We hosted Globetronics’ CFO Mr Ng Kok Choon and corporate manager Mr Ng Kok Yu in Singapore recently to meet up with our institutional investors and overall, management reaffirmed its intention to expand the sensor business over the medium term by riding on the introduction of imaging and health sensors. Maintain BUY with our TP raised to MYR7.10 (from MYR6.85, 15% upside) following our earnings revision.

• Imaging sensors well on track. The new production line for Globetronics Technology’s (Globetronics) 3D imaging sensors is now being installed and will soon be qualified by its Swiss customer. The group has spent some MYR33m thus far on machinery procurement with a target capacity of 20m units/month under the Phase 1 expansion. We expect commercial production to commence by Oct 2015 at a target run rate of 4m-5m for a start. Phase 2 of the production ramp-up, which will involve an additional MYR30m capital investment to double its capacity to 40m units/month, will be carried out by end-2015/early 2016 with full volume loadings by early-2Q16.
• Health sensor on its way. On top of that, management is looking to commence the production of a new multi-die health sensor for its existing Swiss customer as well as for a potential new customer from the US by 1Q16. We suspect that this new health sensor will be incorporated into the next-generation wearable products to better track health indicators such as blood pressure, pulse rate and ultraviolet exposure. Globetronics is allocating capital investment of MYR10m for this new line, with a target initial capacity of 5m units/month.
• Quartz crystal segment holding up well. Demand for Globetronics’quartz crystal devices and temperature compensated crystal oscillators has been encouraging, with production clocking in at run-rates of 150m and 10m-11m units per month respectively. To further improve productivity and production efficiency, management is looking to increase automation at its existing facilities, which will cost MYR9m-10m in investment in FY15 on procurement of new equipment.
• Internet of Things (IoT) a long-term catalyst. Over the next 2-3 years, management expects the IoT industry trend to pick up gradually. In essence, IoT integrates and allows communications between electronic devices. To leverage on that, Globetronics is currently co-developing 2-3 new forms of motion and gesture-related sensors with integrated device manufacturers.

New Sensor Products To Propel Growth Sensors to become the largest revenue contributor in 2015. Globetronics’ sensor segment contributed 32% to its FY14 consolidated sales of MYR355m. This is the group’s second-largest division after its timing and quartz crystal devices, which made up 36% of sales. Judging from the current run rate of approximately 19m-20m units per month for its proximity sensors and 3m-4m units per month for its motionrelated wearable sensors, management expects this division to become Globetronics’largest revenue contributor by end-2015 at 40-45% of total group sales. This, in our view, is predominantly driven by continued, albeit slowing, growth in demand for smart devices. For its proximity modules, management expects ASP erosion of 3-4% pa going forward, given that the product – first launched in mid-2012 – is gradually entering into the mature phase. Globetronics’ wearable modules, meanwhile, arecurrently sitting on installed capacity of 5.5m units per month and are now in the ramp-up mode to maximise production yield in order to meet its Swiss customer’sdelivery schedule.

New sensor products to kick off in phases. A new production line for the latest 3D imaging sensors is now being installed and will soon be qualified by its Swiss customer. Globetronics has spent some MYR33m thus far on machinery procurement, with a target capacity of 20m units per month under the Phase 1 expansion. We expect this new line to commission by mid-3Q15, with commercial production to commence by October at a target run rate of 4m-5m for a start. Phase 2 of the production ramp-up, which will involve an additional MYR30m capital investment to double capacity to 40m units per month, will be carried out by end-2015/early 2016. This is because Globetronics’ Swiss customer expects full volume loadings of 30m-40m units per month by early 2Q16. We gathered that the volume require ments are significantly higher than its proximity sensor modules, as each smart device will require 2-3 units of the 3D imaging sensors (vs one unit of proximity sensor for each device) to allow for better integration with camera modules and lenses.

On top of that, management is looking to commence production of a new multi -die health sensor for its existing Swiss customer as well as for a potential new customer from the US by 1Q16. We suspect that this new health sensor will be incorporated into the next-generation wearable products to better track health indicators such as blood pressure, pulse rate and ultraviolet exposure. If this materialises, this health sensor will mark Globetronics’ second product to be incorporated into the smart wearables universe. The group is allocating capital investment of MYR10m for this new line, with a target initial capacity of 5m units per month.

Timing and quartz to see more production shift from Epson. On the other hand, demand for its quartz crystal devices and temperature compensated crystal oscillators have been encouraging, with production clocking in at run-rates of 150m and 10m-11m units per month respectively. Management expects volume ramp-upfor the former by an additional 10m unit per month come 3Q15 on product transfer from its existing Japanese customer in Epson Toyocom. To further improve productivity as well as production efficiency, management is looking to increase automation at its existing facilities. This will cost an investment of MYR9m-10m in FY15 on procurement of new equipment. Ultimately, Globetronics is looking to be more cost-efficient, which could then translate into lower ASPs for its timing devices going forward. This is because Epson Toyocom is looking to penetrate into the Chinese smartphone brands segment with more price-competitive offerings.Less aggressive on LED and IC segments. On its light-emitting diode (LED) and integrated circuits (IC ) divisions, management guided that volume loadings have been largely normal while acknowledging that Globetronics will not be allocating new capital investments for the two divisions at this point of time. We believe this could be due to escalating competition within the LED segment while some of its IC products are approaching end-of-life. We expect revenue contribution from these divisions to shrink to 3-4% of total group sales by FY16 (from 8% in FY14).

IoT a potential long-term catalyst. Over the next 2-3 years, management expects the IoT industry trend to pick up gradually. In essence, IoT integrates and allows communications between electronic devices. To create the ecosystem, each device will have to be equipped with sensors to facilitate the exchange of data between them . Leveraging on that, Globetronics is currently co-developing 2-3 new forms of motion and gesture-related sensors with integrated device manufacturers. This, if it materialises, should help to sustain its earnings growth momentum in the long run.

New Sensor Products To Propel Growth Sensors to become the largest revenue contributor in 2015. Globetronics’ sensor segment contributed 32% to its FY14 consolidated sales of MYR355m. This is the group’s second-largest division after its timing and quartz crystal devices, which made up 36% of sales. Judging from the current run rate of approximately 19m-20m units per month for its proximity sensors and 3m-4m units per month for its motionrelated wearable sensors, management expects this division to become Globetronics’largest revenue contributor by end-2015 at 40-45% of total group sales. This, in our view, is predominantly driven by continued, albeit slowing, growth in demand for smart devices. For its proximity modules, management expects ASP erosion of 3-4% pa going forward, given that the product – first launched in mid-2012 – is gradually entering into the mature phase. Globetronics’ wearable modules, meanwhile, arecurrently sitting on installed capacity of 5.5m units per month and are now in the ramp-up mode to maximise production yield in order to meet its Swiss customer’sdelivery schedule.

New sensor products to kick off in phases. A new production line for the latest 3D imaging sensors is now being installed and will soon be qualified by its Swiss customer. Globetronics has spent some MYR33m thus far on machinery procurement, with a target capacity of 20m units per month under the Phase 1 expansion. We expect this new line to commission by mid-3Q15, with commercial production to commence by October at a target run rate of 4m-5m for a start. Phase 2 of the production ramp-up, which will involve an additional MYR30m capital investment to double capacity to 40m units per month, will be carried out by end-2015/early 2016. This is because Globetronics’ Swiss customer expects full volume loadings of 30m-40m units per month by early 2Q16. We gathered that the volume require ments are significantly higher than its proximity sensor modules, as each smart device will require 2-3 units of the 3D imaging sensors (vs one unit of proximity sensor for each device) to allow for better integration with camera modules and lenses.

On top of that, management is looking to commence production of a new multi -die health sensor for its existing Swiss customer as well as for a potential new customer from the US by 1Q16. We suspect that this new health sensor will be incorporated into the next-generation wearable products to better track health indicators such as blood pressure, pulse rate and ultraviolet exposure. If this materialises, this health sensor will mark Globetronics’ second product to be incorporated into the smart wearables universe. The group is allocating capital investment of MYR10m for this new line, with a target initial capacity of 5m units per month.

Timing and quartz to see more production shift from Epson. On the other hand, demand for its quartz crystal devices and temperature compensated crystal oscillators have been encouraging, with production clocking in at run-rates of 150m and 10m-11m units per month respectively. Management expects volume ramp-upfor the former by an additional 10m units per month come 3Q15 on product transfer from its existing Japanese customer in Epson Toyocom. To further improve productivity as well as production efficiency, management is looking to increase automation at its existing facilities. This will cost an investment of MYR9m-10m in FY15 on procurement of new equipment. Ultimately, Globetronics is looking to be more cost-efficient, which could then translate into lower ASPs for its timing devices going forward. This is because Epson Toyocom is looking to penetrate into the Chinese smartphone brands segment with more price-competitive offerings.Less aggressive on LED and IC segments. On its light-emitting diode (LED) and integrated circuits (IC ) divisions, management guided that volume loadings have been largely normal while acknowledging that Globetronics will not be allocating new capital investments for the two divisions at this point of time. We believe this could be due to escalating competition withn the LED segment while some of its IC products are approaching end-of-life. We expect revenue contribution from these divisions to shrink to 3-4% of total group sales by FY16 (from 8% in FY14).

IoT a potential long-term catalyst. Over the next 2-3 years, management expects the IoT industry trend to pick up gradually. In essence, IoT integrates and allows communications between electronic devices. To create the ecosystem, each device will have to be equipped with sensors to facilitate the exchange of data between them . Leveraging on that, Globetronics is currently co-developing 2-3 new forms of motion and gesture-related sensors with integrated device manufacturers. This, if it materialises, should help to sustain its earnings growth momentum in the long run.