Investment Merits

• Parentage support from Foxconn

• Market share gain from relocation out of China

• End-to-end solution with wire harness service

• Ease of foreign labour issue.

Company Profile

P. I.E. Industrial (PIE) started off with the manufacturing and assembly  of cables and wires. Since 1996, it has added on fabrication of moulds  and dies, printed circuit board assembly using precision surface mount  technology, plastic injection moulding, Class 10K and 100K clean room  product assembly, and testing of electronic products. It has a total  operation floor space of 1,000,000 sq ft in Malaysia and Thailand. With  new up-to-date manufacturing facilities, the group is now capable of  offering complete integrated one-stop contract electronics  manufacturing services to major multinational companies for various  electronics, telecommunications, and computer peripheral products.

Highlights

Parentage support from Foxconn. PIE has strong parentage support  from Foxconn Technology Group, the world’s largest electronics  manufacturing services (EMS) group. PIE is able to tap on Foxconn’s  first-class engineering and manufacturing capabilities. Its parentage  support also benefits it in procuring raw materials and manufacturing  equipment. Pie has >80% of its sales deriving from turnkey EMS project  which will be benefitted from the economies of scale in terms of  purchasing raw material in bulk with Foxconn. It has a long-term  business relationship with Customer M (an American multinational  telecommunication company) and Customer B (a German multinational  engineering and technology company) for telecommunications and  power tool products.

Market share gain from relocation out of China. Despite any  slowdown in demand of the end products, EMS players in Malaysia will  still benefit from the trade war diversion as the relocation of EMS works  from China is so huge for Malaysia to capture. With PIE’s parentage  support from Foxconn, PIE will be deemed as the first who benefit from  the US-China trade diversion regardless of the EMS market size. PIE  has received orders from Customer N (involved in video game consoles  development) for its new model and is expecting high-consistent orders  from Customer N this year. We foresee its topline contribution from  Customer N to grow c.35%, while the other customers continue growing  steadily at c.14%. Its plant 5 (100,000 sq ft floor space) is completed  and commenced operation with six production lines for Customer A (a  Chinese supercomputing cloud company). In view of the surging demand, we understand that PIE has almost fully utilised its current  capacity.

End-to-end solution with wire harness service. PIE is providing endto-end solution from wire and cable harness to box built assembly. The  capabilities to provide a one-stop solution for its existing customers  helps to improve client stickiness and could command a healthy margin  of c.>7%. To note, the Group is considering increasing production  space for its wire harness division to further grow its business.

A clearer sky after ease of foreign labour issue. Last year, PIE faced  difficulties in getting foreign labour – resulting in higher overtime  charges and impact on its overall margin. To date, PIE has brought on  board the foreign labour needed for its operations. Hence, we expect  the overall margin to recover, especially with more consistent orders  from Customer N. PIE is also in the midst of installing solar panel to  mitigate the impact of hike in electricity price.

Company Report Card

Results highlight. FY22 revenue and profit after tax (PAT) increased  13.6% and 16.1% YoY. This was mainly attributable to higher orders  received from new and existing EMS segment customers. The YoY  margin improvement was mainly due to its consignment arrangement  with Customer A.

Balance sheet. The group has a net gearing of 7.6% as at FY22 (vs  FY21’s net cash position of MYR7m). The higher borrowings were  mainly to fund its working capital. Going forward, we expect its net  gearing to either remain low or return to net cash position.

ROE. We observed a 9.8-13% YoY increase of ROE over the past three  years. With the expected increase of earnings for FY23-24, we  anticipate PIE’s ROE to increase gradually.

Management. PIE is helmed by managing director Mui Chung Meng,  who is responsible for overseeing the overall operations and acquiring  more orders. He has extensive experience in the fields of electronics,  plastics, and rubber. He is supported by the senior management team  comprising individuals with outstanding professional qualifications and  over 10 years of experience in their respective fields.

Investment Case

Fair value of MYR4.02-4.42. We like the stock for its good track record  and strong clientele profile – mostly in high growth industries. PIE’s  business will benefit from market share gain from relocation out of  China, more orders from its customers, ease of foreign labour issues  and capacity expansion. Based on an ascribed P/E of 17-18x on  FY24F-25F earnings, we derive a fair value range of MYR4.02-4.42. We  believe that our target valuation is fair, as it is in line with the local EMS  players’ 1-year forward P/E of 18x.

Key risks include FX and order fluctuations, customer concentration  risk, and labour shortage.

Source: RHB Securities Research - 16 May 2023