Memtech International - CIMB Research 2016-06-19: Plant visit to Nantong and Kunshan

MEMTECH INTERNATIONAL LTD M26.SI

Memtech International - Plant visit to Nantong and Kunshan

Maintain Add on Memtech after our visit to its Nantong and Kunshan plants.
Capabilities in silicone rubber/plastic and injection moulding enable its turnaround following the demise of keypads, and stronger traction into automotive business.
Pipeline of new consumer electronics projects from customers like Beats, Apple, Parrot etc. to contribute to 25% annual growth in FY16-17F for the segment.

Automotive segment to grow at 20% p.a. from FY16-17, supported by Tesla, Faurecia and newly-acquired customer Alpine.

On 14-16 Jun, we took part in a company-organised site visit to Memtech’s Nantong and Kunshan factories, and met with their key management. Both plants have an estimated current production utilisation rate of 70-80%, with plans to ramp up production and expand capacity in the near term.
We previously visited Memtech's Dongguan plant in Sep 2015, its oldest and smallest plant in terms of land area.

Previously a keypad components maker, Memtech leverages on its core capabilities in silicone rubber/plastic and multiple injection technology to diversify into the auto industry when demand for touchscreen started to overtake that for keypad.
It has also in recent years gained better momentum in consumer electronics, securing new orders for Beats’s headbands and Roku’s streaming devices.

Not beaten by the cost-down request from an earlier headband project, Memtech continues to work on new orders for different headset components of Beats and a potentially new acoustic device for one of Apple’s tablets.
Other projects in the pipeline include its first virtual reality (VR) headsets for Parrot (which also develops drones), as well as a potential order win from one of the world’s leading plastic toy builder.
All these, if materialise, should contribute meaningfully to its FY16-17 sales.

Apart from the existing sales orders from Tesla and Faurecia (tier-1 auto parts supplier), Memtech also recently obtained two new projects (one rubber functional part, one decorative part) from Alpine Electronics, an established Japanese in-car audio components supplier.
Production is projected to commence in 2H16. These underpin our FY16-17 growth assumptions of 20% p.a. in automotive topline vs. 25% p.a. in consumer electronics sales.

We keep our estimates and target price of S$0.86, pegged to 9x CY17F P/E (peers’ average).
The stock also offers FY16-18F dividend yield of 4.7-6.5%, based on assumed dividend payout of 40%.
Downside risk to our Add call is unexpected pushback in orders, while stronger order wins are a potential re-rating catalyst.

NGOH Yi Sin CIMB Securities | William TNG CFA CIMB Securities | http://research.itradecimb.com/ 2016-06-19

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