I would not say this is the best time to buy now because no one should catch the falling knives. However, I would like to shed light on the valuation of QES.

The problem of chip shortage is forecasted to persist for at least 5 years. In other words, the earning visibility of the industry will remain clear for the next five years. It's almost certain that QES will manage to make more money in the next five years.

Considering that QES has been expanding its manufacturing division which yields a higher gross profit margin of 40%, and assuming that QES manages to earn 0.85 sen for the next four quarters consecutively in FY 2022, we will have a total EPS of 3.4 sen in FY 2022. If the market values the stock at a lower PE ratio of 25 because of Fed tapering, the price should be around RM 0.85.

The industry prospect and the company's fundamentals are still intact, in fact they are getting better and better.

I'm not saying that you should buy it now. However, the downtrend is real and it's unwise to catch the falling knives. But for those who are holding it now, think carefully before you cut loss. Don't sell because of panic.

The net profit margin of QES is not as high as other tech counters. This is because the company derives a big chunk of its revenue from its distribution division which enjoys a gross profit margin of around 22% - 23%. However, what most of the investors look at here is its manufacturing division which potentially yields a gross profit margin of 40% in a few years down the road.

By the way, as of 5 January 2022, QES has been trading around PE 35.31 while MI (PE 47.63), PENTA (PE 51.86), Greatec (59.26), Vitrox (PE 59.83), Aemulus (PE 77.93) and Elsoft (PE 366.22). As you can see from the PEs, QES's lower profit margin has been priced in and in the recent price run-up, what people focus is its future in manufacturing, especially after its joint venture with Applied Engineering which will help it move up the value chain which in turn will yield a even higher gross profit margin.

So you should ask yourself this question:

Considering the global chip shortage and future technological developments such as EVs, 5G and IoTs, do you believe that QES will succeed in expanding its manufacturing division?

If you believe in QES's endeavour, buy QES when it is still cheap because the future of its manufacturing division has not been priced in yet.

If you don't believe in QES's endeavour, buy other tech counters which are traded at high PEs as investors have priced in the future of the business.

Reference: https://www.theedgemarkets.com/article/qes-group-aims-be-bigname-equipment-player

I would like to share my new findings with all of you here. I hope you enjoy reading it. Please point out my mistakes if there is any.

Similar to Aemulus, Elsoft and Greatec, QES’s manufacturing division is involved in EVs. To date, the global sales of EV have increased by 91%. From 2020 to 2021, China’s EV sales have increased by 6.2 %. In 2021, EV constitutes 11.7% in the Chinese automotive market. China’s EV sales are expected to increase by 18% in 2023. The European market has increased by 61% from 2020 to 2021. In 2021, EV constitutes over 15% or the European automotive market. It is estimated that in 2025, EV will constitute 30% of the global automotive market. From the article on Digitimes Asia, it is clear that the industry of EV is burgeoning. This industry trend is in line with QES’s newly launched products – PDA1000V and WSM1200 – which are used extensively in EVs. If QES manages to bag large orders for its manufacturing division, the market will value it favourably.

References:
1. https://www.digitimes.com/news/a20211227VL200.html
2. https://www.qesnet.com/wp-content/uploads/2021/12/INVESTOR-BRIEFING-%E2%80%93-Q3-2021-Financial-Results.pdf

this is a piece of junk.

Why is the share price of QES going down?

To answer this question, we need to identify the setbacks faced by the industry as a whole.

Below are the setbacks/challenges listed by QES, Mi, Vitrox, Pentamaster and Greatec in their quarterly reports:

QES (Q3, 2021)

QES reported a decline in the distribution section but a slight increase in the manufacturing section. However, no specific reason is provided in the report. I can only identify a few general problems faced by the group under the prospect section:

1. Global supply chain disruptions

2. Looming energy crisis

3. Shipment delays

4. Critical components' longer delivery lead time

Reference: https://cdn1.i3investor.com/my/files/st88k/0196_QES/qr/2021-09-30/0196_QES_QR_2021-09-30_QESResultQ32021_Final_284704097.pdf



Vitrox (Q3, 2021)

1. The decline in revenue was primarily a result of realignment with customers on the shipment delivery date to next quarter as a result of temporary supply chain disruption due to Covid-19 cases.

Reference: https://cdn1.i3investor.com/my/files/st88k/0097_VITROX/qr/2021-09-30/0097_VITROX_QR_2021-09-30_ViTroxQ3_2021_395947341.pdf



Mi (Q3 2021)

I only list out the problems faced by the division of SEBU of MI so that we can make an apple-to-apple comparison.

In the third quarter, the revenue stayed flat as per last year without strong growth, mainly due to:

1. Change in customer order trend where some orders were pulled in earlier to Q2 2021 in anticipation of the possible interruption by full lockdown in Malaysia. Some were pushed out to the subsequent quarters to suit customers’ capex spending timing and revised new capacity schedule.


2. Global chip shortage from upstream wafer fabs has influenced customers’ capacity plan, hence, deferment in delivery schedule.

Reference: https://cdn1.i3investor.com/my/files/st88k/5286_MI/qr/2021-09-30/5286_MI_QR_2021-09-30_MiTBQ3FYE202129Oct2021_333044148.pdf



Penta (Q3 2021)

Penta is the only group among the four main ATE makers that show QoQ improvement. I will only consider its Automated Test Equipment segment here. Despite its higher profit compared to Q2 2021, the increase was marginal. Here are the reasons:


1. The Group undertook a higher quantum of prototype projects for proof of concept and lower margin product mix.

2. The profit margin was also affected by the higher component price of certain material and an escalating shipment cost.

3. With the impending opening up of more cross border travelling, the Group anticipates a smoother progress in its project site installation and deployment at its customer’s premise, which is an important milestone for revenue recognition to take place. (In other words, the group's revenue is actually a lot more than it is on paper, but it cannot be recognised in Q3 due to travelling restrictions)

4. The semiconductor shortage and supply chain constraints remained a pertinent concern to the global technology market. As it is, the Group has been experiencing order intake momentum where customers across the industry segments are gradually preparing for higher levels of inventory to ensure supply security.

Reference: https://cdn1.i3investor.com/my/files/st88k/7160_PENTA/qr/2021-09-30/7160_PENTA_QR_2021-09-30_Q32021_1391981374.pdf



Greatec (Q3, 2021)

1. The group's profit drops QoQ due to the lower revenue contribution from PLS. There were some rescheduling from customer to postpone the equipment installations due to the strictest lockdown measures by certain country.

2. Furthermore, there were lesser revenue recognised during the current financial quarter due to the PLS shipped in the last quarter were in customer site acceptance this quarter.

3. In addition, the new projects have yet to reach the milestone for revenue recognition during this quarter.

Reference: https://cdn1.i3investor.com/my/files/st88k/0208_GREATEC/qr/2021-09-30/0208_GREATEC_QR_2021-09-30_Q32021Announcement_Final_1242157092.pdf



Reflection:

From the extracts taken out from the groups' quarterly reports, we know that the whole industry is facing generally the same type of problems. Most of them have orders in hand, but the revenue cannot be recognised due to a variety of problems, particularly lockdowns and shipment delays in Q2. However, we can rest assured that the prospect of the industry is still intact (unlike the glove industry), and QES is not the only group that has seen drops in revenue QoQ.

As long as the fundamentals of QES and the industry prospect are still intact, we don't have to worry too much. What we can do now is to wait for the bearish market to get over.

As Mr Koon Yew Yin once said, once the tide rises, it raises all boats. (Don't forget QES has been increasing its capex to capture the burgeoning market share).

I agree with you. The market sentiment is really bearish now. But as long as the prospect and fundamental are good, I'll hold on to my shares.

The Malaysian manufacturing sector continued to improve in November. In a separate statement, IHS Markit said the ASEAN manufacturing sector remained in expansion territory during November but the PMI was down at 52.3 compared with 53.6 in October.

Indonesia recorded the fastest rate of expansion with the PMI (53.9), followed by Malaysia (52.3), Vietnam, the Philippines and Singapore (52.2), Thailand (50.6) and Myanmar (50.0). Commenting on the result, the economist Lewis Cooper said the PMI remained above the 50.0 mark to signal another improvement in manufacturing conditions, buoyed by further increase in factory production, with the rate of output growth easing only slightly from October's survey record.

"Overall, the latest data provide some promising signs, with the ASEAN manufacturing sector continuing to recover, and rates of growth in output and new work sticking close to their recent peaks," he said.


Reflection:

The manufacturing production has been increasing since October. In other words, barring unforeseen circumstances such as new rounds of lockdowns, manufacturers are more likely to make more money in Q4 than they did in Q3. Besides, PMI in other ASEAN countries are showing recovery too. It is good news as QES derives most of its revenue from ASEAN countries : Malaysia (42.1%), Singapore (18.1%), Vietnam (14.6%), the Philipes (5.2%) and Indonesia (5.4%).

Reference:https://www.klsescreener.com/v2/news/view/917897/malaysia-s-november-manufacturing-pmi-rises-to-52-3

Let's do some back-of-the-envelop calculation here

Consider the EPS below:

Q1 - 0.83 sen (at full capacity)
Q2 - 0.46 sen (MCO)
Q3 - 0.45 sen (MCO)
Q4 - 0.83 sen (projected, at full capacity)
Total - 2.57 sen

At Forward PE of:

30 - The share price should be around RM 0.77
35 - The share price should be around RM 0.89
40 - The share price should be around RM 1.03

Consider the more conservative projection below:
Q1 - 0.83 sen (at full capacity)
Q2 - 0.46 sen (MCO)
Q3 - 0.45 sen (MCO)
Q4 - 0.75 sen (projected, 10% discounted from the Q1 EPS)
Total - 2.49 sen


At Forward PE of:

30 - The share price should be around RM 0.75
35 - The share price should be around RM 0.87
40 - The share price should be around RM 1.00

Since the semiconductor industry will be booming for the next few years, I think the forward PE of 30, 35 and 40 are quite reasonable. So, I think there is no time like the present.

@keychain, not Mathematics expert. It's making an effort to value a stock that you own. It could be wrong, but it's better than none.

You're not alone. By my calculation, the intrinsic value is around RM 0.72. So I guess I didn't pay too high for it. But maybe my calculation is wrong. I guess you need a lot of luck to buy exactly at the bottom and sell at the peak.

He claims to be a professional analyst but he gets excited by day-to-day price fluctuation and acts like a kopitiam sifu who makes silly claims without any substantiation. I seriously doubt he has just joined the stock market a few weeks ago after joining some Facebook investment lessons. Lol

Lol. Do you expect everyone to act like you?

I've just collected another 4000 units at RM0.795. :)

In my opinion, Q3 is not gonna be very exciting due to the previous MCO, shipping problems, rising costs of materials and chip shortage. However, the third quarter is going to offer us a clear projection of the earnings growth which in turn is the best catalyst for price movement.

No one can tell how the price is going to move in the future. From the price chart, with the strong support level of RM 0.73 (which coincidentally matches my calculation of the DCF intrinsic value), higher lows of prices since September, higher lows of Chaikin Money Flow values, and close prices above EMO, I believe the underlying force is accumulation.

From my point of view, there are a few reasons for QES's depressed stock prices. I list them down here so we can have a little discussion:

1. QES is listed on ACE. Many funds are not allowed to buy shares out of the mainboard. That indirectly reduces the demand for the shares. Once QES is qualified to be listed on the mainboard, the game is gonna be played on a whole new level. Considering the future trend of IoT and 5G, coupled with the dramatic increase of capital expenditure of QES, I believe this is not a distant dream.

2. Most investors buy the shares because of QES's manufacturing business instead of its distribution and maintenance businesses. The manufacturing business has yet to build up and deliver its true potential. Therefore, many people choose to wait until QES releases its 4Q or 1Q 2023 reports in order to avoid expectation discrepancies. However, with the joint venture with Applied Engineering, I believe QES manufacturing will be the gem of the crown in a few quarters. So I choose the collect the shares now before QES true potential is confirmed.


(Please don't shoot me if you disagree with me. I'm not Facebook sifu and have a fragile heart. I'm just a small ikan bilis swimming in the sea. Please kesian me a bit ya. I'm here to look for investing buddies, not enemies. XD)

Maybe Armanhashim really wrote with a good intention here. But I disagree with his interpretation of the chart. Thanks Armanhashim.

Armanhashim, thank you for your advice. I have just collected another 4000 units today. Will continue to buy more if it drops below RM 0.790. Lol.

That's good news for me. I will buy as much as I could. XD

All I want to say is that this stock is still undervalued. Buy it when it is still cheap.

I don't think so.

The longer it rests, the higher it jumps when it wakes up!

It could be a dead cat bound if QES is in a declining industry. For example, we can observe many occasions of dead cat bounds in Air Asia due to the speculative activities. QES is in a booming industry. To me, it is very unlikely to be a dead cat bound. I agree with Newbieinshare that it is a correction, but a deep one.

In the world of stock investment, many factors can affect the sentiment, which in turn will affect the price. It is believed that logistical disruptions and lockdowns have caused manufacturing activity in Malaysia to contract. Since the factories can't operate, the expansion activities cannot be carried out and therefore customers' demands drop (this reason is stated by an interview with Vitrox published by The Edge).

In anticipation of reduced revenues in 3Q, many short-term investors, margin players and institutional players decide to move their funds to other counters with better returns. The profit-taking activity causes this severe price drop that we are seeing now. (Damn it!)

However, if we look at the industry prospect and the company's fundamentals, the potential is still very encouraging. First, the chips are still in severe shortage and many companies are opening new factories in different sites to avoid production halts if lockdowns are implemented. With new constructions of factories in place, demands for equipment will eventually increase. Besides, QES is based in ASEAN where MNCs build their factories for manufacturing. It has also more than 2000 customers in its distribution arm. I believe the company can turn the network into customers easily.

We will not see tragedies that happen in the glove industry as the industry of ATE is very cost-intensive and requires high technology. It is not easy to build an ATE factory from scratch and sell it to your customers immediately. People will be concerned about the quality of your equipment.

The collapse of glove stock prices is caused by a structural change in its industry competitiveness (increased competitors and decreased ASP) while this structural change has not been observed in the industry of semiconductor. So, I believe the price drop is transitory.

Armanhashim, your technical advice is the joke of the year. hahahaha....keep calling people to sell without any evidence to substantiate to claim and you dare to call yourself professional? Joker. hahahaha

@Omega ....I see. So you actually made your fortune with warrants. That is so cool. I have been investing only in mother shares and so far I only manage to make around 30k profits. I have never bought warrants as I do not understand them. Can you please suggest me any website to learn more about it?

@Omega ...6-digit paper gain...I wish I can make as much as you do one day.....

Hi ParaPoraPori,

How is it in the fourth Elliot Wave now? I can't see it.

To share my thoughts with you, I think the technical structure is quite rock solid as bullish pennants have been developing, signifying price level consolidation and the absence of selling pressure. Besides, if you run the price chart through with Chaikin Money Flow, you can see the divergence between the price and the indicator, which is a bullish sign. Since June, the price has been moving sideways. But from the outset of August, the price goes down (still above the support level) while Chaikin Money Flow goes up. It means that money is flowing in. Perhaps, I say perhaps, some quarters are accumulating the shares now.

From technical analysis, there is no way we can predict when the price will move. But we can at least know that investors' sentiment in this counter is bullish at the moment.

Considering the prospect of the industry and the expansion plan of this company, I would hold on to my shares if I were you. But your money, you call. Good luck man!

It's fine if you hold the opposing view of the company. But you need to substantiate your claim with evidence. Simply shouting "run" or making some funny predictions of prices really won't make people panic, at least for me. Your comments reflect your intelligence level. Cheers.

Overall, the drop in the manufacturing division is merely an external factor of lower customers' demand and fixed costs. It has nothing to do with internal factors that are structurally damaging by nature. Given the market position of the company, its tripled capital expenditure and the high growth of 5G, I believe it's still worth putting money in.

However, I'm really curious about the reasons behind "lower customers' demand" as stated in the recent quarterly report. Does anyone know the reason?

Armanhashim, I think QES is set to manufacture testing equipment, not chips.

Exactly. Let's hope for the best. I hope the market won't be driven by unnecessary panic because the company is in the burgeoning industry.

Hi keanchung, thank you for pointing out my mistakes just now. I would like to share my thought with you, if you don't mind.

The losses made in the manufacturing division are caused by a decline in demand for automated handling equipment. Besides, another reason is that the machines of the company are not fully utilised yet (only 60% to 70% being utilised), as stated in the article published by The Edge entitled "QES Group aims to be a big-name equipment player" dated 09June2021. Therefore, a drop in customers' demand will likely increase the fixed costs of production, hence the losses incurred. The reduced demands can be caused by a number of reasons, such as the chip shortage. It does not mean that the company is losing in the competition.

However, it is worth noting that the capital expenditure of the company has increased by three folds since 4QFY2020. Once the customers' demand rebound, the results will likely surprise us because once the fixed costs of QES' manufacturing business reaches the inflection point, any additional revenue that comes in will largely be profit.

The question we need to think here is:

Considering the high growth of 5G, do you believe that QES will manage to rake in more orders and scale up its operation in the manufacturing division in the coming quarters?

Hi KeanChung, I'm sorry I didn't read properly. You are right.

ChickyWaWa 好文！

There many ways to look at PE. The higher the PE, the more expensive it is. PE being "too high" or "too expensive " is a relative concept. In other words, the PE figure is considered high if it is compared with PE in the past, the time before 5G was rolled out and life science was not as hot as now. Try to project the company's earnings in a few quarters into the future, you might notice that the PE is actually not that high. (In the world of stock investing, the future is more relevant than the past). And unlike glove stocks, the growth in Greatec is more sustainable and protected with an economic moat. The business is not subject to cut-throat competition as we will see in the glove industry in a few quarters.

you are welcome.

@ cwshare, from my point of view, the main customer base of Opensys is banks in Malaysia. Due to the impacts of moratorium and overnight rates cut, the market foresees that revenues in the banking sector will be reduced. Therefore, the banks might want to cut their capital expenditure. When this happens, Opensys will be affected too.

I sold at 0.79, with only 8% profits only. I was expecting more but I was uncomfortable with the contracting volume.

I am a bit concerned with the contraction of volume here. When the price breaks out upward, it is good to see the volume expands. However, the volume contracts when the prices breaks out upward. I am afraid that the price level may not be sustainable.

I will start to buy when the price changes direction. :)

I did not average down as I did not know how far it will drop. Normally I will buy more to average down when it rebounds. It might not be a smart move, but it would prevent me from compounding my losses if I made a mistake in valuing this stock.

My average price is 0.743. Even higher than yours @Cooljay. Lol. However, I am quite confident with the positive catalysts (Buysolar platform, CRM and SmartCIT solutions) reported by The Edge recently which were believed to increase the company's growth by 30% for the next 3 to 5 years. Assume that the company can increase 20% on their 2019 revenue, the projected revenue for FY2020 is RM 123445000. Assume that the NP margin is 10%, the NP would be 12344500. The NOSH is 298 million, which would yield projected EPS of 4 sen each. Assume the projected P/E stays the same (20X), its intrinsic value would be around RM 0.8. So, I think the current decline of the share price is scary, but it would not fundamentally destroyed the prospect of this company. :)

Thank you Mr Koon for sharing your experience.

His KYY's posts about Comfort are still there la...

Sadly, I have to agree with @Joe8. We can see a bearish Harami and an evening star (not a perfect one though). When bearish signals formed twice, it's not a good sign though. I would like to see it go up to RM 5. But please be careful. Don't all in buddies. There are signs that the market sentiment has changed.

Production 2019 - 3.45 billion at 83% utilisation rate.
In 2019, Careplus owns 27 production lines which can produce 4.14 billion at full capacity.
On average, one production line can produce 153 million gloves.
Revenue 2019 is RM 365 million with the production of 3.45 billion gloves.
On average, Careplus makes RM 0.106 per glove. In 2020, Careplus adds 9 production lines. So, the capacity becomes 5.51 billion gloves. We assume that Careplus runs at its 100% capacity, it will make RM 584 million revenue in FY2020. The gross profit margin in 2019 is 2.17%. Considering the improvement of efficiencies, average selling price and costs of raw materials, I assume that the gross profit margin in FY2020 is 3.5%. So, the gross profit in FY 2020 is RM 20.4 million. Assume that the tax is 30%, the profit after tax for FY 2020 is RM 14.3 million. Careplus has NOSH of 543 million. So, the projected EPS is RM 0.03. Let's say the projected PER for 2020 is 60X, the projected share price is RM 1.80.

I'm a newbie. Can any sifu tell me if this calculation acceptable?

I don't understand. EPS has increased by 200%, why is it a bad result?

@harmonification ..thank you for your advice. I didn't sell my shares too yesterday. :) Hopefully the price will be more stable.

Zuliana, don't get stuck with people with negative mindset. It's normal to cut loss as nobody would know how low the share price would fall. It was a reasonable decision at that moment.

oh man...I had a heart attack today looking at the share price.

@Waikit2224 your comment sheds light on another perspective.