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10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 1 of 54
Leveraging on “D” ecosystem
We initiate coverage on the Electronics Manufacturing Services (EMS)
sector with an Overweight call, not merely as a beneficiary from the
trade diversion but also to ride on the rapid expansion of their common
key customer – a global renowned household appliances brand. ATA
IMS (BUY, TP: RM1.80), is our preferred sector pick, as we expect the
group to continue charting strong growth on the back of capacity
expansion coupled with margin enhancement from further vertical
integration. We also initiate coverage on V.S. Industry (BUY, TP: RM1.60)
given the group’s diversified customer mix and strong ability in
securing new contracts, which makes it a prime beneficiary of trade
diversion. Elsewhere, we highlight 3 other companies, namely SKP
Resources (Non-rated, RM1.08), i-Stone (Non-rated, RM0.18) and
MTAG (Non-rated, RM0.42), which form part of the “D” ecosystem.
Riding on the key customer’s innovation & growth prospects
V.S. Industry (VS), ATA IMS (ATA), and SKP Resources (SKP) are the three
largest home-grown EMS players in Malaysia (with a combined market
cap of US$1.3bn), serving a common key customer. We expect the sector
continue to grow on the back of rising demand for the key customer’s
premium household appliances, underpinned by: i) a growing middle class,
ii) improving standards of living in developing countries, and iii) rising
demand for high-tech household appliances. The key customer is able to
enjoy a lower cost of production with its entrenched ecosystem in
Malaysia and will continue its investment in technology which should
benefit the Malaysian supply chain.
Window of opportunity from trade diversion
With the escalating US-China trade tension and rising cost of manufacturing in
China, most of the EMS players have received increased enquiries from
multinational corporations (MNCs) looking to shift or diversify their
manufacturing base away from China, and are in discussion with their
prospective customers for potential new opportunities.
Initiate with Overweight rating
Sector PE valuations have de-rated over the past 2 years due to lowered
growth expectations. Trading below its historical mean PER of 13x on
CY2020E, the sector’s risk-reward is looking favorable in view of the: 1)
growth upside of a major global household appliances brand, of which the
three collectively produce >50% of the key customer’s global production; and
2) positive impact from trade diversion which could positively enhance the
sector’s CY18-21E core net profit CAGR of 12%. Downside risks: i) key
customer risk; ii) reliance on foreign labor, iii) competition risk, iv)
downturn in household appliances industry, and v) economic slowdown.
Peer Comparison
Source: Bloomberg, Affin Hwang forecasts* Note: Based on closing prices on 9 October 2019
EMS Peers Rating Sh Pr TP Upside Mkt Cap ROE (%) DY (%)
(RM) (RM) (%) (RM m) CY19E CY20E CY19E CY20E CY19E CY20E CY19E CY20E CY19E CY20E CY19E FY20E
ATA IMS* BUY 1.45 1.80 24.1 1,746.3 14.3 12.9 14.8 10.6 24.9 8.9 8.7 7.6 2.5 2.2 19.0 2.5
V.S. Industry* BUY 1.26 1.60 27.0 2,314.0 13.8 12.6 8.9 9.5 (2.0) 6.0 7.5 6.4 1.4 1.3 10.8 3.4
SKP Resources N/R 1.08 N/R N/R 1,350.2 12.5 10.5 1.5 20.6 4.0 14.4 6.9 5.7 2.2 2.0 17.3 4.3
P.I.E. Industrial N/R 1.37 N/R N/R 526.1 13.7 11.3 (11.6) 21.2 3.5 9.7 6.2 5.5 1.2 1.1 9.0 3.6
Average 13.6 11.8 3.4 15.5 7.6 9.7 7.3 6.3 1.8 1.7 14.0 3.5
Peers within "D" Ecosystem CY17A CY18A CY17A CY18A CY17A CY18A CY17A CY18A CY17A CY18A CY18A CY18A
i-Stone Group N/R 0.18 N/R N/R 226.0 18.5 15.3 107.1 17.6 40.0 11.9 22.2 17.4 n/a 3.7 19.1 n/a
MTAG Group N/R 0.42 N/R N/R 286.3 10.0 8.5 48.3 18.1 19.3 0.9 5.8 4.9 n/a 1.8 20.2 n/a
Average 14.2 11.9 77.7 17.9 29.6 6.4 14.0 11.2 n/a 2.7 19.7 n/a
Core P/E (x) Core EPS Growth (%) Rev. Growth (%) EV/EBITDA (x) P/B (x)
Sector Initiation
EMS
Overweight (Initiation)
Absolute Performance (%)
1M 3M 12M ATA 7.4 -9.9 -14.7 VS -2.3 8.6 -24.6 SKP 1.9 -15.0 -15.0 PIE 24.5 0.0 -14.2 ISTONE 8.8 n/a n/a MTAG n/a n/a n/a
Relative Performance to KLCI (%)
Source: Bloomberg, Affin Hwang
Stock Summary
Name Rating Mkt cap
Price TP
(RM) (RM) (RM)
EMS Peers ATA IMS* BUY 1,746 1.45 1.80 V.S. Industry* BUY 2,314 1.26 1.60 SKP Resources N/R 1,350 1.08 N/R P.I.E. Industrial N/R 526 1.37 N/R Peers within “D” Ecosystem i-Stone Group N/R 226 0.18 N/R MTAG Group N/R 286 0.42 N/R
Source: Bloomberg, Affin Hwang forecast* Note: Based on closing prices on 9 October 2019
Chua Yi Jing (603) 2146 7546
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Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 May-19 Jul-19 Sep-19
ATA VS SKP PIE ISTONE MTAG
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 2 of 54
Table of Contents Sector Initiation
EMS industry growth prospects The three largest listed EMS players in Malaysia
Rising demand for household appliances
Window of opportunity from trade diversion
Key customer’s shifting of headquarters
Introducing “D” ecosystem in Malaysia
Valuation and recommendation
Key investment risks
Company Section
ATA IMS Bhd (Initiation)
Investment Thesis Financial Analysis and Forecasts
Valuation and recommendation
Company background
V.S. Industry Bhd (Initiation)
Investment Thesis Financial Analysis and Forecasts
Valuation and recommendation
Company background
SKP Resources Bhd (Non-rated)
i-Stone Group Bhd (Non-rated)
MTAG Group Bhd (Non-rated)
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10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 3 of 54
EMS industry growth prospects
EMS industry – backbone of every prominent brand
The Electronics Manufacturing Services (EMS) industry has played an integral role in the development and growth of manufacturing industries worldwide. EMS companies function as strategic partners to original equipment manufacturers (OEMs) or brand owners by providing a full range of services which include contract design, testing, manufacturing, final assembly, order fulfillment, and repair and aftermarket services.
Rising trend towards outsourcing – a boon to EMS
The rising trend and growing preference towards outsourcing production
has enabled OEMs and brand owners to focus on their core competencies
(such as R&D, brand building, and sales and marketing), and to maintain
their competitive advantage in the face of rapidly changing market
conditions, global competition and technological advances. By using the
services of EMS providers, OEMs and brand owners can gain access to
the latest design and engineering capabilities, process knowledge and
manufacturing know-how without having to make substantial capital
investments. Outsourcing to EMS providers also helps OEMs and brand
owners to reduce costs by turning fixed costs into variable costs.
A win-win solution for brand owners and EMS providers
Case in point, Zodiac Pool Solution, a leading supplier of automatic pool
cleaners and pool products, shut down its plants in France and Australia in
2014 and 2015 respectively after outsourcing orders to V.S. Industry and
being satisfied with the latter’s competitive pricing and quality, where
market rejections rate are much lower. Currently, VS is the sole
manufacturer of Zodiac’s robotic pool cleaner in the world and has started
producing other pool cleaning-related products such as chlorinators. This
strategy has proven to be beneficial to OEMs and brand owners, and has
helped the EMS market size to expand at a rapid pace in recent years.
To grow at a 7-year CAGR of 8.1% over 2018-2025
As global outsourcing continues to gather momentum, EMS providers are
set to witness a substantial increase in business opportunities in times to
come. According to Adroit Market Research, the EMS market is expected
to grow at a CAGR of 8.1% during the 2018-2025 period and reach
US$847.1bn by 2025 (Fig 1).
Fig 1: Global EMS market size to grow at a 7-year CAGR of 8.1%
Source: Adroit Market Research, Affin Hwang
489.7529.6
572.7619.4
669.8
724.3
783.3
847.1
0.0
100.0
200.0
300.0
400.0
500.0
600.0
700.0
800.0
900.0
2018A 2019E 2020E 2021E 2022E 2023E 2024E 2025E
US$ bn
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 4 of 54
The three largest listed EMS players in Malaysia
The three largest homegrown EMS players in Malaysia
V.S. Industry (VS), ATA IMS (ATA) and SKP Resources (SKP) are the
three largest home-grown EMS players in Malaysia listed on the Main
Market of Bursa Malaysia. They are also the three closest peers in their
industry. Among the three, VS and ATA are two of the top 30 largest EMS
providers in the world (by revenue size), based on the Manufacturing
Market Insider’s (MMI) 2018 list. VS and ATA were ranked 23rd and 30th
respectively in 2018, competing against the likes of Taiwan’s industry
giants Foxconn and Pegatron.
Fig 2: Excerpt of the MMI Top 50 EMS Providers in 2018
Source: Manufacturing Market Insider (MMI), Affin Hwang
Serving a common customer – a prominent global brand
The trio are based in Johor, serving a common key customer within the “D”
manufacturing ecosystem. Their single largest key customer, a global
renowned household appliance brand (the actual name cannot be
disclosed due to the companies’ commercial arrangement with the key
customer), is best known for its floor-care products and other household
appliances. It is reported that the key customer is among the world's top 4
floor-care brands by units sold. With sales of its products in over 80
countries and regions, this customer has registered strong financial
performance since 2010 with an 8-year revenue CAGR of 22%, bolstered
by growing demand for its high-tech household appliances.
The MMI Top EMS Providers in 2018 Region of origin
1 Hon Hai Precision Industry (Foxconn) New Taipei, Taiw an
2 Pegatron Taipei, Taiw an
3 Flex Singapore
4 Jabil St. Petersburg, FL
5 Sanmina San Jose, CA
6 Wistron Taoyuan, Taiw an
7 Celestica Toronto, Canada
8 New Kinpo Group New Taipei, Taiw an
9 Universal Scientif ic Industrial Co Shanghai, China
10 Plexus Neenah, WI
11 Venture Singapore
12 Benchmark Electronics Angleton, TX
13 Shenzhen Kaifa Shenzhen, China
14 Zollner Elektronik Group Zandt, Germany
15 SIIX Osaka, Japan
16 Fabrinet Pathumthani, Thailand
17 Integrated Micro-Electronics, Inc Laguna, Philippines
18 UMC Electronics Saitama, Japan
19 Kimball Electronics Group Jasper, IN
20 Sumitronics Tokyo, Japan
21 Asteelf lash Neuilly Plaisance, France
22 Ultra Electronics Greenford, UK
23 V.S. Industry Berhad Senai, Malaysia
24 Pan International Taipei, Taiw an
25 Kaga International Fremont, CA
26 Neo Tech Chatsw orth, CA
27 VTech Communications Hong Kong
28 Videoton Holding Székesfehérvár, Hungary
29 Scanfil EMS Sievi, Finland
30 ATA IMS Berhad Johor Bahru, Malaysia
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 5 of 54
Focus on vertical integration and more automation
The EMS players have actively been in expansionary mode, pursuing
further vertical integration and more automation to improve efficiency,
profitability and success rates. ATA and SKP have both started printed
circuit board (PCB) assembly and battery pack assembly divisions
following indications of demand by their key customer. In addition, ATA is
looking to add another 2 capabilities in-house, namely wire harness and
brush bar assembly, which it currently purchases from third-party suppliers.
Low margin due to nature of business…
The trio typically record low to mid-single digit core net profit margins, with
SKP leading the pack, followed by VS and ATA. The discrepancy in
profitability is mainly due to their customer mix. Based on our estimates,
ATA derives over 80% from its key customer and hence derives a lower
margin as compared to SKP and VS, which have a lesser reliance on their
key customer (SKP: over 70%, VS: over 50%) (Fig 3). While VS has the
least reliance on the key customer, its net margin is lower than SKP’s as
profitability is impacted by its China operations. VS’ Malaysia operation’s
pre-tax profit is higher than SKP’s.
… but still higher than most of the regional peers
While the net margin for the trio of 4-6% may appear low, it nevertheless is
still ahead of their regional low-mix/high-volume (LMHV) peers of 1-2%.
The margin for high-mix/low-volume (HMLV) peers such as Venture Corp
and Fabrinet are not comparable to LMHV’s as HMLV contract
manufacturers typically focus more on customization with high
customer/product mix and low volume, hence typically command higher
margin as compared to LMHV (Fig 3).
Fig 3: Local vs. regional & LMHV vs. HMLV peers – core net margin trend
Source: Bloomberg, Affin Hwang forecasts*
LMHV: Local Peers CY18A CY19E CY20E
ATA IMS* 3.9% 3.6% 3.7%
VS Industry* 3.8% 4.2% 4.4%
SKP Resources 5.9% 5.6% 5.9%
Average 4.6% 4.5% 4.6%
LMHV: Regional Peers CY18A CY19E CY20E
Flex Ltd 2.3% 2.4% 2.7%
Celestica Inc 2.3% 1.2% 1.8%
Jabil Inc 2.0% 1.9% 2.1%
Hon Hai Precision Industry (Foxconn) 2.4% 2.1% 2.1%
Quanta Computer Inc 1.5% 1.5% 1.5%
Inventec Corp 1.3% 1.3% 1.4%
Compal Electronics 0.9% 0.8% 0.8%
Wistron Corp 0.6% 0.6% 0.7%
Average 1.6% 1.5% 1.6%
HMLV: Regional Peers CY18A CY19E CY20E
Venture Corp Ltd 10.6% 10.1% 10.2%
Fabrinet 8.8% 8.6% 8.9%
Plexus Corp 3.8% 3.3% 3.5%
Average 7.7% 7.3% 7.5%
High-mix / low-volume (HMLV)
Low-mix / high-volume (LMHV)
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 6 of 54
Rising demand for household appliances
Competitive advantages of the key customer
The key customer enjoys superior profitability of above 20% as compared
to many of its peers, thanks to its innovative and high-end products.
Trusted Review, one of the largest reviews websites in the UK that focuses
on technology product review, tested all battery-powered floor care
products through a rigorous set of tests, and the key customer’s floor care
products are ranked the top best-scoring cordless floor-care products and
is the only brand to achieve a 10/10 score. In spite of the success, the key
customer is not resting on its laurels and the founder of the MNC was
quoted in Forbes that the company aims to develop 100 new products by
2020. Currently it has lesser than 60 products listed on its UK website. We
believe this will continue to bring strong order flow for the three EMS
companies.
Fig 4: The key customer’s net profit and net margin track record
Source: Various, Affin Hwang
Growing demand for household appliances to support the growth
We expect demand for premium household appliances to continue to grow,
underpinned by:
Growing middle class. The key customer’s products continue to
garner massive appeal among Asia’s rising middle class, who are able
to afford big-ticket purchases and willing to invest in high-tech and
lifestyle-enhancing products. According to research from the
Brookings Institution, a non-profit public policy organization based in
Washington, September 2018 marked a global tipping point as just
over 50% of the world’s population (or some 3.8bn people) live in
households with enough discretionary expenditure to be considered
“middle class” or “rich.” The middle class is projected to grow at a
CAGR of 3% to reach 5.3bn people worldwide by 2030, which is
c.62% of the 8.6bn world population estimated by United Nations.
20%
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28%
0
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2013 2014 2015 2016 2017 2018
GBP m Net profit (LHS) Net profit margin (RHS)
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 7 of 54
Fig 5: Growing global middle class
Notes: Income categories, using PPP-adjusted (2011) dollars, are: extreme poor <$1.90/day; vulnerable = $1.90 to $11/day; middle class = $11 to $110/day; rich >$110/day. Source: The Brookings Institution
Improved standards of living in developing countries. Not only are
the key customer’s products within the top-selling household
appliances in many developed markets, it also grabbed the hearts of
the middle classes in emerging markets. In 2018, the key customer
reported record earnings of GBP1.1bn (RM5.7bn), mainly due to high
demand from Asian consumers where it derives more than half of its
profit. In addition, of the abovementioned growing global middle class,
the bulk of the growth will come from Asia. By 2030, Asia will
represent 66% of the global middle-class population and 59% of
middle-class consumption, compared to 28% and 23% respectively in
2009, according Organisation for Economic Co-operation and
Development (OECD).
China, one of the fast-growing countries targeted by the key
customer. The key customer is focusing on the fast-growing
Southeast Asia markets, especially China. Notably, Alibaba said that
some of its top-selling products during its annual Singles’ Day event in
2018 came from this key customer. According to Statista, the revenue
in the consumer electronics segment in China would amount to
US$127.3bn in 2019 and is expected to grow at a 5-year CAGR of
9.5%, resulting in a market volume of US$180.0bn by 2023 (Fig 6).
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 8 of 54
Fig 6: Revenue in the consumer electronics segment in China
Source: Statista, Affin Hwang
Growing demand for high-tech household appliances. According
to Allied Market Research, the global household floor-care market is
expected to grow at a CAGR of 4.7% during the 2015-2022 period and
reach US$16.7bn by 2022. The global household appliances market,
on the other hand, is projected to grow at a CAGR of 5.4% during the
2018-2025 period and reach US$763.5bn by 2025. With the
technological advancements, there is a great thirst for new technology
and well-designed household appliances. It is reported that the key
customer's share of the non-robot floor care market is increasing. It hit
6.1% in 2016, up from 5.4% in 2014, despite its high prices that are in
the range of RM1,500-3,000 (US$300-600) (Fig 7). This is mainly
driven by the key customer’s willingness to invest in technology and
focus on developing products that solve problems for the public. The
key customer has affirmed that technology continues to be at the
forefront of its business, with the company continuing with a
GBP2.5bn (US$3.0bn) investment program in technology.
Fig 7: Price comparison between the key customer & its peers (in US$)
*Unable to disclose actual name due to the companies’ commercial arrangement with the key customer Source: Nikkei Asian Review, Affin Hwang
114.5
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10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 9 of 54
Window of opportunity from trade diversion
Potential beneficiary of US-China trade diversion
Other than riding on the growth prospects of its key customer, the US-
China trade tension has also opened up a window of opportunity for the
three Malaysia’s EMS players. With the escalating US-China trade tension
and the rising cost of manufacturing in China, MNCs and Chinese
companies are mulling to relocate their manufacturing base from China to
Southeast Asia countries. As the 7th-largest electrical & electronic (E&E)
exporter in the world, Malaysia is one of the preferred destinations, to avoid
US tariffs of as much as 25% on some US$250bn of imports from China.
US imports from China have fallen 13%, while exports to China have
declined 16% in the first eight months of 2019, a reflection of dwindling
two-way trade (Fig 8).
Fig 8: The yoy growth of the US trade in goods with China
Source: The United States Census Bureau, Affin Hwang
Malaysia’s FDI momentum picked up since 2018
According to a survey by the American Malaysian Chamber of Commerce
(Amcham) on American E&E companies based in Malaysia, 76% of the
companies intend to invest further in the country over the next 5 years. The
survey also found that there were 12 new product lines and 6 research &
development (R&D) centres and centres of excellence relocated to
Malaysia within the past year. In addition, based on the official data from
the Malaysia Investment Development Authority (MIDA), Malaysia’s
approved foreign direct investment (FDI) surged 48% to RM80.5bn in 2018
(Fig 9). Even stripping off the one-off factor of the acquisition of a 16%-
stake in IHH Healthcare by Japan’s Mitui & Co. Ltd., the approved FDI in
2018 was still a positive yoy growth of 32%. The 2018 approved FDI was
an all-time-high, even as global FDI figures dipped to the lowest levels in a
decade. In 6M19, the country’s approved FDI continued to grow by a
whopping 97% yoy to RM49.5bn. The increased in FDI is a possible sign
of a business diversion from the MNCs, in our view, as trade tensions
continue to escalate.
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US imports from China US exports to China
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 10 of 54
Fig 9: Malaysia’s approved FDI
Source: MIDA, Affin Hwang
MNCs knocking at the doors of EMS players
We gather that most of the EMS players have received enquiries from
MNCs looking to shift or diversify their manufacturing base from China and
most of the EMS players have jumped on the bandwagon to explore new
opportunities stemming from the escalating US-China trade standoff. While
little has materialized at this juncture and may require some time for the
actual investment and shift in manufacturing to happen, as moving a
manufacturing base is not an easy task as it requires the MNCs to
rearrange their entire supply chain, there are ongoing discussions and the
MNCs are already doing a lot of planning on how to do this.
One in the bag and the rest are also in serious discussions
So far, VS has secured a new customer, Bissell, as a result of the trade
tension, and the group is in the midst of discussions with other prospective
customers. Meanwhile, ATA is also in discussions with its prospective
customers for potential new contracts, with preference towards Internet of
Things (IoT) related opportunities. Both players are positive on their
potential to secure new orders and/or customers given their proven strong
track records. In addition, we gather that the Penang-based EMS players,
namely PIE Industrial (Non-rated, RM1.37) and CPI, the newly acquired
wholly-owned subsidiary of Kumpulan Perangsang Selangor (Non-rated,
RM0.65), have secured new orders from a number of new customers given
the customers’ shift in supply chain motivated by the trade tension.
Key customer’s shifting of headquarters
A boon to the Johor-based EMS players
The key customer has announced early this year that it will move its
corporate head office to Singapore as it believes that its center of gravity
now lies in Asia, where it sees tremendous opportunities for growth.
Meanwhile, it also announced investment plans including i) the expansion
of its Singapore Technology Centre to double its current size, and ii) its
Malaysia Design Centre’s (MDC) fifth phase of development. It will also
build its new electric vehicle (EV) in its new factory there. We think the key
customer’s shift of regional headquarters to Singapore, which is a stone’s
throw away from its global manufacturing hub in Johor, should be positive
to the Johor-based EMS players.
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10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 11 of 54
Opportunity from key customer’s new venture minimal at the moment
The key customer has been working on an EV for several years and aims
to launch its first EV by 2021. While the three EMS players stand a high
chance in clinching any potential automotive-related contract from the key
customer as they have been serving customers in the automotive industry
and supplying plastic parts that are used in automotive, we understand that
the initial EV-related contract, if any, is likely to be small in term of
production volume, as compared to the key customers’ existing household
appliances.
Introducing “D” ecosystem in Malaysia
“D” ecosystem in Malaysia fulfills >50% of its requirement globally
Recently 2 non-EMS-related companies which are part of “D” ecosystem
were newly listed on Bursa Malaysia, namely i-Stone Group (Non-rated,
RM0.18) and MTAG Group (Non-rated, RM0.42). In total, there are now 5
Johor-based listed companies in Malaysia that form part of the “D”
ecosystem, serving this common key customer. These 5 companies are
involved in the: i) box-build assembly & sub-assembly, ii) PCB and battery
pack assembly, iii) manufacturing of filters, iv) customized specialized
automation machines, and v) label printing and material converting in the
key customer’s supply chain. Notably, they fulfill more than half of the key
customer’s requirement globally in their respective segments, playing an
important role in supporting the growth of the key customer.
A strong ecosystem to support “D” growth
With a well-established strong ecosystem in Malaysia, the key customer is
able to enjoy a lower cost of production altogether and become more
competitive, in our view. In the long run, the continuous investment of the
key customer should continue to benefit Malaysian companies that are in
its supply chain. This can also be seen from the rapid expansion plans by
the five companies, with most of the EMS players (ATA and VS) having
recently completed theirs, SKP’s in the process, while the newly-listed i-
Stone and MTAG to follow with their newly-raised funds from IPOs.
Fig 10: The companies in “D” ecosystem in Malaysia are less than 100km
away from the key customer’s Technology Centre in Singapore
Source: Affin Hwang
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 12 of 54
Elimination of Malaysian supply chain unlikely, in our view
While the key customer’s appointment of another Taiwanese company for
contract manufacturing in the Philippines has sparked investors’ concern
over a potential shift of supply chain to the Philippines, we understand that
the intention of the appointment is largely to tap on the benefit of zero
export tariff from the Philippines to the US. Coupled with the key
customer’s recent shifting of headquarters to Singapore with its view that
its center of gravity lies in Asia, where it sees tremendous opportunities for
growth, we think it is unlikely that the key customer will move its entire
supply chain to another country. In our view, with the key customer’s
ambitious plans and aggressive R&D roadmap, we think that the future
business is large enough to support both a Malaysian and Philippines
supply chain.
Any other non-EMS options to tap on “D” growth?
As part of the ecosystem, i-Stone supplies various specialized automation
machines to the key customer, while MTAG supplies certain components
of household appliances such as mesh, labels and stickers, tapes and
adhesives to the key customer. The key customer is their single largest
customer, making up 65% and 80% of i-Stone and MTAG’s revenue
respectively. Both of the companies have similar ranges of core net profit
margins, which stand at an average of 15% over the past four years.
Notably, their margins have improved over the past four years on the back
of greater cost efficiency and economies of scale; for the latest financial
year core net profit margin stands at 17%. Investors who are interested in
tapping on “D” growth but concerned about the low margin of EMS players
now have more options with the two newly-listed companies, details of
which are discussed in pages 49-52 of this report.
Barrier of entry to “D” ecosystem
As part of the key customer’s quality control and costing process, its
suppliers and contract manufacturers need to undergo stringent
qualification before becoming approved suppliers and contract
manufacturers to the key customer. Given the costly and time-consuming
qualification process, it is believed that the approved suppliers and
contract manufacturers are able to maintain their business relationships
with the key customer, as it will not be easy and commercially viable for
them to seek alternative suppliers. Based on our channel checks, today it
would take at least RM500m to set up a manufacturing facility for the key
customer – with no guarantee of business. We think this alone is a great
barrier to entry for existing players.
Established working relationship of >10 years with the key customer
The 5 companies have been working with the key customer for >10 years,
proving their capabilities in meeting the key customer’s high standards of
quality. All five companies have recorded robust average 3-year revenue
and core net profit CAGRs of close to 20% on the back of the key
customer’s strong revenue and net profit growth of 36% and 33%
respectively (Fig 11).
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 13 of 54
Fig 11: 3-year revenue and core net profit CAGR of the five companies that
are part of “D” supply chain
Source: Various, Companies, Affin Hwang
Valuation and recommendation
Initiate EMS sector with Overweight rating
We initiate coverage on the EMS sector with an Overweight rating as we
expect the sector to record a strong 3-year sector core net profit CAGR of
12% (CY18-21E) by riding on the brand owner’s growth prospects and
tapping on the opportunities arising from US-China trade standoff. The
sector currently trades at an attractive valuation of only 12x CY2020E. The
downside risk is minimal, in our view, as share prices of the EMS players
have weakened by >20% from their recent highs. We believe there is re-
rating potential for the EMS players’ PER multiple and it is time to revisit
the sector and appreciate its strong growth prospects given the key
customer’s strong product pipeline. While a protracted US-China trade
standoff would undeniably hurt most of the businesses in the world, we
think that the three EMS companies could be better off as beneficiaries of
the trade tension.
Premium valuation against regional peer justifiable by strong growth
While the local EMS sector has been trading at around 3-4x PER above
the regional EMS’ (Fig 15), we think it is well justified by the strong growth
demonstrated by the local EMS players. In terms of revenue, the local
EMS sector has charted an astounding 10-year CAGR of 59%, which was
almost quadruple of the regional peers’ 15% over the same period. The
10-year net profit CAGR of the local EMS sector was even higher at 63%
as compared to regional peers’ 15%. Looking ahead, both estimated
revenue and net profit growth of the local EMS for CY20E are also more
superior at 10% and 14% respectively, way ahead of the regional peers’
single-digit growth of 6%.
0%
5%
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15%
20%
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30%
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40%
Key customer ATA VS SKP i-Stone MTAG
3-year revenue CAGR 3-year core net profit CAGR
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
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Fig 12: The local EMS sector’s 10-year forward PER
Source: Company, Bloomberg, Affin Hwang forecasts
Fig 13: The local EMS sector’s 5-year forward PER
Source: Company, Bloomberg, Affin Hwang forecasts
Fig 14: The regional EMS sector’s 10-year forward PER
Source: Company, Bloomberg
Fig 15: 10-year PER spread between local and regional EMS
Source: Company, Bloomberg, Affin Hwang forecasts
Top pick: ATA IMS (BUY, TP: RM1.80)
We initiate coverage on ATA (BUY, TP: RM1.80) and VS (BUY, TP:
RM1.60), given their attractive valuation and growth prospects. While both
have their own distinctive competitive advantages, we prefer ATA given it
is a purer proxy to its key customer. Elsewhere, while we also like VS for
its strong ability in securing new customers and believe the group is poised
to become a prime beneficiary of trade diversion among the three EMS
players, we remain cautious on its China operations which is expected to
remain a drag to the group’s operations due to the underutilization of its
facilities as a result of intensive competition and US-China trade tension,
though the losses are expected to narrow going forward.
Fig 16: Peer Comparison
Source: Bloomberg, Affin Hwang forecasts* Note: Based on closing prices on 9 October 2019
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Spread (LHS) Local EMS PE (RHS) Regional EMS PE (RHS)(x) (x)
EMS Peers Rating Sh Pr TP Upside Mkt Cap ROE (%) DY (%)
(RM) (RM) (%) (RM m) CY19E CY20E CY19E CY20E CY19E CY20E CY19E CY20E CY19E CY20E CY19E FY20E
ATA IMS* BUY 1.45 1.80 24.1 1,746.3 14.3 12.9 14.8 10.6 24.9 8.9 8.7 7.6 2.5 2.2 19.0 2.5
V.S. Industry* BUY 1.26 1.60 27.0 2,314.0 13.8 12.6 8.9 9.5 (2.0) 6.0 7.5 6.4 1.4 1.3 10.8 3.4
SKP Resources N/R 1.08 N/R N/R 1,350.2 12.5 10.5 1.5 20.6 4.0 14.4 6.9 5.7 2.2 2.0 17.3 4.3
P.I.E. Industrial N/R 1.37 N/R N/R 526.1 13.7 11.3 (11.6) 21.2 3.5 9.7 6.2 5.5 1.2 1.1 9.0 3.6
Average 13.6 11.8 3.4 15.5 7.6 9.7 7.3 6.3 1.8 1.7 14.0 3.5
Peers within "D" Ecosystem CY17A CY18A CY17A CY18A CY17A CY18A CY17A CY18A CY17A CY18A CY18A CY18A
i-Stone Group N/R 0.18 N/R N/R 226.0 18.5 15.3 107.1 17.6 40.0 11.9 22.2 17.4 n/a 3.7 19.1 n/a
MTAG Group N/R 0.42 N/R N/R 286.3 10.0 8.5 48.3 18.1 19.3 0.9 5.8 4.9 n/a 1.8 20.2 n/a
Average 14.2 11.9 77.7 17.9 29.6 6.4 14.0 11.2 n/a 2.7 19.7 n/a
Core P/E (x) Core EPS Growth (%) Rev. Growth (%) EV/EBITDA (x) P/B (x)
PER premium justified given the strong growth
of the local EMS players
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 15 of 54
Key Investment Risks
Dependent on single major customer. Having a major key customer
which accounts for a big portion of total revenue, the fortunes (or lack
thereof) of the EMS players are highly dependent on the performance and
number of orders received from that particular key customer. A significant
reduction in number of orders from the key customer or losing the key
customer could materially and adversely impact their financial
performance.
Reliance on foreign labour. The EMS industry is highly dependent on
foreign labour for their operations. Any increase in minimum wage or
shortage in labour supply in Malaysia could raise its operating costs and/or
disrupt its operations.
Competition risk. The EMS industry is highly competitive with the
contract manufacturers having low bargaining power against its key
customer. The key customer may reallocate its research and development
spending to another segment of products or reallocate its production line
to another contract manufacturer. The introduction of lower-priced
competition or significant price reductions by any of the key customer’s
contract manufacturers could result in price reductions that would
adversely affect the EMS players’ business, financial condition and
operating results.
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 16 of 54
Initiation: Casting its net wider
ATA IMS (ATA) is the largest box-build contract manufacturer and filter
supplier to its key customer with the widest product range. We like
ATA for its: i) position as the prime proxy to its key customer – a
prominent global household appliance brand, ii) strong order flow from
the key customer, iii) potential margin enhancement from vertical
integration, iv) superior ROE of 18%, v) solid earnings growth – 3-year
CAGR of 13% over FY19-22E, and vi) reasonable dividend yields of
c.3%. We initiate coverage on ATA with a BUY rating and 12-month
target price (TP) of RM1.80, based on a CY20E PER of 16x.
Riding on the growth of its key customer
ATA is the second largest home-grown EMS player in Malaysia. Over 80%
of ATA’s revenue is derived from its single largest customer and it is also
the largest box-build contract manufacturer and filter supplier to its key
customer. The pole position of ATA indicates the trust and relationships ATA
has built, as well as its capabilities and capacity for its key customer. Hence
we view ATA as the prime proxy to the strong growth prospects of its key
customer – which is a privately-owned multinational corporation (MNC).
Notably, the filter business is ATA’s key distinction against its other pure-
assembly contract manufacturing peers as the filter business commands
higher margin as compared to conventional box-build business.
Eyeing IoT-related opportunities from trade diversion
While ATA expects continued strong growth for its key customer with the
introduction of new products going forward, it is not resting on its laurels
and continues to pursue diversification in areas of product and customer
mix, with preference towards Internet of Things (IoT) related, to tap on the
opportunities arising from trade diversion.
Initiate coverage with a BUY rating and TP of RM1.80
We initiate coverage with a BUY rating and TP of RM1.80, based on 16x
CY20E PER, which is in line its 1-year forward PER mean. Currently
trading at only 12x CY20E PER, valuation looks appealing vs. its 3-year
CAGR of 13%. We view the recent share-price pullback on concerns on
higher set-up expenses for new product and labour costs as an
opportunity for investors to accumulate shares to ride on its future growth
once the new lines operate at more efficient rates.
Earnings & Valuation Summary FYE 31 Mar 2018A 2019A 2020E 2021E 2022E
Revenue (RMm) 2,306.6 2,908.6 3,378.1 3,778.9 4,231.0
EBITDA (RMm) 145.1 187.1 205.1 227.4 255.2
Pretax profit (RMm) 108.1 150.8 165.3 188.6 215.8
Net profit (RMm) 74.4 111.3 122.3 139.6 159.7
EPS (sen) 8.2 9.4 10.2 11.6 13.3
PER (x) 17.7 15.5 14.3 12.5 10.9
Core net profit (RMm) 74.4 111.3 122.3 139.6 159.7
Core EPS (sen) 6.5 9.2 10.2 11.6 13.3
Core EPS growth (%) (21.7) 42.5 10.0 14.1 14.4
Core PER (x) 22.4 15.7 14.3 12.5 10.9
Net DPS (sen) - 3.3 3.6 4.1 4.6
Dividend Yield (%) - 2.3 2.5 2.8 3.2
EV/EBITDA (x) 11.5 9.8 8.4 7.4 6.4
Chg in EPS (%) - - -
Affin/Consensus (x) 0.96 0.93 0.93 Source: Company, Affin Hwang forecasts, Bloomberg
Initiate Coverage
ATA IMS AIB MK Sector: EMS
RM1.45 @ 9 October 2019
BUY (Initiate Coverage) Upside: 24%
Price Target: RM1.80 Previous Target: -
Price Performance
1M 3M 12M Absolute 7.4% -9.9% -14.7% Rel to KLCI 11.1% -2.3% -2.4%
Stock Data
Issued shares (m) 1,204.4 Mkt cap (RMm)/(US$m) 1746.3/416.1 Avg daily vol - 3mth (m) 0.6 52-wk range (RM) 1.32-1.88 Est free float 29.1% BV per share (RM) 0.54 P/BV (x) 2.67 Net cash/(debt) (RMm)
(3Q17)
(91.92) ROE (2020E) 18.3% Derivatives No Shariah Compliant Yes
Key Shareholders
Dato’ Seri James Foo 33.7% Dato’ Fong Chiu Wan 26.1% Balachandran 8.7% Source: Company, Bloomberg
Chua Yi Jing (603) 2146 7546
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Oct-16 Mar-17 Aug-17 Jan-18 Jun-18 Nov-18 Apr-19 Sep-19
(RM)
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 17 of 54
Investment Thesis
#1. Purest proxy to the prominent global
household appliance brand’s growth prospects
Riding on the growth of its key customer
ATA has been working closely with its key customer since 2003, starting as
a sub-contractor for the latter. The group subsequently became one of the
main contract manufacturers for its key customer in 2008. Notably, ATA
was awarded the Contract Manufacturer Award of the Year for the third
time in 2018 by this key customer. At present, over 80% of ATA’s revenue
is derived from its single largest customer. Over the past four years, ATA
recorded a 4-year revenue CAGR of 22%, mirroring its key customer’s 4-
year revenue CAGR of 33% (Figs 17). Going forward, we expect ATA’s
future growth to be driven by its anticipated robust product pipeline on the
back of its key customer’s revolutionary technology, continuous product
innovation and investment in R&D.
Fig 17: ATA’s revenue over the past five years
*Motor component-related revenue was excluded for FY15 and FY16 as it was recorded in both revenue and COGS with no value added. The motor components are supplies on a consignment basis and no longer captured as revenue nor COGS since FY17. Source: Company, Affin Hwang
Largest box-build contract manufacturer to its key customer…
ATA has the biggest market share among its key customer’s contract
manufacturers with around one-third market share of its key customer’s
global box-build production (in term of volume), while the remaining two-
thirds are produced by the other five contract manufacturers. As its key
customer’s largest box-build contract manufacturer, we think that ATA is
well-positioned as the prime proxy to the innovation and strong growth
prospects of its key customer – the privately-owned global household
appliance brand.
-
500
1,000
1,500
2,000
2,500
3,000
3,500
FY15* FY16* FY17 FY18 FY19
RM m
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 18 of 54
… with the widest product range
Not only being the largest contract manufacturer to its key customer, ATA
is also the contract manufacturer that covers the widest range of its key
customer’s product offerings. ATA produces around five out of the six
products introduced by its key customers (Fig 18).
Fig 18: Types of product assembled by the three listed EMS players for their
common key customer
ATA IMS V.S. Industry SKP Resources
Floor care products ✔ ✔ ✔
Personal care products ✔ ✔ ✔
Air treatment products ✔ ✘ ✘
Environmental products ✔ ✘ ✔
Lighting ✔ ✘ ✘
Hand dryers ✘ ✘ ✔ Source: Affin Hwang estimates
Not forgetting the filters!
In addition to being the largest box-build contract manufacturer which
produces the broadest product range for its key customer, ATA is also the
largest supplier of filters for its key customers’ household appliances,
making up around 75% of its requirement globally. This is ATA’s key
distinction against its other pure-assembly contract manufacturing peers as
filter business commands higher margin as compared to conventional box-
build business. Filters serve as a major component in keeping the floor
care and air treatment products running efficiently by ensuring the harmful
ultrafine particles stay trapped in the filter media.
#2. Riding on the growing demand for its key
customer’s household appliances
Continuous substantial order flow witnessed
Earlier, we have highlighted the potential strong demand for high-tech
household appliances (please refer to page 6-8 of the report). At ATA, we
have seen consistent strong order flow from the key customer in recent
years with the latest products including floor-care (commenced in January
2019) and environmental products (commenced in March 2019). With the
key customer’s target of developing 100 new products by 2020, we think
ATA stands strong as a prime beneficiary among its peers for its key
customer’s robust growth.
More projects in the pipeline
Currently, ATA has 3 new projects in the pipeline with its key customer,
which should continue to drive the group’s growth momentum. Of the 3
new projects, one is a new personal care product which is expected to
commence production by the end of 2019, while another new project is
expected to commence production in 2020. Besides, the third new project
is an upgraded version of an existing model for which the timeline is still
unknown. All these 3 new projects are not out in the market yet at this
junction. The new projects will continue to drive the group’s revenue
growth which we estimate to be around 12-18% for FY20-22E. As usual,
management remains tight-lipped on the details/features of the new
products due to the commercial arrangement with the key customer. Going
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 19 of 54
forward, the group remains committed to continue bidding for more
projects and growing together with its key customer.
Margin to be affected in the short term but recovery on the way
Near-term margins are expected to be affected due to the initial learning
curve, but will likely improve going forward once the production lines are
running at optimal rate. Recall that the group’s core net profit margin
deteriorated to 2.0% in 4QFY18 (from 4.2% in 4QFY17) due to the start-up
expenses for new products, and subsequently recovered to 4-6% in the
subsequent quarters. Similarly, the core net profit margin declined to 2.9%
in 1QFY20 (from 5.8% in 1QFY19). We expect the margin to recover
gradually going forward as the new assembly lines become more efficient.
Expansion for future growth
In FY19, ATA acquired 2 additional factories which successfully increased
its production space by 49% to 1.15m sq. ft., while in FY20 the group
leased 1 additional factory which expanded its production space by 10% to
1.26m sq. ft. For the final assembly line, it has invested in 2 new final
assembly lines (growing from 12 to 14) to cater for the commencement of
new products in FY20E. While the group expects a normalised capex
following the huge investment of RM113m in FY19, it remains committed
and is ready to continue ramping up its production capacity to cope with
any expected increase in orders from its key customer should the capacity
be fully utilised.
Fig 19: Capacity expansion
FYE 31 Mar FY18 FY19 FY20
No. of facilities 22 25 26
No. of assembly lines 8 12 14
Production space (sq. ft.) 774k 1.15m 1.26m
Warehouse space (sq. ft.) 210k 328k 328k
Total space (sq. ft.) 984k 1.48m 1.59m Source: Company, Affin Hwang
#3. Vertical integration to enhance capabilities &
profitability
Started PCB assembly and battery pack assembly divisions
The major shareholders of ATA, who are also part of the management
team, have separately established a private company, Microtronics
Technology Sdn Bhd (MTSB), to do printed circuit board (PCB) assembly
and battery pack assembly in 2017, prior to the reverse takeover exercise.
According to the management, MTSB was not injected together with IMS
Group into the listed Denko Industrial Corporation when the reverse-
takeover exercise was undertaken because it was still in the process of
setting up the divisions, bringing in machineries, and undergoing
qualification by its key customer, and hence was in the red which could be
a drag to the group’s profitability.
To add on PCB assembly and battery pack assembly, as well as…
Post-qualification by the key customer, MTSB started operations in
October 2018 and achieved breakeven recently. Currently it has 14
surface-mount technology (SMT) lines, which are able to fulfil around 60%
of ATA’s PCB and battery pack requirements, with the remaining still
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 20 of 54
sourced from its peer. It plans to increase this to 18 lines by the end of the
year, with a target to develop self-sufficiency. The shareholders plan to
fully integrate the divisions under the private arm into the listed ATA group,
by mid-2021. We acknowledge that this will be a possible related-party
transaction (RPT) in the future.
… wire harness and brush bar assembly to its core competencies
In addition, ATA is also looking to add another two capabilities, namely
wire harness and brush bar assembly to the group, which it currently
purchases from third-party suppliers. The group has submitted brush bar
samples to undergo testing by its key customer, while its wire harness site
is being audited by the key customer. Both capabilities are expected to
commence production in early CY2020. With the wire harness and brush
bar produced in-house, this will save on the group’s average annual
purchases of about RM230m from external suppliers and the cost savings
arising will eventually enhance its margin and bottom line.
Vertical integration – a win-win situation for ATA & its key customer
The integration of new capabilities will help improve the group’s profitability
as the manufacturing of components typically command higher margins as
compared to box-build assembly. Most importantly, vertical integration will
pave the way for more contracts as it will not only benefit ATA but also lead
to significant savings on logistics and packaging costs to its key customer.
With more component parts manufactured in-house by its box-build
contract manufacturers, it helps the key customer eliminate the hassle of
outsourcing component parts from various vendors. In addition to vertical
integration, ATA is exploring more automation to enhance manufacturing
and cost efficiency. Based on our sensitivity analysis, every 0.1ppt
enhancement to the group’s core net margin will lead to c.3% increase in
core net profit in FY20-22E.
#4. Eyeing opportunities from trade diversion
Customer diversification opportunities on the back of trade tension
While ATA expects continued strong growth for its key customer with the
introduction of new products going forward, it is not resting on its laurels
and continues to pursue diversification in areas of customer mix and
product, with preference towards Internet of Things (IoT) related, to tap on
the opportunities arising from trade diversion as a result of US-China trade
standoff. The group has been actively exploring the opportunities and is
currently in discussion with a number of prospective customers. As one of
the world’s Top 30 EMS companies by revenue (ranked by Manufacturing
Market Insider list of Top EMS providers in 2018), we think that ATA
should have the ability to secure new customers, though it may take some
time as it prefers to be prudent and selective in term of bringing in new
customers.
Looking to diversify into IoT space, but may take time
ATA is exploring the IoT space, particularly smart home appliances, as the
products usually consist of a mix of electronic and mechanical components
which fits well with the group’s vertically integrated capabilities. The group
is in collaboration with Canada’s Swift Labs, which specializes in wireless
and IoT hardware development, system integration and testing services,
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 21 of 54
for Original Design Manufacturers (ODM) to tap on the latter’s capabilities
and wide customer base. Some of the partner’s customers are renowned
large corporations such as Wistron, Hyundai Mobis, SanDisk, Clearpath
Robotics, and ecobee. Currently, the group is in quotation and feedback
stage for some projects, hence prefers to remain tight-lipped on the
quantum and details of the contracts. That said, we still expect any new
projects to take around 1-2 years to fully materialise as this is a relatively
new venture to the group. Thus contribution, if any, is likely to be negligible
over the near term.
IoT future looks promising
According to International Data Corporation’s (IDC) recent publication of its
latest Worldwide Semiannual Internet of Things Spending Guide,
worldwide technology spending on the IoT is expected to grow at a CAGR
of 13.6% over the 2017-2022 forecast period and reach US$1.2trn in 2022.
With the introduction of 5G technology which promises to provide data
transmission speeds over wireless broadband networks of up to 20Gbps,
20 times faster than 4G networks, the IoT future looks promising. The
forecast also highlights that the consumer sector will lead IoT spending
growth with a worldwide CAGR of 19% (Fig 20).
Fig 20: Top 5-year CAGR (2017-2022) industries
Source: IDC Worldwide Semiannual Internet of Things Spending Guide, 2017H2
19.0%
17.5%16.9%
16.1%14.9%
12.3%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 22 of 54
Financial Analysis and Forecasts
Strong revenue and core net profit growth
ATA recorded an encouraging 4-year revenue and core net profit CAGR of
27% and 23% respectively through FY19, driven by growing orders and
product range from its key customer. Notably, the group had achieved a
record-high financial performance in FY19, which saw its core net profit
crossing the RM100m mark for the first time on the back of close to RM3bn
in revenue. In terms of growth, its revenue and core net profit surged by
26% and 50% respectively in FY19.
1QFY20: Waylaid by new lines’ start-up expenses
ATA reported a strong revenue growth of 45% yoy in 1QFY20, mainly
driven by higher sales orders and new projects from its key customer.
However, core net profit declined 29% yoy due to i) lower efficiency and
higher start-up cost of new assembly lines that came on stream, ii) higher
material contents for new models, and iii) higher labour cost as a result of
the minimum wage hike which was not fully passed on to the key customer
given the strong competition. Consequently, its core net profit margin
declined to 2.9% in 1QFY20, from 5.8% in 1QFY19.
Still a growth year despite near-term headwinds
While we expect a lower core net profit margin of 3.6% for full year FY20E
(from 3.8% in FY19) mainly dragged by: i) higher start-up cost of new
assembly lines and ii) higher labour cost as a result of minimum wage hike
which was not fully passed on to the key customers given the strong
competition, we see limited downside risk from its 1QFY20 core net profit
margin of 2.9% and expect the margin to recover gradually in the coming
quarters as the new assembly lines become more efficient. Overall we
think full-year FY20E will still be a growth year despite near-term
headwinds. On a positive note, we believe the group’s revenue growth
prospects remain intact, mainly driven by with higher box-build orders from
its key customer.
Expecting 3-year core net profit CAGR of 13%
We project ATA to record a 3-year core net profit CAGR (FY19-22E) of
13%, driven by: 1) growing orders from its existing key customer, 2)
improving economies of scale and better operating efficiencies post the
learning curve and after achieving full efficiency as the new assembly lines
go into full swing, and 3) higher margin as a result of vertical integration.
Any potential contract wins from new customers as a result of the US-
China trade tension could provide upside to our earnings forecast.
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 23 of 54
Fig 21: Projecting 13% 3-year revenue CAGR (FY19-22E)
Source: Company, Affin Hwang forecasts
Fig 22: Projecting 13% 3-year core net profit CAGR (FY19-22E)
*Note: Core net profit margin was much higher in FY17 mainly due to the lower effective tax rate as a result of the utilisation of tax incentives given by the government for hitting a certain sales target. Source: Company, Affin Hwang forecasts
Plenty of headroom for gearing up
ATA has spent significant capex of RM122m and RM113m in FY18 and
FY19 respectively, mainly to acquire new facilities and production lines for
expansion. To finance the expansion, the group has undertaken additional
borrowings of RM203m, and private placement of 5% of its issued share
capital with RM96m in funds raised. Post-expansion, management expects
its capex to normalise to around RM50-55m per year over the next three
years. The group sits on a heathy cash pile of RM271m with comfortable
net gearing of 0.14x as at end-FY19, which allows it to have ample
flexibility to gear up for future expansion, if necessary. Moreover, in view of
the strong take-up rate for its private placement in March 2019 (close to 3x
oversubscription), the group should be able to tap on the equity market to
raise funds for expansion, if needed.
Dividend payout to reward investors
Despite not having a formal dividend policy in place, ATA indicated that it
aims to maintain a minimum dividend payout of 35%. Following the
reverse takeover in 2018, ATA has declared a maiden dividend of
3.29sen/share for FY19. For FY20-22E, we forecast a dividend payout of
35%, translating to an average yield of around 3%.
Lowest margin among its closest peers, but striving to improve by
adding vertical capabilities
ATA has the lowest core net profit margin among its closest peers given its
highest reliance on their common key customer (Fig 23). On a positive
note, while the profitability from the key customer is significantly lower than
its other customers, the key customer provides significantly larger
production volume vis-à-vis ATA’s peers. Moreover, its margin should
improve going forward as it adds more capabilities such as PCB assembly,
battery pack assembly, wire harness and brush bar assembly to its core
competencies.
Fig 23: Historical core net margin trend
FY17 FY18 FY19
ATA IMS 4.7% 3.2% 3.8%
VS Industry 5.1% 3.7% 4.2%
SKP Resources 5.4% 5.6% 5.7%
Average 5.1% 4.1% 4.6%
Source: Company, Affin Hwang
0%
5%
10%
15%
20%
25%
30%
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
FY17A FY18A FY19A FY20E FY21E FY22E
RM m Revenue (LHS) Revenue growth (RHS)
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
-
20
40
60
80
100
120
140
160
180
FY17A FY18A FY19A FY20E FY21E FY22E
RM m Core net profit (LHS) Core net profit margin (RHS)
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 24 of 54
Valuation and Recommendation
Initiate with a BUY rating and TP of RM1.80
We initiate coverage on ATA with a BUY rating and 12-month TP of
RM1.80. Our TP is based on 16x CY20E PER, which is in line with its 1-
year forward PER mean. We like ATA for its: 1) position as the key
customer’s largest box-build supplier in the world, producing most of its
key customer’s product offerings, 2) growing orders from its key customer,
3) aspiration to be vertically integrated, 4) superior ROE of 18%, 5) solid
earnings growth – 3-year CAGR of 13% over FY19-22E, based on our
estimates, and 6) reasonable dividend yields of c.3%.
Prior valuation not reflective of current business model
Only 1-year historical forward PER is available as the reverse takeover
exercise was only conducted a year ago, and the PER prior to this was not
reflective of its current business model (annual revenue is 22x higher,
market cap is 4x larger post-reverse takeover). Moreover, the group prior
to the reverse takeover was not profitable for six years over the past 10
years, hence PER may not be a useful metric to value its historical
valuations.
Opportunity to buy at trough
ATA’s share price fell as much as 21% recently following the
announcement of its weaker-than-expected quarter results and the cut in
consensus earnings forecast in anticipation of potential higher set-up
expenses for new product and labor costs. Currently trading at only 12x
PER to its CY20E EPS, we think that the share-price correction has
reflected the potential near-term earnings weakness and the valuation
looks appealing vs. its 3-year CAGR of 13%, with reasonable average
dividend yields of c.3% for FY20-22E. We think that the recent share-price
weakness serves as a good buying opportunity for investors to accumulate
shares to ride on its future growth once the new production lines fully ramp
up and operate at more efficient rates.
Fig 24: ATA’s 1-year forward PER
Source: Bloomberg, Affin Hwang forecasts
11.0
12.0
13.0
14.0
15.0
16.0
17.0
18.0
19.0
20.0
Fe
b18
Ma
r18
Apr1
8
Ma
y1
8
Jun1
8
Jul1
8
Aug
18
Sep
18
Oct1
8
Nov18
Dec18
Jan1
9
Fe
b19
Ma
r19
Apr1
9
Ma
y1
9
Jun1
9
Jul1
9
Aug
19
Sep
19
(x)
+2 SD: 18.7x
+1SD: 17.3x
Avg: 15.9x
-1SD: 14.5x
-2 SD: 13x
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 25 of 54
Fig 25: Peer Comparison
Source: Bloomberg, Affin Hwang forecasts* Note: Based on closing prices on 9 October 2019
Key investment risks
Downside risks include: i) dependent on single major customer; ii) reliance
on foreign labor, iii) competition risk, iv) liquidity risk of stock as over 90%
of the shareholdings are held by the management and institutional funds,
v) a downturn in the household appliances industry, and vi) a slowdown in
the economy.
EMS Peers Rating Sh Pr TP Upside Mkt Cap ROE (%) DY (%)
(RM) (RM) (%) (RM m) CY19E CY20E CY19E CY20E CY19E CY20E CY19E CY20E CY19E CY20E CY19E FY20E
ATA IMS* BUY 1.45 1.80 24.1 1,746.3 14.3 12.9 14.8 10.6 24.9 8.9 8.7 7.6 2.5 2.2 19.0 2.5
V.S. Industry* BUY 1.26 1.60 27.0 2,314.0 13.8 12.6 8.9 9.5 (2.0) 6.0 7.5 6.4 1.4 1.3 10.8 3.4
SKP Resources N/R 1.08 N/R N/R 1,350.2 12.5 10.5 1.5 20.6 4.0 14.4 6.9 5.7 2.2 2.0 17.3 4.3
P.I.E. Industrial N/R 1.37 N/R N/R 526.1 13.7 11.3 (11.6) 21.2 3.5 9.7 6.2 5.5 1.2 1.1 9.0 3.6
Average 13.6 11.8 3.4 15.5 7.6 9.7 7.3 6.3 1.8 1.7 14.0 3.5
Peers within "D" Ecosystem CY17A CY18A CY17A CY18A CY17A CY18A CY17A CY18A CY17A CY18A CY18A CY18A
i-Stone Group N/R 0.18 N/R N/R 226.0 18.5 15.3 107.1 17.6 40.0 11.9 22.2 17.4 n/a 3.7 19.1 n/a
MTAG Group N/R 0.42 N/R N/R 286.3 10.0 8.5 48.3 18.1 19.3 0.9 5.8 4.9 n/a 1.8 20.2 n/a
Average 14.2 11.9 77.7 17.9 29.6 6.4 14.0 11.2 n/a 2.7 19.7 n/a
Core P/E (x) Core EPS Growth (%) Rev. Growth (%) EV/EBITDA (x) P/B (x)
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 26 of 54
Company background
A reverse takeover to create a whole new EMS player
ATA IMS (formerly known as Denko Industrial Corporation) was incorporated in Malaysia in 1989 and listed on Bursa Malaysia in 1991. The group changed its name from Denko Industrial Corporation to ATA IMS after the reverse acquisition by Integrated Manufacturing Solution Group (IMS Group) in 2018. Similar with Denko’s business, IMS Group, founded by Dato’ Sri Foo Chee Juan and Dato’ Fong Chiu Wan in 1991, is principally involved in manufacturing and sales of precision plastic injection moulded parts, air filters and sterilisers, assembly of electrical and electronics components and products, and design and fabrication of tools and moulds, serving the electrical and electronics industry. The group carries decades of experience and expertise in various industries including consumer appliances, environmental care, lighting, automotive and healthcare. In addition to the key customer that accounts for over 80% of the group’s revenue, ATA also has other minor customers that collectively make up less than 10% of its total revenue, including Pioneer, Kenwood, Schneider Electric and Autoliv. Fig 26: Major milestones
Year Major Milestones
1989 Incorporated in Malaysia under the name of Ecodynamic (M) Sdn Bhd
1990 Changed its name to Denko Industrial Corporation Sdn Bhd
Converted into a public listed company
1991 Listed on Bursa Malaysia
2018 Reverse acquisition by Integrated Manufacturing Solutions Sdn Bhd and its subsidiaries (IMS Group)
Changed its name from Denko Industrial Corporation Berhad to ATA IMS Berhad
2019 Incorporation of ATA Components Sdn Bhd. The principal activities of ATA Components Sdn Bhd are manufacture of all kinds of components relevant to electronics or electrical products, mechanical or consumer products and any kind of industrial components, e.g. wire harness and brush bar assembly.
Source: Company, Affin Hwang
Manufacturing facilities and warehouses Headquartered in Johor Bahru, ATA has 26 manufacturing facilities and
warehouses, with around 1.26m sq. ft. of production space and 0.3m sq. ft.
of warehouse space. It has in recent years completed a number of
expansions including a 5-story detached factory with office for production
at Jalan Dewani (built-up area: 187k sq. ft.), 3-story detached factory with a
new warehouse with high ceiling (built-up area: 116k sq. ft.), new spray
facility which houses advanced robot and spindle arms, and new plastic
injection facility which houses 58 injection machines. Going forward, it will
continue to invest in automation to improve its production efficiencies.
Experienced management team
Following the completion of the reverse take-over, ATA IMS is now helmed
by Dato’ Seri James Foo (Executive Chairman & Executive Director), Dato’
Fong (Chief Executive Officer & Executive Director) and Balachandran
(Chief Operating Officer & Executive Director). The trio collectively own
around 67% in the group, with Dato’ Seri James Foo being the largest
shareholder with a 34% stake followed by Dato’ Fong with a 26% stake
and Balachandran with a 7% stake.
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 27 of 54
Fig 27: Experienced management team with strong industry expertise Key Management Personnel Profile
Dato’ Seri James Foo Chee Juan Aged 58, Singaporean Executive Chairman & Executive Director
Has more than 25 years of experience in the manufacturing and sale of precision plastic injection moulded parts and assembly of electrical and electronic components and products. Established ATA Industrial (M) Sdn Bhd in 1991. Joined ATA Industrial Pte Ltd in 1991 as a business development manager. Graduated from the University of Oregon with a Degree in Bachelor of Science, major in Finance and Marketing.
Dato’ Fong Chiu Wan Aged 56, Singaporean Chief Executive Officer & Executive Director
Has more than 30 years of experience in the manufacturing and sale of precision plastic injection moulded parts and assembly of electrical and electronic components and products. Established ATA Industrial (M) Sdn Bhd in 1991. Joined ATA Industrial Pte Ltd in 1987 as general manager. Graduated from the University of Oregon with a Degree in Bachelor of Arts.
Balachandran A/L Govindasamy Aged 45, Malaysian Chief Operating Officer & Executive Director
Has 24 years of work experience in the electronics manufacturing sector and has been with ATA Industrial (M) Sdn Bhd for the last 18 years. Graduated with a Diploma in Electronics from Federal Institute of Technology, Malaysia, and is a Qualified Lead. Assessor upon completion of his training in Advanced Environment Management Systems Auditing Course.
Source: Company, Affin Hwang
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 28 of 54
Fig 28: Design & Engineering Solutions
Source: Company
Fig 29: Mould Design & Fabrication
Source: Company
Fig 30: Plastic Injection Moulding
Source: Company
Fig 31: Sub & Full Assembly
Source: Company
Fig 32: Secondary Process
Source: Company
Fig 33: Surface Mount Technology (SMT)
Source: Company
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 29 of 54
ATA IMS – FINANCIAL SUMMARY
Source: Company, Affin Hwang forecasts
Profit & Loss Statement Key Financial Ratios and Margins
FYE 31 Mar (RM m) 2018A 2019A 2020E 2021E 2022E FYE 31 Mar (RM m) 2018A 2019A 2020E 2021E 2022E
Revenue 2,307 2,909 3,378 3,779 4,231 Growth
Operating expenses -2,162 -2,721 -3,173 -3,552 -3,976 Revenue (%) 27.1 26.1 16.1 11.9 12.0
EBITDA 145 187 205 227 255 EBITDA (%) 32.9 29.0 9.6 10.9 12.2
Depreciation -14 -25 -27 -30 -33 Core net profit (%) -13.0 49.6 10.0 14.1 14.4
EBIT 131 162 178 197 222
Net int income/(expense) -3 -9 -12 -8 -6 Profitability
Exceptional gains / (losses) -20 -2 0 0 0 EBITDA margin (%) 6.3 6.4 6.1 6.0 6.0
Pretax profit 108 151 165 189 216 PBT margin (%) 4.7 5.2 4.9 5.0 5.1
Tax -34 -40 -43 -49 -56 Net profit margin (%) 3.2 3.8 3.6 3.7 3.8
Minority interest 0 0 0 0 0 Effective tax rate (%) 31.2 26.2 26.0 26.0 26.0
Net profit 74 111 122 140 160 ROA (%) 7.9 8.1 7.3 8.0 8.5
Core net profit 74 111 122 140 160 ROE (%) 23.6 21.2 18.3 18.5 18.7
ROCE (%) 29.0 20.6 17.7 19.1 20.6
Balance Sheet Statement Dividend payout ratio (%) 0.0 35.1 35.0 35.0 35.0
FYE 31 Mar (RM m) 2018A 2019A 2020E 2021E 2022E
Fixed assets 209 297 324 344 360 Liquidity
Other long term assets 76 76 76 76 76 Current ratio (x) 1.3 1.4 1.5 1.6 1.6
Total non-current assets 285 373 401 420 437 Op. cash f low (RM m) 74 -46 216 140 159
Cash and equivalents 155 271 329 320 323 Free cashflow (RM m) 42 -108 161 90 109
Stocks 127 218 201 225 251 FCF/share (sen) 4.1 -9.4 13.4 7.5 9.0
Debtors 501 739 720 805 902
Other current assets 26 44 44 44 44 Asset management
Total current assets 808 1,272 1,294 1,394 1,521 Debtors turnover (days) 79.3 92.7 77.8 77.8 77.8
Creditors 506 634 665 744 833 Stock turnover (days) 21.4 29.2 23.1 23.1 23.1
Short term borrow ings 124 260 200 150 100 Creditors turnover (days) 85.5 85.0 76.5 76.4 76.4
Other current liabilities 0 4 4 4 4
Total current liabilities 630 898 869 898 937 Capital structure
Long term borrow ings 35 102 102 102 102 Net gearing (%) 1% 14% -4% -9% -13%
Other long term liabilities 7 14 14 14 14 Interest cover (x) 44.1 20.3 16.7 27.6 42.4
Total long term liab. 42 116 116 116 116
Shareholders' Funds 422 630 710 800 904
Minority Interest 0 0 0 0 0 Quarterly Profit & Loss
FYE 31 Mar (RM m) 1Q19 2Q19 3Q19 4Q19 1Q20
Cash Flow Statement Revenue 577 692 837 803 836
FYE 31 Mar (RM m) 2018A 2019A 2020E 2021E 2022E Operating expenses -530 -648 -786 -756 -794
Pretax Profit 128 152 165 189 216 EBITDA 46 43 51 47 42
Depreciation & amortisation 14 25 27 30 33 Depreciation & amortization -6 -6 -7 -7 -7
Working capital changes -32 -205 67 -30 -34 EBIT 41 37 44 40 35
Cash tax paid -37 -27 -43 -49 -56 Int expense -2 -2 -3 -3 -2
Others 1 8 0 0 0 Exceptional items 3 2 -2 -4 -1
C/F from operation 74 -46 216 140 159 Pretax profit 39 35 42 37 33
Capex -32 -62 -55 -50 -50 Tax -9 -8 -8 -15 -8
Others 6 13 0 0 0 Minority interest 0 0 0 0 0
C/F from investing -26 -49 -55 -50 -50 Net profit 31 27 34 21 25
Debt raised/(repaid) 9 164 -60 -50 -50 Core net profit 33 29 32 17 24
Dividends paid 0 0 -43 -49 -56
Others -57 56 0 0 0 Margins (%)
C/F from financing -47 220 -103 -99 -106 EBITDA 8.0 6.2 6.1 5.8 5.0
Net change in cash flow 1 125 59 -9 3 PBT 6.8 5.1 5.0 4.6 3.9
Net profit 5.3 4.0 4.0 2.6 2.9
Free Cash Flow 42 -108 161 90 109
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 30 of 54
Initiation: Prime beneficiary of trade diversion
V.S. Industry (VS) is the largest home-grown vertically integrated
Electronics Manufacturing Services (EMS) player in Malaysia. We like
VS for its: i) diversified customer mix, ii) strong ability in securing new
contracts which makes it a prime beneficiary of trade diversion, iii)
earnings growth on the back of new orders and potential narrowed
losses from its China operations, and iv) reasonable dividend yields
of 3-4%. We initiate coverage on VS with a BUY rating and 12-month
target price (TP) of RM1.60, based on CY20E PER of 16x.
The most diversified local EMS player among its closest peers
VS has the most diversified customer mix among its closest peers, with its
three major MNC customers collectively making up more than 70% of its
revenue in FY19. Most importantly, all three major customers are involved
in different industries, alleviating the common concern on the concentration
risk investors have for EMS players. In addition, with its diversified
customer mix, VS stands a high chance of gaining more market share from
its existing customers’ contract manufacturers.
Strong ability in clinching new orders
Following the decline in order flow from its single largest key customer, VS
has managed to secure a new customer, Bissell, to partly fill the gap within a
remarkably short period. With the recent contract wins demonstrating its
strong ability in clinching new contracts, we believe that VS is at the forefront
of securing more orders from the trade diversion. Besides, despite the
reduction in orders from its key customer, VS’ recent quarters results were
above market expectations due to the improved production efficiency
arising from greater economies of scale, the absence of set-up costs of
new lines and more favorable product mix. While VS is also a victim of trade
tension with its operation in China, it is currently streamlining and downsizing
the operation to optimise cost and minimise losses.
Initiate with a BUY rating and TP of RM1.60
We initiate coverage on VS with a BUY rating and TP of RM1.60, based
on 16x CY20E PER, in line with +0.5SD of its 5-year forward PER mean.
Currently trading at 13x CY20E PER, we think that the share-price
correction reflects the potential near-term weakness and the valuation
looks appealing at current levels.
Earnings & Valuation Summary
FYE 31 Jul 2018A 2019A 2020E 2021E 2022E
Revenue (RMm) 4,100.7 3,978.4 4,042.3 4,345.5 4,678.5
EBITDA (RMm) 285.5 294.4 328.1 357.7 386.1
Pretax profit (RMm) 175.0 182.4 229.3 259.6 287.6
Net profit (RMm) 149.9 166.0 174.7 192.9 211.7
EPS (sen) 9.3 8.6 9.6 10.6 11.6
PER (x) 13.6 14.6 13.1 11.9 10.8
Core net profit (RMm) 149.9 166.0 174.7 192.9 211.7
Core EPS (sen) 9.2 9.1 9.6 10.6 11.6
Core EPS growth (%) (17.4) (1.2) 5.3 10.4 9.7
Core PER (x) 13.7 13.8 13.1 11.9 10.8
Net DPS (sen) 4.3 4.4 4.3 4.8 5.2
Dividend Yield (%) 3.4 3.5 3.4 3.8 4.1
EV/EBITDA (x) 8.0 8.0 6.8 6.0 5.3
Chg in EPS (%) - - -
Affin/Consensus (x) 0.99 0.94 0.99 Source: Company, Bloomberg, Affin Hwang forecasts
Initiate Coverage
V.S. Industry VSI MK Sector: EMS
RM1.26 @ 9 October 2019
BUY (Initiate Coverage) Upside: 24%
Price Target: RM1.60 Previous Target: -
Price Performance
1M 3M 12M Absolute -2.3% 8.6% -24.6% Rel to KLCI 1.0% 17.8% -13.7%
Stock Data
Issued shares (m) 1,836.5 Mkt cap (RMm)/(US$m) 2314/551.4 Avg daily vol - 3mth (m) 11.0 52-wk range (RM) 0.63-1.70 Est free float 57.4% BV per share (RM) 0.87 P/BV (x) 1.45 Net cash/(debt) (RMm)
(3Q17)
(48.98) ROE (2020E) 10.6% Derivatives No Shariah Compliant Yes
Key Shareholders
KWAP 10.9% Datuk Beh Kim Ling 7.9% Datin Gan Chu Cheng 7.0% Datuk Gan Sem Yam 5.9% Source: Company, Bloomberg
Chua Yi Jing (603) 2146 7546
0.00
0.50
1.00
1.50
2.00
2.50
3.00
Oct-16 Mar-17 Aug-17 Jan-18 Jun-18 Nov-18 Apr-19 Sep-19
(RM)
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 31 of 54
Investment Thesis
#1. Prime beneficiary of trade diversion
Lower order flow from key customer
While FY19 was supposed to be a year where VS’ earnings start to
accelerate strongly with most of the lines reaching full efficiency, the
expectations fell through following the decline in order flow from its single
largest key customer. In December 2018, VS announced in its 1QFY19
results that it had expected a decline in order flow from its key customer in
Malaysia, with no reason being cited. There was a reduction in orders for 3
lines of its floor care products.
3 lines taken away, but added 1.5 lines
While there was a reduction in orders for 3 lines of floor care products from
the key customer, VS has received 1 line of new additional orders from its
key customer for the latest version of floor care product and 0.5 line of
additional orders for a personal care product that is already in production
due to strong demand for the product. As a result, the net lower order flow
is only 1.5 lines. This has largely alleviated the concern on the risk of any
further reduction in order flow from the key customer and demonstrated
VS’ ability in securing new product orders with its experience and
expertise. Currently, it is running 3.5 lines for the key customer.
Impact from the decline in order flow less austere than expected
Following the profit warning, the market was expecting the group to report
weaker results; however, this did not materialise as the impact from the
reduction in orders was less severe than expected. Its Malaysian
operations recorded a stronger revenue (+10% yoy, +19% qoq) and pre-
tax profit (+68% yoy, +106% qoq) in 4QFY19. The better-than-expected
performance was mainly driven by: i) the improvement in production
efficiency stemming from greater economies of scale as more lines are
running optimally, ii) the absence of set-up costs associated with
commissioning of new lines that were incurred in the corresponding period
last year, and iii) more favorable product sales mix, particularly the key
customer’s personal care products which command higher ASP.
Bissell comes to the rescue…
Three months after the issuance of a profit warning back in March 2019,
VS made a surprise announcement of contract win from a new customer –
Bissell International Trading Company, B.V. (Bissell) in February 2019, to
manufacture home care products on a box-build assembly basis. Bissell’s
products are mainly manufactured in China and Mexico, and this product
transfer is mainly due to the US trade tariff on China. Per management, the
contract was secured within 6 months which is in a short time frame as
compared to a normal contract which takes around 18 months to secure.
This has undeniably demonstrated the group’s strong ability in clinching
new orders.
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 32 of 54
… but only partly offset the shortfall in the near term
That said, while Bissell came in on time to partly offset the decline in order
flow, and further diversify VS’ customer mix and reduce the concentration
risk, we note that in the short term the contribution from Bissell is still not
sufficient to fully cover the decline in order flow from the key customer.
Bissell is expected to contribute an estimated revenue of RM300m to the
group in FY20E (c.7% of the group’s revenue in FY20E).
Commenced mass production for its first Bissell model
VS has commenced the mass production for its first Bissell model, a water-
based carpet cleaner, at its 160,000 sq. ft. facility. The delivery will start by
end-October, hence we expect the contribution to be minimal in 1QFY20
and only come in progressively from 2QFY20 onwards. So far, a total of 5
models has been confirmed and will commence progressively once the first
production line stabilises. The group targets to break even on the set-up
cost for its Bissell production in December 2019.
More opportunities ahead from Bissell on the back of trade diversion
Bissell is one of the top-selling brands in small home-care products in the
USA with an estimated market share of 20%, recording close to US$1.0bn
of annual revenue in 2018. In addition to offering an array of homecare
products that include carpet cleaners, vacuums, sweepers, cleaning
formulas, and pet grooming & clean-up products, Bissell also provides
commercial cleaning equipment to various industries under the brand
Sanitaire, which was acquired from Electrolux. Bissell’s products are sold
in North and South America, Europe, the Middle East, and in Asia, such as
in Taiwan, Japan and China. Its contract manufacturers are located in
China and Mexico, and VS is its first contract manufacturer in Southeast
Asia. VS believes there is potential for more contract wins from Bissell and
expects Bissell to become its second largest customer, contributing around
20% to its annual revenue in three years’ time.
Fig 34: Bissell’s key product categories
Source: Company
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 33 of 54
Another contract win in the cards?
Eyeing a piece of the pie from the potential MNC’s supply-chain shift, VS
has established a special business development taskforce to pursue these
opportunities. Other than Bissell, VS also secured a new customer which is
expected to contribute around RM100m in annual revenue to the group.
The group is currently in advanced stages of discussions with a number of
other prospective customers, though the management remains tight-lipped
on the type of products/industries. With the group’s ability in securing new
orders within a shorter-than-expected period, we reckon that the group
stands a high chance in securing new customers, filling up its 180k sq. ft
new factory. Should new orders come to fruition, it would further diversify
VS’ customer mix and enable the group to regain investors’ confidence.
Based on our sensitivity analysis, every RM100m new contract from a new
customer could potentially increase the group’s core net profit by c.2-3%
for FY20-22E.
#2. The most diversified local EMS player
among its closest peers
A well-diversified customer mix
Among the three largest home-grown EMS players in Malaysia, VS has the
most diversified customer mix, with its three major customers collectively
making up close to 90% and 75% of its Malaysia’s and group’s revenue
respectively in FY19. Mostly importantly, all three major customers are
involved in different industries (Fig 35). Based on our estimates, given the
decline in order flow from its single largest key customer, the reliance on
the particular key customer will constitute less than half of the group’s total
revenue from FY20E onwards (from more than half of the group’s revenue
in FY19). With the inclusion of Bissell, for which production commenced in
September 2019, the group’s customer mix will become even more well-
distributed, alleviating the common concern on the concentration risk
investors have for EMS players.
Fig 35: Profile of top four major customers
Customer Profile
Global renowned premium household appliances brand
Single largest key customer* Customer since 2011
2 types of contracts on hand: 1) box-build assembly, and 2) PCB & battery pack assembly
Leader in the North American market for single-serve coffee selling coffee pods and brewers
Customer since 2012
VS serves as OEM & ODM
VS is 1 of 3 suppliers to Keurig and the only one out of China
Leading supplier of pool cleaners with key markets in Australia, US and South Africa
Customer since 2013
VS serves as OEM & ODM
VS is the sole manufacturer of Zodiac’s robotic pool cleaner in the world
One of the top-selling brands in small homecare products in the USA
Latest customer secured in 2019
VS is Bissell's first supplier in Southeast Asia *Unable to disclose actual name due to the companies’ commercial arrangement with the key customer Source: Company, Affin Hwang
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 34 of 54
Fig 36: Revenue breakdown by customer mix and segment
Source: Company, Affin Hwang
Fig 37: Revenue contributions from top three major customers
Source: Company, Affin Hwang
Backed up by renowned MNC customers
VS’ order flow from both Keurig Dr Pepper (Keurig) and Zodiac Pool
Solutions (Zodiac) have been growing strongly at a CAGR of 63% and
51% respectively since the first year they appointed VS as contract
manufacturer, which signals their confidence in VS’ quality and delivery.
VS currently serves Keurig and Zodiac in both the OEM and ODM spaces.
Notably, Zodiac closed down its plants in France and Australia in 2014 and
2015 respectively and moved their production volume to VS after
outsourcing orders to VS and being satisfied with the latter’s competitive
pricing and quality where market rejection rates are much lower. VS is now
the sole producer of Zodiac’s robotic pool cleaners in the world and has
started producing other pool cleaning-related products such as
chlorinators.
Fluidra-Zodiac merger…
In mid-2018, Zodiac completed a merger with Fluidra, a multinational
Spanish-listed company involved in the manufacturing of pool equipment
products, as well as in industrial water treatment, irrigation and engineering
services, to create a global leader in the pool sector. The combined
company has retained the Fluidra name and turned into a global
powerhouse with presence in over 45 countries and 30-40% combined
market share in robotic cleaners in the European Economic Area (EEA),
according to a press release by Fluidra (Fig 38). Fluidra owns a portfolio of
some of the industry’s most recognized and trusted brands, including
Jandy, AstralPool, Polaris, Cepex, Zodiac, CTX Professional and Gre.
Objectives set by the company for 2022E include an annual sales growth
target of 5-8%, resulting in revenue of EUR1.7bn and EBITDA of over
EUR350m in 2022E.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY15 FY16 FY17 FY18 FY19
Key customer Keurig Zodiac Other China Indonesia
0
500
1,000
1,500
2,000
2,500
3,000
3,500
FY15 FY16 FY17 FY18 FY19
RM m
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 35 of 54
Fig 38: Fluidra’s market share in the EEA post-merger with Zodiac
Country / Region Market share in robotic cleaner
EEA 30 - 40%
Sweden 60 - 70%
Greece 60 - 70%
Spain 50 - 60%
Czech Republic 40 - 50%
Belgium 40 - 50%
Cyprus 40 - 50%
Germany 40 - 50%
Romania 40 - 50%
The Netherlands 40 - 50%
Austria 30 - 40%
Italy 30 - 40%
France 30 - 40%
Hungary 30 - 40%
Bulgaria 30 - 40%
Portugal 20 - 30%
Luxembourg 20 - 30% Source: Fluidra, Affin Hwang
… offers opportunity for VS to tap on the enlarged Fluidra group
Notably, VS has received Supplier of the Year Award from Fluidra this year
for its outstanding quality with zero market rejection for the past 9 months.
With this, we believe that the group stands a high chance in gaining market
share from Fluidra’s existing contract manufacturer in Israel. While the
revenue contribution from Zodiac is relatively small at <10% of VS’
revenue, the merger offers opportunity for VS to secure new contracts from
the enlarged Fluidra group post-integration of the businesses. Based on
our sensitivity analysis, every RM100m in new contracts from Fluidra could
potentially increase the group’s core net profit by c.3-4% for FY20-22E.
Contributions from Keurig to recover marginally
Revenue from Keurig declined 22% yoy in FY18 due to the cessation of
production of coffee machine models that have reached the end of the
product lifecycle, while new replacement models only commenced
production towards the end of FY18. The contribution from Keurig
continued to decline by a quarter in FY19 due to the merger exercise
between Keurig Green Mountain and Dr Pepper Snapple Group, which
required the company to work on aligning and integrating the businesses.
Going forward, we expect a marginal growth in contributions from Keurig
underpinned by organic sales growth on the back of the launching of more
functional new models and the escalating trade diversion.
#3. Turning risk into opportunity
Anticipating lower PCB assembly sales from its key customer...
VS is one of the earliest EMS players which had in-house printed circuit
board (PCB) assembly and battery pack assembly lines among its key
customer’s contract manufacturers, and hence has been supplying PCB
and battery packs to its key customer’s other contract manufacturers that
do not have the capability. However, as its key customer has indicated its
preference for all the contract manufacturers to have their own in-house
PCB assembly and battery pack assembly capabilities to realise cost
savings, most of its peers have jumped on the bandwagon to start a PCB
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 36 of 54
assembly and battery pack assembly segment in-house with a target to
achieve self-sufficiency. In view of this, VS has in fact anticipated
weakness in revenue from its PCB assembly and battery pack assembly
business segment since 2-3 years ago.
… but managed to secure a new customer to partly offset the
anticipated weakness
While its revenue from PCB assembly and battery pack assembly are still
holding up well year to date (contrary to earlier anticipation of weaker PCB
assembly and battery pack assembly sales), VS has recently secured a
new customer for its PCB assembly business with an estimated
contribution of RM200m per annum. While management remained tight-
lipped on the name of the customer and type of the product, it indicated
that the PCB assembly for this new customer has begun in August 2019
and the contract is to cater for two models of the customer’s commercial
products. In fact, this customer has its own existing PCB assembly lines,
and the new contract awarded to VS is a result of growing demand as the
customer has no intention to expand its own in-house PCB assembly
capacity. Note that PCB assembly business generates higher margins,
which should help to partly mitigate weakness as a result of the decline in
order flow from its key customer.
Fig 39: VS’ EMS solutions
Source: Company, Affin Hwang
#4. Streamlining regional operations
China: Having presence in China via 43.3%-owned subsidiary
VSI has a presence in China, via its 43.3%-owned subsidiary VS
International Group Ltd (VSIG). VSIG commenced its business in 1997 in
China, and was listed on the Main Board of the Hong Kong Stock
Exchange (HKSE) in 2002. Similar to its parent, VSIG is principally
engaged in the manufacture and sale of plastic molded products and parts,
assembling of electronic products as well as mould design and fabrication.
VSIG’s existing major customers include Georgia-Pacific, Amway and
Diamond. The key products VSIG manufactures include the Diamond
Water Bar, Aristo coffee machines, cutleries and paper cup dispensers.
A drag to the group’s performance since FY09
Having suffered in the past 8 years since FY09, VSIG turned around in
FY17 on the back of: i) new orders from NEP to serve NEP on an ODM
basis, offering one-stop EMS services following VS’ acquisition of a 20%-
stake in NEP, and ii) increase in orders from Perfect China to manufacture
a new air purifier model on an ODM basis for sale in the China market
(contract value: RMB400m or c.RM242m). However, the robust
performance in FY17 was short-lived as the results had fallen back into the
R&D
Plastic
Tooling
Design
Plastic
Tooling
Fabrication
Plastic
Injection
Molding
Plastic
Secondary
Processes
PCB
Assembly
Sub-
Assembly
Complete
Product
Assembly
Logistics &
Fulfillment
PCB
Assembly
Division
Plastic Injection DivisionTooling Division Assembly Division
4 key divisions in Manufacturing Services
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 37 of 54
red in FY18 and the losses further widened in 9MFY19, due to lower sales
orders from customers following the expiry of contract from its main
customer with no indication of contract renewal, which resulted in the
underutilisation of its facilities. Adding to the woes are the rising operating
cost structure and stiff competition in China.
Operations in China losses widened in FY19
VSIG’s revenue declined 44% yoy to RM388m in FY19, while pre-tax
losses almost quadrupled to RM83m (from RM22m pre-tax losses in FY18)
or RM36m excluding non-controlling interest, mainly due to the
underutilisation of its facilities and the significant downsizing activities.
Stripping off the exceptional items, the estimated core pre-tax losses stood
at RM45m, or RM19m excluding non-controlling interest (which was an
11% drag on the group’s pre-tax profit in FY19).
Stemming the losses
VS is in the midst of streamlining and downsizing its operations in China in
order to optimize costs and minimize losses. Following the recognition of
the sizeable restructuring costs, the group expects its China operation’s
core net losses to narrow on lower fixed overhead costs. It has no plan to
dispose its operations in China at this junction, and is currently pursuing an
asset-light strategy to lower gearing and improve financial flexibility for its
operation in China.
Outlook remains bleak
Going forward, the operating environment for its China operation is
expected to remain challenging due to the underutilization of its facilities on
the back of the absence of large sales orders as a result of intensive
competition and prolonged US-China trade tension. Moreover, we do not
rule of the possibility that its operation in China might record wider losses
should the US-China trade tension escalate into a full-blown trade war. Our
in-house economists see a 30% probability of a global recession in 2020E,
based on the assumption that US-China trade tension could escalate into a
full-blown trade war in the coming months.
Indonesia: Impacted by lower sales volume and weakening of Rupiah
VS also has a presence in Indonesia through its wholly-owned subsidiary,
PT. V.S. Technology Indonesia, which involves in printed circuit board
(PCB) assembly and sub-assembly. Revenue from its Indonesian
operations declined 19% yoy to RM246m (6% of the group’s revenue) in
FY19 due to lower sales volume coupled with the weakening of the
Indonesian Rupiah. As a result, FY19 pre-tax profit declined 58% to RM1m
(0.8% of the group’s pre-tax profit). On a positive note, its operation in
Indonesia has returned to the black since 2QFY19 after incurring losses for
three consecutive quarters, underpinned by favorable product mix.
To maintain at current scale as sub-assembly house
Management expects its operations in Indonesia to remain profitable,
though minimal to the group, as it continues to seek new business to attain
higher levels of economies of scale. The group plans to maintain its
Indonesian operations at current scale as a sub-assembly house given the
different business environment in Indonesia, where the customers usually
prefer to be their own main contractor, hence it is difficult to expand
Indonesian operations as compared to its main operations in Malaysia.
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 38 of 54
While its operation in Indonesia is also likely to benefit from the positive
spillover from trade diversion, its Indonesian operation was relatively small,
making up only 6-7% of the group’s revenue in FY18-19.
Fig 40: Segmental revenue track record
Source: Company, Affin Hwang
Fig 41: Segmental pre-tax profit track record
Source: Company, Affin Hwang
Fig 42: Segmental revenue breakdown (FY18)
Source: Company, Affin Hwang
Fig 43: Segmental revenue breakdown (FY19)
Source: Company, Affin Hwang
Fig 44: Quarterly pre-tax profit/loss from China operation
Source: Company, Affin Hwang
Fig 45: Quarterly pre-tax profit/loss from Indonesia operation
Source: Company, Affin Hwang
1,328 1,489
2,294
3,088 3,338
526
565
803
304 246
81 119
182
689 388
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
FY15 FY16 FY17 FY18 FY19
RM m Malaysia China Indonesia
170 163
204 194
260
(8) (19)
17 3 1
(4)
7
(5) (22)
(83)
(150)
(100)
(50)
-
50
100
150
200
250
300
FY15 FY16 FY17 FY18 FY19
RM m Malaysia China Indonesia
Malaysia, 76%
Indonesia, 7%
China, 17%
Malaysia, 84%
Indonesia, 6% China, 10%
(60.0)
(50.0)
(40.0)
(30.0)
(20.0)
(10.0)
-
10.0
20.0
30.0
RM m
(12.0)
(10.0)
(8.0)
(6.0)
(4.0)
(2.0)
-
2.0
4.0
6.0
RM m
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 39 of 54
Financial Analysis and Forecasts
Strong revenue and core net profit growth in the past 5 years
VS recorded an encouraging 5-year revenue and core net profit CAGR of
18% and 23% respectively, through FY19, driven by growing orders from
its customers. The group had achieved a record-high revenue of RM4.1bn
in FY18 (+25% yoy), mainly driven by its single largest key customer.
However, despite stripping off the exceptional items related to impairment
loss on properties and loss on disposal of a subsidiary, FY18 core net
profit declined 11% yoy, mainly dragged by the set-up costs for new lines
and the losses from its China operations.
FY19 core net profit improved despite marginally lower revenue
Previously expected to be hit by the decline in order flow from its largest
key customer in FY19, VS’ FY19 performance came in above the market’s
expectation with revenue only declining 3% yoy while core net profit grew
11% yoy to RM166m in FY19, mainly due to the higher contribution from
Malaysian operations which offset the weakness in regional operations.
Malaysia continues to underpin growth
Despite a decline in order flow from its key customer, VS’ revenue from
Malaysia’s operation grew 8% yoy mainly due to the higher demand for the
key customer’s personal care products, which command higher ASP. PBT
for Malaysia’s operation also increased 34% yoy, mainly due to: i) the
improvement in production efficiency stemming from greater economies of
scale as more lines are running optimally, ii) the low base effect in FY18
which was affected by high initial set-up costs associated with
commissioning of new lines, and iii) more favorable product sales mix,
particularly the key customer’s personal care products which command
higher ASP.
4QFY19 results above market expectations
In term of quarterly performance, VS’ 4QFY19 results were a positive
surprise to the market. Revenue was flat (+0.3% yoy) as the strong growth
of domestic sales (+10% yoy) was offset by its China operation (-47% yoy).
In an effort to streamline its China operations, its China subsidiary
recognized one-off expenses including loss on disposal of plant and
equipment, impairment loss on plant and equipment and termination
benefit to employees, which amounted to RM35m. Stripping off the
exceptional items, VS’ core net profit grew 5% yoy on the back of improved
production efficiency, lower initial setup costs and more favorable product
sales mix.
Expecting 3-year core net profit CAGR of 8%
We expect VS to record 3-year core net profit CAGR of 8% over FY19-
22E, underpinned by: i) improvement in efficiency due to optimal running of
production lines, ii) potential more contract wins from its existing
customers, Bissell, and other potential new customers as a result of trade
diversion, and iii) potential narrowed losses from China due to the cost
rationalisation initiatives. While the orders from its key customer are
expected to be decline in FY20E due to the cessation of production of the
older floor-care model that has reached the end of the product lifecycle, we
expect this to be offset by Bissell and potential new customers.
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 40 of 54
Potential upside from further new contract wins
VS has secured Bissell, a new PCB assembly customer and another new
box-build customer which are expected to collectively contribute RM600m
or 15% to the group’s revenue in FY20E. We have not included any further
potential additional contract wins from new customers, hence any further
potential contract wins from new customers as a result of US-China trade
tension would provide upside to our earnings forecast. Based on our
sensitivity analysis, every RM100m of revenue from a new contract from a
new customer could potentially increase the group’s core net profit by c.2-
3% for FY20-22E.
Fig 46: Projecting 6% 3-year revenue CAGR (FY19-22E)
Source: Company, Affin Hwang forecasts
Fig 47: Projecting 8% 3-year core net profit CAGR (FY19-22E)
Source: Company, Affin Hwang forecasts
Healthy financial position
VS sits on a healthy cash pile of RM379m as at end-FY19 and generates
consistent strong net operating cash flow annually with an average net
cash generation from operations of around RM142m per year over the past
five years. The group has spent significant capex of RM167m/RM217m/
RM125m in FY17/FY18/FY19, mainly to acquire new facilities and
production lines for expansion. Following the expansion, management
expects its capex to normalize to around RM60m per year over the next
three years. Its current net gearing is comfortable at 0.03x (as at end-
FY19), which allows it to leverage to fund growth, if necessary.
Distributes dividend every quarter
VS has a formal dividend policy of paying out at least 40% of its net profit
to reward investors. The group has consistently paid out an average 45%
of its net profit as dividends over the last 10 years. For FY20-22E, we
estimate a dividend payout of 40%, translating to an average yield of
around 3-4%.
-10%
0%
10%
20%
30%
40%
50%
60%
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
FY15A FY16A FY17A FY18A FY19A FY20E FY21E FY22E
RM m Revenue (LHS) Revenue growth (RHS)
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
0
50
100
150
200
250
FY15A FY16A FY17A FY18A FY19A FY20E FY21E FY22E
RM m Core net profit (LHS) Core net profit margin (RHS)
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 41 of 54
Fig 58: 10-year dividend track record
Source: Company, Affin Hwang
Valuation and Recommendation
Initiate with a BUY rating and TP of RM1.60
We initiate coverage on VS with a BUY rating and 12-month TP of
RM1.60. Our TP is based on 16x CY20E PER, which based on +0.5SD of
its 5-year forward PER mean given the group’s strong ability in securing
new customers. Though this is above its 10-year forward PER mean of 9x,
we think the premium valuation to its 10-year PER mean is justified as the
group has grown into a much larger corporation with a diversified customer
base and strong track record over the years, recording 10-year revenue
and core net profit CAGRs of 19% and 33% respectively. We like VS for
its: 1) diversified customer mix, 2) strong ability in securing new contracts
which makes it a prime beneficiary of trade diversion, 3) earnings growth on
the back of new orders and potential narrowed losses from its China
operations, and 4) reasonable dividend yields of 3-4%. Trading at only 13x
PER to its CY20E EPS, we think that the valuation looks appealing at
current levels.
Operations still resilient despite expectations falling through
Despite the reduction in orders from its key customer which disappointed
the market, VS has managed to secure new customers to partly fill the gap
within a remarkably short period. With the recent contract wins
demonstrating its strong ability in clinching new contracts, we believe that
VS is at the forefront of securing more orders from the trade diversion. In
addition, its recent quarters results were above market expectations due to
the improved production efficiency arising from greater economies of
scale, the absence of set-up costs of new lines and more favourable
product mix. While we remain cautious on the potential risks for its China
operations on the back of the prolonged trade tension, the losses should
moderate going forward following the downsizing activities in FY19.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
-
10
20
30
40
50
60
70
80
90
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
RM m Dividend paid (LHS) Dividend payout (RHS)
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 42 of 54
Fig 49: VS’ 5-year forward PER
Source: Bloomberg, Affin Hwang forecasts
Fig 50: VS’ 10-year forward PER
Source: Bloomberg, Affin Hwang forecasts
Fig 51: Peer Comparison
Source: Bloomberg, Affin Hwang forecasts* Note: Based on closing prices on 9 October 2019
Key investment risks
Downside risks include: i) dependent on single major customer; ii) reliance
on foreign labor, iii) competition risk, iv) a prolonged US-China trade
standoff, and v) a slowdown in the economy.
-
5.0
10.0
15.0
20.0
25.0
30.0
Oct1
4
Dec14
Fe
b15
Apr1
5
Jun1
5
Aug
15
Oct1
5
Dec15
Fe
b16
Apr1
6
Jun1
6
Aug
16
Oct1
6
Dec16
Fe
b17
Apr1
7
Jun1
7
Aug
17
Oct1
7
Dec17
Fe
b18
Apr1
8
Jun1
8
Aug
18
Oct1
8
Dec18
Fe
b19
Apr1
9
Jun1
9
Aug
19
Oct1
9
(x)
+2 SD: 23.7x
+1SD: 18.4x
Avg: 13.1x
-1SD: 7.8x
-2 SD: 2.5x
-
5.0
10.0
15.0
20.0
25.0
30.0
Oct0
9
Fe
b10
Jun1
0
Oct1
0
Fe
b11
Jun1
1
Oct1
1
Fe
b12
Jun1
2
Oct1
2
Fe
b13
Jun1
3
Oct1
3
Fe
b14
Jun1
4
Oct1
4
Fe
b15
Jun1
5
Oct1
5
Fe
b16
Jun1
6
Oct1
6
Fe
b17
Jun1
7
Oct1
7
Fe
b18
Jun1
8
Oct1
8
Fe
b19
Jun1
9
Oct1
9
(x)
+2 SD: 20.2x
+1SD: 14.7x
Avg: 9.1x
-1SD: 3.6x
EMS Peers Rating Sh Pr TP Upside Mkt Cap ROE (%) DY (%)
(RM) (RM) (%) (RM m) CY19E CY20E CY19E CY20E CY19E CY20E CY19E CY20E CY19E CY20E CY19E FY20E
ATA IMS* BUY 1.45 1.80 24.1 1,746.3 14.3 12.9 14.8 10.6 24.9 8.9 8.7 7.6 2.5 2.2 19.0 2.5
V.S. Industry* BUY 1.26 1.60 27.0 2,314.0 13.8 12.6 8.9 9.5 (2.0) 6.0 7.5 6.4 1.4 1.3 10.8 3.4
SKP Resources N/R 1.08 N/R N/R 1,350.2 12.5 10.5 1.5 20.6 4.0 14.4 6.9 5.7 2.2 2.0 17.3 4.3
P.I.E. Industrial N/R 1.37 N/R N/R 526.1 13.7 11.3 (11.6) 21.2 3.5 9.7 6.2 5.5 1.2 1.1 9.0 3.6
Average 13.6 11.8 3.4 15.5 7.6 9.7 7.3 6.3 1.8 1.7 14.0 3.5
Peers within "D" Ecosystem CY17A CY18A CY17A CY18A CY17A CY18A CY17A CY18A CY17A CY18A CY18A CY18A
i-Stone Group N/R 0.18 N/R N/R 226.0 18.5 15.3 107.1 17.6 40.0 11.9 22.2 17.4 n/a 3.7 19.1 n/a
MTAG Group N/R 0.42 N/R N/R 286.3 10.0 8.5 48.3 18.1 19.3 0.9 5.8 4.9 n/a 1.8 20.2 n/a
Average 14.2 11.9 77.7 17.9 29.6 6.4 14.0 11.2 n/a 2.7 19.7 n/a
Core P/E (x) Core EPS Growth (%) Rev. Growth (%) EV/EBITDA (x) P/B (x)
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 43 of 54
Company background
The largest home-grown EMS provider in Malaysia
VS Industry was established in Singapore in 1979 and subsequently
relocated to Malaysia in 1982. The group was listed on the Main Market of
Bursa Malaysia in 1998. Based in Johor, VS is a leading global EMS
provider involved in plastic injection moulding, mould design and
fabrication, production of PCB assembly, sub-assembly and final product
assembly of consumer electronic products. VS serves as original design
manufacturer (ODM) and original equipment manufacturer (OEM) to
customers who are mainly from the USA, Europe and Japan. VS is not
only Malaysia’s largest home-grown EMS provider but it is also one of the
world’s top 50 EMS providers (ranked 23rd in 2018) and top 5 EMS
providers in ASEAN.
Fig 52: Major milestones
Year Achievements & Awards
1979 Established in Singapore
1982 Relocated to Malaysia
1997 Expanded into China
1998 Listed on Bursa Malaysia
2001 Secured the key customer as customer
2002 VS International Group Ltd (VSIG), listed on HKSE
2003 Expanded into Indonesia
2011 Annual revenue hit RM1.0bn
2012 Secured Keurig as customer
2013 Secured Zodiac as customer
Acquired additional stake in VSIG, making it a subsidiary of the group
2014 R&D award by the key customer
2015 CSR award by the key customer
2016 Acquired 20%-stake in NEP ((Diamond water filters)
Annual revenue crossed RM2.0bn
Commenced box-build assembly for floor care products
Lean Manufacturing Award by the key customer
Vertically Integrated Status Award by the key customer
Best Supplier Award by Keurig
2017 Acquired 60%-stake in Skreen Fabric
Achieved record high revenue & net profit (RM3.3bn & RM156.3m)
“Brew A Better World” recognition by Keurig
“Supplier of the Year” award by Keurig
2018 Acquired remaining 40%-stake in Skreen Fabric
Annual revenue hit record high of RM4.1bn
2019 Secured Bissell as customer
Supplier of the Year award by Fluidra
Source: Company, Affin Hwang
Proven track record of delivering a wide range of products
Headquartered in Johor, VS has more than 30 years of experience and
track record. Examples of finished and semi-finished products
manufactured and/or assembled by the group include floor care products,
coffee brewers, automatic swimming pool cleaners, automotive plastic
components, printed circuit boards, and battery packs, etc. The group has
manufacturing facilities in Malaysia, China and Indonesia, with a total
combined built-up space of more than 3m sq. ft.
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 44 of 54
Fig 53: Distinctive clientele base
*Unable to disclose actual name due to the companies’ commercial arrangement with the key customer Source: Company
Fig 54: Products manufactured and/or assembled
Source: Company, Affin Hwang
Fig 55: Regional presence in Malaysia, Indonesia and China
Source: Company, Affin Hwang
Experienced management team
VS is helmed by the founding members of the group – Datuk Beh Kim Ling
(Executive Chairman) and Datuk Gan Sem Yam (Managing Director), who
have over 30 years of experience in plastics injection. Both of them and
their family members own 19% and 6% in the group respectively.
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 45 of 54
Fig 56: Experienced management team with strong industry expertise Key Management Personnel Profile
Datuk Beh Kim Ling Aged 61, Malaysian Executive Chairman
Has more than 30 years of contract manufacturing experience in the plastic injection and electronics & electrical assembly industries Started his career in 1976 as a plastic injection moulding technician in Singapore Set up V.S. Industry Pte. Ltd. in Singapore in 1979 Relocated the entire business operations from Singapore to Johor Bahru, and together with his wife, Datin Gan Chu Cheng, incorporated V.S. Industry Berhad in 1982 Brother-in-law to Datuk Gan Sem Yam and Dato’ Gan Tiong Sia
Datuk Gan Sem Yam Aged 63, Malaysian Managing Director
Joined V.S. Industry in 1982 and played the key role in setting up the plastic finishing and electronic assemblies division Promoted to General Manager and appointed as an Executive Director in 1988 Instrumental in the business integration and expansion of the Group since 1990 Brother to Datin Gan Chu Cheng & Dato’ Gan Tiong Sia Brother-in-law to Datuk Beh Kim Ling
Datin Gan Chu Cheng Aged 65, Malaysian Executive Director
Has more than 20 years of enterprise building experience and played a key role in the Group’s expansion, both locally and overseas Established V.S. Industry Berhad together with her husband in 1982 Spouse of Datuk Beh Kim Ling Sister to Datuk Gan Sem Yam & Dato’ Gan Tiong Sia
Dato’ Gan Tiong Sia Aged 59, Malaysian Executive Director
Joined V.S. Industry in 1982 as a Management Trainee and was promoted to Marketing Manager in 1986 Appointed to the Board in 1988 Responsible for the overall marketing function of the group Brother to Datin Gan Chu Cheng & Datuk Gan Sem Yam Brother-in-law to Datuk Beh Kim Ling
Ng Yong Kang Aged 58, Malaysian Executive Director
Has extensive engineering and operations experience in the manufacturing sector, with MNCs like General Electric (TV) Sdn. Bhd., Thomson Audio Muar Sdn.Bhd., Lion Plastic Industry Sdn. Bhd. and Likom Group of Companies Joined V.S. Industry as a Group General Manager in 2002 Joined the Board in 2005 Graduated from the National Taiwan University with a Bachelor of Science in Mechanical Engineering in 1985, obtained a Diploma in Management from the Malaysian Institute of Management in 1992, and has a Master in Business Administration from the Heriot-Watt University, UK in 2002
Source: Company, Affin Hwang
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 46 of 54
V.S. Industry – FINANCIAL SUMMARY
Source: Company, Affin Hwang forecasts
Profit & Loss Statement Key Financial Ratios and Margins
FYE 31 Jul (RM m) 2018A 2019A 2020E 2021E 2022E FYE 31 Jul (RM m) 2018A 2019A 2020E 2021E 2022E
Revenue 4,101 3,978 4,042 4,345 4,678 Growth
Operating expenses -3,815 -3,684 -3,714 -3,988 -4,292 Revenue (%) 25.0 -3.0 1.6 7.5 7.7
EBITDA 285 294 328 358 386 EBITDA (%) -10.6 3.1 11.5 9.0 7.9
Depreciation -79 -99 -87 -90 -93 Core net profit (%) -11.2 10.7 5.3 10.4 9.7
EBIT 206 195 241 267 293
Net int income/(expense) -23 -19 -14 -10 -7 Profitability
Exceptional gains / (losses) -1 8 0 0 0 EBITDA margin (%) 7.0 7.4 8.1 8.2 8.3
Associates' contribution -7 -2 3 2 2 PBT margin (%) 4.3 4.6 5.7 6.0 6.1
Pretax profit 175 182 229 260 288 Net profit margin (%) 3.7 4.2 4.3 4.4 4.5
Tax -39 -62 -69 -75 -81 Effective tax rate (%) 22.1 34.2 30.0 29.0 28.0
Minority interest 14 46 14 9 5 ROA (%) 5.0 5.4 5.7 6.2 6.6
Net profit 150 166 175 193 212 ROE (%) 12.0 10.9 10.6 11.0 11.4
Core net profit 150 166 175 193 212 ROCE (%) 10.7 9.5 11.8 12.8 13.6
Dividend payout ratio (%) 45.8 45.8 50.8 45.0 45.0
Balance Sheet Statement
FYE 31 Jul (RM m) 2018A 2019A 2020E 2021E 2022E Liquidity
Fixed assets 873 889 862 831 798 Current ratio (x) 1.5 1.7 1.9 2.0 2.1
Other long term assets 314 236 238 240 242 Op. cash f low (RM m) 215 226 264 225 247
Total non-current assets 1,187 1,125 1,100 1,072 1,040 Free cashflow (RM m) 9 101 204 165 187
Cash and equivalents 416 379 443 472 513 FCF/share (sen) 0.5 5.5 11.2 9.1 10.3
Stocks 395 372 385 412 442
Debtors 940 1,014 993 1,067 1,149 Asset management
Other current assets 186 143 143 143 143 Debtors turnover (days) 83.6 93.1 89.6 89.6 89.6
Total current assets 1,936 1,908 1,963 2,093 2,247 Stock turnover (days) 37.8 36.8 37.8 37.7 37.6
Creditors 730 721 732 786 846 Creditors turnover (days) 69.8 71.5 71.9 71.9 71.9
Short term borrow ings 552 362 300 250 200
Other current liabilities 14 21 21 21 21 Capital structure
Total current liabilities 1,295 1,104 1,053 1,057 1,067 Net gearing (%) 16% 3% -5% -9% -13%
Long term borrow ings 94 67 67 67 67 Interest cover (x) 12.3 15.5 23.5 36.7 57.0
Other long term liabilities 73 85 85 85 85
Total long term liab. 167 152 152 152 152
Shareholders' Funds 1,438 1,599 1,695 1,801 1,917 Quarterly Profit & Loss
Minority Interest 223 178 164 155 151 FYE 31 Jul (RM m) 4Q18 1Q19 2Q19 3Q19 4Q19
Revenue 1,027 1,076 983 890 1,030
Cash Flow Statement Operating expenses -963 -1,003 -906 -825 -950
FYE 31 Jul (RM m) 2018A 2019A 2020E 2021E 2022E EBITDA 64 73 77 64 80
Pretax Profit 176 174 229 260 288 Depreciation & amortization -21 -23 -23 -24 -29
Depreciation & amortisation 79 99 87 90 93 EBIT 43 50 54 41 51
Working capital changes -65 -66 19 -48 -52 Int expense -5 -6 -6 -4 -3
Cash tax paid -46 -52 -69 -75 -81 Associates' contribution -7 2 2 2 -7
Others 71 71 -3 -2 -2 Exceptional items 16 12 -6 -9 12
C/F from operation 215 226 264 225 247 Pretax profit 30 45 49 38 41
Capex -207 -125 -60 -60 -60 Tax -3 -17 -14 -12 -20
Others 22 15 0 0 0 Minority interest 14 11 2 5 27
C/F from investing -184 -110 -60 -60 -60 Net profit 42 40 38 31 48
Debt raised/(repaid) -51 -243 -62 -50 -50 Core net profit 58 51 32 22 61
Dividends paid -73 -72 -79 -87 -95
Others 220 151 0 0 0 Margins (%)
C/F from financing 96 -164 -140 -137 -145 EBITDA 6.2 6.8 7.8 7.2 7.8
Net change in cash flow 126 -48 64 28 42 PBT 3.0 4.2 5.0 4.3 4.0
Net profit 4.1 3.7 3.9 3.5 4.7
Free Cash Flow 9 101 204 165 187
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 47 of 54
The third largest local EMS player in Malaysia
Established in 1994, SKP Resources (SKP) is an Electronics
Manufacturing Services (EMS) provider, principally involved in the
manufacture of plastic components, precision moulds, advance
secondary processes, sub-assembly of electronics equipment and full
turn-key contract manufacturing. SKP serves a common key customer
as ATA IMS and V.S. Industry, which accounts for over 70% of its
revenue. Going forward, SKP plans to expand its PCB assembly,
injection moulding and engineering capabilities in anticipation of
higher capacity utilisation and to improve production throughput.
First in-house PCB assembly line commenced in April 2019
SKP commenced its first in-house printed circuit board (PCB) assembly line
in April 2019, which is expected to improve its profitability and success rate
in clinching new orders from its key customer given the latter’s emphasis for
its contract manufacturers to be vertically integrated.
Weak performance in recent quarter
SKP recorded weaker performance in the recent quarter with 1QFY20
revenue slipping 16% yoy due to moderating demand by its key customer for
production of an older model that has progressed towards the later part of
the product lifecycle. Consequently, core net profit declined 31% yoy given
the reduction in orders, higher operating expenses and diminished
economies of scale due to the production volume drop.
On expansion mode
Nevertheless, SKP recorded a 5-year revenue and core net profit CAGR of
32% and 28% respectively, mainly driven by the strong orders from its key
customer. The group has set aside a higher capex of RM47m for FY20E to
expand its PCB assembly, injection moulding and engineering capabilities in
anticipation of higher capacity utilisation and improved production throughput
as per its key customer guidance (FY17-19: RM24-26m).
In a healthy financial position
SKP is the only net cash company among its closest peers, sitting on a net
cash position of RM257m (RM0.21/share, which represent 19% of its current
market capitalisation). The group has been consistently distributing 50% of
its profit as dividend, which is in line with its dividend payout policy.
Valuation below that of its local peers
SKP’s CY18 historical PER of 13x is below the 14x average PER of its local
peers and the local listed companies that are part of “D” ecosystem.
Earnings & Valuation Summary
FYE 31 Mar 2015A 2016A 2017A 2018A 2019A
Revenue (RMm) 619.3 1,015.4 1,943.6 2,106.4 1,654.2
EBITDA (RMm) 64.3 121.6 158.8 173.7 139.0
Pretax profit (RMm) 55.8 101.4 138.5 156.2 124.6
Net profit (RMm) 42.3 81.5 103.3 126.8 96.7
EPS (sen) 3.4 6.5 8.3 10.1 7.7
PER (x) 31.9 16.6 13.1 10.7 14.0
Core net profit (RMm) 42.2 76.4 105.0 117.3 95.0
Core EPS (sen) 3.4 6.1 8.4 9.4 7.6
Core EPS growth (%) 54.7 80.9 37.5 11.7 (19.0)
Core PER (x) 32.0 17.7 12.9 11.5 14.2
Net DPS (sen) 2.0 3.5 4.2 5.1 3.8
Dividend Yield (%) 1.8 3.2 3.8 4.7 3.6
EV/EBITDA (x) 19.8 11.2 8.7 7.4 9.4 Source: Company, Bloomberg, Affin Hwang forecasts
Company Note
SKP Resources SKP MK Sector: EMS
RM1.08 @ 9 October 2019
Non-rated
Price Target: n/a Previous Target: n/a
Price Performance
1M 3M 12M Absolute 1.9% -15.0% -15.0% Rel to KLCI 5.4% -7.7% -2.7%
Stock Data
Issued shares (m) 1,250.2 Mkt cap (RMm)/(US$m) 1350.2/321.7 Avg daily vol - 3mth (m) 0.9 52-wk range (RM) 0.95-1.44 Est free float 56.0% BV per share (RM) 0.48 P/BV (x) 2.23 Net cash/(debt) (RMm)
(3Q17)
257.49 Derivatives No Shariah Compliant Yes
Key Shareholders
Beyond Imagination Sdn Bhd 14.4% KWAP 14.4% Datuk Gan Kim Huat 9.5% Renown Million Sdn Bhd 8.1% Source: Company, Bloomberg
Chua Yi Jing (603) 2146 7546
0.00
0.50
1.00
1.50
2.00
2.50
Oct-16 Feb-17 Jun-17 Oct-17 Feb-18 Jun-18 Oct-18 Feb-19 Jun-19
(RM)
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 48 of 54
Focus charts Fig 57: Recorded 10-year revenue CAGR of 25%
Source: Company, Affin Hwang
Fig 58: Recorded 10-year core net profit CAGR of 28%
Source: Company, Affin Hwang
Fig 59: SKP’s distinctive clientele base
Source: Company
Fig 60: SKP’s key milestones
Source: Company, Affin Hwang
Fig 61: SKP 5-year forward PER
Source: Company, Bloomberg
Fig 62: SKP 10-year forward PER
Source: Company, Bloomberg
-40%
-20%
0%
20%
40%
60%
80%
100%
-
500.0
1,000.0
1,500.0
2,000.0
2,500.0
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
RM m Revenue (LHS) Revenue growth (RHS)
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
-
20.0
40.0
60.0
80.0
100.0
120.0
140.0
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
RM m Core net profit (LHS) Core net profit margin (RHS)
Year
2000 Incorporated in Malaysia under the name of Vital Conglomerate Sdn Bhd
Converted to a public limited company
2002 Renamed to SKP Resources Bhd
Acquired the entire stake in Sin Hw ang Plastic Sdn Bhd, Goodhart Industries
Sdn Bhd and Goodhart Land Sdn Bhd
2003 Listed on the Second Board of KLSE
2004 Completed a share split exercise on the basis of 10 new ordinary shares for
every 1 ordinary share, 1-for-4 bonus issue and transfer of listing to the Main
Board of Bursa Malaysia
2005 Acquired the remaining 37%-stake in Goodhart Technology Sdn Bhd
2006 Acquired the entire stake in S.P.I Plastic Industries Sdn Bhd for RM30m
2009 Entered into a contract for manufacturing and supply of product w ith its key
customer
2012 Undertaken 1-for-2 bonus issue and 1-for-5 free w arrants
2015
Acquired entire stake in Plastictecnic (M) Sdn Bhd, Sun Tong Seng Mould-Tech
Sdn Bhd and Bangi Plastic Sdn Bhd, all w holly-ow ned subsidiaries of Tecnic
Group Berhad, for RM200m
-
5.0
10.0
15.0
20.0
25.0
30.0
Oct1
4
Dec14
Fe
b15
Apr1
5
Jun1
5
Aug
15
Oct1
5
Dec15
Fe
b16
Apr1
6
Jun1
6
Aug
16
Oct1
6
Dec16
Fe
b17
Apr1
7
Jun1
7
Aug
17
Oct1
7
Dec17
Fe
b18
Apr1
8
Jun1
8
Aug
18
Oct1
8
Dec18
Fe
b19
Apr1
9
Jun1
9
Aug
19
Oct1
9
(x)
+2 SD: 22.7x
+1SD: 19x
Avg: 15.3x
-1SD: 11.6x
-2 SD: 7.9x
-
5.0
10.0
15.0
20.0
25.0
30.0
Oct0
9
Fe
b10
Jun1
0
Oct1
0
Fe
b11
Jun1
1
Oct1
1
Fe
b12
Jun1
2
Oct1
2
Fe
b13
Jun1
3
Oct1
3
Fe
b14
Jun1
4
Oct1
4
Fe
b15
Jun1
5
Oct1
5
Fe
b16
Jun1
6
Oct1
6
Fe
b17
Jun1
7
Oct1
7
Fe
b18
Jun1
8
Oct1
8
Fe
b19
Jun1
9
Oct1
9
(x)
+2 SD: 21.7x
+1SD: 16.4x
Avg: 11.1x
-1SD: 5.8x
-2 SD: 0.5x
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 49 of 54
Specialised automation machines expert
i-Stone is principally involved in the design, manufacturing and
modification of specialised automation machines (c.72% of its revenue
in FY18), maintenance & technical support services, and provision of
data management systems (DMS). It serves the same common key
customer as the EMS players, which accounted for 65% of its revenue
in FY18, and has been working with the key customer for the past 12
years since its incorporation in 2007. Going forward, i-Stone plans to
focus on: i) developing new products and new features for its existing
machines, ii) enhancing its manufacturing and design and
development capabilities, and iii) improving its manufacturing
efficiency with standard modules.
Experienced management team with strong industry expertise
i-Stone is led by an experienced management team, each with >15 years of
experience in the E&E industry specializing in specialized automation
machines, and has a diversified customer base of >100 customers from
various industries, i.e, E&E (household appliances & consumer electronics),
automotive, robotics, mechanical & engineering, and semiconductors.
3-year revenue and core net profit CAGR of 15% and 22% respectively
i-Stone recorded 3-year revenue and core net profit CAGR of 15% and 22%
respectively, through 2018, mainly driven by: i) the increase in sales of
various new customised specialised automation machines, which is in line
with the increase in manufacturing lines set up for new models introduced by
its key customer, and ii) the attainment of economies of scale.
Paving the way for industry 4.0
i-Stone relocated its manufacturing operations to its new factory in October
2018. With the additional floor space, it plans to: i) acquire new machines,
equipment and software to enhance its manufacturing capability, and ii)
improve its efficiency by manufacturing standard modules. In addition, it
plans to build a new design and development (D&D) centre within the
compound of the new factory to expand its product offerings and ongoing
design activities, with target completion in 2H2021. Besides, it will also focus
on the development of new products and features for its existing machines
(i.e., deep learning system for vision inspection machines, fully-automated
joint-test system and more advanced version of DMS).
Valuation in between that of its indirect and direct local peers
i-Stone’s CY18 historical PER of 19x is above the 14x average PER of the
local listed companies that are part of “D” ecosystem, but below its listed
local peers’ average PER of 25x. i-Stone was listed on the ACE Market on
17 July 2019 at an IPO price of RM0.16.
Earnings & Valuation Summary
FYE 31 Dec 2014A 2015A 2016A 2017A 2018A
Revenue (RMm) - 44.1 43.1 60.4 67.6
EBITDA (RMm) - 4.8 5.8 9.9 13.1
Pretax profit (RMm) - 4.5 5.1 9.4 12.0
Net profit (RMm) - 4.0 4.7 8.2 11.2
EPS (sen) - 0.3 0.4 0.7 0.9
PER (x) - 54.8 46.3 26.8 19.5
Core net profit (RMm) - 6.3 4.7 9.8 11.5
Core EPS (sen) - 0.5 0.4 0.8 0.9
Core EPS growth (%) - n/a (25.8) 107.1 17.6
Core PER (x) - 34.7 46.7 22.6 19.2
EV/EBITDA (x) - n/a n/a n/a n/a Source: Company, Bloomberg, Affin Hwang forecasts
Company Note
i-Stone Group ISTONE MK Sector: Technology
RM0.18 @ 9 October 2019
Non-rated
Price Target: n/a Previous Target: n/a
Price Performance
1M 3M 12M Absolute 8.8% n/a n/a Rel to KLCI 12.6% n/a n/a
Stock Data
Issued shares (m) 1,221.5 Mkt cap (RMm)/(US$m) 226/53.8 Avg daily vol - 3mth (m) 11.9 52-wk range (RM) 0.15-0.28 Est free float 66.8% BV per share (RM) 0.03 P/BV (x) 6.65 Net cash/(debt) (RMm)
(3Q17)
(12.11) Derivatives No Shariah Compliant Yes
Key Shareholders
One United Equity Sdn. Bhd. 27.0% Chan Kok San 20.3% Chin Chung Lek 7.4% Tee Sook Sing 5.5% Source: Company, Bloomberg
Chua Yi Jing (603) 2146 7546
0.00
0.05
0.10
0.15
0.20
0.25
0.30
16-Jul-19 30-Jul-19 13-Aug-19 27-Aug-19 10-Sep-19 24-Sep-19 8-Oct-19
(RM)
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 50 of 54
Focus charts Fig 63: Business segments
Source: Company
Fig 64: Manufacturing capabilities – Design, manufacturing &
modification of specialised automation machines
Source: Company
Fig 65: Complementary product & services – Design &
fabrication of precision machining parts, metal frames &
panels
Source: Company
Fig 66: Core net profit track record
Source: Company, Affin Hwang
Fig 67: Revenue breakdown by business
Source: Company, Affin Hwang
Fig 68: Major milestones
Source: Company, Affin Hwang
6.3
4.7
9.8
11.514.4%
10.9%
16.1% 17.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
-
2.0
4.0
6.0
8.0
10.0
12.0
14.0
2015 2016 2017 2018
RM m Core net profit (LHS) Core net profit margin (RHS)
Business Segments (%) 2015 2016 2017 2018
Manufacturing automation 81.8% 80.0% 81.9% 83.6%
(1) Design, manufacturing &
modification68.9% 64.7% 65.5% 71.8%
(2) Maintenance & technical
support services10.7% 12.7% 12.6% 9.6%
(3) Provision of Data
Management Systems2.2% 2.6% 3.8% 2.2%
Complementary products &
services18.2% 20.0% 18.1% 16.4%
(4) Design & fabrication of
metal panels, frames &
precision parts
0.0% 1.7% 4.2% 4.0%
(5) Distribution of
manufacturing automation
hardware & software
18.2% 18.3% 13.9% 12.4%
Year
2007 Establishment of i-Stone Technology Sdn Bhd at Skudai Johor, Malaysia
Commenced the assembly & modification of specialised automation machines
& provision of Data Management Systems
2010 Set up in-house mechanical engineering team to develop mechanical designs
for the specialised automation machines
2011 Ventured into distribution of manufacturing automation softw are & hardw are,
namely Minitab & Digi
2013 Ventured into the design & fabrication of precision parts used in specialised
automation machines via the acquisition of 40.0% equity interest in i-Stone
Engineering
2016 Expanded in-house capability to include the design & fabrication of metal
panels & frames used for specialised automation machines via the acquisition
of the 60.0% equity interest P.A. Metal
2018 Distribute robotic arms from Universal Robots A/S in Malaysia
Moved to centralised manufacturing facility in Taman Teknologi Johor, Senai to
accommodate to its grow th in business activities
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 51 of 54
Label printing & material converting specialist
MTAG is involved in the: i) printing of labels & stickers and customised
converting services, and ii) distribution of industrial tapes, adhesives &
other products. MTAG is understood to be one of the largest label &
sticker suppliers and converters of mesh materials for its indirect key
customer – a global renowned household appliances brand. It is also an
authorised distributor for 3M and Henkel’s industrial tapes and
adhesive products. MTAG plans to construct a new manufacturing
plant and purchase new machineries to increase its capacity for the
printing of labels and stickers gradually over the next 3 years.
Established track record & relationship with reputable customers
MTAG has been in operation for >23 years and has established a diversified
customer base of >600 customers from various industries such as electrical
& electronic (E&E), precision tooling, mechanical & engineering, automotive
and construction. Approximately 80% of MTAG’s revenue is contributed by
the EMS companies, namely ATA IMS, V.S. Industry and SKP Resources,
who are serving a common key customer. As part of the “D” value chain,
MTAG supplies certain components of household appliances such as mesh,
labels and stickers, tapes and adhesives, which are used by its customers to
assemble products for its indirect key customer.
3-year revenue and core net profit CAGR of 14% and 28% respectively
MTAG recorded FY16-19 revenue and core net profit CAGR of 14% and
28% respectively, mainly driven by higher sales arising from the introduction
of new models by its indirect key customer and higher cost efficiency.
Printing & converting business was the main revenue contributor, accounting
for an average 86% of its revenue over the past 4 years, with the remaining
14% contributed by its distribution business. MTAG is sitting on a net cash
position of RM20m as at end-FY19 and has a 20% dividend payout policy.
Capacity expansion plan to cater for new job orders
MTAG intends to acquire a plot of 10-acre land to construct a new
manufacturing plant to house its corporate office, production lines and
warehouse in 2 phases. In addition, MTAG will purchase new machineries to
double its annual capacity for printing of labels & stickers (the segment which
contributed 21% to the group’s revenue in 9MFY19) over the next 3 years
and improve production efficiency.
Valuation below that of its indirect local peers
MTAG’s CY18 historical PER of 9x is below the 14x average PER of the
local listed companies that are part of “D” ecosystem. MTAG was listed on
the ACE Market on 25 September at an IPO price of RM0.53.
Earnings & Valuation Summary
FYE 30 Jun 2015A 2016A 2017A 2018A 2019A
Revenue (RMm) - 127.0 186.6 187.5 190.0
EBITDA (RMm) - 24.5 34.6 61.9 46.4
Pretax profit (RMm) - 21.1 30.0 58.3 43.8
Net profit (RMm) - 15.9 22.6 47.5 33.0
EPS (sen) - 2.3 3.3 7.0 4.8
PER (x) - 18.0 12.6 6.0 8.7
Core net profit (RMm) - 15.9 22.6 34.5 33.0
Core EPS (sen) - 2.3 3.3 5.1 4.8
Core EPS growth (%) - n/a 42.4 52.4 (4.5)
Core PER (x) - 18.0 12.6 8.3 8.7
EV/EBITDA (x) - n/a n/a n/a n/a Source: Company, Bloomberg, Affin Hwang forecasts
Company Note
MTAG Group MTAG MK Sector: Label Printing & Converting
RM0.42 @ 9 October 2019
Non-rated
Price Target: n/a Previous Target: n/a
Price Performance
1M 3M 12M Absolute n/a n/a n/a Rel to KLCI n/a n/a n/a
Stock Data
Issued shares (m) 681.6 Mkt cap (RMm)/(US$m) 286.3/68.2 Avg daily vol - 3mth (m) 4.0 52-wk range (RM) 0.41-0.7 Est free float 29.8% BV per share (RM) 0.15 P/BV (x) 2.87 Net cash/(debt) (RMm)
(3Q17)
19.68 Derivatives No Shariah Compliant Yes
Key Shareholders
Chaw Kam Shiang 50.5% Lau Cher Liang 16.7% Ang Yam Fung 2.0% Source: Company, Bloomberg
Chua Yi Jing (603) 2146 7546
0.00
0.10
0.20
0.30
0.40
0.50
0.60
24-Sep-19 1-Oct-19 8-Oct-19
(RM)
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 52 of 54
Focus charts
Fig 69: Corporate structure
Source: Company
Fig 70: Business segments
Source: Company
Fig 71: Key milestones
Source: Company
Fig 72: Utilisation of IPO proceeds
Source: Company, Affin Hwang
Fig 73: Printed products
Source: Company
Fig 74: Converted products
Source: Company
Land acquisition & construction of
manufacturing plant, 46%
Capital expanditure, 18%
Repayment of bank borrow ings,
14%
Working capital, 17%
Estimated listing expenses, 5%
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 53 of 54
Fig 75: 3M’s industrial tape and adhesive products
Source: Company
Fig 76: Henkel’s adhesive products
Source: Company
Fig 77: Revenue breakdown by business segments
Source: Company, Affin Hwang
Fig 78: Revenue breakdown by major products
Source: Company, Affin Hwang
Fig 79: Printing & converting capacity
Source: Company
Fig 80: Malaysia label printing & converting industry is
projected to grow at a CAGR of 8.2%
Source: Independent Market Research conducted by Protégé Associates Sdn Bhd
FY16 FY17 FY18 9MFY19
Distribution 16.8 25.6 31.1 22.9
Printing & converting 110.2 161.0 156.4 167.1
86.8%
86.3% 83.4%88.0%
13.2%
13.7% 16.6%12.0%
-
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
180.0
200.0
RM m
127.0
186.6 187.5190.0
64% 62%57% 57%
13% 17%18% 21%
10% 7%8%
9%
13% 14% 17% 13%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY16 FY17 FY18 9MFY19
Filter media & mesh Stickers & labels
Hardware products General merchandise goods
5.05.5
5.96.4
7.07.5
8.1
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
2017A 2018A 2109E 2020E 2021E 2022E 2023E
RM bn
10 October 2019
Affin Hwang Investment Bank Bhd (14389-U)
Page 54 of 54
Important Disclosures and Disclaimer
Equity Rating Structure and Definitions
BUY Total return is expected to exceed +10% over a 12-month period
HOLD Total return is expected to be between -5% and +10% over a 12-month period
SELL Total return is expected to be below -5% over a 12-month period
NOT RATED Affin Hwang Investment Bank Berhad does not provide research coverage or rating for this company. Report is intended as information
only and not as a recommendation
The total expected return is defined as the percentage upside/downside to our target price plus the net dividend yield over the next 12 months.
OVERWEIGHT Industry, as defined by the analyst’s coverage universe, is expected to outperform the KLCI benchmark over the next 12 months
NEUTRAL Industry, as defined by the analyst’s coverage universe, is expected to perform inline with the KLCI benchmark over the next 12 months
UNDERWEIGHT Industry, as defined by the analyst’s coverage universe is expected to under-perform the KLCI benchmark over the next 12 months
This report is intended for information purposes only and has been prepared by Affin Hwang Investment Bank Berhad (14389-U) (“the Company”) based on sources believed to be reliable and is not to be taken in substitution for the exercise of your judgment. You should obtain independent financial, legal, tax or such other professional advice, when making your independent appraisal, assessment, review and evaluation of the company/entity covered in this report, and the extent of the risk involved in doing so, before investing or participating in any of the securities or investment strategies or transactions discussed in this report. However, such sources have not been independently verified by the Company, and as such the Company does not give any guarantee, representation or warranty (expressed or implied) as to the adequacy, accuracy, reliability or completeness of the information and/or opinion provided or rendered in this report. Facts, information, estimates, views and/or opinion presented in this report have not been reviewed by, may not reflect information known to, and may present a differing view expressed by other business units within the Company, including investment banking personnel and the same are subject to change without notice. Reports issued by the Company, are prepared in accordance with the Company’s policies for managing conflicts of interest. Under no circumstances shall the Company, be liable in any manner whatsoever for any consequences (including but are not limited to any direct, indirect or consequential losses, loss of profit and damages) arising from the use of or reliance on the information and/or opinion provided or rendered in this report. Under no circumstances shall this report be construed as an offer to sell or a solicitation of an offer to buy any securities. The Company its directors, its employees and their respective associates may have positions or financial interest in the securities mentioned therein. The Company, its directors, its employees and their respective associates may further act as market maker, may have assumed an underwriting commitment, deal with such securities, may also perform or seek to perform investment banking services, advisory and other services relating to the subject company/entity, and may also make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report. The Company, its directors, its employees and their respective associates, may provide, or have provided in the past 12 months investment banking, corporate finance or other services and may receive, or may have received compensation for the services provided from the subject company/entity covered in this report. No part of the research analyst’s compensation or benefit was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. Employees of the Company may serve as a board member of the subject company/entity covered in this report. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. This report, or any portion thereof may not be reprinted, sold or redistributed without the written consent of the Company. This report is printed and published by: Affin Hwang Investment Bank Berhad (14389-U) A Participating Organisation of Bursa Malaysia Securities Berhad 22nd Floor, Menara Boustead, 69, Jalan Raja Chulan, 50200 Kuala Lumpur, Malaysia. T : + 603 2142 3700 F : + 603 2146 7630 [email protected] www.affinhwang.com