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.

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.

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 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’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 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.

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).

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