Tech Manufacturing Sector 2020 Outlook - CGS-CIMB Research 2019-12-09: NEUTRAL


Tech Manufacturing Sector 2020 Outlook - NEUTRAL

Tech Manufacturing Sector - 3 key segments

Tech Manufacturing Sector - 2019 recap

  • For the EMS segment and the PIM segment, the trade war was a major dampener in 2019. In the EMS (Electronics Manufacturing Service) space, Venture Corp experienced near-term volatility arising from customers’ product transitions. The protracted trade tensions and the global economy slowdown were concerns that affected customers’ product launches. Valuetronics’ revenue was weak as a result of order losses from customer’s supply chain reconfiguration, and reduced demand from other industrial electronics customers. Order visibility was also limited. Post 2QFY3/20 results, Valuetronics saw share price re-rating on better-than-expected results which in our view was not a quality beat as this was driven by higher interest income and one-time provision write-back.
  • For the Plastic Injection Moulding (PIM) space, Fu Yu fared better than Sunningdale Tech as the former had been adjusting its cost structure to adapt to lower demand and steered away from lower margin projects. Sunningdale Tech however was badly affected by the slowdown in the global automotive industry which was related to the US-China trade tensions.
  • In the semiconductor space, AEM started the year on a positive note but still retained its cautious outlook for FY19. This would eventually give way to a record FY19F earnings as orders from its key customer accelerated through the year. Frencken Group continued to benefit from strong demand from its key customer in the Industrial Automation segment. UMS started the year on a cautious note too as the semiconductor industry headed for a downturn in 2019 as we predicted earlier in 2018’s Navigator. The outlook turned brighter in 2H19 as the industry looked forward to a recovery in 2020.

Tech Manufacturing Sector - 2020 outlook

  • Long-term growth drivers remain intact. The basic premise of tech manufacturing remains in innovation. As long as companies continue to innovate with new and better products, there will be demand for manufacturing. Current long-term growth drivers include Internet of Things, industrial automation for factories, artificial intelligence, life sciences, new applications for drones and autonomous vehicles, to name a few.
  • The relocation of selected manufacturing activities out from China has gained pace. We believe ASEAN as a whole could be a beneficiary. Vietnam could be a big beneficiary given its proximity to China as factories in China could complete the final product assembly there to mitigate the tariff impact. Malaysia has also successfully developed an electronics manufacturing hub in Penang.
  • Recurring risks include volatile exchange rates, higher oil prices, the ongoing geo-political tensions between US and China and margin pressure induced by trade tensions.
  • EMS industry – Venture Corp and Valuetronics will continue to feel the impact of the cautiousness induced by the trade war.
    • Positives for Venture Corp include new opportunities as manufacturing shifts from China. In the longer-term, life sciences will likely play a larger role in our lives as life spans increase. Given the substantial effort that Venture Corp has poured into this area, the next key product wins in the coming years are likely to spring from this segment.
    • While Valuetronics continues its efforts in securing new customers, it faces execution risks as the group expands its presence in Vietnam.
  • PIM Industry – Fu Yu is likely to fare better than Sunningdale Tech given its lower exposure to the automotive sector. Less than 9% of Fu Yu’s FY18 revenue was derived from the automotive sector versus 37% for Sunningdale Tech. Both companies however are price takers given the competitive nature of the industry and will be affected broadly by the US-China trade war.
  • Semiconductor Industry – In the semicon space, AEM will continue to benefit from demand from its key customer which needs to introduce new products and has ambitious plans to grow its total addressable market. Frencken Group will continue to benefit from customer demand in the Industrial Automation space and in its semiconductor business, the outlook is also positive as its customer ships new products. UMS will benefit from the expected recovery in the semiconductor industry. We note that SEMI expects semiconductor equipment sales to rebound 11.6% y-o-y in 2020F and that UMS has again successfully renewed its contract with a key customer.

M&A interest is likely to continue.

  • We think CEI Limited (SGX:AVV) would be open to M&A offers as the company’s current size limits its growth opportunities.
  • There have been various press articles highlighting the possibility that the major shareholders of Fu Yu are keen to sell their stake.
  • For Powermatic Data Systems (SGX:BCY), the company has finally announced the review of its capital structure (including options relating to the Company’s property at No. 7 and 9 Harrison Road Singapore 369650 /369651) which may or may not involve a capital reduction. If Powermatic goes ahead with the disposal of its investment property and capital reduction, it may be easier to find a buyer for the residual core wireless design business.


  • The tech sector’s forward P/E is now creeping up towards its long-term mean of 13.9x driven by the recovery in the earnings outlook for semiconductor-related stocks.
  • Earnings disappointment in the semiconductor space is a key risk to watch out for but our base view is that semicon stocks will enjoy a good year in 2020.
  • On a P/BV basis, valuations are close to the long-term mean. Whether the P/BV multiple can rise further will depend on the strength of the recovery for the semiconductor sector in FY20-21. The sharp spike in the P/BV multiple in FY17-18 was due to the record earnings experienced by the semiconductor industry as demand for automotive and data centre chips exceeded available supply.

Tech Manufacturing Sector - Top picks & least preferred

  • Our most preferred pick is AEM which we think offers the best visibility in the near term. AEM has guided for a full-year revenue of S$305m-315m (3Q19:S$84m, 9M19:S$235m). As semiconductor chips become more complex and their use in mission-critical applications (such as 5G, electric vehicles, Industry 4.0, etc.) increases, AEM’s products are well-placed to tap into this demand.
  • Although Intel remains the key revenue contributor, there has been progress in AEM’s other businesses too. We think AEM can achieve strong profit in FY19F and FY20F due to the following reasons:-
    1. demand for existing products remains strong;
    2. a greater need for system level testing (for which AEM already has an established product), and
    3. the launch of a hybrid Test Handler (TH) in 2020 which we think could command the same price range as existing THs.
  • AEM has also leased additional floor space to cope with the stronger demand. For 4Q19, we are expecting a net profit of S$8.8m (+100% y-o-y, -36% q-o-q). Our 4Q19 earnings expectations could be conservative still as we have not given AEM the benefit of margin expansion in our forecasts.
  • On the non-core side, AEM holds a 21.2% stake in Novoflex Pte Ltd which is an investment holding company that wholly owns Smartflex Technology Pte Ltd, a leading outsourced assembly & test company for smart card modules used in banking and Smartflex Innovation Pte Ltd, a company that has developed proprietary manufacturing equipment, processes and intellectual property for producing very low cost SIM card modules for telecommunications and smart card modules for banking uses. As this is a non-core investment, we think AEM will likely sell its stake if it receives any reasonable offers. See AEM Holdings Share PriceAEM Holdings Target PriceAEM Holdings Analyst ReportsAEM Holdings Dividend HistoryAEM Holdings AnnouncementsAEM Holdings Latest News.
  • Our least preferred pick is Sunningdale Tech which retains a cautious outlook into FY20. Headwinds cited include rising labour costs, utility costs, price pressure and negative market sentiment amid global trade tensions. In addition, Sunningdale Tech continues to be impacted by a slowdown across global automotive markets, especially in China and India. The consumer/IT segment has also become challenging due to slowing demand from customers. In the healthcare segment, the group remains positive as it has secured new projects from new and existing customers.
  • On the positive side, mass production at Sunningdale Tech’s latest manufacturing facility in Penang has begun and utilisation at this new Penang facility is expected to gradually improve. Similarly, the group has completed the relocation of its parts operations from one plant in Shanghai to Chuzhou in 3Q19. These should help alleviate cost pressures.
  • While the fundamental outlook is weak, the share price will be supported by dividend yields of 6.3% and low net gearing of 0.10x. See Sunningdale Tech Share PriceSunningdale Tech Target PriceSunningdale Tech Analyst ReportsSunningdale Tech Dividend HistorySunningdale Tech AnnouncementsSunningdale Tech Latest News.
  • See also company update: Venture Corporation - Cautious On FY20F.

William TNG CFA CGS-CIMB Research | ONG Khang Chuen CFA CGS-CIMB Research | NGOH Yi Sin CGS-CIMB Research | https://www.cgs-cimb.com 2019-12-09
SGX Stock Analyst Report HOLD MAINTAIN HOLD 16.880 SAME 16.880