Highlights

• Our second annual event was privileged to have: 1. Datuk Phang Ah Tong, MIDA’s Deputy CEO 1; 2. Dato’ Wong Siew Hai, Chairman of Malaysian American Electronics Industry, AMCHAM; and 3. Mr. Chu Jenn Weng, President and CEO of ViTrox. as our distinguished speakers. It was a closed door event attended by more than 25 HLIB clients.

• The industry is expected to expand healthily in FY15 (see Figure #1) with growth rate ranging 3%-12%, signaling another record year in the making.

• Smart devices remain the sector’s growth leader despite at a slower pace as pervasiveness peaks. It is strongly believed that this role will be relayed to emerging trends of wearables, internet of things and big data which are disruptive enough to fuel growth further.

• Acknowledging that Malaysia was late to the smart device party, MIDA and MAEI are strategizing to attract capital intensive, knowledge based, hi-tech and high-value added investments such as into IC design / development and wafer fabrication (see Figure #2).

• Strong greenback is definitely a boon to this export-oriented industry. Players like ViTrox tends to gain as circa 90% of revenue is dominated in USD, while cost at 30%.

• Even excluding the USD uplift, ViTrox is confident to achieve a double-digit organic growth based on YTD advancement. ABI utilization rate is high at circa 70% but MVS at 50% mainly due to traditional seasonal weakness.

• By ploughing 15% of revenue back into R&D, ViTrox earned recognitions from the regulator as industry role model. As a result, it is confident to extend its pioneer status leveraging on new product innovations.

• Talent scarcity or brain drain remains the ultimate threat to the industry. While this is mitigated through collaboration with agencies (TalentCorp) in the near term, the panels believe that this must be handled fundamentally from education to human capital improvements.

Catalysts

• Technological advancement and creation of new electronics applications for emerging trends (IoT, connected cars, big data, smart home / city, etc).

• Improved consumer confident.

Risks

• FOREX, input costs (gold and copper), weaker consumer demand and stalemate in electronics innovation.

Forecasts

• Maintained.

Rating

• Overweight

Positives

• Appreciation of USD, proliferations of tablets,smartphones, internet of things (IoT), wearable techs and hybrid / electric automobiles.

Negatives

• intense competition, lack of talent / retention,high CAPEX, rising electricity cost / wages, unable to move into the high value chain (design and development).

Valuation

• Reiterate BUY on ViTrox with unchanged TP of RM3.80 pegged to 1SD above 5-year historical average P/E multiple of 16.0x of FY16 EPS (see Figure #3).

Source: Hong Leong Investment Bank Research - 16 Mar 2015