VITROX CORPORATION BHD (VITROX)

Transcription

1 VITROX CORPORATION BHD (VITROX) 1/3/214 Financial Year: Dec-213 Latest Quarter: 31/12/213 Price: 1.32 Stock Category: Fast Grower Board: Main Board FBMKLCI: NO Industry: TECHNOLOGY Sub-Sector: INDUSTRIAL AUTOMATION SYSTEMS Ownership: - Corporate Owned (Local) AND PRODUCTS L. C. Chong is NOT an investment advisor nor a financial advisor, and no information provided here is to be interpreted as a suggestion to buy or sell securities. All figures in thousands of Ringgit Malaysia except per share values and ratios Click here to understand definition of some financial terms Prepared by: L. C. Chong Website: L. C. Chong Page 1 of

2 VITROX CORPORATION BHD FY Latest Rolling 4 Quarter Results Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Turnover Net Profit EPS Revenue and Earnings /12/26 31/12/28 31/12/21 31/12/212 Revenue EBIT Net Income Balance Sheet PER SHARE VALUE (CENTS) CROIC Gross Profit Margin FCF/Sales Debt Coverage (FCF) % 1.% ROIC Net Profit Margin Cash Conversion Cycle Debt/Equity 31/12/2631/12/2831/12/2131/12/212 Total Assets Total Liabilities Total Equity Cash Flow /12/2631/12/2831/12/2131/12/212 Valuation DCF 3-Y -Y 1-Y Good 16% Base 12% Bad 8% Ugly 4% EY% Valuation R4Q-EPS FY14-EPS FY1-EPS Buy Under Sell Above Absolute P/E R4Q-EPS FY14-EPS FY1-EPS Fair Value Buy Under Operating Owner Earnings

3 Economic Moats Economic Moats: Cost Advantage Over 6% gross margin for the past 7 years! Switching Costs Not available or no moat found Network Effect - VITROX is the only machine vision system, automated board inspection and electronics communication system manufacturer in Malaysia. - Its products are world-class and ranked among the top five globally in their respective categories. Intangible Assets - To maintain their competitive edge, VITROX is able to develop new models almost every six to 12 months. - Their relentless commitment in research and development helps ViTrox to grow more than 4 times in revenue since 29. To further enhance technology differentiation and stay competitive in the market place, VITROX invested RM14.6 million, representing 16.% of revenue in FY212 for research and development activities. With this investment, they increase their R&D headcount from 19 to 129, primary to support various key R&D activities for MVS-T and PCA business. - In 212, VITROX successfully filed patents and 1 copyright for AOI and AXI products. - In terms of new technology, ViTrox is developing a 3D product under its AOI division, called "phase shift topology", which is capable of performing 3D measurements of critical dimensions of solder paste and components, using patent pending profilometry technology. In a typical AOI system, a camera moves to take various snap-shots of a PCB. The images will then be compared with a golden image which is similar to a blueprint, to ensure quality. However, most companies only have 2D or 2.D systems. A 3D imaging system would be able to reveal more errors on the circuit board. - This new product will further enhance VITROX's leadership in providing superior 2D and 3D inspection capabilities for PCB assemblies. In the mid-term, the product should be able to help ViTrox improve on revenue and profitability as it offers higher value to customers Efficient Scale Not available or no moat found Growth Drivers & Risks/Challenges Growth Drivers

4 - In 213, VITROX successfully expanded our presence to new territories include Japan, Europe, South America and East America, India and Indonesia through our sales team and local channel partners. - The new products namely V1G2, V81, TH1S and TR1S have been well accepted by many new major customers around the world, where 3% of revenue was contributed from new customers acquired in the past 2 years. - High commitment in developing and launching new product: - Examples: 1. High-speed vision systems supporting turret (rotary)-based test handlers, with throughput up to 6KUPH, comprising integrated vision systems capable of inspecting mark, lead and package related defects concurrently. 2. Launch of new high speed Tray inspection handler (TH1S) and Tray to Tape & Reel inspection handler (TR1S). Both new models will come with enhanced inspection features to handle new IC packages, higher throughput and better ease of use functionalities. 3. Enhanced inspection functions (for Tray Handler) include OCR (optical character recognition) capability and also POP (package on package) 3D inspection using advanced optical setup and software algorithms. 4. 3D Phase shift Profilometry AOI system and side marking inspection capability, which is capable of performing 3D measurements of critical dimensions of solder paste and components, using patent pending profilometry technology. In a typical AOI system, a camera moves to take various snap-shots of a PCB. The images will then be compared with a golden image which is similar to a blueprint, to ensure quality. However, most companies only have 2D or 2.D systems. A 3D imaging system would be able to reveal more errors on the circuit board.. Release of enhanced AXI platform with multiple form factors that tailors to the need of emerging market such as automotive, smart phone and tablet. - VITROX strong R&D team who are committed to launch at least three innovative products (one for each business unit) every 6 months continue to strengthen their leading position in semiconductor component inspection, 3D Tray IC inspection, AOI inspection and 3D X-ray inspection. - 7% of ViTrox workforce is involved in Research, Design and Development. Since Y21, ViTrox has expended approx. 1% of their Revenue for R&D. - In 212, VITROX successfully filed patents and 1 copyright for our AOI and AXI products. - ViTrox operates a high IP business and owns several patented technologies, it commands a high Revenue Margin of 3% (7-year average) h l d l f d l f l Risks/Challenges - FOREX, downturn in semiconductor demand and equipment spending, patent infringement, technology imitation. - 7% of ViTrox total Sales is denominated is USD, making the business prone to the gyrations of the FOREX market. - ViTrox operates in a highly competitive market and prone to rapid advances in technology. - Pioneer status which allows ViTrox to enjoy tax exempt incentives will be expiring in Jan 21 and it plans to submit new application next year in order to obtain extension - Concentra%on Risk - Reliance on a single product i.e. MVS with SRM Integration (M) Sdn. Bhd. as their single largest customer, which made up approx. % of its total Revenue. However, ViTrox has recently succeeded in diversifying its product mix from MVS to ABI segment i.e. Advanced X-ray Inspection for Printed Circuit Assemblies (AXI-PCA) products. - ViTrox is prone to rapid advances in technology, hence the persistent need to remain innovative to stay ahead of competition. Coupled with the global financial recession, the downturn in the semiconductor sector is expected to continue the trend, leading to reduced budget on equipment spending. Escalating competition will continue to drive down margins. - Malaysian enterprises will face further margin depression due to the impending rise in costs which include minimum wage policy, electricity tariff hike, reduced subsidies on consumables and energy, GST implementation etc. - Intellectual Property Rights - Operating in a high IP environment, ViTrox may be susceptible to issues related to patent infringement. At the same time, it needs to ring-fence its products from imitation technology. - Seasonality nature of the semiconductor and electronics industries will impact sales.

5 Strategy My View: - Fair value: - Y DCF: (MOS: 11% - 22%) - VITROX is still undervalued. Market Timing: - EY%: Buy below.79, sell above I believe that FY14 will be a growth year for VITROX because of the recovery of global semiconductor industry and improving US, Japan and European markets. - I will accumulate VITROX if it formed a strong support level Portfolio Strategy: Lump Sum + Top Up Averaging Down Method: - Dollar Cost/Value Averaging - Sum of Digits Laddering Portfolio Execution: - Buy and Monitor BUY1;BUY2;BUY3;BUY4;BUY;B Buying Basis: EPS QoQ Growth > 1% Price is below Intrinsic Value (DCF) Price is below Intrinsic Value (EY%) Price is below Intrinsic Value (Absolute PE) Price is below Intrinsic Value (DY%) Stock price breaks out of consolidation/dip on an uptrend. Company owner/directors, and major fund institutions heavily buying SELL6;SELL7;SELL8;SELL9;SELL1;SELL11;SELL12;SELL14 Selling Basis: Quarterly EPS drop for 3 consecutive months. Price has risen too far from its intrinsic value (DCF) Price has risen too far from its intrinsic value (EY%) Price has risen too far from its intrinsic value (Absolute PE) Price has risen too far from its intrinsic value (DY%) Long term trend changed from bullish to bearish Company owner/directors, and major fund institutions heavily selling Fundamental of business turns unattractive or bad (bear cases) The current price is 3% away from my average holding price. Other good reasons stated in MorningStar's article. L. C. Chong Page of