Jubilee Industries Holdings Ltd - CIMB Research 2018-03-09: Turnaround Of Plastic Manufacturer For Electronics

Jubilee Industries Holdings Ltd - CIMB Research 2018-03-09: Turnaround Of Plastic Manufacturer For Electronics JUBILEE INDUSTRIES HLDGS LTD. 5OS.SI

Jubilee Industries Holdings Ltd - Turnaround Of Plastic Manufacturer For Electronics

  • Jubilee Industries Holdings is set to swing back into full-year positive net profit after two years of net losses post-restructuring, based on our estimates.
  • Electronic component distribution (ECD) sales rose 90% y-o-y in 1HFY3/18, driven by new product line acquisitions and strong demand for memory chips and MLCCs.
  • Plans for fivefold capacity expansion by end-FY19F in mechanical moulding business through both organic and inorganic means.
  • Gross margins are likely to improve moving forward, in our view, as higher-margin mechanical business turns around and expands.
  • Initiate coverage with an ADD and target price of S$0.051, based on SOP valuation.

Returning to net profit after two years of losses post-restructuring 

  • Jubilee posted S$0.8m net profit for 1HFY18 after four consecutive halves of losses since the acquisition of its ECD business in Jan 2015. Originally a pure-play mechanical moulding firm, Jubilee underwent a long restructuring period since a change in management in 2014 to downsize its loss-making legacy business in China and continually expand its profitable ECD business.

Riding the electronic component uptrend regionally

  • ECD sales expanded 90% y-o-y to S$84.4m and contributed c.96% to total revenue in 1HFY18, partially due to new product lines from NeoPhotonics and Innodisk in 2HFY17. 
  • It also distributes memory chips for SK Hynix and multilayer ceramic capacitors (MLCCs) for Samsung Electro-Mechanics. MLCCs are used in smartphones and several other electronic devices, and we expect to see increasing demand for these capacitors.

Turning around its mechanical business

  • Jubilee's business comprises precision injection moulding and design, fabrication and sale of plastic injection moulds, with operations mainly in two plants – in China and Malaysia. 
  • After four consecutive halves of declines, sales increased to S$4m in 1HFY18 which could hint to an earnings turnaround soon, in our view, reversing from a gross loss of S$1.6m in FY17. Key customers include Hewlett Packard, Flextronics and Dyson.

Expanding moulding capacity fivefold by end-FY19F

  • Jubilee is set to quadruple its plastic injection moulding capacity to 151 machines – a fivefold increase, over the next twelve months. 
  • In Dec 2017 it entered into a sales and purchase agreement to acquire HonFoong Plastic Industries for S$3.5m. This will add to its capacity 93 moulding machines in Batam, Indonesia. In addition, it aims to add 32 new machines to its existing Malaysian plant, which currently has 26 machines.

Gross margins likely to expand as business turns around

  • Overall gross margin improved to 6.4% in 1HFY18 from 4.0% in 2HFY17 as a result of leaner manufacturing and better product mix with higher margin and commission.
  • Management guided that its mechanical segment could deliver higher gross margin (potentially up to mid-teens) than ECD business (5-7%), which could lift overall gross margins as the mechanical business turns around and ramps up capacity.

Initiate coverage with ADD and Target Price of S$0.051

  • Our Target Price is derived from a sum-of-parts (SOP) valuation, factoring in possible dilution from warrants issued from rights cum warrants issue completed on 1 Mar 2018. Jubilee is trading at 6.4x CY19F FD P/E (including dilution from warrants). 
  • We estimate net profit will more than double to S$4.8m in FY19F, factoring in capacity expansion and contributions from HonFoong. 
  • Potential re-rating catalysts: better-than-expected earnings growth. 
  • Downside risk: termination of distributorships with key principal suppliers.


Corporate history 

  • Jubilee Industries Holdings Ltd (Jubilee) was formerly known as JLJ Holdings and listed in 2009 at S$0.27/share. 
  • Through subsidiary Jin Li Mould Manufacturing (Unlisted), it once supplied Apple (AAPL US, Not Rated) with moulds for the production of a range of products, including iPhones and iMac desktops. The company subsequently lost its major customer, Apple, following a bribery scandal in 2010 involving Apple’s global supply manager and several key staff members of Jin Li. This led to resignation of its Executive Chairman in Jun 2011 and the group was saddled with losses in 2012-2013. JLJ was formally renamed to Jubilee Industries Holdings in Apr 2012.
  • In May 2014, Accrelist (ACC SP Not Rated), then known as WE Holdings Ltd, acquired a 25.5% stake in JLJ from major stakeholders, Mr Toh Soon Huat and Mr Chua Kim Guan. 
  • WE Holdings’ Executive Chairman, Mr Terence Tea, subsequently took over as JLJ’s CEO in Jun 2014. 
  • Jubilee subsequently undertook a rights-cum-warrant issue (at S$0.06/share) in Nov 2014 to acquire 100% of Accrelist’s stake in WE Component Holdings (which forms Jubilee’s current ECD business) and its minority stake (11.8% as at end-1HFY18) in Bursa-listed EG Industries (EG MK, Not Rated), an electronic manufacturing services provider whose key customers include Hewlett Packard (HPQ US, Not Rated), Flextronics (FLEX US, Not Rated) and Dyson (Unlisted).

Restructuring to trim down losses 

  • Following a change in management and change in reporting year end from Dec to Mar in 2015, the group proceeded to scale down its loss-making operations in China and undertook impairments and restructuring in FY16-17. 
  • It expects the restructuring to be completed by FY18F and its 1HFY18 results already show a return to positive net profit after four consecutive halves of net losses. We expect Jubilee to swing back into full-year net profit in FY18F.

Accrelist upped stake in Jubilee via convertibles 

  • On 7 Oct 2016, Jubilee entered into a US$8m Convertible Loan agreement with Accrelist, the proceeds from which were used for working capital to support the expanding ECD business. 
  • Accrelist proceeded to convert the convertibles into 338m shares at S$0.0324 per share in Jun 2017, bringing its stake to 64.7%.

Continued growth in ECD from IoT trend 

Regional distribution in Asia 

  • Injected from Accrelist into Jubilee on Apr 2015, the ECD business is held under Jubilee’s subsidiary, WE Components. Currently the business has a network of 11 distribution centres located in Singapore, China, Hong Kong, India, Thailand, Indonesia, Vietnam and the Philippines, serving over 1,000 customers. 
  • It distributes components and connectors to both original equipment manufacturers (OEM) and electronic manufacturing services (EMS) providers and also offers value-added services in engineering designs.

Added two new product lines from renowned brands 

  • In Jan-Mar 2017, Jubilee acquired two new product lines, from NeoPhotonics (NPTN US, Not Rated) and Innodisk (5289 TT, Not Rated). This propelled its ECD sales to S$84m in 1HFY18, compared to S$56m in 2HFY17.
    • NeoPhotonics is a leading designer and manufacturer of optoelectronic solutions for hi-speed communications networks in telecom and data centre applications. As Singapore pushes for 5G network this year, we see potential increase in demand for fibre optic components and NeoPhotonics’ products are suitable for this space.
    • Innodisk is an industrial grade producer of flash and dynamic random-access memory (DRAM). 
  • According to Innodisk’s Senior Director of Flash, Charles Lee, 2018 will see a distinct increase in demand for memory chips following the trends of Internet of Things (IoT) and Industry 4.0 – a buzzword to denote the current trend of automation and data exchange that is revolutionising manufacturing processes.

Distributor for Samsung and Hynix 

  • Apart from Neophotonics and Innodisk, Jubilee has distributorships with other renowned brands like Samsung Electro-Mechanics (009150 KS, Reduce, Target Price: W85,000) and SK Hynix (000660 KS, Add, Target Price: W110,000). 
  • Jubilee distributes memory chips for Hynix in Singapore and India, and Samsung's multilayer ceramic capacitors (MLCCs) in Singapore. High-capacitance MLCCs are an ideal solution for IoT devices because of their intrinsic reliability and long service life. Applications that use high-capacitance MLCCs include automotive electronics, medical electronics, and industrial equipment. According to Nikkei Asian Review, Apple’s latest models are said to be furnished with upward of 1,000 MLCCs, which represents a 10%-plus increase over previous-generation iPhones.
  • We expect demand for memory chips to remain buoyant, supported by greater memory requirements for each new generation of smartphones. According to BusinessKorea, supply will continue to grow as South Korean memory chip producers are improving their production yield rates for the advanced processors, including 3D NAND chips. We believe global memory chip shipments would likely continue to rise, and this could lead to increasing ECD sales for Jubilee.
  • Jubilee also distributes smart energy meter modules; they contributed maiden revenues of S$4.5m of the total S$100m in ECD revenue in FY17. Management disclosed it sold as much as 500,000 units of its smart energy meters in Indonesia and in India in FY17, yielding gross margin of about 7%.

Big expansion plans for the mechanical business 

Synergies with component distribution 

  • Jubilee envisions establishing a one-stop platform for its customers. From mechanical moulding to components assembly and finally components distribution, the company hopes to build on the operational synergies between each business segment and grow its mechanical business both organically and inorganically.

S$3.5m acquisition of HonFoong Plastic Industries in the pipeline 

  • In Dec 2017, the company entered into a sales & purchase agreement for a S$3.5m acquisition of HonFoong Plastic Industries (Unlisted), which operates plastic injection and moulding facilities in Batam, Indonesia. The acquisition will add 93 moulding machines to Jubilee’s existing portfolio of 26 machines in its Malaysian plant. Of the S$3.5m amount, S$1m will be paid using internal cash resources and the remaining S$2.5m will be satisfied via the issuance of 55.6m new Jubilee shares. 
  • Management believes the acquisition will add synergy and help strengthen the company's current tooling and moulding business. We expect HonFoong to add at least S$0.5m to Jubilee’s pretax profit in FY19F.
  • Jubilee expects to complete this acquisition by Apr 2018.

Addition of 32 new machines to its Malaysian plant 

  • In addition to the acquisition of HonFoong, Jubilee aims to add 32 new machines to its Malaysian plant. With both, its total capacity will rise to 151 machines by end-FY19F – a fivefold increase over two years.
  • Jubilee’s Malaysian plant produces a wide range of precision plastic components that are typically used as parts in consumer electronic products. Management guided that its capacity expansion will accommodate further demand growth, with orders committed mostly from its existing customer base, which include Hewlett Packard, Flextronics and Dyson. The 32 new machines, to be added by end-Jun 2018, would cost a total of c.S$3.5m in capex.
  • Management guided that capex would be on a deferred scheme with payments spread out over four years (FY19-22F).

Rights issue undertaken to raise capital for expansion 

  • On 1 Mar 2018, Jubilee completed a rights cum warrants issue, raising S$0.97m in net proceeds from 255.6m rights shares with warrants. Each rights share came with one warrant. Each warrant carries the right to subscribe for one new share at an exercise price of S$0.045 and is exercisable within a period of two years. 
  • Due to the rights shares issued, Accrelist now holds a 71.9% stake in Jubilee.


Segmental information 

  • The mechanical business comprises two segment – precision injection moulding (PPIM) and design, fabrication and sale of plastic injection moulds (MDF). This segment accounted for 5% of Jubilee’s 1HFY18 revenue, with the remaining 95% contributed by the ECD business. 
  • In terms of geographical breakdown, China was the largest contributor to FY17 revenue (c.48%), followed by Singapore (c.15%), Malaysia (c.10%) and India (c.9%).

Net profit to rise S$2.9m-3.1m p.a. in FY19-20F on strong turnaround and continued growth in components 

  • We project net profit of c.S$1.9m in FY18F, further expanding 156% y-o-y in FY19F and 64% y-o-y in FY20F. Our estimates assume earnings contribution from HonFoong will start in FY19F. 
  • We expect earnings growth to come from two fronts – ECD and the mechanical business – buoyed by continued uptrend in demand for components and capacity expansion in its mechanical business.
  • In terms of topline, we project revenue from the mechanical business (excluding contributions from HonFoong) to organically grow by S$8m-10m p.a. in FY19- 20F, factoring in capacity expansion in its Malaysian plant. We forecast full-year topline contribution from HonFoong at c.S$25m in FY20F.

Tax benefits to support future earnings 

  • As at end Mar 2017, Jubilee has unrecognised tax losses of c.S$21.5m and capital allowances of S$3.9m which can be carried forward and used to offset against future taxable income. 
  • The tax losses and capital allowances have no expiry dates apart from c.S$3.7m tax losses expiring in 2022.

Margin assumptions 

  • Jubilee's ECD business registered gross margins of 5-7% in FY16-17F, while its mechanical business has historically generated gross margins ranging from 11- 27% (at the height of its success in CY06-10).
  • We assume that the gross margin for the mechanical business will recover to close to the FY11 level by FY20F after factoring in cost savings from downsizing of the China plant operations. We project gross margin for the ECD to improve in FY18F, driven by increasing sales from the higher-value add product lines acquired.
  • Overall, we project gross margin to gradually improve to 6.4-7.5% in FY18-19F on the back of expansion in the mechanical business. We estimate breakeven gross profit at c.S$9.3m for FY18F.


Initiate coverage with ADD and target price of S$0.051 

  • We initiate coverage on Jubilee with an ADD call. Our Target Price is based on SOP, using 10x CY19F P/E, which is at a 10% discount to global peer average of 11.1x, for its core business and market value for its 11.8% stake in EG Industries Bhd.
  • Jubilee is currently trading at 5.1x CY19F P/E (6.4x CY19F FD P/E including dilution effects from warrants). As at end-Sep 2017, Jubilee had S$7.6m net debt, which translates into net gearing of 0.3x. 
  • Re-rating catalysts could come from strong earnings growth that would be bolstered by higher growth in its ECD business and solid recovery in its mechanical business.


Termination of distribution agreements with key principal suppliers.

  • Jubilee’s ECD business relies on maintaining good relationships with its principal suppliers and on the product innovation of these suppliers to sustain customer demand for their products. Termination of contracts with any major principal suppliers, such as SK Hynix or Samsung, is likely to have severe negative impact on Jubilee’s earnings, in our view.

Slow demand. 

  • Given that Jubilee plans to boost its production capacity five-fold by end-FY19F, its customer demand has to grow accordingly to meet its expanded capacity. A slowdown in demand growth could further erode Jubilee’s returns on investment on its new and acquired machines

Colin TAN CIMB Research | http://research.itradecimb.com/ 2018-03-09
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