what happened to...., page-5

Following ETC's announcement of its MOU with the Vietnam Road Administration Ministry in October 08, the VRAM was apparently inundated with competing bids from 'smart card'/RFID-based drivers license manufactures. The VRAM has had to sort through these competing bids, which has put the announcement for the final contract back many months. (In retrospect, ETC may have made strategic mistake in publicly announcing details of its Vietnam MOU so early, because this has allowed competitors to come back to the Vietnamese Road Administration with some knowledge of what ETC has proposed). During the period early this year when the VRAM was sorting through competing bids, ETC management stopped most work on the Vietnam drivers license contract and focused their efforts on the start of printing for the Malaysian Visa and Chinese Gas tank contracts.

Now that the latter two contracts are well under way, management are again working with the VRAM (and have been so for the last two months). Apparently, there are still some outstanding issues that the VRAM wants ETC to satisfy, but ETC have told at least two analysts that they expect to win the contract because other bidders cant compete with Nexcode on security and cost. ETC management have given one analyst a time frame of roughly 6 weeks for an announcement on this contract to be made. Presumably, ETC management have had similar discussions with the larger institutional holders.

Regarding the Malaysian drivers license contract, this contract is at a more preliminary stage than Vietnam. In fact, it is my understanding that no firm contract has even been announced by the Malaysian MOT. Rather, there has just been talk that such a contract is 'in the works'. The problem is that Malaysia has an existing '1 card does all' (that was supposed to include DL) called MyKad, but MyKad has significant security and cost problems, and there is an internal debate within the Malaysian govt as to whether to pump more money into MyKad, or scrap parts (or all of MyKad) and opt for better technologies such as Nexcode. Apparently, the Malaysian MOT doesn't want anything to do with MyKad, and is looking for a 2d bar code based card with a cheap, highly secure, easy to use reader: hence their interest in Nexcode.

ETC management have informed two analysts that they are confident of eventually winning a Malaysian drivers license contract, but, to the best of my knowledge, have yet to give any details as to the likely timing. My best guess is that this contract is still 6 months away.

One final point I would like to clear up. There has been some talk, including recent media reports, that ETC's profit forecasts are dependent upon winning more contracts. This is largely false. Providing the current consulting, Malaysian visa, and chinese gas tank projects proceed smoothly, ETC expect to generate profits this year in the general region of $48mill, $100mill in FY10, and $117mill in FY11 (as per the Lodge partners report). In other words, even if ETC don't win another single contract over the next 2 years, their existing contracts alone (assuming there are no hick-ups) will see the company post significant and increasing profits.

As I see things, ETC is already a solid, long term buy on the basis of contracts already won. The large Vietnam and Malaysian drivers license contracts will simply be more icing on the cake.