PLATO'S RETREAT (PLATO)

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FEATURED STOCK

It has been a long microcap drought for this newsletter. The reasons are two-fold: the micros haven't been working, until these past couple of weeks, and we decided to be very choosy when it came to financial ratios such as PE, book value and growth rates, in keeping with the more selective nature of the market as a whole. What we have this week for you has all the hallmarks of a big-payoff micro - a tech stock with a growth rate of 50%, a trailing PE of 7, selling at twice book, with Return on Equity of 78%, looking at explosive demand for their products and a series of lucrative JV's - plus it's completely unknown. We are sure you will like this stock a lot. If you're a new reader, I suggest you look at some of our "undiscovered" micro picks form 6-9 months ago and see how well they've done, and how quickly. Happy days are here again...

Score One (SCRO, 78c, BB) manufactures specific application printed circuit boards (PCBs) including flexible double-sided conductive carbon and polyester based PCBs, principally to OEM manufacturers of brand named consumer electronics companies such as Sharp, Canon, Polaroid, Citizen, Sony and Hitachi. The consumer electronics and telecommunication products they supply include hand-held organizers, scientific calculators and mobile phones. According to a recent study "Multilayer PCBs are considered a key growing segment, and output is expected to have an annual 30% increase while revenue is estimated to increase by 25% annually." SCRO is a major player in this field, and the biggest in China.

Score One's wholly owned operating subsidiary, Advanced Technology Holdings International, Ltd. (ATHI), is one of the largest manufacturers of printed circuit boards in China, based in Hong Kong with two manufacturing facilities in Southern China Welcome to fuchang. These production facilities employ approximately 600 people, and they produce three major product lines: flexible circuit boards, conductive carbon circuit boards and standard fixed circuit boards. Advanced Technology has a market-leading 60% share of the flexible circuit board market, i.e. very small PCBs used in the new generation of communications equipment - palm computers, smart cell phones and such - sold to leading brand-name companies, many of which manufacture in China for export. ISO 9002 qualification, which was granted in 1999, also sets the company apart from most of the other manufacturers of PCBs in China.

ATHI, formerly Modern Frame Int'l Ltd., began to expand its productivity in mid-1995 with the increased capacity and relocation to Dong Guan. The R&D Department was established in the same year. In 1996 the company reduced its cost of sales by 40% by launching the double-sided conductive carbon PCB, which now represents 66% of their production vs. the single sided PCB. ATHI further advanced its technology and pared its costs in 1998, with the introduction of Polyester & Polyamine PCB production. They have very few competitors in the double-sided PCB market, and they have no competitors that they are aware of in the conductive carbon PCB market in China. Advanced Technology is the first company to China to bring in conductive carbon technology, which eliminates the welds in the circuitry and uses carbon as a conductive element, which is a much more efficient method to produce the electrical circuit. ATHI is now developing a Multiple Polyamide Inter Connection Board (MPIC) product that is "expected to add $16.5M in revenue and $5.9M in earnings for fiscal year 2001" (if true, that's 30c a share, this year!). Our estimates below only use that forecast for next fiscal year, not this one.

In addition, in October 2000 SCRO began to provide the installation of electronic components on its PCBs as a value added service to its existing customers. This new Circuit-On-Board (COB) product line is expected to retain and attract new customers for its existing PCBs and open a new marketplace for the COB product, which CEO Roy Ho predicted would deliver approximately 20% more business to the company and a substantial increase to net income. We saw the first fruits of this effort with their latest earnings report, showing a 75% increase in net income.

SCRO recently signed the Blue-Tech joint-venture agreement, which is expected to generate around $20M in revenues and $2.65M in net income for the first year of operation, approximately $1.2M of which would accrue to SCRO. That's potentially another 6c a share this fiscal year.

There are a few more things in SCRO's favor: 1) China's recent approval for permanent trade relations could afford SCRO an approximate 17% reduction on its import duty for raw materials used in the production of PCBs, 2) The Asian markets are expected to be the fastest-growing consumer-electronics markets in coming years and 3) China's entry into the WTO could translate into additional growth, assuming expansion of the production facilities.

In 1999 Advanced Technology's revenues were US$22M, and net profit was US$4M. Net income in Q1'00 (ending March 31) was US$1.2M, or 6c a share. For the second quarter ended November 30, net income increased 75% from the prior year to $1.7M or 8.5c a share, while gross profit margin also increased to 39.2% from 22.8% in 1999. Roy Ho, CEO of Score One: "We attribute the Company's increase in net income and gross profit margin to our successful entrance into higher profit margin PCB markets, additional value-added services to our clients during the last two quarters and lower production costs as a result of bulk purchases of raw materials at comparatively lower prices. With the highly anticipated entry of China into the World Trade Organization, we expect numerous doors to open, which will enable us to capture an abundance of new and lucrative business for many years to come.'' The total earnings per share of 9c for the quarter ended Nov.30 is a 50% increase over the 6c reported for Nov.30, 1999. During the previous six-month reporting period ended Nov.30, 2000, shareholder equity appreciated by 64%, to $0.40.

After China signed the World Trade Organization agreement, the foreign manufacturers that have been producing there will have a much easier regulatory and operating environment to manufacture products in China for export. And as China’s electronics manufacturing moves from the more generic into the high technology areas, SCRO expects to take a rising share of the flexible PCB market through continuing their focus on R&D, which has been largely a key to their success in the past. By contrast, a lot of their competitors are still "generic", i.e. they produce fixed non-flexible printed circuit boards for the generic electronic products. Advanced Technology is very bullish about the future of its business.

As we said, book value is 40c a share, and the company is completely free of debt. Our earnings estimate for fiscal 2001, ending in May, is 26c a share and we expect EPS next year to rise to 35-37c, conservatively. That puts SCRO's current multiple at less than 3! SCRO has about 20M shares outstanding, but only 17% in the float. That can be good, if you're looking for a fast mover. The stock trades typically less than 100K shares a day, so buy carefully. But don't expect the stock to remain unknown long.

(CHART)

SCRO has been basing in the 0.55-1.00 range for two months, on low volume. The moving average stands at 90c or so and the next rally should allow the stock to move past it. There is a little supply in the 1.60 area, but no significant resistance is visible until 2.00. The stochastics are already strong, in the 70 range, indicating an impending move. As you can see in October, the stock is capable of doubling in a matter of days, given any decent amount of buying. We suggest you hold on for a couple of quarters, though - you should see the stock in the 2.50-3.00 range by summer and closer to 5 by year-end. For now, use limit orders to buy, because the stock is a bit thin.

This newsletter has received no compensation whatsoever from SCRO.
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