Aztech Global Ltd - CGS-CIMB Research 2021-03-11: One-Stop Electronics Manufacturing Solution


Aztech Global Ltd - One-Stop Electronics Manufacturing Solution

  • Aztech’s net profit posted a 107% CAGR (FY17-19) to S$47.2m as management shifted its strategic focus to IoT and smart lighting products.
  • Profit margin/EBITDA margin expanded from 2.9%/5.2% in FY17 to 11%/15% in FY19, driven by higher-margin smart lighting and IoT products.
  • The global IoT device market is expected to deliver 20.8% CAGR (FY19-23F), offering a US$425bn opportunity, according to Frost & Sullivan.

Aztech - Company Background

  • Aztech was established in 1986 by Mr. Michael Mun to undertake the design, manufacture and distribution of PCs. Today, Aztech has a core focus on one-stop design and manufacturing solutions for Internet-of-Things (IoT), data communication and LED lighting products. Aztech has over 290 customers in more than 40 countries, with three manufacturing facilities in Dongguan, People’s Republic of China (PRC), and Johor, Malaysia, as at 15 Feb 2021.
  • Aztech operates three key business segments, namely IoT devices and data communication products, LED lighting products, and other electrical products.
  • The company will list its shares on the SGX on 12 Mar 2021 as Aztech Global Ltd (SGX:8AZ), with a market capitalisation of S$990.4m, based on an invitational price of S$1.28 and post-invitational share capital of 773.7m shares, according to the company’s offer document.
  • See

IoT devices and data communications

  • The IoT device and data communications product segment accounted for 68.2% of Aztech's FY19 revenue at S$292.5m (9M20: 82.6%).
  • This segment offers customers ODM, OEM, JDM or CMS manufacturing services for their branded products, such as smart security cameras, IoT lighting products and satellite modems. Aztech also manufactures and distributes its own range of IoT device products marketed under its own brands “Aztech” (B2B) and “Kyla” (B2C).

LED lighting products

  • The LED lighting product segment accounted for 31.7% of Aztech's FY19 revenue at S$136.0m (9M20: 17.2%).
  • Under this segment, Aztech manufactures general lighting products, including a variety of luminaires, bulbs and tubes, for residential, commercial and industrial uses. Aztech also manufactures key components such as drivers and optics for its LED lighting products.

Other electrical products

  • The other electrical product segment accounted for 0.1% of Aztech's FY19 revenue at S$0.3m (9M20: 0.3%).
  • This segment offers primarily kitchen appliances, such as ovens and air fryers, as well as other home and living products, such as cordless vacuum cleaners and air purifiers. As at 15 Feb 2021, Aztech had over 11 product lines and more than 35 models of electrical products, which are marketed under its “Aztech” brand.

Aztech's Competitors

As an electronics manufacturing service (EMS) provider, AZTECH faces competition from other EMS players both domestically and globally that offer similar services.

  • In Singapore, we believe that EMS providers such as Valuetronics (SGX:BN2) and Venture Corp (SGX:V03) provide similar services such as ODM, JDM and CMS for the manufacturing of electronic products. Meanwhile, global peers include Foxconn Technology Co Ltd (2354 TT).

Aztech's peer comparables

Global EMS providers trading at CY20 P/E of 13.2x.

  • Aztech’s invitational price of S$1.28 and FY19’s earnings per share of S$0.076 (based on pre-IPO number of shares) imply a 16.8x P/E, according to Aztech Global Ltd's offer document.
  • See comparison of Aztech with peers including Venture Corp (SGX:V03), Valuetronics (SGX:BN2), Pegatron Corp, Foxconn Technology, Celestica, Wistron Corp, Inventec Corp in report attached below.
  • Historically, other EMS companies traded at an average CY20 P/E of 13.2x, based on Bloomberg consensus data.

Aztech - Company History

2006 SGX mainboard listing – 2017 privatisation

  • Aztech Group (SGX:AVZ) was listed on the SESDAQ (Stock Exchange of Singapore Dealing and Automated Quotation System) on 23 Feb 1994, before its listing status was transferred to the mainboard of the SGX. See Aztech Group's share price history.
  • During this period, Aztech ventured into areas of multimedia telecommunication devices (video conferencing and DECT phones), launched its own portfolio of networking products (e.g. modems), and expanded its data communications business. The company also embarked on an OEM contract to supply LED lighting products in 2013. Aztech cited low trading liquidity and no present need to access the capital markets as reasons for the privatisation, according to Aztech Global Ltd's IPO Prospectus.

Post-privatisation rationalisation exericse and IPO in 2021

  • Following the privatisation, Aztech underwent a rationalisation exercise and divested most of its non-core business units, which include the marine and shipping business as well as the food and beverage business, according to the company’s offer document.
  • Aztech entered into a manufacturing and development services agreement in 2018 to manufacture and develop smart security cameras for a major US e-commerce retailer and established its IoT manufacturing facility in Malaysia to expand its IoT devices and data communication and LED lighting product business units in 2019 (production commenced in 3Q20). The company is now seeking to list its shares again in Mar 2021, on the back of a fast-growing IoT market globally, which is expected to post 20.8% CAGR to reach US$425.2bn between 2019 and 2023F, underpinned by mass adoption of IoT devices, according to Frost & Sullivan, a global market research company.
  • According to management in its offer document, it believes that tapping the capital markets again will position Aztech to capture the robust growth in the fast-growing IoT electronics business.

Aztech's Major Customers

3 main customers formed 86.3% of AZTECH’s FY19 revenue (9M20: 83.3%). Customer A is AZTECH’s largest customer, accounting for 49.0% of FY19 revenue (9M20: 57.8%).

  • Aztech began manufacturing smart security cameras in 2015 for a consumer electronics company that was acquired by Customer A, a major US e-commerce retailer in 2017, according to the company’s offer document. Customer A and Aztech entered into a manufacturing and development services agreement in 2018 to supply smart security cameras, which drove Customer A’s revenue contribution from 5.7% in FY17 to 49.0% in FY19 as smart security cameras rose in popularity from active marketing efforts online post-acquisition.

In FY19, Customer B and Customer C accounted for 28.4% (9M20: 13.4%) and 8.9% (9M20: 12.1%) of revenue, respectively.

  • Customer B is a Hong Kong subsidiary of a leading Europe-based multinational lighting group, while Customer C is a German company specialising in smart home technology; Aztech manufactures LED lighting products and HomePlug for them, respectively, according to the company’s offer document.

Aztech's Financials

Revenue, profitability and margins

  • Aztech’s revenue recorded 6.6% CAGR in FY17-19 to reach S$428.8m in FY19, primarily driven by growth in the IoT device and data communications business segment.
  • The IoT device and data communications business grew from S$118.9m in FY17 to S$292.5m in FY19, representing a CAGR of 56.8%, on the back of strong demand from customers, according to the company’s offer document. However, the LED lighting/other electrical product segments shrunk at a 27.3%/46.5% CAGR over the same period to S$136.0m/S$0.3m, due to the management’s strategic shift to increase its focus on production of smart lighting products and its IoT device and data communication business segment.

Net profit delivered 107% CAGR in FY17-19 to reach S$47.2m, while net profit margins expanded by 8.1% points to 11.0% in FY19.

  • As Aztech increased its focus on smart lighting products and its IoT business, which commanded higher profit margins, and discontinued the production and sale of lower profit margin products in the LED lighting business, the company recorded higher sequential net profit growth of 81% y-o-y and 136% y-o-y in FY18 and FY19, respectively, to reach S$20.1m and S$47.2m. This helped drive its net profit margin expansion from 2.9% in FY17 to 11.0% in FY19.

9M20 operations and profitability impacted by COVID-19 restrictions in China and Malaysia.

  • Aztech’s 9M20 revenue fell 19.6% y-o-y to S$262.2m, due to the decrease in revenue from the LED lighting product segment as the company had to temporarily shut down its manufacturing facilities in China in 1Q20 due to the pandemic, as well as management’s decision to shift its focus away from the business, according to its offer document.
  • Additionally, the Movement Control Order restrictions in Malaysia delayed the renovation and equipment shipment to Aztech’s manufacturing facility in Johor, which only commenced operations in 3Q20, according to the offer document. As a result, net profit fell 13.5% y-o-y to S$30.5m in 9M20 (from S$35.3m in 9M19).

Aztech Global Ltd (SGX:8AZ)

William TNG CFA CGS-CIMB Research | Darren ONG CGS-CIMB Research | https://www.cgs-cimb.com 2021-03-11
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