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Behind Greatech's "great" numbers
Author: Jay | Publish date: Sun, 16 Jun 2019, 11:57 PM

Why am I writing

What prompted me to write this article? It is partly because of a friend of mine who asked me about this company during a dinner over the weekend. I don’t like to give un-informed advice so I did some research before getting back to him. It was then that I realize many retailers may be chasing this stock without understanding key information about this company. Information is only useful when it’s timely, so I decided to piece them together and share what I know about Greatech in this article.

Not so "great" news

Before I start, to save you time I should let you know the info below does not constitute postive news for the company (though by no fault of the company). If you only wish to hear good stuffs and/or are not interested to know the other side of story, you can stop reading here.

I generally don’t like to write this kind of articles because it naturally attracts a lot of criticisms from fan boys and fan girls. Writing articles with screaming BUYs is so much easier. But I believe in investing by knowing your facts and make reasonable assumptions on the future. So just because it's not good news does not mean it should be swept under the carpet. Without further ado, let's start.

Who is Greatech

Greatech is a manufacturer of automated equipment, including material handling, assembly, inspection etc. For readers who are familiar with listed equipment makers, such products would be similar to your likes of Vitrox, Pentamaster, Mi Technovation, MMSV etc. Greatech however also sell production line systems which are mainly for solar customers.

Please read its prospectus if you are interested to know further of the business nature.

Explosive historical profits

Why did Greatech share price soar from the first day? The reasons are simple: profits, profits and profits.

From 2016 net profit of RM5.8m, it exploded to RM19m and RM31.7m in 2017 and 2018 respectively. First quarter 2019 alone it hit RM12.5m. So annualising it would yield RM50m.

Assuming similar growth rate, then next year maybe hit RM70m and who knows, sky's the limit?

At RM0.81, market cap translate to RM510m, what a steal isn’t it? especially when compared to other equipment makers which some trade in PE of more than 10x or 15x.

But wait, did anyone bother to find out what’s the reason behind these amazing numbers?

Closer look

Looking closer, it will reveal that Greatech is not quite the same as the other equipment makers mentioned above. If you look at the revenue breakdown, production line system is the key contributor. Unlike other listed equipment makers who sell mostly to semiconductor customers, Greatech serves primarily solar panel maufacturers. This is where its major customer, First Solar, comes in. First Solar is a solar panel manufacturer listed in US. Please google them if interested to know more.

Previously its single automated equipment was sold to semiconductor and also solar guys like First Solar. It did ok in 2015-2016 but there's no signs of a future RM500m maket cap company. It was only in 2017 when they manage to sell the whole production line system to primarily First Solar that the sales exploded. Revenue contribution from First Solar group of companies also surged to as high as 88% in 2018. So suffice to say Greatech swim or sink with First Solar.

Basically, First Solar have a significant upgrade in their solar panel technologies from Series 4 to Series 6. To produce the new Series 6 panels, they were investing in setting up new factories. As you can see, they started building in Ohio, Malaysia and Vietnam. Excluding Malaysia S6 Factory 2 which has yet to be decided, five S6 factories were/will be set up with total capacity of 5.4GW.

Then the picture becomes clearer. As First Solar invests in new factories, they need to buy new equipments including production line systems from companies like Greatech, which is why Greatech’s revenue soared since 2017.

But how about the future?

As some of you may have observed, 4 out of 5 (or 4.2GW out of 5.4GW) of the S6 factories were completed and have started production as of today. Which begs the question, what will happen to First Solar’s purchase of equipments from Greatech? With only Ohio S6 Factory 2 1.2GW to be commissioned, will Greatech’s revenue be affected?

I’m afraid the answer is more likely than not.

Logically, you only need to invest heavily in equipments when you start a brand new factory. For specialized equipments, you would also need to order in advance to ensure they are ready once your factory is built. But once production started, there will likely only be periodic replacement or upgrades of equipments on a piecemeal basis. Which is what’s likely to happen to the business relationship between First Solar and Greatech.