Background

SALUTICA - a one-stop turnkey electronic manufacturing provider, is primarily involved in the design, development and manufacture of consumer electronic products such as Bluetooth-related devices (i.e. Bluetooth stereo headsets, smartwatches, car kits) as well as other electronic products and precision parts and components (i.e. optical light guide, 3D glasses, electronic door locks, plastic parts for lighting) for external brands.

The group is also involved in product conceptualisation, design, development, manufacture and marketing and sales of its in-house Bluetooth related products under the brand name “FOBO”.

Key takeaways

In the conference, management showcased its competitive edge from both qualitative and quantitative perspectives. One of the differentiating factors of the group vis-à-vis competitors is its strong manufacturing capabilities which involves in-house tool, design and fabrication, moulding, test solutions, spray lines, PCB Assembly, wires joining/soldering technology and in-house Quality Assurance facilities.

We understand that management is currently developing several new Bluetooth-related devices which we believe will see meaningful contributions from 2HCY17 (1H18) onwards. We also understand that these devices which are premium headsets for key customers, are seeing new features that might go head-to-head in competition with the top smartphone vendor’s wireless headset.

Meanwhile for Neonode’s AirBar which adds touchscreen functionality to PCs/Laptops, the group is looking to be involved in Neonode’s upstream job, i.e. in the assembly and testing segment with the knowledge and know-how transferred from Neonode. We are sanguine over the development given the fact that Salutica as the sole vendor for Neonode’s Airbar, is riding on the wave of IoT with the exposure of abovementioned products. Note that the application of affordable “touchscreen” functionality beyond PCs/Laptops (of only 1/3 the cost of PCs/Laptops), i.e. automotive, medical, industrial etc. is currently seeing wider adoption across the global MNCs names.

Outlook

We see FY17 as a transition year for the group where its margins will be suppressed by higher cost incurred for the new products development. That said, we see it as a crucial move for the group to supercharge its prospect from the current level.

Meanwhile, FY18 should see low hanging fruits underpinned by the earnings contribution from both Neonode’s Airbar as well as its new Bluetooth headsets for its key customers. Adoption of Neonode’s Airbar beyond PCs/Laptops, i.e. into Automotive, medical, industrial will be the game changer for the group.

Risk

• Customer concentration risks
• Technology obsolescence
• Patents infringement
• Delay in rollout of new products, and expansion plans

Conclusion

Overall, while FY17 appears to be the transition year for the group, the positive trade-off is far better off, with the exciting pipelines of product developments alongside growing global clientele base to be reflected in FY18.

SALUTICA is trading at 17.9x FY17E PER (based on our FY17E NP numbers) which we believe is fairly reflective of its prospect.

Source: Kenanga Research - 19 Apr 2017