Tech Manufacturing Services - CIMB Research 2016-11-21: Breathing life

Tech Manufacturing Services - CIMB Research 2016-11-21: Breathing life CEI CONTRACT MANUFACTURING LTD AVV.SI VENTURE CORPORATION LIMITED V03.SI

Tech Manufacturing Services - Breathing life

  • Electronics manufacturing services (EMS) was once a high growth industry.
  • New Venture Research, a market research and consulting firm, projects an EMS industry sales CAGR of 6.2% in 2015-2020.
  • Maintain sector Overweight, as new opportunities in life sciences/medical tech (medtech) and 3D printing have emerged.
  • Venture has embraced these new opportunities successfully, as has CEI Limited, with its focus on life sciences/medtech customers.

EMS was once a high revenue growth industry in Singapore 

  • Singapore once had a booming cluster of EMS companies listed on the SGX in the late- 1990s/early-2000s. Back then, there were around 16 EMS companies listed on the SGX but today, there are only four. 
  • An annual industry report published by Electronic Trend Publications in Oct 2000 had forecast that the global EMS industry revenue would increase by CAGR of 29% in 1999-2004. In this report, we explore how the industry has changed, its new opportunities, and our top picks for this sector.

Who says electronics manufacturing is boring? 

  • EMS opportunities have evolved from the traditional personal computer, printer, hard disk drive and mobile phone segments to the life sciences/medtech, 3D printing, virtual reality devices and automotive sectors. Mordor Intelligence estimates that the global 3D printing market will expand by 27.3% CAGR in 2015-2020 to reach US$20.7bn in 2020.
  • Frost & Sullivan estimates that the medical electronics manufacturing sector would be worth US$40bn by the end of this decade.

New shoots of hope in the industry 

  • New Venture Research Corp, a technology market research and consulting firm, forecasts that EMS industry revenue will continue to expand at a 5-year CAGR of c.6.2% from US$430bn in 2015 to US$580bn in 2020. 
  • Flextronics, a world-leading EMS company, noted in its Mar 2016 annual report that: “the total available market for the EMS industry is poised for continued growth, with current penetration rates estimated to be less than 30%.” 

Venture Corporation - higher margin niche products 

  • Venture’s management had the strategic vision to realise early on that the way forward would be to pursue a higher-value sales mix and value-added manufacturing. Hence, it pared down its exposure to the consumer electronics industry significantly. 
  • Venture’s earnings growth in recent years has been driven by the life sciences/medtech and 3D printing areas. 
  • Key catalysts include better-than-expected margins due to engagement in higher-value-added products. 
  • A key risk to our call is order pushback by customers.

CEI Limited - Add 

  • CEI Ltd has always focused on a high-value sales mix and low-to-moderate volume business. It started with Perkin Elmer as sole customer for analytical instruments but has since gained customers in life science/measuring instrument industries. Clients include Waters Corp and Thermo Fischer Inc. 
  • In terms of capability, CEI Ltd now does printed circuit board assembly and module building. 
  • Key catalysts include better earnings and stronger life science/medtech orders. 
  • Order pushback by customers is a risk.

Highlighted companies 

CEI Limited 

  • ADD, TP S$1.04, S$0.84 close 
  • CEI Limited is a contract manufacturer with more than 26 years of experience in printed circuit board assembly and box-build services.
  • Its life sciences/medtech segment is the largest revenue contributor (~50% of FY15 sales).

Venture Corporation 

  • ADD, TP S$10.94, S$9.88 close 
  • Venture is an established top-tier EMS company with strong free cash flow generation capability. The life sciences/medtech and 3D printing industries could spur the company’s earnings growth in the coming years.

William TNG CFA CIMB Research | http://research.itradecimb.com/ 2016-11-21
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.040 Same 1.040
ADD Maintain ADD 10.94 Same 10.94