Posted by matakuda > 2015-04-21 06:34 | Report Abuse

Thanks Noby. KESM is new to me, and it looks good.

Posted by RosmahMansur > 2015-04-21 07:10 | Report Abuse

Thanks for the write up, but the ROE is very low about 3-4% only. Doesnt seems to be attractive

Posted by alpha investor > 2015-04-21 10:12 | Report Abuse

Thank you for sharing, Noby

Posted by wintermelon > 2015-04-27 20:00 | Report Abuse

Nice write up, noby!

Posted by wintermelon > 2015-04-27 20:05 | Report Abuse

Wish to throw a few question:
a) is ROE 2% ~ 6% considered good?
b) Gross profit margin is about 4% ~ 9%, while Net profit margin is 2% ~ 5%, is it satisfied?
b) who are the competitor? how does KESM stands up in the competition?

Posted by NOBY > 2015-04-28 00:02 | Report Abuse

wintermelon, KESM is cheap for a reason. And you mentioned the correct points. My view is that its earnings are on upward trajectory, I m OK with the average ROIC for now (note the ROE is low because of the high cash holding), expecting it to improve further if their plants utilization improves in future.

The main catalysts are its acquistion of minority interest which will boost the EPS by 40% and its venture into automotive semiconductor testing which should show decent growth. P/E of 6x post acquisition is too cheap to ignore despite its mediocre ROE.

I did not run a comparison cause KESM is the only independent test house listed in Malaysia. There are others like INARI and UNISEM but these companies have other businesses also which may not make it apple to apple comparison. Furthermore, I m very sure these companies are already pretty expensive as they are widely followed.

Posted by matakuda > 2015-05-01 13:36 | Report Abuse

Noby,

Thank you for what you have shared.

As per Annual Report 2014, KESM’s main operating expenses are (i) Labours (34.9%); (ii) Electricity (25.4%); & (iii) Depreciation of property, plant and equipment (22.3%). These three constitute about 83% of the total operating expenses.

TNB has revised the tariff downwards, offering a rebate of 2.25 sen/kWh for the period starting 01-03-2015 to 30-06-2015. The electricity tariff for the Industrial Category has been reduced from 42.7 sen/kWh to 40.45 sen/kWh or a 5.3% reduction to be precise.
http://www.therakyatpost.com/business/2015/02/11/electrictiy-tariff-cut-march-1/

Assuming the all other variables in the Annual Report 2014 remain unchanged, a cost saving of RM3.0 can be netted from the revised tariff (EPS enhanced by 7sen).

This burn-in business has a high entry barrier given that there is a need for constantly rolling out expensive capex that must be dealing with high depreciation costs. Any ideas who are competitors to KESM?

Posted by NOBY > 2015-05-01 16:07 | Report Abuse

matakuda, thanks for that information. I do agree that the barrier of entry for this business is the huge capex needs. I dont know of any listed pure burn in test provider in Malaysia aside from KESM. As I said if you look in terms of contract manufacturers like UNISEM may also provide such service but they also provide the manufacturing service so its not an apple to apple.

If looking internationally, there are 2 based on my google results, and they are pretty expensive. From Reuters

Avi-Tech Electronics (P/E=24.34x ROE:2.93%)
Trio-Tech International (TRT) (P/E=28.76x ROE=1.84%)

Posted by NOBY > 2015-05-02 12:56 | Report Abuse

The Edge Weekly just did a piece on KESM this week. Nothing new in terms of info provided by the TA securities write up and mine but seems like this company is starting to surface....

Posted by matakuda > 2015-05-05 12:19 | Report Abuse

@Noby,

The Edge Weekly confirmed your earlier statement there is no direct competitor to its now 100%-owned KESM Test (M) Sdn. Bhd. as this entity is concentrating on automotive segment.

The Weekly also cited about the high capex required in the burn-in industry. According to KESM Annual Report, the PPM is fully depreciated between 1.5 year to 5 years. Prospect wise, semiconductors for car segment are gaining momentum. Electronic circuits may become obsolete rapidly but the replacements (new circuits) must be subject to the same or more complicated test. The high capex therefore should not be a concern at least for the next few years.

Now, really hope that our handsome boy Samuel Lim can do something to increase the efficiencies in their another 2 entities, i.e. KESB Sdn. Bhd. & KESM Industries (Tianjin) Co. Ltd. Will be great if handsome boy can shed some lights on what he is going to do with these 2.