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

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.

Site visit to factory in Nantong and Kunshan, China

  • 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.

Expertise in material science and technology

  • 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.

More consumer electronics projects in the pipeline

  • 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.

Automotive is the other sales growth engine

  • 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.

Reiterate Add, with unchanged estimates and target price

  • 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
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 0.86 Same 0.86