Grand Venture Technology Ltd - CGS-CIMB Research 2019-04-03: A Play On Growth

GRAND VENTURE TECHNOLOGY LTD (SGX:JLB) | SGinvestors.io GRAND VENTURE TECHNOLOGY LTD (SGX:JLB)

Grand Venture Technology Ltd - A Play On Growth

  • GRAND VENTURE TECHNOLOGY LTD (SGX:JLB) is an established manufacturing solutions provider that was listed on 23 Jan 2019 at an IPO price of S$0.275.
  • The purpose of the listing is to facilitate the company’s growth. Only new shares were offered in its IPO exercise.
  • We initiate coverage on Grand Venture Technology with an ADD call and target price of S$0.34.


Company History


Founded by established industry veteran

  • Grand Venture Technology’s history began with the founding of GVT Singapore in Sep 2012 by its Executive Chairman, Mr Ricky Lee. In Feb 2013, the company acquired GVT Malaysia by way of a share swap, pursuant to which GVT Malaysia’s then-shareholders, including Mr Kong Sang Wah and Mr Saw Yip Hooi, became shareholders of GVT Singapore. Mr Kong and Mr Saw had managed GVT Malaysia since 2010.
  • Before establishing GVT Singapore, Mr Ricky Lee was one of the founders and executive directors of Norelco Centreline Holdings Limited (Norelco). Following a merger in 2004, Norelco became part of UMS HOLDINGS LIMITED (SGX:558), which is listed on the Main Board of the SGX-ST. Subsequently, in 2007, Mr Ricky Lee joined Eng Tic Lee Achieve Pte Ltd, which was listed on the Main Board of the SGX-ST as ETLA Limited (ETLA) in 2007, as an executive director and substantial shareholder. ETLA was delisted in 2009 following its acquisition by Electrotech Investments Limited, now known as FRENCKEN GROUP LIMITED (SGX:E28).
  • Grand Venture Technology’s CEO and Executive Director, Mr Julian Ng, and COO, Mr Tan Chun Siong, joined the group in Mar 2014 and Feb 2014, respectively. They were Mr Ricky Lee’s colleagues at both Norelco and ETLA. Managing Director (Malaysia) Mr Kong Sang Wah and Group Senior Director of Sales Mr Saw Yip Hooi, were also Mr Ricky Lee’s colleagues at Norelco.
  • Shortly after its incorporation, Grand Venture Technology acquired the lease for its current property at 2 Changi North Street 1, Singapore 498828, and invested in plant, equipment and machinery for the manufacturing of precision engineering parts. The company commenced commercial operations in early 2013, serving the Singapore-based customers of GVT Malaysia.
  • Concurrent with the start-up of its Singapore production facility, GVT Malaysia purchased a 75,110 sq ft plot of land in Penang, Malaysia and commenced the construction of a new production facility. GVT Malaysia relocated to the new production facility and commenced operations there in 2014.
  • While GVT Malaysia focuses on the precision manufacturing of component parts and sheet metal manufacturing services for semiconductor multinational corporations operating in Malaysia, GVT Singapore targets similar customers based in Singapore and abroad.
  • In Nov 2017, the group established a wholly-owned subsidiary named GVT Suzhou, in response to its customers’ plans for business expansion in China.

Customer wins

  • In 2014, Grand Venture Technology secured approved vendor status for the manufacturing of semiconductor components from Teradyne Inc, a leading supplier of automated test equipment that is used to test semiconductors and a wide range of other complex electronic systems. In the same year, the group broke into the analytical life sciences industry, securing approved vendor status for the manufacturing of mass spectrometer components from a leading North American analytical life sciences company.
  • From 2014-16, the group focused on manufacturing and securing first article approvals from both these customers, attaining them in 2016 and commencing full production thereafter. In 2016, the group also started providing modular assembly services to these customers.
  • Grand Venture Technology’s precision manufacturing abilities were further validated in 2018 when it secured first article orders for the manufacturing of mass spectrometer components from two global life sciences groups – another North America analytical life sciences company and Thermo Fisher Scientific Inc (TMO US).
  • In 2015, Grand Venture Technology extended the scope of its services, providing full-service sheet metal manufacturing, including painting and powder-coating by GVT Malaysia.
  • In 2016, GVT Singapore and GVT Malaysia started modular assembly for ASM Assembly Systems Singapore Pte Ltd (Unlisted) and BE Semiconductor Industries NV, respectively.

Recent developments

  • In 2018, Grand Venture Technology distinguished itself from competitors by expanding its capabilities to include the following:
    1. cleanroom assembly of precision machining components and complex modular assembly for mass spectrometers in a Class 10,000 cleanroom environment;
    2. the manufacturing of engineering plastic components and ceramic machining; and
    3. sub-micron precision machining and manufacturing services.
  • With respect to its quartz machining capabilities, in 2018, the group entered into a 10-year cooperation agreement with an established Austrian manufacturer and supplier of silicon, ceramics and quartz glass for optical, semiconductor, precision-machining, and custom-made solutions, SICO Technology GmbH, and its Singapore outfit, Sico Asia Quartz Pte Ltd (collectively referred to as SICO in this report), to build up its ceramic and quartz machining capabilities. Grand Venture Technology started offering its customers quartz machining services in 2018.
  • In early 2018, the group commenced a research and development project with another North American analytical life sciences company in conjunction with the Singapore Economic Development Board’s Partnerships for Capability Transformation (PACT) programme to localise the manufacturing of a critical sub-assembly (currently being carried out in a technologically-advanced European country), and in respect thereof, the group has already secured an order.


Key Business Segments


Semiconductor

  • Grand Venture Technology’s services and products cater to customers that are leading capital equipment manufacturers for semiconductor and electronics manufacturing and assembly solutions. Front-end processes include wafer fabrication and wafer probing, while back-end processes include assembly, testing and packaging.
  • For front-end processes, Grand Venture Technology manufactures and supplies key and high-precision components such as chamber lids, cooldown plate bases, hinge brackets, and squeeze film damper (SFD) pivots that go into the vacuum chamber of chemical vapour disposition equipment.
  • For back-end processes (including die-cutting, die-attaching, wire bonding, package moulding, lead cutting and tin plating), Grand Venture Technology manufactures and supplies key and high-precision components, such as machine bases, as well as assembles complex modules, such as linear guides that are used in the manufacture of die bonders, wire bonders and wedge bonder equipment. With regard to back-end test equipment, Grand Venture Technology manufactures and supplies key and high-precision components, such as bridge plate bases that are used in automated test machines, as well as assembles complex modules, such as zero insertion force (ZIF) assemblies.
  • The manufacturing of the aforesaid products requires, in general, precision machining, complex sheet metal manufacturing, vacuum parts manufacturing and assembly of complex modules. Grand Venture Technology also provides engineering plastics and quartz machining services for customers in the semiconductor industry.
  • Grand Venture Technology’s customers in the semiconductor industry include Teradyne Inc, BE Semiconductor Industries NV, Kulicke & Soffa Industries Inc (KLIC US), as well as the contract manufacturers for these and other original equipment manufacturers (OEMs), namely SAM Precision (M) Sdn Bhd and SAM Tooling Technology Sdn Bhd – collectively referred to as SAM Equipment in this report – and Flex Ltd (FLEX US).

Analytical life sciences

  • Grand Venture Technology manufactures and supplies key components of both single and hybrid mass spectrometers (such as vacuum chambers and interfaces, and complex parts of the mass filters and the ion source). The group also assembles key modules of ion source for mass spectrometers. These mass spectrometers are apparatus for identifying the kinds of particles present in any given substance and are mainly used in analytical life sciences research, environmental testing, food and beverage testing, forensic analysis, pharmaceutical applications and clinical diagnosis.
  • Grand Venture Technology also manufactures key components of high performance liquid chromatography instruments (such as manifolds, valves and plugs) that are used in laboratories for environmental testing, food and beverage testing, pharmaceutical applications, forensics screening and clinical diagnosis.
  • Such manufacturing usually requires sub-micron machining, vacuum parts manufacturing, ultra-high vacuum production processing and Class 10,000 cleanroom modular assembly. Grand Venture Technology is able to manufacture components made of engineering plastics, ceramics, steel and aluminium.
  • Its customers include AB Sciex Pte Ltd, Thermo Fisher Scientific Inc, as well as the contract manufacturers for these and other OEMs such as Plexus Corp (PLXS US). Grand Venture Technology was selected by these customers to be one of their Asian supply chain partners to support their growth plans in Asia.

Electronics and others

  • For OEMs in the electronics and other industries, Grand Venture Technology mainly manufactures key and high-precision components, such as key components of feeder systems in SMT machines, as well as assembles the complex modules thereof, for customers that produce a range of industrial automation and manufacturing equipment.
  • From time to time, Grand Venture Technology provides customised engineering solutions to customers that are involved in the hard disk drive, automotive and general industrial applications industries.
  • Its customers include ASM Assembly Systems Singapore Pte Ltd, which manufactures surface mount technology (SMT) machines for the electronics industry, as well as other local engineering services firms in the countries that Grand Venture Technology operates in.


Business Development Strategy

  • Grand Venture Technology’s marketing and business development activities are headed by CEO and Executive Director, Mr Julian Ng, and the Group Senior Director of Sales, Mr Saw Yip Hooi. The group has 17 sales and marketing, accounts, and project management personnel.
  • Grand Venture Technology’s marketing strategy to increase revenue includes:
    1. direct marketing,
    2. referrals and industry introductions, and
    3. marketing via its corporate website.


Competitors

  • According to Grand Venture Technology, the key entry barriers to the precision engineering parts manufacturing industry are:
    1. production technology,
    2. breadth and depth of production capabilities and
    3. track record.
  • Grand Venture Technology has undergone various vetting and validation processes to be appointed as an approved vendor by its major customers. The expertise and ability to meet and manage these requirements can only be built through years of experience in providing precision-manufacturing services, and this is not easily replicated by new entrants.
  • Its closest competitors, as cited by Grand Venture Technology are:
    1. AllianceCorp Manufacturing Sdn Bhd (Unlisted);
    2. JEP HOLDINGS LTD. (SGX:1J4);
    3. FRENCKEN GROUP LIMITED (SGX:E28);
    4. UMS HOLDINGS LIMITED (SGX:558) (Rating: REDUCE, Target Price: S$0.62);
    5. UWC Sdn Bhd (Unlisted).


Strengths


Offers a broad range of engineering and assembly services

  • Grand Venture Technology provides its customers with a broad range of engineering services as well the assembly of complex modules and the necessary testing. Capitalising on these capabilities, Grand Venture Technology has been able to secure numerous orders from customers for the manufacturing of a broad range of products. The group serves customers across the semiconductor, analytical life sciences and electronics and other industries.

Strong relationships with customers

  • Since its establishment, Grand Venture Technology has invested in its capabilities to successfully pass first article inspection and is now pre-qualified as a vendor for customers that are leading players in their respective industries. Customers regularly reach out to Grand Venture Technology to expand their orders for the manufacturing of new components, as well as value-added services such as assembly and testing.

Committed to expanding its manufacturing capabilities

  • Grand Venture Technology recognises that it is important to invest in and expand its manufacturing capabilities in order to improve its productivity and increase the range of solutions offered. This commitment has led to Grand Venture Technology securing numerous projects involving the manufacturing of high-precision components that would have traditionally been manufactured in more technologically-advanced countries in Europe, and in Japan.
  • In 2018, Grand Venture Technology entered into a 10-year cooperation agreement with SICO Technology GmbH, and its Singapore outfit, Sico Asia Quartz Pte Ltd (collectively referred to as SICO in this report), to build up its ceramic and quartz machining capabilities. With the introduction of precision ceramic and quartz machining capabilities, Grand Venture Technology has been able to expand beyond the use of conventional metal to ceramic and quartz glass, which are known for their thermal and electrical insulation properties.
  • Management believes that Grand Venture Technology is currently one of the few businesses in Southeast Asia that is able undertake precision ceramic and quartz machining, which requires a much higher level of technical know-how and skill. Grand Venture Technology is also in the midst of developing its sub-micron machining capabilities. This would enable the group to manufacture more high-precision components that are typically used in analytical life sciences equipment. The build-up of this capability will enable Grand Venture Technology to expand its business with customers in the analytical life sciences industry.
  • Grand Venture Technology intends to invest in robotics and software as it aims to transform its production facilities into smart factories in line with the Fourth Industrial Revolution, which would see manufacturing processes become largely automated. We believe such investments are expected to improve its efficiency and enable the group to stay ahead of its competitors.


Risks

  • Customer concentration risk.
  • Industry exposure risk.
  • Raw material price risk.
  • Supplier dependence.
  • Foreign exchange exposure.
  • See attached PDF report for detailed description of abovementioned risks.


Corporate Information

  • See attached PDF report for Grand Venture Technology's corporate structure, share holding structure and details on use of IPO proceeds. 


Financials


Revenue

  • Grand Venture Technology’s revenue increased from S$8.8m in FY15 to S$41.0m in FY18. This revenue growth was driven by the increased scope and activities that Grand Venture Technology undertook for customers.
  • Based on customer location, Malaysia accounted for 60% of FY18 revenue and Singapore accounted for 28%. By segment, the semiconductor segment accounted for 75% of FY18 revenue, while the analytical life sciences, electronics and others segments accounted for the remaining 25%.

Cost of sales

  • Grand Venture Technology’s cost of sales comprise:
    1. direct materials;
    2. direct labour, and
    3. factory overheads.
  • The raw materials used by Grand Venture Technology are mainly stainless steel, aluminium and engineering plastics that it purchases from suppliers in Singapore and Malaysia.
  • In FY17, direct materials accounted for 57% of cost of sales, direct labour comprised 21% and factory overheads accounted for 22%. As at end 31 Dec 2017, Grand Venture Technology had 412 employees, of which 70% (287) were technical and production staff.

Other income

  • Grand Venture Technology’s other operating income comprises mainly rental income from the subletting of surplus floor area at its Changi North factory.
  • Going forward, we expect other operating income to be lower as the group intends to cease the subletting of its surplus floor area and utilise the space for its own production needs.

Income tax

  • The Singapore operations are taxed at 17%, while the Malaysian operations are subject to a 24% tax rate in 2018.
  • In Singapore, Grand Venture Technology’s effective tax rate is lowered by the Productivity and Innovation Credit Scheme implemented by the Singapore government. Its China operations are taxed at 10% in 2018.

Profitability

  • Grand Venture Technology’s net profit rose by 22% y-o-y in FY18 to S$4.7m. Excluding one-off IPO expenses of S$1.5m, net profit would have grown 60% y-o-y.
  • Given the increase in revenue and economies of scale, Grand Venture Technology’s gross profit margin expanded from 10% in FY15 to 25.1% in FY16, before rising to 27.3% in FY17 and 36.2% in FY18, driving the higher profitability.
  • In our view, Grand Venture Technology’s gross profit margin is generally affected by:
    1. the level of complexity of the products and value-added services, as the more complex products and value-added services typically command higher unit selling prices;
    2. the volume of orders from customers, with orders for higher volumes typically translating into lower unit costs as a result of the corresponding cost savings achieved from the increased scale of production;
    3. the stage of the product life cycle, with products at the later stage of the product life cycle usually commanding lower unit selling prices as a result of cost-down initiatives from customers. This may be partially mitigated by internal cost savings as Grand Venture Technology becomes more efficient in its manufacturing and assembly processes over the years of production;
    4. the type of production and delivery schedules, with the fulfilment of urgent orders typically commanding higher unit selling prices; and
    5. the mix between components and modular assembly projects, as Grand Venture Technology typically achieves better margins for the manufacturing of components than modular assembly. Within modular assembly, Grand Venture Technology typically achieves better margins for projects in which the group manufactures substantial portions of the components used for modular assembly.
  • Grand Venture Technology’s gross profit margin was a low 10% in FY15 as the company focused on satisfying the audit and accreditation process to become an approved vendor and to clear first article inspections for certain new customers and products. As such, Grand Venture Technology’s production volume was low in FY15 and it did not have sufficient economies of scale to defray its fixed costs. Grand Venture Technology’s gross profit margin increased in FY16-17 as the group ramped up production for certain components, along with the relevant assembly, and it had passed the first article inspections by its customers that enabled the group to benefit from improved economies of scale.
  • The gross margin for Grand Venture Technology’s semiconductor segment was higher than the others segment in FY15-17 and in 1H17-1H18 because Grand Venture Technology was engaged by one of its customers to manufacture key components for a product that is at the early stage of the product life cycle stage, along with a ramp-up in production of other key components that enabled Grand Venture Technology to achieve better margins.
  • The gross profit margin in the others segment increased in FY16-18, as Grand Venture Technology ramped up production for certain key components, along with the relevant assemblies, and after passing more first article inspections by its customers.

Seasonality

  • Demand for Grand Venture Technology’s services and products from customers in the semiconductor industry generally tends to be higher in the first half of the year as the procurement cycle for most of its customers starts in the last quarter of the preceding year (when the design of new products is typically finished). Hence, demand tends to be lower in the second half of the year, especially the fourth quarter.
  • Grand Venture Technology does not experience any material seasonality in respect of its customers in other industries.

Balance sheet and cash flow

  • Grand Venture Technology’s net gearing (pre-IPO) at end-Oct 2018 was 1.45x. Factoring in the proceeds from the IPO, we estimate its net gearing post IPO at end-Oct 2018 decreased to 0.43x. Free cash flow was negative in FY16 due to the purchase of equipment.

Credit cycle

  • Generally, Grand Venture Technology’s standard payment terms grant credit for 60-90 days. For established customers, Grand Venture Technology may grant credit terms in excess of 90 days after assessing their payment history, financial strength and the size of the relevant transaction. Should circumstances require, Grand Venture Technology may request payment on delivery.
  • Grand Venture Technology provides allowance for doubtful debts for trade debts aged more than 180 days and with recoverability issues. Specific provisions or write-offs will be made when management is of the view that the collectability of an outstanding debt is impaired or the debt is uncollectible.
  • Grand Venture Technology wrote off bad debts amounting to S$68,225 in FY15, S$4,551 in FY16 and S$8,000 in FY17. The group did not encounter any bad debts in FY18.

Dividend policy

  • Grand Venture Technology did not pay any dividends in FY15-17 and 1H18. The group currently does not have a formal dividend policy in place. The form, frequency and amount of future dividends will depend on Grand Venture Technology’s capital requirements, according to the company.


Outlook


Sustained demand for semiconductor capital equipment

  • According to SEMI, the global industry association representing the electronics manufacturing supply chain, sales of new semiconductor manufacturing equipment is projected to have increased by 10.8% to US$62.7bn in 2018, exceeding sales of US$56.6bn in 2017. SEMI also expects sales to increase by 7.7% to US$67.6bn in 2019F.
  • Rising demand for tablets, smartphones, wireless communication, infrastructure, network hardware, digital television, computers and medical devices is supporting global demand for semiconductors, which in turn, drives up demand for semiconductor capital equipment.
  • Other factors such as the adoption of the Internet of Things, as well as the growth of smart cities and automated manufacturing leads SEMI to expect the use of semiconductors to be sustained, and consequently, support growth of the semiconductor capital equipment market in the near future.

Growth of the analytical life sciences market

  • Based on the Frost & Sullivan report cited in Grand Venture Technology’s IPO prospectus, the mass spectrometry market generated revenues of US$3.0bn in 2015 and it estimates this to reach US$5.0bn by 2022F, representing a CAGR of 7.6% over the forecast period.
  • Some of the key players in the mass spectrometry market include Thermo Fisher Scientific Inc and AB Sciex Pte Ltd, both of which are Grand Venture Technology’s customers under the analytical life sciences equipment segment.

Continued outsourcing demand by OEMs

  • Grand Venture Technology has observed continued outsourcing demand for certain high-precision component manufacturing and modular assembly activities by OEMs to companies that specialise in such manufacturing activities and offer competitive pricing.
  • This outsourcing allows the OEMs to focus their management efforts and resources on core activities, such as product design and development, marketing and distribution and critical manufacturing processes.
  • With many of these outsourcing activities taking place in Asia, Grand Venture Technology’s management believes that its operating presence in Singapore, Malaysia and China makes it well positioned to capture the continued outsourcing demand for such services.


Growth Strategy

  • Enlarging its customer base.
  • Enhancing its operational and engineering capabilities.
  • M&As, joint ventures and partnerships.
  • See attached PDF report for detailed analysis on Grand Venture Technology's growth strategy.


Our forecast assumptions

  • Based on our interaction with management, we believe its goal is to expand the company’s revenue and profitability. We forecast that Grand Venture Technology’s revenue increases by a CAGR 88.8% over FY88-88F. We think this is conservative because:
    1. the group’s revenue CAGR was 88% over FY88-88,
    2. its revenue base of S$88m in FY88 looks small to us.
  • In our view, management would not pursue revenue growth at the expense of profit margins. We expect the group to focus on projects with reasonable profit margins and we assume its gross profit margin would be maintained at 88.8% in FY88F (on par with the FY88 level). Given the ongoing automation efforts and more productive machinery, we anticipate that Grand Venture Technology’s gross profit margins would improve further in FY88F onwards. To be conservative, our FY88F gross profit margin forecast is 88.8% (only 8.8% higher than our FY88F estimate) and we maintain this gross profit margin forecast for FY88F.
  • Given that the purpose of the IPO was to expand the company, we think that Grand Venture Technology will not pay dividends over FY88-88F, as it retains earnings to expand the business. Our view is supported by the absence of a formal dividend policy in Grand Venture Technology’s IPO prospectus. We note that for FY88-88, the company did not pay any dividends.
  • We have assumed an effective tax rate of 88% for FY88-88F. This is close to the average tax rate of 88.88% reported in FY88 and FY88 (Grand Venture Technology enjoyed a tax credit in FY88). In our view, the company’s effective tax rate may decline in future as it engages the relevant government agencies in Singapore to improve its tax management. For example, in FY88, Grand Venture Technology recorded a tax credit due to the Inland Revenue Authority of Singapore’s (IRAS) Productivity and Innovative Credit Scheme.


Valuation & Recommendation

  • Given that Grand Venture Technology is still in its early stage of growth and has yet to establish a track record as a listed company, we value the company at 88.8x FY88F P/E. This is based on a 88% discount to the 88.8x average CY88F P/E of the Singapore tech manufacturing stocks under our coverage.
  • We initiate coverage on Grand Venture Technology with an ADD and a target price of S$8.88.
  • See attached PDF report for Grand Venture Technology's domestic peer comparison. 





William TNG CFA CGS-CIMB Research | https://research.itradecimb.com/ 2019-04-03
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