singapore | information technology sector …...analysts deborah ong (lead) +65 6531 9810...

Out of the Woods: Foray into automotive and consumer

electronics industries has borne fruit

Memtech International is a precision engineering manufacturer that

supplies plastic components in a variety of industries. Prior to 2013,

Memtech mainly served the mobile phone industry through its keypad

and touchscreen production. After venturing into the automotive and

consumer electronics space in 2013, Memtech has gained significant

headway – generating US$94.6m in revenue and US$5.9m in

operating profit from these two industries alone in FY14. We are now

confident of Memtech’s future growth opportunities in this space.

Key revenue streams in the pipeline; new order upside

expected from customers

The management has mentioned plans from three key customers

(Beats by Dr. Dre, Tesla, and Continental) to expand their portfolio of

services with Memtech. Going forward, we expect further new order

upside from both existing and new customers to contribute to

Memtech’s growth. We forecast revenue to increase by 4.8% YoY in

FY15, 10.8% in FY16, and 0.7% in FY17.

Product mix and automation to steadily increase gross margins

As Memtech makes headway in supplying high-precision functional

components to Tier 1 automotive suppliers, the new product mix is

expected to contribute to a higher gross margin. Furthermore,

automation efforts in its tooling and moulding processes are expected

to contribute to margin improvements in the longer run. Gross

margins are forecasted to be 17.1% in FY15, 17.3% in FY16, and

18.3% in FY17.

High dividend yield and potential value accretion

Memtech has been paying dividends consistently since listing, even

during its loss-making years in 2012 and 2013. In addition, we note

Memtech’s potential as takeover target at 0.61x NTA. Based on ample

scope for earnings growth, an attractive valuation and an expected

dividend yield of 5.9%, we initiate with a BUY rating at a fair value of

S$0.158 and total return of 30.3%.

A NEW ERA OF GROWTH Strong recovery post restructuring

Opportunities in automotive, CE space

Potential value accretion through

dividend yield and earnings upside

25 Nov 2015

Company Report

MEMTECH INTL | BUY

Asia Pacific Equity Research

Singapore | Information Technology Sector

BUY (initiate) Fair value S$0.158

add: 12m dividend forecast S$0.008

versus: Current price

S$0.127

12m total return forecast

30%

Analysts

Deborah Ong (Lead) ● +65 6531 9810

[email protected]

Eli Lee ● +65 6531 9112

[email protected]

Key information

Market cap. (m) S$89.5 /

USD63.5

Avg daily turnover (m) S$0.2 /

USD0.1

Avg daily vol. (m) 1.2

52-wk range (S$) 0.097 - 0.159

Free float (%) 46.6

Shares o/s. (m) 704.4

Exchange SGX

BBRG ticker MTEC SP

Reuters ticker MEMT.SI

SGX code M26

GICS Sector Information Technology

GICS Industry Electronic Equipment

Top shareholder Keytech Invt 43.8%

Relative total return 1m 3m 12m

Company (%) -2 11 32

STI-adjusted (%) 3 8 42

Price performance chart

Sources: Bloomberg, OIR estimates

Industry-relative metrics

Note: Industry universe defined as companies under identical GICS classification listed on

the same exchange. Sources: Bloomberg, OIR estimates

Key financial highlights

Year Ended Dec 31 (US$m) FY14 FY15F FY16F FY17F

Revenue 137.6 144.2 159.8 160.9

Gross profit 24.0 24.6 27.7 29.5

Depreciation & amortization -8.5 -10.1 -10.5 -10.8

PATMI 6.5 6.2 7.7 8.4

EPS (S-cents) 1.3 1.2 1.5 1.7

Cons. EPS (S-cents) na 1.2 1.5 1.8

Net profit margin (%) 4.7 4.3 4.8 5.2

PER (x) 9.8 10.2 8.3 7.5

ROE (%) 5.7 5.5 6.7 7.2

EV/EBITDA (x) -1.1 -0.9 -0.5 -0.6

Please refer to important disclosures at the back of this document. MCI (P) 006/06/2015

MARKET CAP: USD 63.5M AVG DAILY TURNOVER: USD 0.1M

OCBC Investment Research Singapore Equities

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Section A: Summary

We initiate on Memtech with a BUY rating. Our fair value estimate is $0.158, with an upside of 24.4% from the current price of $0.127. Our investment thesis for Memtech rests on three parts: 1. Revenue to be driven by three factors: new order growth,

ramp-up of existing orders, and automotive industry strength Having recently entered the automotive and consumer electronics industry, we expect Memtech’s revenue growth to be led by new orders for both its automotive and consumer electronics segment. Automotive and consumer electronics revenue are expected to increase by 18.8% and 18.4% YoY in FY15, by 12.9% and 38.4% in FY16, and by 9.3% and 2.2% in FY17. Total revenue is forecasted to increase by 4.8% YoY in

FY15, 10.8% in FY16, and 0.7% in FY17.

2. Product mix and automation to increase gross margins As Memtech shifts to supplying product mix with greater proportion of high-margin functional automotive products, we forecast improvements in its gross margin. Following more extensive automation, we expect longer term productivity improvements and margin stability as Chinese

labor costs continue increasing. Gross margins are forecasted to increase from 17.1% in FY15F, to 17.3% in FY16 and 18.3% in FY17.

3. Potential value accretion driven both by dividend payouts (5.9% yield for FY16) and earnings upside (+23.6% in FY16) We value Memtech by applying a target PER of 10.27x to our FY16F EPS

to arrive at the target price of $0.158, an upside of 24.4% from the current share price. Including our projected dividends of 0.75 cents for FY16 (5.9% yield) and 0.80 cents for FY17 (6.3% yield). Memtech has an implied annualized return of 30.3% for this upcoming fiscal year. We

initiate with a BUY rating on Memtech.

Section B: Brief business overview

i. History Memtech is a plastic components manufacturer serving the automotive,

mobile communication, consumer electronics, and industrial/medical space. Currently, the company has three manufacturing sites located in China – Dongguan, Kunshan and Nantong. Memtech started out primarily manufacturing keypads. At its peak in FY11, the company produced 122.1m worth of sales in keypads, which

contributed around 80% of its total revenue. To combat the loss of revenue in the keypad business with the arrival of smartphones, the company ventured into the touchscreen business, which ended up being unprofitable up to the disposal of the subsidiary in Feb 2013. For FY13, Memtech subsequently made forays into the automotive and consumer electronics space, which has proven to be a successful

transition based on the financial results to date. Given that accumulation of technical expertise, fixed capital, and management experience, we believe Memtech is poised to gain further market share in these new segments as they solidify their new business relationships.


3

ii. Business segments

Post-restructuring, Memtech has four business segments: 1) Automotive 2) Mobile Communications 3) Consumer Electronics 4) Industrial and Medical. Exhibit 1: Revenue by segment from 2014

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00

Automotive Mobile Communication Consumer Electronic Industrial & Medical

Source: Company, OIR

Automotive Memtech manufactures key components for Tier 1 suppliers in the automotive space. Their offerings mainly consist of decorative parts used in key-fobs, body control and infotainment systems. They also

manufacture precision parts used in the engine control unit, and

functional parts used in door/seating/mirror controls. Customers include Kostal, Tesla, Lear, Hella, Visteon, and Magna. Memtech’s components end up in the leading automotive brands such as GM, Ford, VW, and BMW. Exhibit 2: Schematic map of the different components Memtech manufactures



4

Exhibit 3: Products for the Automotive Segment

Rubber (Functional): Conductive pads

Plastics (Functional): Buttons

Plastics (Decorative): Key Fobs, Logos, and Plating Rings

Plastics (Decorative): Control Panels



5

Consumer Electronics For this segment, Memtech produces light guides, speakers, router &

digital box housing, computers keyboards, and remote controls. Customers include Amazon (for the Kindle), Samsung Electronics, net gear, Microsoft, Nikon, Canon, Sony, and Fujifilm. Exhibit 4: Products for the Consumer Electronics Segment Gaming/Remote Controls and Keypads

Routers and Router Shells

Light Guide Panels, Wearables, Speakers



6

Mobile Communications Memtech produces keypads, window-lens, plastic housings and antennas

for customers including Nokia, Kyocera, LG, Panasonic, and Foxconn. Exhibit 5: Products for the Mobile Communications Segment Antennas, Window Lens, and Metal Domes

Mobile Housing

Keypads


Industrial and Medical

For this segment, Memtech produces bar code scanners and medical devices. Customers served include USI, Zebra Technologies, Leica, Pulse, Omron, Honeywell, and others.

Exhibit 6: Products for the Industrial and Medical Segment Industrial PDAs and Barcode Scanners



7

Defensive position in industry due to value chain position and

competitive trends Section C: Automotive Industry Outlook

As we expect the automotive segment growth to contribute an

increasingly large proportion of Memtech’s revenue and operating profit, we will focus on the prospects of this segment. Growth in the automotive segment is can be broken down into the following components: 1) an increase in sales of car brands Memtech’s components are used for 2) volume ramp-up of existing orders 3) the arrival of new orders. For the first component, we will take a look at the automotive industry in China, USA, and Europe.

China: Sales spurred by tax cut Roughly half of Memtech’s automotive plastic components are ultimately used in cars sold in China, with the other half split between the US and Europe. After automotive sales fell for three consecutive months in June, July, and August, they rose by 11.8% YoY and 9.7% MoM in October.

Auto sales were given a boost after the government cut purchase taxes from 10% to 5% for cars with engines smaller than 1.6 litres. Such cars currently make up around 70% of all automobiles sold in China, and the tax will last until end-2016. The sheer size of China as a market for automobiles (19.3m in new vehicle registrations YTD) underscores the importance of this market for automotive components manufacturers like

Memtech. In FY16 and FY17 we expect the tax cut to continue encouraging consumer spending, thereby lending a source of growth to Memtech’s

automotive segment. Exhibit 7: New vehicle registrations in China increased >10% YoY in Oct

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China New Vehicle Registrations (Monthly) YoY

Source: Bloomberg, OIR

USA: Oct vehicle sales best in years According to Autodata, new-car sales jumped 13.6% YoY in October, with an annualized selling rate of 18.2m. The industry is expected to hit the highest sales in 15 years if the momentum continues. The US car brands fared particularly well: GM was up 15.9% YoY; Ford increased

13.4%; and Fiat Chrysler rose 14.7%. The increase was driven by pickup trucks and SUVs, which had increased 21.9% YoY. Steven Szakaly, the chief economist for the National Automotive Dealers Association recently

ROBUST INDUSTRY OUTLOOK


8

announced that he expects new vehicle sales to continue to grow and peak next year. Among the factors mentioned are moderate wage

growth, falling gasoline prices, and continued low interest rates on auto loans. Given that the Fed seeks to increase rates gradually over the next year and given the lack of clarity about significant oil supply adjustment by OPEC and other producers, we expect automotive firms to take

advantage of currently low interest rates and low gas prices to push sales volume in the coming two years. Exhibit 8: New USA vehicle registrations jumped in Oct

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US New Vehicle Registrations (Monthly) YoY


Europe: Slowing sales may be helped by ECB stimulus measures

Up to Oct 2015, car registrations in Europe are up 2.7% over the same period in 2014. However, we note that Europe sales seem to have slowed in October. Given that Draghi is likely to announce new monetary stimulus measures in December, including a possible cut of the ECB’s deposit rate into negative territory, we note that big ticket items such as

automobiles are in a position to benefit from such measures. For FY16 and FY 17, we expect the robust industry outlook for China, USA, and Europe to be a source of steady growth for Memtech’s top line. Exhibit 9: With the ECB likely to ease monetary policy in December, slowing Europe sales may be helped by lower interest rates

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9

Section D: Company drivers increasing revenue

One stop solution attractive to new customers

Plastics manufacturers in China are often only directly involved in the injection moulding of parts, choosing to outsource other parts of the production process – such as engineering design and mould fabrication – to third parties. For Tier 1 customers, this outsourcing translates into 1)

a greater number of parties to deal with, 2) the counterproductive shifting of blame between parties, as well as 3) additional lead time

needed for prototype submission. Having the capability to directly service clients for each step of the production process, Memtech is given a competitive edge when it comes to pitching for contracts.

In-house engineering design capabilities

Memtech differentiates itself by offering high-quality tooling design and mould fabrication capabilities to its supplier. Most plastics components manufacturers outsource the tooling work to third-party specialist

workshops. As Memtech does its tooling in-house, it is able to provide customers with a greater assurance of its quality standards, consistency, and reliability.

Both plastic and rubber moulding capabilities Memtech is one of the few automotive component suppliers able to work with both plastics and rubber. This allows them to produce key

automotive and consumer electronic parts that utilize both materials, giving them a distinct advantage over other plastics components producers that need to outsource part of the work to rubber component firms. Wide variety of secondary processes offered to clients Memtech is able to offer customers a wide variety of secondary

processes to enhance the aesthetic of the component, and routinely offer customers two to three designs to choose from. Their capabilities include spray-painting, UV coating, nanoplating, and In-Mould Decorating (IMD), silkscreen printing, tampo printing, and laser etching.

Equipped with precision engineering expertise and equipment to

meet for demanding customer specifications When it comes to producing components with demanding specifications, such as those used in the Engine Control Unit of automobiles, Memtech is equipped with the necessary tools and expertise to meet customer requirements. High-tech mould machining equipment

Beyond providing the entire suite of product management services, it is the capital expenditure on the new precision tooling machines that will increasingly allow Memtech to produce higher-margin functional products for the automotive space. Memtech sets aside a capex budget of US$12m a year.

NEW ORDER GROWTH


10

Experienced and long-serving tooling expertise Furthermore, Memtech places a great emphasis on maintaining recruiting

and keeping its engineering personnel. Each of its General Managers has a background in the field, and the average turnover for the firm is relatively low. Memtech’s wide-ranging tooling abilities and precision equipment for molding gives it the flexibility to produce different types of high-requirement components for their clients.

We note that Memtech is an approved supplier for Beats Electronics, which was recently acquired by Apple. Going forward, we look at the possibility of Apple using Memtech for precision plastic components for its iPhones and iPads. Investments made into material formulation R&D Throughout its history, Memtech has invested into material formulation

R&D, which is in essence knowing how to mix raw materials with

different additives, pigments, and catalysts to achieve the right specifications for the component to be produced. Because of the knowledge accumulated, the company has been able to carve out an edge in the formulation of materials according to customer specifications.

Large Production Capacity

Memtech currently has 181,866m2 in production area (the equivalent of ~145 Olympic-size swimming pools) with factories in Dongguan, Nantong, and Kunshan. According to ball-park estimates by the management, among the plastics component manufacturers, Memtech ranks in the top 20% in terms of capacity. Large supplier capacity is attractive to Tier 1 customers, as much less time and investment would

be required to start the production of the commissioned components. Exhibit 10: Land area and employee count of the three production sites

Location Land Area (m2) Employees

Dongguan 39,600 1,600 Nantong 72,600 1,800 Kunshan 40,900 1,100

Current Total 159,300 4,500

Short lead time and ramp-up period

Memtech has short lead times for the various tooling processes it carries out (see Exhibit 11). The lead time ranges from 10+ to 30 days depending on the complexity of the design. Having such a short lead time and sizeable tooling capacities helps Memtech to provide a variety of prototypes and to make prototype improvements during its pitch to customers.

Furthermore, relative to other manufacturers in the automotive space, Memtech requires only a short pilot-build/ramp-up period of six months (vs. up to one year by its competitors). As the life cycle of a car is several years long, automobile manufacturers have traditionally not

sought to compress supplier ramp-up period times. Memtech’s ability to deliver such a short ramp-up period stems from extensive experience in

the mobile phone industry, where products had much shorter product life cycle of six months. We expect Memtech’s shorter lead times and ramp-up periods to prove to be an asset as automotive suppliers seek to increase supply chain efficiency. Management mentioned that there are some manufacturers in Japan and Korea which have a similarly short lead time and ramp-up

period. While Memtech currently holds a locational advantage over them in terms of serving China-based suppliers, we note the recent investments made by Korean automotive plastics firms in China (Kopla, Hanil E-Hwa, Top Metal Works, Hyundai Mobis, etc.) which may lead to increased competition in the longer-run.


11

Exhibit 11: Short lead times for different injection/moulding processes in Dongguan, Kunshan, and Nantong

Type Lead Time Tooling Capacity (Units/Month)

DONGGUAN

Keypad Injection 12 days 40 to 50 units Mobile Phone Housing 18 days 5 to 8 units

Digital camera Injection 35 days 2 to 3 units Automotive Product Injection 28 days 20 to 40 units

Two Color Injection/Double Injection/ Insert Molding/Over Molding

28 to 30 days 20 to 30 units

Rubber Mold 12 to 28 days 60 units Stamping Progressive Die 12 to 25 days 6 to 10 units

KUNSHAN

Mobile Phone Housing 18 days 5 to 8 units Digital camera Injection 21 to 28 days 2 to 3 units

Automotive Product Injection 21 to 28 days 20 to 40 units Two Color Injection/Double Injection/

Insert Molding/Over Molding 21 to 28 days 20 to 30 units

Stamping Progressive Die 12 to 25 days 6 to 10 units

NANTONG

Keypad Injection 12 days 40 to 50 units Mobile Phone Housing Injection 18 days 5 to 8 units

Digital Camera Injection 35 days 2 to 3 units Automotive Product Injection 28 days 20 to 40 units

Two Color Injection/Double Injection/ Insert Molding/Over Molding

28 to 30 days 20 to 30 units

Rubber Mold 12 to 28 days 60 units Stamping Progressive Die 12 to 25 days 6 to 10 units


High Standard of Professionalism and Singaporean Brand Name During our visit to the Dongguan factory in September, we noted the orderliness of the assembly layout, as well as stringent protocols for

cleanliness for precision products. From what we could see, workers

worked in pleasant conditions, were offered both free and heavily subsidized meals, and were given 10-minute breaks throughout the day. We believe international customers will continue to look favorably upon the strength of Memtech’s brand as a Singaporean company, as concerns of enduring quality, professionalism, fair worker treatment and

compliance with non-disclosure agreements persist. Exhibit 12: ISO Certification

Factories Certification Description Dongguan,

Nantong, Kunshan ISO/TS 16949 Technical specification emphasizing defect

prevention and reduction of variation and waste in the supply chain

Dongguan,

Nantong, Kunshan

ISO 14001 Environmental management certification

Dongguan, Nantong

OHSAS 18001 Occupational health and safety management system specification

Kunshan QC 080000 Hazardous substance process management

specification

Dongguan ISO 9001 Quality management system certification that covers areas including facilities, people, training,

services, equipment



12

Exhibit 13: Map of the Dongguan Factory


Section E: Margin Improvements, Diversification, and Risk

i. Driving gross margin

Automotive product mix to shift to functional products

Memtech’s management has plans to shift from supplying the lower-margin decorative products to higher margin functional products (20% to 24% GP). According to the management, there are around 20-odd serious competitors located in China for the decorative plastics space,

while there are less than 10 such workshops for the functional plastics space as such products require a high degree of technical expertise. As such, most of the workshops for functional plastics tend to be small but highly competent family-run businesses in Europe and the US. While Memtech is a latecomer to the game, its technical expertise and presence in Kunshan and Nantong (near the automotive production

facilities) should give it an edge in carving out market share. Should it be successful, the investors can expect a greater gross margin from the changed product mix. Economies of scale during ramp-up Memtech is expects to ramp up to the peak volume production of its

automotive goods supplied in 2016 and 2017 as it reaches the 3rd and 4th

year of its relationship with many of the customers. Given the economies of scale, we expect automotive gross profit margins to increase by 0.5% pts. in FY16, and 0.7% pts. in FY17.

We note that as Memtech’s production of automotive products ramps up in the next two years, its operational performance will be an important litmus test for customers to decide whether or not to continue engaging

their production services. Caution with selecting automotive customers The management has been cautious with supplying parts for Chinese automotive firms, preferring to work for established international brands to reduce counterparty risks. The two Chinese automotive brands they

have supplied to so far are Great Wall Motors and FAW.

MARGIN IMPROVEMENTS


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ii. Addressing cyclicality and industry changes

Geographical diversification While based in China, Memtech’s components are used in products delivered to several different international markets. As mentioned earlier, roughly half of the automotive products Memtech supplies are used in vehicles delivered to US and Europe. This geographical diversification of

end markets lessens Memtech’s reliance on the health of the Chinese economy.

Persistence of plastics as a key component in automotives Given the paradigm shift from keypads to touch screens and the consequent effect the industry change had on Memtech, we consider a how likely it is for a similar change to phase out plastic components in

automobiles going forward. Looking at the safety requirements needed

for cars, and the currently unperfected reliability of touch screens, it is likely that automotive firms to rely on mechanical (as opposed to electronic) devices for key safety features such as window control. Wide portfolio of major customers With a large portfolio of well-established and international customers,

Memtech’s is less reliant on order contributions from any particular customer, and is relatively assured of the quality of its receivables.

iii. Key risks Both NADA and IHS Automotive predict that the US automotive market is

nearing its peak and will experience a slight fall in sales in or after 2017, as interest rates rise. Furthermore, sentiments in the consumer electronics space will depend largely on expected economic growth in worldwide, which currently seems muted. While we forecast much of the

growth for Memtech to come from new customers, a weak economic sentiment both in China and abroad could cause delays in product launches and squeeze supplier’s profit margins.

We do note, however, that the US economy is showing signs of a strong footing after the Oct employment report, and that both the BOJ and ECB are likely to announce further easing measures in Dec.


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Section F: Financial highlights and forecasts In the previous sections, we have explored the qualitative aspects of the

industry and company dynamics. In this section, we will detail what we expect those dynamics to mean financially. i. Growth: A look at earnings and dividends Forecasted yield of 5.9%; paid dividends every year since listing Though without a formal dividend policy, Memtech has consistently

rewarded shareholders with dividends even in years of losses (2012,

2013). Going forward we expect the firm to distribute 0.60 S-cents in FY15, 0.75 S-cents in FY16 and 0.80 S-cents in FY17. The FY16 dividend gives a yield of 5.9% against Memtech’s current share price of S$0.127. Exhibit 14: Memtech has paid dividends every year since listing, even when it made losses in 2012 and 2013

0%

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New Era of Growth Memtech’s foray into the automotive and consumer electronics segment in 2014 and YTD indicates that Memtech has garnered enough demand for its services as a new player in the market and has a competitive edge that will make potential customers consider offering them a chance. As

mentioned previously, these competitive advantages include having high precision tooling capabilities, being able to work with both rubber and plastics, and offering the entire a variety of services from design to post-production. Having passed this important litmus test, we expect further potential orders to come from both existing and new customers as Memtech continues to build its track record with them.

HIGH DIVIDEND YIELD

AND POTENTIAL VALUE ACCRETION


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Exhibit 15: High and consistent overall gross profit and net profit margins

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Revenue (LHS) Gross profit (LHS) Net profit (LHS)

Gross profit margin (RHS) Net profit margin (RHS)


Exhibit 16: Memtech shows high revenue and net profit seasonality Quarterly contribution to full year revenue and net profit

0.00%

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Revenue Gross Profit


Exhibit 17: Forecasted growth rates by segment Overall Automotive Consumer

Electronics Mobile Comm


FY15F +4.8% +18.8% +18.4% -26.5% +22.5% FY16F +10.8% +12.9% +38.4% -30.0% +5.0% FY17F +0.7% +9.3% +2.2% -30.0% +5.0% Source: Company, OIR

Exhibit 18: Forecasted gross profit margins by segment Overall Automotive Consumer

Electronics Mobile Comm


FY16 17.3% 18.0% 18.7% 13.0% 15.0% FY17 18.3% 20.0% 18.7% 13.0% 15.0% Source: Company, OIR

Period of

restructuring in 2012

New era of stable

growth expected going forward

High quarterly seasonality;

revenue bump typically in 4th

quarter


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Exhibit 19: Forecasted revenue composition by segment

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Automotive Mobile Communication Consumer Electronic Industrial & Medical


Automotive segment For FY16 and FY17, we expect the automotive segment to be supported by healthy industry growth, volume ramp-ups for existing orders, and most importantly, new orders from customers as Memtech proves its capability and reliability in this space. Considering that Memtech only

entered the space two years ago, we see opportunities for winning over new customers (or new orders from existing customers), as it accumulates a track record. Gross margins are expected to increase from 18% in FY16 to 20% in FY17 as Memtech increasingly supplies higher-margin functional products to automotive customers. Exhibit 20: Forecasted revenue for automotive segment (US$’000)

7,000

9,000

11,000

13,000

15,000

17,000

19,000


Automotive revenue

growth to be driven

by new orders from

customers like Tesla and Continental


17

Consumer Electronics The industry outlook for consumer electronics looks weak going forward

as GDP forecasts for major economics range in the low single digits. Nonetheless, we note potential sources of new revenue in the pipeline from companies such as Beats by Dr. Dre.

Exhibit 21: Forecasted revenue for the CE segment (US$’000)

-

5,000

10,000

15,000

20,000

25,000


Mobile Communications As industry demand for mobile keypads and mobile housing fades, we expect this segment to contribute less to the group’s revenue.

Exhibit 22: Forecasted revenue for the mobile communications segment (US$’000)

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000


The mobile communications segment is expected to

gradually contribute less to

the group’s topline as the

industry demand fades

CE to be driven mainly by

growth in new orders

against weak industry

outlook


18

Industrial & Medical While the Industrial & Medical segment is starting out from a low base,

we project modest revenue growth for the next two years, and may look to revise our view pending further visibility on growth opportunities and Memtech’s competitive advantage within this space.

Exhibit 23: Forecasted revenue for the Industrial & Medical segment (US$’000)

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500


ii. Risk and Efficiency: A look at balance sheet and return ratios Net tangible assets of 22.3 S-cents per share; balance sheet is cash rich, has low debt

Memtech is currently trading at only 0.61x its net tangible assets (NTA) per share. With a gearing ratio of 2.3% and net cash per share of 4.9 S-cents, we expect that an equity investment in Memtech is buffered from severe downside risk. We also note the possibility of Memtech being acquired at such attractive valuations by foreign manufacturers seeking to gain a foothold in China.

ROE and ROA – Efficiency of invested resources Memtech’s return ratios took a hit in 2012 and 2013 when the company underwent restructuring plans and made the painful adjustment of servicing new industries. All three ratios (ROE, ROA, ROIC) turned positive in 2014. Going forward, we expect the company to continue its progress to reaching ROE high of more than 15%; we forecast that ROE will be 5.5% in FY15, 6.7% in FY16, and 7.2% in FY17.

Exhibit 25: Post-restructuring turnaround in return ratios starting 2014

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016F FY2017F

ROE ROA ROIC



19

Short cash conversion cycle – Efficiency of operations The 5Y average cash conversion cycle for Memtech stands at 76.4 days.

Going forward, we forecast Memtech’s CCC to range from 80 to 90 days, given that a significant part of Memtech’s operations will be in the automotive industry. Exhibit 26: Cash conversion cycle

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015F FY2016F FY2017F

Inventory Days Receivable Days Payable Days Cash Conversion Cycle



20

Section G: SWOT Analysis Exhibit 27: OIR’s SWOT Analysis for Memtech

STRENGTHS WEAKNESSES

- High precision tooling capabilities and comprehensive suite of engineering capabilities - Long track record within the plastics components space - Track record of paying dividends

even in loss-making years

- Revenue loss expected from declining mobile communications segment - Partial exposure to slowing Chinese market

OPPORTUNITIES THREATS

- Healthy automotive industry outlook in the next two years

- Potentially further order book growth from existing and new customers - Potential as a takeover target as it trades at only 0.61x NTA per share

- Mild to weak economic growth expected worldwide, and its

impact on the consumer electronics segment

Source: OIR

Section H: Valuation Based on our estimates of FY16 and FY17 EPS, applied against a fair PE ratio* of 10.27x, our fair value for Memtech is S$0.158. Below is a

sensitivity table for different forward PE ratios:

Exhibit 28: Sensitivity table showing fair value at different PE ratios

Earnings Per Share (S-Cents)

Forward PE

9.77x

10.27x* Fair PE ratio according to

DDM

10.77x

FY16 EPS (1.31 cents)

15.0 cents +18% upside



FY17 EPS (1.50 cents)




*Our PE ratio is derived using a DDM assuming conservative long-run estimates: dividend payout ratio of 30%, a sustainable growth rate of 2.80% (based on 4.0% ROE) and a required rate of return of 5.7% (based on the 0.8 beta against the STI). Exchange rate used is 1 USD = 1.4139 SGD. Source: OIR

We initiate on Memtech with a BUY rating and a price target of $0.158.

SUMMARY AND VALUATION


21

Exhibit 29: Dongguan’s tooling fabrication Computer-Aided Design (CAD) and Computer-Aided Manufacturing (CAM) Workstation

3D Coordinate Measuring Machine (CMM) Inspection

Computerized Numerical Control (CNC) Machines

Wire Cut Machines


APPENDIX


22

Exhibit 30: Dongguan’s in-house secondary processes

Pad Printing Line

Roll-to-Roll Printing Line

Laser Etching Line

Assembly Line



Company financial highlights

Company financial highlights

Income statement


Revenue 137.6 144.2 159.8 160.9

Gross profit 24.0 24.6 27.7 29.5

EBITDA 15.3 16.3 19.1 20.2

Depreciation & amortization -8.5 -10.1 -10.5 -10.8

EBIT 6.8 6.2 8.7 9.6

Finance costs -0.1 -0.1 -0.1 -0.1

XO Items 10.0 0.6 0.0 0.0

Profit before tax 17.8 6.7 8.6 9.5

Income tax expense -0.8 -0.5 -0.9 -1.0

PATMI 6.5 6.2 7.7 8.4

Balance sheet

As at Dec 31 (US$m) FY14 FY15F FY16F FY17F

Bank and cash balances 32.4 29.7 25.6 26.7

Other current assets 74.2 79.0 87.3 88.0

Property, plant, and equipment 44.7 46.6 48.2 49.4

Total assets 152.9 156.2 162.0 164.9

Debt 3.3 3.1 2.9 2.7

Current liabilities excluding debt 33.9 35.4 39.0 39.3

Total liabilities 40.8 42.0 45.5 45.6

Shareholders equity 112.1 114.1 116.5 119.3

Minority interests 0.0 0.0 0.0 0.0

Total equity and liabilities 152.9 156.2 162.0 164.9

Cash flow statement


Op profit before working cap. chg. 15.5 17.5 19.0 20.3

Working cap, taxes and int -7.0 -3.1 -4.5 -0.3

Net cash from operations 7.6 13.8 13.6 19.0

Purchase of PP&E -9.0 -12.0 -12.0 -12.0

Other investing flows 0.6 0.0 0.0 0.0

Investing cash flow -8.3 -12.0 -12.0 -12.0

Financing cash flow -3.8 -4.6 -5.6 -5.9

Net cash flow -4.5 -2.8 -4.0 1.0

Cash at beginning of year 37.1 32.4 29.7 25.6

Cash at end of year 32.4 29.7 25.6 26.7

Key rates & ratios FY14 FY15F FY16F FY17F

EPS (S-cents) 1.3 1.2 1.5 1.7

NTA per share (S-cents) 22.3 22.7 23.2 23.7

EBIT margin (%) 5.0 4.3 5.5 6.0

Net profit margin (%) 4.7 4.3 4.8 5.2

PER (x) 9.8 10.2 8.3 7.5

Price/NTA (x) 0.6 0.6 0.5 0.5

EV/EBITDA (x) -1.1 -0.9 -0.5 -0.6

Dividend yield (%) 4.7 4.7 5.9 6.3

ROE (%) 5.7 5.5 6.7 7.2

Net gearing (%) Net Cash Net Cash Net Cash Net Cash

Sources: Company, OIR forecasts

Important disclosures


SHAREHOLDING DECLARATION: The analyst/analysts who wrote this report holds/hold NIL shares in the above security.

DISCLAIMER FOR RESEARCH REPORT This report is solely for information and general circulation only and may not be published, circulated, reproduced or distributed in whole or in part to any other person without the written consent of OCBC Investment Research Pte Ltd (“OIR” or “we”). This report should not be construed as an offer or solicitation for the subscription, purchase or sale of the securities mentioned herein or to participate in any particular trading or investment strategy. Whilst we have taken all reasonable care to ensure that the information contained in this publication is not untrue or misleading at the time of publication, we cannot guarantee its accuracy or completeness, and you should not act on it without first independently verifying its contents. Any opinion or estimate contained in this report is subject to change without notice. We have not given any consideration to and we have not made any investigation of the investment objectives, financial situation or particular needs of the recipient or any class of persons, and accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of the recipient or any class of persons acting on such information or opinion or estimate. You may wish to seek advice from a financial adviser regarding the suitability of the securities mentioned herein, taking into consideration your investment objectives, financial situation or particular needs, before making a commitment to invest in the securities. In the event that you choose not to seek advice from a financial adviser, you should consider whether investment in securities and the securities mentioned herein is suitable for you. Oversea-Chinese Banking Corporation Limited (“OCBC Bank”), Bank of Singapore Limited (“BOS”), OIR, OCBC Securities Pte Ltd (“OSPL”) and their respective connected and associated corporations together with their respective directors and officers may have or take positions in the securities mentioned in this report and may also perform or seek to perform broking and other investment or securities related services for the corporations whose securities are mentioned in this report as well as other parties generally. The information provided herein may contain projections or other forward looking statements regarding future events or future performance of countries, assets, markets or companies. Actual events or results may differ materially. Past performance figures are not necessarily indicative of future or likely performance. Privileged / confidential information may be contained in this document. If you are not the addressee indicated in this document (or responsible for delivery of this message to such person), you may not copy or deliver this message to anyone. Opinions, conclusions and other information in this document that do not relate to the official business of OCBC Bank, BOS, OIR, OSPL and their respective connected and associated corporations shall be understood as neither given nor endorsed. RATINGS AND RECOMMENDATIONS: - OCBC Investment Research’s (OIR) technical comments and recommendations are short-term and trading

oriented. - OIR’s fundamental views and ratings (Buy, Hold, Sell) are medium-term calls within a 12-month investment

horizon. - As a guide, OIR’s BUY rating indicates a total expected return in excess of 10% based on the current price;

a HOLD rating indicates total expected returns within +10% and -5%; a SELL rating indicates total expected returns less than -5%.

- For companies with market capitalization of S$150m and below, OIR’s BUY rating indicates a total expected return in excess of 30%; a HOLD rating indicates total expected returns within a +/-30% range; a SELL rating indicates total expected returns less than -30%.

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Carmen Lee Head of Research

For OCBC Investment Research Pte Ltd

Published by OCBC Investment Research Pte Ltd

Published by OCBC Investment Research Pte Ltd

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