Investment Highlights

• We maintain our NEUTRAL stance on Electronics Manufacturing Services (EMS) players for 2H19 as we opine that the positive prospects of manufacturers tied to the production of household general products such as V.S. Industry (VSI) and ATA IMS (ATA) have been fairly factored in.

• Mixed 1QCY19 results: ATA’s 4QFY19 results fared beneath expectations at RM21mil due to lower box-build orders as there were less working days attributed to festive seasons, and higher taxation seen for the quarter as some expenses were being disallowed for tax purposes. ATA’s FY20 earnings are expected to be boosted by higher sales orders from its key customer following the addition of two assembly lines. Meanwhile, VSI’s 3QFY19 results were slightly above expectations at RM22mil, despite a 22% decline in core profit and 10% fall in revenue due to slowdown in orders for its key customer in its Malaysian segment as the decline in box build orders for its key customer’s floorcare products was not as severe as initially anticipated while the customer’s beauty product sales boosted orders. VSI’s 4Q is anticipated to register similar profits based on its current order visibility, also owing to the 4Q being a seasonally stronger quarter for one of its key Malaysian operations’ customer, Keurig.

• Ties to innovative key customer with robust growth prospects: VSI currently has 3.5 lines running for the key customer, producing a mixture of a personal care product and floorcare products while ATA has 14 lines for its key customer with a broad product range of floorcare products and healthy lifestyle products, after adding 2 assembly lines for FY20F on the back of growing orders — one for a household product to commence production in March 2019 and another line for a personal care product expected to commence production in October 2019.

• Diversifying customer base through securing new customers:

• VSI and Bissell: VSI entered into a master supply agreement with Bissell in March 2019, where the group has dedicated a 160K sqft plant to the customer that is equipped with injection molding facilities, assembly lines, a warehouse and test lab. Bissell’s earnings contribution kicks in from FY20F onwards with sales anticipated to reach RM1.2bil by CY2022. VSI is expected to mass produce one model of its carpet cleaner in August 2019. Higher margins are expected for Bissell relative to VSI’s other customers due to the ability to choose and negotiate its own suppliers which could potentially lead to margin savings.

• ATA and new customer: ATA secured a contract to manufacture a household appliance equipped with Internet of Things (IoT) capabilities. The group has allocated 1 line for the customer but the contribution is expected to be negligible at 1–2% of total revenue. Although production volume is low, ATA is keen to explore the potential of IoT capabilities.

• Vertical integration positioning translates to more job wins:

VSI is a known vertically-integrated player with tooling, plastic injection, PCBA and assembling capabilities, which give it an edge compared with peers who lack PCBA or tooling capabilities. However, local peer SKP Resources (SKP) has recently added PCBA capabilities, commencing in 1H19. Meanwhile, ATA has also bumped up its efforts to be vertically-integrated by adding 4 capabilities i.e. PCBA, battery pack, wire harness and brush bar assembly in order to be self-sufficient and reduce reliance on external suppliers. ATA’s group chairman Datuk Seri Foo Chee Juan said the company has 8 surface-mount technology (SMT) lines on the private side and plans to increase this to 18 lines by 2HCY19, with plans to inject the PCBA and battery pack capabilities into ATA by mid- 2021. Wire harness production will commence in August 2019 while brush bar assembly will start production at end-CY2019, with contributions expected in 2HFY20 and 4QFY20 respectively.

• Opportunities from the US-China trade war: Following the US-China trade war, VSI has received enquiries from MNCs looking to shift or diversify their manufacturing bases from China to Southeast Asia. The group is in the midst of discussion with various prospects and is positive on its potential to secure new orders and/or customers as it has a 180K sqft factory which will be ready by end-CY2019 to accommodate new prospects.

• Potential changes in sector rating:

We may upgrade the sector to OVERWEIGHT if: (i) the companies secure major orders and/or key customers which boosts box-build orders; and (ii) performance of overseas operations (such as VSI’s) improves due to better cost-saving initiatives and comeback in sales orders.

Source: AmInvest Research - 12 Jul 2019