Grand Venture Technology Ltd - CGS-CIMB Research 2020-07-03: Delivering Precision & Innovative Solutions

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GRAND VENTURE TECHNOLOGY LTD (SGX:JLB)

Grand Venture Technology Ltd - Delivering Precision & Innovative Solutions

• Grand Venture Technology (GVTL) is an established manufacturing solutions provider that was listed on 23 Jan 2019 at an IPO price of S$0.275.
• According to its IPO prospectus, the purpose of the listing was 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 rating and target price of S$0.262. 

Grand Venture Technology - Background

• Grand Venture Technology Limited (SGX:JLB)’s (GVTL) 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 became shareholders of GVT Singapore.
• In Nov 2017, the group established a wholly-owned subsidiary, GVT Suzhou, in response to its customers’ plans for business expansion in China.
• On 23 Jan 2019, Grand Venture Technology listed on the Catalist Board of the Singapore Exchange at an initial public offer price of S$0.275. See Grand Venture Technology Share Price.
• Grand Venture Technology has three business segments;
  1. semiconductor,
  2. analytical life sciences, and
  3. electronics and others.

Grand Venture Technology - Business segments

Semiconductor

• Grand Venture Technology customers in the semiconductor segment are equipment suppliers that provide solutions for semiconductor and electronics manufacturing and assembly. These customers are either involved in the front-end semiconductor manufacturing processes (such as wafer fabrication and wafer probing) or in back-end semiconductor manufacturing (such as assembly, testing and packaging of semiconductors).
• For front-end processes, Grand Venture Technology manufactures and supplies high-precision components, such as chamber lids, cooldown plate bases, hinge brackets and squeeze film damper pivots that go into the vacuum chamber of chemical vapour disposition equipment.
• For back-end processes, Grand Venture Technology manufactures and supplies 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.
• Grand Venture Technology’s customers in the semiconductor industry include Teradyne Inc (TER US), BE Semiconductor Industries NV (BESI NA) and Kulicke & Soffa Industries Inc (KLIC US) as well as their contract manufacturers, such as 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 components for 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 modules for ion source for mass spectrometers. These mass spectrometers are apparatus used 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 components for 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.
• Its customers in this segment include AB Sciex Pte Ltd and Thermo Fisher Scientific Inc (TMO US) as well as their contract manufacturers, such as Plexus Corp (PLXS US).

Electronics and others

• For customers in the electronics and others segment, Grand Venture Technology manufactures high-precision components (such as components for feeder systems in surface mount machines) and assembles modules used by customers for industrial automation equipment. According to Grand Venture Technology, the group can also provide customised engineering solutions to customers that are involved in the hard disk drive, automotive and general industrial applications industries.
• Its customers in this segment include ASM Assembly Systems Singapore Pte Ltd (Unlisted), which manufactures surface mount technology machines for the electronics industry, as well as other local engineering services firms in the countries that Grand Venture Technology operates in.

Grand Venture Technology - 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. According to Grand Venture Technology, the expertise and ability to meet and manage these requirements can only be built through years of experience providing precision-manufacturing services and this is not easily replicated by new entrants.
• Closest competitors (as at end Dec-2019), as cited by Grand Venture Technology, are:
  • AllianceCorp Manufacturing Sdn Bhd (Unlisted);
  • JEP Holdings (SGX:1J4);
  • Frencken Group (SGX:E28) (ADD, Target Price S$1.06, see recent report: Frencken Group - CGS-CIMB Research 2020-05-14: 1Q20 Net Profit Slightly Above Expectations);
  • UMS Holdings (SGX:558) (ADD, Target Price: S$0.96, see recent report: UMS Holdings - CGS-CIMB Research 2020-05-12: Returning To Higher Dividend Payouts);
  • UWC Sdn Bhd (UWC MK).

Grand Venture Technology - Strengths

Offers a broad range of 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 for 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 unlisted Singapore outfit, Sico Asia Quartz Pte Ltd (collectively referred to as SICO in this report), to build up its ceramic and quartz machining capabilities.
• Management believes that Grand Venture Technology is currently one of the few companies in Southeast Asia that are 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 will enable the group to manufacture even higher precision components that are typically used in analytical life sciences equipment.

Grand Venture Technology - Risks

Industry exposure risk

• Grand Venture Technology serves customers in the semiconductor, analytical life sciences and electronics industries. Each of these end-markets is subject to industry cycles that could delay investment decisions for new capital equipment in laboratories and factory production lines. This, in turn, could affect the demand for the various components, services and products that Grand Venture Technology provides. The semiconductor and electronics industries are historically volatile, alternating between upturns and downturns.

Customer concentration risk

• Grand Venture Technology’s five major customers accounted for an aggregate of 84% of FY19 revenue (88% of FY18 revenue). Each customer accounted for more than 10% of revenue. Typically, in the tech manufacturing services industry, there are no long-term supply agreements with customers. As such, there can be no assurance that Grand Venture Technology will be able to retain its major customers.

Raw material price risk

• Grand Venture Technology’s main raw materials are aluminium and stainless steel. Grand Venture Technology occasionally enters into fixed-price arrangements (six or twelve months) with its supplier for aluminium. In general, the group does not enter into long-term arrangements with its suppliers to fix pricing. Hence, Grand Venture Technology is exposed to fluctuating raw material prices and the group may not be able to pass on the cost increase to its customers in a timely manner.

Supplier dependence

• Grand Venture Technology relies on a regional network of suppliers to provide the group with the standard components and raw materials that it does not manufacture in-house. As Grand Venture Technology does not enter into long-term or exclusive arrangements with its suppliers, there can be no assurance that they will continue to sell the components and raw materials that Grand Venture Technology requires at acceptable prices. Failure to obtain adequate raw materials will result in cost overruns or late penalty charges imposed by customers.

Foreign exchange exposure

• Grand Venture Technology’s functional reporting currency for its statutory financial statements is the Singapore dollar. Its revenue is predominantly recognised in US dollar, ringgit and renminbi while its costs and purchases are in Singapore dollar, US dollar, ringgit, renminbi and Japanese yen. Grand Venture Technology does not hedge its foreign currency exchange rates exposure.

Grand Venture Technology - Major shareholders

• Following the IPO, Grand Venture Technology has an enlarged share base of 234.3m shares. The group issued 42.9m new shares at S$0.275 per share.
• The major shareholders of Grand Venture Technology as at 16 Mar 2020 are Metalbank with a 57% stake and Sunshine Power with an 8.8% stake. Metalbank is the investment holding company for certain key executives of Grand Venture Technology while Sunshine Power is an investment holding company representing certain investors.

Grand Venture Technology - Outlook

Sustained demand for semiconductor capital equipment

• According to Semiconductor Equipment and Materials International (SEMI), the global industry association representing the electronics manufacturing supply chain, sales of new semiconductor manufacturing equipment are projected to decline 4% y-o-y in 2020F but grow 24% y-o-y in 2021F. 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, is driving 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 lead SEMI to expect the use of semiconductors to be sustained and, consequently, support growth of the semiconductor capital equipment market.

Growth of the analytical life sciences market

• Based on Industry forecaster, Frost & Sullivan, 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.

Outsourcing demand by OEMs

• Grand Venture Technology has observed consistent outsourcing demand for certain high-precision component manufacturing and modular assembly activities by original equipment manufacturers (OEMs) to companies that specialise in such manufacturing activities and are able to offer competitive prices. Grand Venture Technology believes that such 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 outsourcing demand for such services.

Grand Venture Technology - Financial highlights

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. In FY19, revenue fell 2.3% y-o-y to S$40.1m due to the slowdown in the semiconductor industry.
• Based on customer location, Malaysia accounted for 47% of FY19 revenue and Singapore accounted for 39%. By segment, the semiconductor segment accounted for 59% of FY19 revenue while the analytical life sciences, electronics and others segment accounted for the remaining 41%.

Cost of sales

• Grand Venture Technology’s cost of sales as at end Dec-2019 comprises:
  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.

Other income

• Grand Venture Technology’s other operating income as at end Dec-2019 comprises mainly rental income from the subletting of surplus floor area at its Changi North factory.

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 rose 60% y-o-y for FY18. 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.
• In FY19, net profit fell 34% y-o-y to S$3.1m due to the slowdown in the semiconductor industry and higher operating costs as Grand Venture Technology added headcount and purchased new machines to support its future growth.
• 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 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 for modular assembly. Within modular assembly, Grand Venture Technology typically records better margins for projects in which the group manufactures substantial portions of the components used.
• 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 overall gross profit margin increased in FY16-19 as the group ramped up production for certain components, along with the relevant assembly.
• The gross profit margin for Grand Venture Technology’s semiconductor segment was higher than for the analytical life sciences, electronics and others segment in FY15-18 as the group was engaged by one of its customers to manufacture key components for a product that was at the early stage of the product life cycle. The gross profit margin in the analytical life sciences, electronics and others segment increased in FY16-19 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 with regards to its customers in other industries.

Balance sheet and cash flow

• Grand Venture Technology’s net gearing as at end-Dec 2019 was 0.80x. Excluding a shareholder loan of S$5.0m, the net gearing was 0.64x. In FY19, Grand Venture Technology generated negative net cash from operations of S$1.2m due to higher working capital requirements. With S$6.0m capex in FY19, the free cash flow for FY19 was a negative S$7.2m.

Credit cycle

• 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 size of the relevant transaction. Should circumstances require, Grand Venture Technology may request payment on delivery, according to the company.

Dividend policy

• Grand Venture Technology did not pay any dividends in FY15-19. 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.

Grand Venture Technology - 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 will post a CAGR of 9.4% over FY20-22F.
• We expect the group to focus on projects with reasonable profit margins. Given the ongoing automation efforts and more productive machinery, we expect Grand Venture Technology’s gross profit margins to be maintained in the 37.4-37.5% region despite pricing pressure from customers.
• Given that the purpose of the IPO was to grow the company, we currently assume that Grand Venture Technology will not pay dividends over FY20-22F 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 also that the company did not pay any dividends for FY15-19.
• We have assumed an effective tax rate of 20% for FY20-22F. The average tax rate over FY18-19 was 20%.

Grand Venture Technology - Valuation & recommendation

We initiate coverage on Grand Venture Technology with an ADD recommendation and a target price of S$0.262.

• Our target price is based on a 1.76x FY20F P/BV multiple derived from the Gordon Growth Model (COE: 7.8%; ROE: 12.2%). We use a Gordon Growth Model-derived P/BV to arrive at our target price given the cyclicality of the business.
• Grand Venture Technology is trading at 1.48x FY20F P/BV (vs. the peer average of 1.57x). Based on our forecasts, Grand Venture Technology’s FY21F projected P/E multiple is 11.2x versus the peer average of 9.9x.
• See Grand Venture Technology Share Price; Grand Venture Technology Target Price; Grand Venture Technology Analyst Reports; Grand Venture Technology Dividend History; Grand Venture Technology Announcements; Grand Venture Technology Latest News.
• Grand Venture Technology has a limited trading history as the shares were only listed on 23 Jan 2019. Given a total return potential of more than 10%, we initiate coverage on Grand Venture Technology with an ADD rating and a Target Price of S$0.262.
• Upside catalysts are stronger-than-expected customer demand and earnings-accretive M&A.
• A downside risk is a deterioration in customer demand due to escalation of the Covid-19 outbreak.

William TNG CFA CGS-CIMB Research | Darren ONG CGS-CIMB Research | https://www.cgs-cimb.com 2020-07-03

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