecting old car replicas.

These replicas, which come in various scales from 1/12 to 1/64 the size of the original product, are medium- and high-feature products that must meet exacting standards. Many of the die-cast replicas have complex designs that require high-quality workmanship and decorative details, with pad printing of up to one hundred imprints.

The most complex of these models incorporate up to 200 parts. Zindart’s die-cast scale model replicas are sold through hobby shops, collectors’ clubs, car and equipment dealers, toy and gift stores and other channels.

Replicas typically cost between US$150.00 and US$180.00 for high-feature products, between US$25.00 and US$60.00 for medium-feature prod-

ucts and between US$5.00 and US$10.00 for small-scale products.

Many of these products have nostalgic appeal for adult consumers. And some, especially the automobile replicas, have attracted a following of collectors and are traded on a secondary market.

For example, Zindart annually turns out several products for which molds were made between five and ten years ago. These include the ’70 Ford Mustang, ’68 Pontiac GTO, ’67 Corvette convertible, Ford Roadster, Allis Chalmers Model “C” Tractor and John Deere Skid Steer Loader.

Competitors as customers?

The toy making industry is very competitive. But Zindart has a pool of cheap and skilled labor. And many of its competitors know this.

 With the increasing popularity of NASCAR racing, Mattel has introduced a successful NASCAR Hot Wheels line called “Pro-Racing.” In March 1997, Zindart started a business relationship with Mattel to produce the Hot Wheels Pro-Racing and Legend Series. This line of 1/64 scale model replicas are highly detailed, requiring 40 to 60 imprints per car body.

Other renowned designers and marketers of die-cast collectibles like Revell-Monogram and SWG of Germany have been customers since 1987 and 1989, respectively.

Revell-Monogram is a leading worldwide designer and marketer of plastic model kits and die-cast replicas of airplanes, automobiles and ships marketed under the “Revell” and “Monogram” brand names. SWG is one of the largest designers and marketers of die-cast replicas in Germany, sold under the brand name “Siku.”

Zindart also manufactures action figures and miniature figurine play sets for various designers and marketers like Hasbro and Galoob Toys. These products, primarily sold as toys, include miniature replicas of popular television and movie characters like Thomas the Tank Engine & Friends and various Disney and Sesame Street characters.

There’s a developing trend in the toy industry. It’s not the quantity but the quality of the toys that will make a company profitable. To achieve profitability, many toy makers are moving into the sale of higher-priced toys. And this requires high-quality and detailed manufacturing skills like Zindart’s.

Precious moments

Another big customer is Hallmark. Known for its greeting cards, Hallmark has successfully diversified into collectible holiday ornaments and giftware products. Hallmark relies on Zindart to manufacture many of its Keepsake Ornaments, a variety of Christmas ornaments, holiday-themed pieces and other giftware both in die-cast zinc alloy and plastic.

Hallmark’s Keepsake Ornaments also include freestanding decorations such as die-cast replicas of pedal cars. These products require highly developed hand spray-painting skills and attention to quality in order to meet Hallmark’s exacting aesthetic and quality requirements.

Now we know Zindart makes ornaments for Hallmark during the holidays. But if you’ve been in a Hallmark store you’ll have noticed many other collectibles depicting characters from storybooks and films like the Wizard of Oz, Star Trek, Pocahontas, the Flintstones, Peanuts, and various American icons like Lou Gehrig and Babe Ruth.

Setting up shop

Zindart’s Hua Yang Printing Holdings Company produces high-quality books and specialty packaging.

Book products include “pop-up” books, novelty books and board books. Pop-up books are books containing specially die-cut, folded and glued paper pieces. When the book opens, they pop out in three dimensions. Most of these books are targeted at children, but a small segment also caters to the adult and young adult markets.

Novelty books, sometimes referred to as “books-plus,” have extra or unusual elements that make the book interactive or provide play value. Examples include an electronic device, a noisemaker, plastic, vinyl, textured or scented materials, or a plush toy. Kids just love this.

Board books are usually die-cut or punched into an unusual shape, thus requiring hand assembly. These books are made of heavyweight, stiff, durable paperboard and usually targeted at the children’s market. Often board books come in a set of three or more titles and are grouped together in a hand-assembled slipcase, sleeve or custom-made box.

Specialty packaging includes paperboard and E-flute (corrugated) boxes and, to a lesser extent, blister cards and inserts. Box packaging often requires advanced printing techniques, including six and seven color printing, hot foil stamping, spot or total coating, varnishing, embossing and lamination.

In the pipeline

This company has been around since 1978, and had its IPO back in 1997. After an impressive run, the stock price has fallen. But it looks as if the market is turning around.

For the third quarter of 2003, revenues were US$29.2 million and net profit was US$0.7 million.

That’s an increase compared to the same period last year.

Revenues for the nine months ended December 31, 2002, were US$91.3 million, with net profit of US$0.8 million. Revenues were slightly down from the previous period. But instead of posting a net loss as in the previous nine months, the company was able to post a profit.

People are still spending, and when the market recovers further, so will Zindart’s share price. This should be an exciting year for Zindart. We’ve all heard about the world’s most popular game, Cranium. Both the Hua Yang and Zindart Manufacturing business units will be responsible for making the deluxe edition of Cranium due out this fall. Cosmo, a team building game, is scheduled to launch this summer. And a new children’s treasure-hunt game, Cranium Cariboo, will be on the market in time for Christmas.

This company has winning elements that are triggering a buy signal now. Zindart has seen 12 insider buys since the beginning of the year. It has a low float. This may pose a liquidity problem for some, but should resolve itself when the stock price rises and attracts more attention. You’ll want get in before everyone else.

Zindart recently hit a 52-week high on increased volume. These are all bullish signs for the stock.

Zindart Limited (ZNDT:NASDAQ) is a buy under US$5.