Incorporated in Malaysia since 1989, P.I.E Industrial Berhad (“PIE”), a 51%-owned subsidiary of Taiwan-listed Pan-International Industrial Corp (“PAN”) is involved in the electronic manufacturing services (“EMS”) industry.

Hon Hai Precision Industry Co., Ltd (“Foxconn”) has a 30% stake in PAN, and hence is indirectly the holding company of PIE. As all would have known, Foxconn is the World’s largest EMS provider with a notable client list which includes the likes of Apple, Amazon, Huawei, Dell, Microsoft, Xiaomi, Nintendo, Sony and etc.

Starting off as a manufacturer and assembler of cable and wire, the Group has since expanded into the fabrication of moulds and dies, printed circuit board (“PCB”) assembly, plastic injection moulding, Class 10K and l00K cleanroom product assembly, and testing of electronic products.

This article introduces PIE, analyzes its business model, financial track record, business prospects, and provides our opinion on PIE as an investment target. (Visit our official site for timely updates)

PIE currently operates from two sites, with its main operation based in Seberang Jaya Industrial Estate, Penang, Malaysia and another in Prachinburi province, Thailand. The Group operates from 4 factories in Malaysia and a factory in Thailand, with a total factory floor space of about 80,000 sq ft. The Group’s total workforce is currently about 2,500.

Operations in Thailand are primarily focused on wire harness and cable assembly work, contributing just about 3% to the Group’s revenue.

The Group has three business divisions: manufacturing industrial products, trading electronic materials, and investment holding. Manufacturing of industrial products can be further broken down into (i) Electronic manufacturing services (“EMS”), (ii) Raw wire and cable manufacturing, and (iii) Cable assembly and wire harness.

During FY2020, the EMS segment contributes 83.5% of the Group’s revenue, followed by raw wire and cable manufacturing, 14.6% and cable assembly and wire harness.

With regard to the EMS segment, PIE offers a vertically integrated portfolio of services including mould and die fabrication, plastic injection moulding, LCD mould assembly, configuration, programming and testing, cleanroom assembly, complete box build, regional distribution and after-sales service and maintenance etc. Several larger clients of PIE includes Motorola, Bosch and Nintendo (recently secured).

Trading activities involve promoting the parent company’s products in the ASEAN market. The management does not expect growth from this segment. During FY2020, this segment contributes less than 1% of the Group’s revenue.

Malaysia remains as PIE’s largest market, contributing approximately 58% of the Group’s revenue, followed by USA (16.4%), Asia Pacific (13.5%) and Europe (11.4%).

MANAGEMENT TEAM

Mr. Wong Thai Sun, Malaysian, aged 66 was appointed as the Group Chairman in February 2020. He has over 34 years of public practice experience in accountancy and currently having his own practice firm known as Wong Thai Sun & Associates. He is also an independent non-executive director of Emico Holding Berhad.

Mr. Mui Chung Meng, Malaysian, aged 69 heads the Group as the Managing Director since May 2000. Graduated from the University of Singapore majoring in Electronics, Mr. Mui has extensive knowledge in the fields of electronics, rubber and plastics. Mr. Mui joined Pan International Electronics (Thailand) in 1993.

Other key management staff includes:

• Hong Yong Peng, aged 65 leads the Contract Electronic Manufacturing (“CEM”) – Converter division. He has been with the Group since 2011.
• Law Thong Han, aged 49 leads the CEM – Electronic division. He has been with the Group since 2007.
• Ong Tiew Ling, aged 53 leads the Supply Chain support and assisting with CEM – Electronic division. He has been with the Group since 2018.
• Cheah Heng Lye, aged 57 assists with CEM – Electronic division. He has been with the Group since 1990.
• Chen Ming Lung, aged 65 leads the raw wire and cable manufacturing division. He has been with the Group since 1980.
• Liao Yueh Chen, aged 58 is the factory manager for the raw wire and cable division. She has been with the Group since 1979.

HEALTHY AND CONSISTENT PROFITABILITY

For the past 5 years, PIE’s revenue was relatively stagnant with a compound annual growth rate (“CAGR”) of just 4.3%. As compared to its peers i.e. V.S. Industry Berhad, ATA IMS Berhad and SKP Resources Berhad who were achieving a 5-year revenue CAGR of 10% – 25%, PIE was underperforming. This can be partly due to the conservative management of PIE when it comes to securing new clients and/or committing to a significant CAPEX investment (takeaway from engagement with management).

In terms of profitability, the Group records relatively healthier and stable net margins compared to its peers. Annual net margin range between 5.0% – 7.0%, averaging at about 6.6%, while its peers’ margin range lower between 2.0% to 7.0%, averaging about 4.0%.

During FY2020, the Malaysian EMS providers’ performance was resilient as they all recorded top and bottom-line growth despite the production halt in March/April. The Group’s return on equity (“ROE”) over the past 5 years ranged between 8% – 12%. FY2020 ROE was 9%.

PIE generates strong and consistent cash flow from operations with an average CFO to Net income ratio of about 1.4x for the past 5 years. FCF to Net income ratio were >1.0x over the years.

The negative CFO to Net Income ratio in FY2020 was due to an increase in trade receivables and inventory. These were due to an increase in revenue and inventory stocking up by management in anticipation of the electronics chip shortage.

The negative FCF to Net Income ratio during FY2016 and FY2020 were due to management commitment to a high dividend payout ratio (>40%) despite lower cash generated and significant CAPEX invested.

The Group has minimal bank borrowings and is in net cash of RM122.5m as at 31 December 2020.

No concern on the Group’s financial position given the healthy solvency and liquidity position.

UPDATE FROM THE LATEST QUARTER RESULT (1Q2021, JAN – MAC 2021)

Compared with the preceding year’s corresponding quarter, the significant increase in revenue was attributable to increased orders from new and existing EMS customers and resumption of production at full capacity. Higher profits were due to higher revenue, better margins and reversal of provision for slow-moving inventories.

However, in comparison to the immediate preceding quarter, the Group recorded a drop in profit despite being 7% higher in revenue. The decrease was mainly due to higher administrative and distribution expenses, and the weaker USD throughout the quarter.

Based on the latest quarter results, the Group seems to be on track to close FY2021 at above RM1bil in revenue (Note: 1Q results are seasonally lower in the year due to shorter working days in Malaysia). Profitability would be of concern on whether the Group can sustain its high margin achieved in 4Q2020.

KEY STRENGTHS & PORSPECTS FORWARD

• 20 years track record of growing revenue and consecutive profits. Strong balance sheet position with net cash of RM122.5m, healthy liquidity and solvency position.
  
  
• Strong cash flow generated year on year coupled with a consistent dividend payout ratio of >40% for the past several years.

• Promising outlook with confirmed orders secured from a new Tier 1 multinational customer (“MNC”) (“Customer N”). The contract involves supporting 20% of Customer N’s global demand for a handheld electronic entertainment device. Further negotiation is ongoing to increase the 20% allocation as demand for the device is highly sought globally and often sold out.
  
  During 4Q2020, PIE only supplied about 70% – 80% of the allocated orders due to backlogs brought forward from previous months. For FY2021, the management is estimating orders from Customer N to contribute up to RM500m in revenue or 50% of the Group’s revenue.   
  
  In addition to the above, the Group is also witnessing growth in orders (~5%) from its existing major customers i.e. Motorola and Bosch.

• Capacity expansion by 150,000 sq ft (equivalent to 3 football fields) with purchase and expansion of a new factory, expected to complete and commission in 1Q2022. The new factory is allocated mainly for box-build assembly and product testing works for Customer N.
  
  PIE has currently maximized usage of its available floor space due to strong orders from new and existing customers. Utilization rate exceeding 90%.
  
  The management is also in talks with one of its lessee to repossess a factory of theirs which was on lease for the past 20 years. The lease term is coming due in 2H2021. The repossession was necessary to accommodate the increasing orders from existing and prospective clients.

• Invested in Level 10 box build production and added 3 new lines for printed circuit board (“PCB”) assembly. Level 10 box build is expected to fetch better margins for it involves highly technical labour skills/process while requiring minimal expenditure on raw material purchases.
  
  Installation of new PCB lines was to accommodate orders secured from a new US customer in the robotic industry. Production for the Robotic customer is to commence in 2H2021 with an initial order of 200k units, before ramping up to 600k units in 2022.

• Foxconn leverage provides PIE with the network and access to top-tier semiconductor suppliers. Sourcing of technology, intelligence, and raw materials etc has been more convenient, timely and economical given the bargaining power and establishment of Foxconn.
  
  During FY2020, PIE made purchases totaling RM188m from various of its related companies, as illustrated below:
  • Foxconn Technology Co., Ltd – RM147.5m
  • Hon Hai Precision Industries Co., Ltd. – RM 39.1m
  • Pan-International (USA), Inc – RM0.9m

KEY RISKS FOR CONSIDERATION

• Foreign labour shortage to persist following the stance of the Malaysian government to reduce reliance on foreign labour. Replacement of foreign labour with local workers has resulted in increased operating cost due to the high attrition rate and labour wages.

• Weakening of the USD. Although the Group enjoys a natural hedge for a significant portion of its USD income, they are still partly exposed as not 100% of its costs are incurred in USD.

• Delay with construction, completion and commissioning of the new factory may disrupt PIE’s expansion plan and production commitments made to its clients.

• An extended shortage of electronics supply may cause disruption to PIE’s production. Management indicated that the current inventory level including the incoming supply would last them up to December 2021. If the shortage persists/worsen, PIE’s production may be affected but only in FY2022. As of today, the chips supply shortage has no impact on PIE.

• Customers” concentration risk. As disclosed in PIE’s annual report, their top 3 customers contribute up to 54% of the Group’s revenue. For FY2021, the management expects their newly secured MNC customer (believed to be Customer A) to top the list and makeup around 50% of the Group’s total revenue.

MAJOR SHAREHOLDERS AS AT 19 March 2021

Besides Pan Global Holding Co. Ltd which holds 51.4% stake in PIE, other notable shareholders include Public Smallcap Fund (3.4%), Employees Provident Fund (3.3%), Public Strategic Smallcap Fund (1.8%), Public Islamic Growth Balanced Fund (0.8%), Singular Value Fund (0.7%), PMB Shariah Growth Fund, Kenanga Growth Fund and Gibraltar BSN Fund etc.

Mr Mak Tian Meng, a prominent value investor also holds a significant stake in PIE totaling 3.8%.

Compared to the list of major shareholders a year ago, we note that Public, Singular, PMB, Kenanga and Gibraltar BSN have all been increasing their stakes in PIE.

PEERS COMPARISON

Table below compares PIE to several of its closest peers within the EMS industry.

Taking into consideration of PIE’s outstanding track record, consistent dividend payout and promising outlook, we value PIE at a forward PE range of 15x – 25x. The range is consistent and comparable to its industry peers.

HOW MUCH DO WE VALUE PIE?

Based on management indication and our best estimate of PIE’s FY2021 performance, we opine the recent retracement of PIE’s share price by around 20% from its peak, an opportunity for investors to initiate/accumulate a position.

Long term prospect of the Group is intact with secured orders waiting to be delivered. Further, more upsides are expected as the Group expands and upgrade its manufacturing facility.

At a recent management briefing, we were updated on the following:

• No concern of any potential claims against them for alleged forced labour, as faced by its peer, ATA IMS. PIE commits to good practice and fair treatment to all workers. PIE is a Responsible Business Alliance (“RBA”) registered company since 2017 and they comply with strict guidelines under RBA as part of their contract requirement with several of its MNC customers.
• The latest MCO limitation on workforce capacity (60%) is not expected to impact PIE’s production. However, an extension period of capacity limitation may cause a delay in its production.
• Raw material price increase would not impact the Group’s profitability as the cost can be fully passed on to their customers. In fact, the rising copper price has benefited its raw wire and cable manufacturing division as they stronger orders from customers.
• Management is highly optimistic of its prospects and reaffirmed to investors that business orders are promising. The limiting factors are currently on labour supply and production floor space. In order to overcome the problem with labour shortage, management is allocating a significant budget for automation of its production lines for the next 2 years. They target to reduce reliant on labour force by 10% -15%.
• Automation would work well for the Group as they shift their business model towards the production of high volume products. The current model emphasizes low volume, high mix production.
• Management is very selective when it comes to securing new clients/products. They are currently in talks with two prospective clients with one of them involved in the electric vehicle industry.
• Moving forward, management has plans to apply for tax pioneer status.