Investment Highlights

• We retain our HOLD recommendation on QES Group (QES) and fair value of RM0.21/share. Our valuation is based on an unchanged FY19F PE of 15x, while maintaining our earnings forecast.

• We came away from QES’ 2QFY19 briefing learning that the company foresees 2HFY19 to be better than 1HFY19 on improved activities in its semiconductor customers. Based on orders received in July and August, revenue from the equipment manufacturing division is expected rise 3x in 2H compared with 1H. However, on a YoY basis, it will still be lower due to the high-base effect in the previous year.

• QES’ manufactured equipment is mostly catered to automotive semiconductor players. This explains the slowdown for equipment orders as car sales in China and Europe are still in the doldrums. For 1H2019, car sales fell 12.4% in China and 3.1% in Europe.

• On a positive note, the company’s distribution and servicing segment continues to show high resilience amid the trade war. Some customers are seeking upgrades to existing machines to improve yield rates instead of new purchase. Revenue for the distribution and servicing segment has increased 19% YoY for 1HFY19, and is expected to continue its upward trajectory.

• QES’ long-term strategy is still focused on expanding its manufacturing segment with two models of automated optical inspection (AOI) equipment, post-dicing inspection and post-probing inspection. The equipment is slated to begin pilot testing in March 2020. This will allow QES to diversify into the upstream semiconductor space, reducing its reliance on automotive semiconductor customers.

• In the near term, the company has secured a project from its customer to distribute voltage sag regulators to protect semiconductor equipment from minor voltage spike which could result in yield loss. The project is estimated to contribute around RM4.5mil to revenue, which will be recognised in 2HFY19

• QES is also in talks with one of its existing customers to distribute cooling additives to better optimise the cooling towers for better energy efficiencies. With an increasing emphasis on environmental, social and governance (ESG) criteria, this may be a lucrative product to be added into the company’s distribution line.

• While we still like QES for its long-term expansion plans for the manufacturing segment and resilient recurring revenue from its trading and servicing business, we take a cautious stance due uncertainties from the long-standing dispute between the US and China.

Source: AmInvest Research - 29 Aug 2019