We visited the manufacturing facilities of Kumpulan Perangsang Selangor’s (KUPS) 3 main subsidiaries on Nov 3 and 4 – Toyoplas and Century Bond in Senai, Johor and CPI Engineering Thermoplastics (ETP) & Electronic Manufacturing Service (EMS) in Bayan Lepas, Penang. We drew 3 key takeaways from this visit: 1) The progress and update of CPI and Toyoplas manufacturing facilities, 2) Lower operating cost within the manufacturing division and 3) Impact from the US chip-related export controls. We make no changes to our forecasts given that we have accounted for the contribution from the 2 new plants. Besides, we expect the lower operating cost environment which results in cost saving to the Group will have negligible effect to the Group’s bottomline due to slower demand across all end segments, in line with the weakened global economic output. We also do not foresee impact to KUPS in relation to the US chip export controls. We reiterate our Neutral rating on KUPS with a sum-of-the-parts TP of RM0.78.

• CPI’s new EMS plant to start production by 4Q22. The new EMS facility is located in Bayan Lepas, Penang and is 2x bigger in terms of floor size. It has a built-up area of approximately 3.9k sq m, with a 2- storey production floor of 5.1k sq m which is expected to contribute c. RM78.5m the Group’s topline from FY23 onwards, on the assumption of a 70% plant utilisation rate. Upon completion, CPI will have 3 operating surface mount technology (SMT) production lines. Management plans to add another high-speed SMT production line which is 2.5x more efficient than the existing production line. We view this as a positive development given that the investment in the new high-speed machine, which has already been accounted for in FY20, will render an additional c. RM65.4m to the Group’s topline. However, we make no changes to our forecast as Management clarified that the utilisation of the high-speed line is contingent on future orders and demand, which at this point is non-existent as yet.

• Toyoplas’ Senai, Johor and Bac Giang, Vietnam plant. The Senai plant has a total capacity of 24 production lines, with utilisation rate improving from 38% in 2Q to 50% currently due to the commencement of the additional 5 production lines from Customer D as mentioned in our previous report. Only 3 out of 5 production lines have commenced while the remaining 2 lines will commence by 4QFY22. Management has guided that these 5 lines produce distinct accessories which will translate to c. RM150m contribution to the Group’s topline from FY23 onwards. Upon commencement of the 5 production lines, Customer D will emerge as Toyoplas’ largest customer.
  On the Bac Giang, Vietnam facility, it will be fully operational by 1Q23. The facility has similar layout and capacity as the Senai facility. It is equipped with 77 injection moulding machines and has a built-up area of approximately 12.1k sq m. Assuming an utilisation rate of 50%, this facility is expected to contribute c. RM83.9m to the Group’s topline from FY23 onwards.

• Lower operating cost within the manufacturing division due to faltering raw material costs. As mentioned in our previous report, high resin price remains a concern to the Group’s profitability as the raw material constitutes more than 50% of the Group’s operating cost. However, resin prices have slipped 16.1% from 2Q to 3QFY22 due to slower demand, improving supplies and lower logistic costs. We think resin prices will continue to decline as demand normalisation takes place. Moving forward, we expect the Group’s cost saving to be negligible due to slower demand across all end-segments, in line with the weakened global economic output. The International Monetary Fund (IMF) has predicted global growth to slow from 3.2% in 2022 and 2.7% in 2023.

• Muted impact from the US chip-related export controls. We sought insights from KUPS’ main subsidiaries with regards to the US-China chip war. Despite owning 2 manufacturing plants in China – Shanghai and Dongguan, there is no negative impact as the Group’s clientele has zero exposure to the targeted Chinese technology companies. Additionally, its facilities in China serve as contract manufacturers providing secondary processing and sub-assembly services (refer figure 1) to US-based clients. Also, KUPS has taken proactive steps to close down the Nanning, China facility and relocate to Bac Giang, Vietnam to complement its existing customers’ supply chain.

• Thoughts. We make no changes to our forecasts given that we have accounted for the contribution from the 2 new plants. Besides, we expect the lower operating cost environment which results in cost saving to the Group will have negligible effect to the Group’s bottomline due to slower demand across all end-segments, in line with the weakened global economic output. We also do not foresee impact to KUPS in relation to the US chip export controls. All in all, we reiterate our Neutral rating on KUPS with a sum-of-the-parts TP of RM0.78.

Source: PublicInvest Research - 7 Nov 2022