• Speculation about activist Andy Hall assessing the EMS sector on similar grounds as the glove sector has dented sentiment. However, we are not entirely surprised as he had already hinted he may look at several other sectors in Malaysia at a glove conference in early 2021
• While our analysis shows that the market did not react negatively to those allegations for the glove sector initially, some investors have seen the implications and concerns may be valid. However, the key customer in mind here is a leading UK brand which we believe strictly adheres to labour laws. Thus the end results may not be the same
• We remain positive on the sector for its structural growth and believe this pullback serves as a buying opportunity

The Big Event

The Malaysia EMS sector took a heavy beating yesterday on speculation that migrant w orker rights activist, Andy Hall (AH) is looking to assess the sector on any potential labor mistreatment issues. ATA IMS, SKP Resources and VS Industry saw share prices react negatively, declining by 18%, 13% and 7% respectively.

Info That We Know

From our multiple channel checks, w e gather this has indeed happened but w ith the issue targeting the “main customer level”, rather than the contract manufacturers (CM). From our sources, one of the CMs w as approached by AH but had subsequently diverted this issue to its customer. The underlying concerns at this point in time lies in the possibility of a repeat of Top Glove’s detention orders as imposed by the US Customs and Border Protection (CBP). All the CMs nevertheless w ere unable to guide on their revenue exposure to the US. How ever, w e believe the “main customer” being established in the UK is likely to have adopted and adhered to stringent labour law s. Also, w e take comfort that multiple audits are conducted annually on each CM’s value chain to ensure compliance. We thus see this situation being completely different than that of, w hereby EMS players (including at the customer level) show strong emphasis on staff w elfare such as providing a comfortable w orker accommodation environment, and bearing foreign labour recruitment fees and levies to name a few , from our ground checks.

Maintain Sector Overweight

Given the short-term overhang until better clarification from companies and w ith the fragile market sentiment, w e low er our target PER multiples on both VS and ATA to 18x (from 26x) and MTAG to 14x (from 17x). We lower target price on VS to RM1.64 (post bonus issue), ATA to RM3.06 and MTAG to RM0.99. We continue to like the EMS sector as we believe there is no change in fundamentals. The escalation in the trade war w ill continue to see MNCs shifting their operations out of China, benefiting local EMS players. More importantly, w e remain positive on the longer-term demand trend for consumer appliances due to higher expectations tow ards a better quality of living

Source: Affin Hwang Research - 21 May 2021