EG: Pending breakout

Ranked top 50 EMS player in the world. Incorporated on 14 August 1991, EG provides services in original equipment manufacturing and original design manufacturing with full turnkey solutions for completed final product assembly (box build), printed circuit board assembly, and modular components assembly. With over 20 years of operating history, EG has become one of the world’s top EMS and Vertical Integration providers. Currently, the group has three manufacturing facilities in Malaysia and one manufacturing facility in Prachinburi, Thailand.

Fueled by the 5G segment. To recap, EG signed a letter of intent with Customer C to produce advanced high-speed optical signal transmitter and receiver for 5G wireless network (optical modules) using photonics and semiconductor technologies back in 4Q22. This collaboration integrated the 5G photonics modular products of transceivers into its portfolio. Subsequently, the introduction of this segment has catalysed remarkable growth, with revenue derived from 5G wireless and photonic-related products now constituting approximately one-third of EG's FY2023 revenue. Looking ahead, this thriving segment is expected to be further amplified as EG is collaborating with a worldwide top three ethernet switch company through its 30% associate company to produce 5G photonic modular components using co-packaged optics technology by 1H24. We highlight that that the increasing proportion of sales from this segment will lead to margin expansion, as evidenced by the notable 2.7ppt in FY23.

New plant in Batu Kawan to boost production space by >40%. EG is in the midst of constructing its new two-storey Smart Factory 4.0 manufacturing facility in Batu Kawan, Penang – which will effectively boost production space by 22.5k sqm (or more than 40%) upon completion. This new factory is targeted for completion in early-2024 and is expected to begin commissioning by 4QFY24. We gather that this new plant will house approximately 10-15 lines for Customer C to ramp up production for its 5G modules.

Pending breakout. Technically, EG is pending for a breakout above the short-term downtrend channel, with indicators showing uptick bias. A successful breakout above RM1.50 will signal a trend reversal and spur the price toward RM1.62-1.75-1.80. Cut lost at RM1.23.

Collection range: RM1.27-1.33-1.43

Upside targets: RM1.62-1.75-1.80

Cut loss: RM1.23

Source: Hong Leong Investment Bank Research - 17 Oct 2023