Monday, 19 October 2015

Memtech International Limited

OCBC on 29 Sep 2015

Memtech is a precision components manufacturer serving Tier 1 suppliers in the automotive, consumer electronics, and telecommunications space. We recently visited Memtech’s Dongguan plant and were introduced to various aspects of its tooling and manufacturing process. We note Memtech’s tooling capabilities and its high dividend yield, but also expect economic headwinds and order consolidation ahead. Memtech is currently trading at 3.3x P/E and 0.5x P/B. We do not have a rating on Memtech.

Plastic and rubber component manufacturer based in China
We recently visited Memtech’s Dongguan plant. The company produces components for automotives (climate & audio controllers, key fobs, etc.), consumer electronics (Kindle light guides, keyboard, routers, remotes, etc.), and telecommunication devices (keypads). In FY14, the company showed strong results as revenue grew 18% to S$137.6m, and net profit turned positive to S$17.6m. For FY15, the first half-year financial results reflect weakness in the market. 2Q15 revenue dropped 2.6%, while net profit decreased 12.75% YoY. The gross profit margin is currently low (17.5% in FY14 and 17.7% in 2Q15); management is seeking to grow it by supplying higher-margin, functional automotive products (margin of ~20-25%) and being more selective when choosing customers. 

Competitive edge: Tooling capabilities and technical know-how 
Memtech’s in-house tooling capabilities allow the manufacturer to fashion appropriate molds for sophisticated components such as functional plastic components found within the automotives. Furthermore, Memtech invests in R&D (expected capex of ~US$10m/year) to develop ways to treat rubber and plastic materials to meet customer specifications, and to design conductive pills that can deliver low contact and corrosion resistance.

High dividend yield, economic headwinds, order consolidation
Memtech offers a high dividend yield (12 month yield of 5.17%). However, we note that the automotive industry in China is showing signs of weakness, and more than half of Memtech’s automotive products are used in cars sold in China. Meanwhile, it is noteworthy that a large proportion of Memtech’s contracts with automotive clients were made 1-2 years ago; they are now due for volume ramp-ups, a trend that may help offset weakness in the automotive sector going forward. Management expects the consumer electronics division to show more resilience in the weak economic environment, and sales are expected to improve in the next two quarters as part of a cyclical trend. Memtech has also recently obtained design approval for the component of next generation product line under Beats by Dr. Dre. For this product, Memtech expects to supply 400-500K components per month at US$3-4 each. Memtech is currently trading at 3.3x P/E and 0.5x P/B. We do not have a rating on Memtech.

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