The Art of JF Technology Berhad (0146)

Dear followers,

Speaking of rich valuation in technology company, one would think that JFTECH would easily rank amongst the top. But no one had really discussed on the reasons behind why the market is giving the company such a high P/E of over 95 times.

We are going to unmask the art of JFTECH today to determine the true value of the company.

JFTECH Principal Activities

Everyone talks about JFTECH being in the test industry, providing test sockets. But seriously, what are test sockets?

Test sockets can be defined as a connection device between the tester and the chip. One would involve in the earlier wafer test process on IC Design and test development of the chip level, and another end would be volume final test. In terms of volume final test, the reliability of the test socket must be high. Testing is a high-speed process and imagine this: if you need to stop and pause for every 100,000 pieces of chip in order to change the test socket, how time consuming would it be?

It would be extremely time consuming.

JFTECH’s test socket, could generally test up to 6,000,000 chips whereas the closest competitor in US can only last up to 2,000,000 chips. The price range between both of them are close to NIL, ranging from approximately USD3,000 to USD4,000 per piece.

The fun part of the test socket business which investors rarely talked about is the recurring and compounding model. Imagine this, your test socket is equivalent to your car, and the more you travel (test chips), the more likely you would need to change your tyres. Car rely on mileage, and test socket relies of total number of tested chips.

Tyres on the other hand, represent the less-known part of JFTECH, which is the sale of test pin & elastomer for their test socket. The higher the number of test sockets sold, the higher the potential recurring sales of test pin & elastomer. Once again, the less known part of JFTECH actually takes up to 35% to 40% of their total sales.

In Malaysia market, a lot of people are comparing JFTECH with FPGROUP. JFTECH had 33 patents granted and another 35 in the pipeline now, and they are spread between 5G and automotive testing sector. FPGROUP by comparison, does not have patent thus far, plus the products they manufacture are now highly technical test sockets, but more like test frames to be installed on the tester.

So, you get the gist, why JFTECH is being so expensive.

Expansion Plan

Apart from the level of technicality in the technology sector, expansion plan is the second utmost important factor in determining the value of a tech stock is the growth plan. The current capacity of JFTECH’s factory is 46,000 sqft, but the newly expansion factory, which is right behind the existing one would add an additional floor space of 44,000 sqft floor space.

Since everyone was talking about China, let’s talk about JFTECH’s expansion in China too. JFTECH had a collaboration with Huawei, and the production line for the company is expected to start in 21Q3, which I expect they had already started the productions. In China, they are able to produce 600 test sockets in the first year and 1,200 test sockets in the second year onwards.

Bear in mind that the 600 to 1,200 test sockets capacity is the bare minimum level for the company to fulfil Huawei’s orders. If required, they are able to sell more and once again, more recurring income on the test pin and elastomer’s end.

If we take this into consideration, the first two years would result into approximately RM26.4 million in revenue and with 35% profit margin, the net profit would be RM9.2 million. But since the company owns 55% of the JV, ultimate net profit would be RM5.1 million – which is higher than any single quarter net profit of the company.

One would also need to consider the competitive landscape in China. We mentioned the closest peer was in US, and there is no close competitor in China in terms of technical knowhow, and this is why Huawei selected them as collaborative partner. The issue with JFTECH is never the demand, but the supply end of the company itself. We could see aggressive ramping up in production level and coupled with the high CAPEX in China, one could expect this would bode well with JFTECH.

Logical PE Valuation?

For investors who are scrambling for low PE valuation of 10 to 15 times, surely, they are suffering from the market now. The winner would grow stronger in this quick-changing environment. The ability to finance, to raise capital, to go into joint ventures, they are all domino effect ultimately. Hence, if you are waiting for JFTECH to retrace to 30 times PE valuation, heck, or even 50 times, I do not think that would even happen.

For the past year, JFTECH is traded at the lowest level of 80 times PE valuation.

My advice for investors who want to buy JFTECH, you really need to close your eyes on the PE valuation and do so. For the next 10 years, JFTECH will continue to grow strong, and stronger.

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