Investment Merits

• Massive potential riding on Enovix’s commercialisation of active silicon lithium-ion batteries
• Beneficiary of the recovery in demand for precision components in the telecommunications and E&E space
• Sensible valuation – at 15x FY23F (Mar) P/E – allows investors to
• capitalise on the exponential growth potential of the company

Company Profile

YBS International (YBS) is principally engaged in precision machining and stamping of components, precision engineering and plastic injection moulding, manufacture & assembly of electronic components, and manufacture of paper honeycomb products. The group has seven manufacturing operations – three in Johor, two in Penang, one in Ho Chi Minh City, Vietnam, and one in Kerala, India.

Highlights

Massive growth potential. YBS entered into a master service agreement with Enovix Corp (Enovix) to manufacture state-of the-art silicon-anode, lithium-ion batteries in its plant in Penang. This technology breakthrough by Enovix is patented and enables higher energy density and capacity without compromising on safety. The pressing needs of an increasing battery size to cater for applications and artificial intelligence (AI) opens up massive opportunities for this new technology, especially when the device size is maxed out. Based on company disclosure, there is a total addressable market of USD12bn (1.2bn units) in the smartphone segment alone, and another USD12bn in IoT and computing segments. It can be widely used in wearables and IoT, smartphones, laptops and tablets, and in the industrial, medical, and EV industries. In addition, the cell architecture has thermal advantages to enable fast charging, improving the lifecycle that is suitable for EVs in the product roadmap rollout.

A proxy to the proliferation of silicon lithium-ion cells. YBS co-invested in the first production line, as well as provided the building and labour as specified in the manufacturing agreement, with volume undertaking from Enovix. Based on the outlook guidance by Enovix, high-volume production of EX-1M Cells is expected to begin in 2Q24 for certain smartphone and IoT product launches in 2024 and 2025, followed by EX- 2M Cells in 4Q24/1H25. The accelerated installation of a second line and beyond by Enovix points to a highly promising outlook for YBS, and its confidence in securing customers’ orders. We understand that YBS can achieve positive operational profit, even during the ramp-up period. This profit should grow exponentially once the production volume scales upwards. The biggest growth catalyst should come from the proliferation of Enovix products, in our view.

Existing core business to recover. YBS’ precision machining and stamping, as well as injection moulding serves global multi-national corporations in the telecommunications, E&E, aerospace, and automotive industries. Its niche capabilities in small and lightweight parts with precise tolerance at competitive prices are among its key differentiators. The recovery of the semiconductor and E&E sectors are expected to boost orders and improve the utilisation rate of its existing bread-and-butter business. Another segment of growth could come from its electronics manufacturing services (EMS) business – which is currently in the red. This segment is set for a boost, with more consignment projects secured. Meanwhile, the paper products segment is set to sustain its growth momentum and add to the bottomline.

Company Report Card

Results highlights. YBS chalked a 9MFY24 loss MYR2.5m from a profit of MYR3.0m in 9MFY23, even though revenue grew 3% YoY. The lacklustre performance was mainly due to the lower demand in the precision engineering and plastic injection mouldings segment, impacted by weak market conditions as the overall E&E industry was undergoing an inventory correction. These came on top of an increase in operating costs and pre-operating expenses in preparation for the Enovix project. The revenue growth was boosted by a higher contribution from the paper products segment.

Balance sheet/cash flow. YBS’ 9MFY24 gearing was at 0.76 – the majority of the borrowings are for the construction and machinery for its new factory in Penang that is currently occupied by Enovix. The gearing level may continue to inch upwards, before tapering off when production kicks off and it can begin to recover the cash.

Dividends. We expect ROE to increase to a high single digit or low double digits, as profitability should improve, given the contributions from new projects and the recovery in its existing businesses.

Management. Yong Chan Cheah is the Managing Director, with over 18 years of experience in marketing metal and plastics components. He cofounded Oriental Fastech Manufacturing, a key operating unit of YBS, with his brother Yong Swee Chuan in 2006. Yong Swee Chuan, an Executive Director, has over 18 years of experience specialising in metal works and welding, as well as tool and automation fabrication and modification in Malaysia and Singapore.

Investment Case

Huge upside potential, sensible valuation. We believe the successful commercialisation of Enovix’s product will contribute to a huge spike in production volume – which should fuel YBS’ exponential earnings growth in the years to come. Best of all, the risk is very minimal for YBS (being the contract manufacturer) – given the volume undertaking by Enovix regardless of whether the commercialisation of the product is successful or not. Based on a target P/E range of 20-22x on FY25-26F earnings, we derive a FV range of MYR0.98-1.40. We believe our valuation is fair, as it is still at a discount to KLTEC’s 5-year mean P/E of 25x.

Key downside risks include the escalation of input costs, slower orders, unfavourable FX rates and high gearing levels.

Source: RHB Securities Research - 15 May 2024