Navigating Singapore ~ Tech/manufacturing and others - CIMB Research 2016-12-05: Revival of the EMS industry

Navigating Singapore ~ Tech/manufacturing and others - CIMB Research 2016-12-05: Revival of the EMS industry Singapore Sector Outlook 2017 Electronics Manufacturing Services

Navigating Singapore ~ Tech/manufacturing and others - Revival of the EMS industry

EMS was once a high revenue growth industry in Singapore 

  • Singapore once had a booming cluster of EMS (Electronics Manufacturing Services) 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.

Still a growth industry albeit at a slower pace 

  • 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%.

Where are the new opportunities? 

  • 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.
  • According to a 2016 Deloitte study, most life science companies are entering the second half of this decade with a cautiously optimistic view. In the pharmaceutical segment, Deloitte forecasts that global pharmaceutical sales will reach US$1.4tr by 2019. Deloitte also highlighted that biotech drugs (vaccines, biologics) continued to gain traction in the life sciences sector. Most of the top 10 pharmaceutical products (by sales) in 2014 were biotech drugs, including monoclonal antibodies and recombinant products. Deloitte estimated that biotech drug sales amounted to US$289bn in 2014 and it projected that this would increase to US$445bn by 2019. Supporting this biotech sales growth are analytical instrument companies such as Illumina, PerkinElmer, Thermo Fischer Scientific Inc and Waters Corporation.
  • Apart from life sciences/medtech, 3D printing and consumer electronics segments, the automotive sector is another area where we see increasing EMS opportunities, as such companies ride on the trend of more connected cars.
  • According to McKinsey’s Jan 2016 report, the number of networked cars is anticipated to rise 30% annually, and by 2020, one in five cars will be connected to the Internet. These could create additional revenue of up to US$1.5tr to the automotive revenue pool by 2030. Part of this revenue growth will stem from data connectivity services, including apps, navigation, entertainment, remote services and software upgrades.


A key threat to Asian EMS players is US “reshoring”. 

  • According to studies carried out by The Boston Consulting Group, the cost of manufacturing in the US is now only 5% higher than in Asia, after all hidden costs are taken into consideration. 
  • Mexico also continues to expand as a manufacturing base for the US, although political stability and safety remain serious barriers to investment. Further threats to outsourcing could come from aggressive tax rate cuts for US corporations when incoming President Donald Trump assumes office.

Venture Corp and CEI 

  • Venture (Add) has an excellent track record as a dividend paymaster. The company has paid dividends every year since FY00. In FY04-15, Venture’s annual DPS was S$0.50, except for FY10 and FY11, when it rose to S$0.55.
  • This track record is backed by management’s focus on the bottomline. In recent years, the test & measurement/medical/others segment has been growing in importance for Venture. We note that this segment’s revenue contribution increased from 27.7% of total revenue in 1Q13 to 44.1% in 3Q16, making it the largest segment in terms of revenue. Sales of products like life sciences equipment and other analytical instruments are driving growth in this segment. Our base DPS assumption for FY16-18F remains S$0.50. 
  • Given the weak economic outlook, we believe there could be earnings-accretive M&A opportunities for Venture in FY17F. 
  • Potential re-rating catalysts include better-than-expected margins due to engagement in higher value-added products with customers and a higher dividend. A key risk continues to be order pullback by customers.
  • CEI is a smaller proxy to the rise of med-tech and life-science trend, trading at c.7x CY 17 P/E vs. Venture’s c.14x.


  • Valuetronics (Add) is a HK-based EMS provider with core businesses in consumer electronics (CE), and industrial and commercial electronics (ICE).
  • The estimated sales split between CE and ICE for FY3/17-19F is 40/60. The company is poised for a strong earnings recovery in FY3/17 following its exit from the less-profitable mass-market LED lighting, which contributed to the steep FY16 topline decline. Our projected double-digit growth is mainly driven by its recent expansion into the automotive sector (supply of media connectivity modules), as well as two new customers in 2QFY17 that manufacture wireless LED lighting and develop innovative bathroom products.
  • We like the company not only because it is a potential beneficiary of the Internet of Things, but also because of its cash-generative business and attractive dividend yields of 6-7%. We have an Add rating on the stock with a target price of S$0.60, pegged to 8.4x CY18 P/E, which is at a 20% discount to peers’ average. 
  • Catalysts include higher-than-expected dividends and stronger earnings delivery, while unexpected order pushback is a key risk.

William TNG CFA CIMB Research | NGOH Yi Sin CIMB Research | http://research.itradecimb.com/ 2016-12-05