EMS to benefit from fresh orders on supply chain diversion

by AZALEA AZUAR / graphic by TMR

THE electronics manufacturing sector (EMS) is expected to improve this year due to the outsourcing trend and the loosening of travel restrictions.

Hong Leong Investment Bank Research (HLIB Research) analyst Syifaa’ Mahsuri Ismail noted the continued outsourcing trend sparked by work-from-home options and the trade war between China and the US has brought a positive impact to the sector.

“Despite some headwinds from prolonged supply chain disruptions, the lifting of restrictions domestically and abroad is expected to further improve demand conditions and support manufacturing activity in Malaysia,” she said.

HLIB Research reiterated the ‘Overweight’ call on the sector.

A report from the Department of Statistics Malaysia indicated the manufacturing industry grew 8% year-on-year (YoY) supported by growth in domestic-oriented and export-oriented sectors where broad-based improvement across industries has been observed.

The electronic and electrical production increased 13.6% YoY due to higher computers and peripheral equipment and consumer electronics productions, while trade data in November 2021 remained in expansionary mode at 32.4% YoY.

“Exports to the US and the European Union in November 2021 recorded double-digit YoY increase of 33.5% and 30.9%, respectively,” Syifaa’ Mahsuri explained.

Both these regions mainly contribute to VS Industry Bhd and Uchi Technologies Bhd.

“We gather the Panasonic Manufacturing Malaysia Bhd’s SA2 plant is currently fully operational with the target to increase the in-house production of injection parts.

“We note the possible delay in reaching its target due to the recent flood that affected its SA2 plant but we hope production will start ramp up once condition normalises,” she added.

The bank also expects VS Industry’s new facility in i-Park Senai Airport City, Johor, which has commenced operation to pick up steadily.

“We gather that full utilisation for the dedicated facility could garner RM1.5 billion revenue from Customer Y. Furthermore, VS Industry secured two additional factories early this year in anticipation of robust demand from pool cleaner customers.

“We gather that the additional space could garner between RM600 million and RM800 million sales. Note that pool cleaner contributes the highest margin,” said Syifaa’ Mahsuri.

Statistics from the Semiconductor Industry Association (SIA) revealed the global semiconductor sales gained 24% YoY to US$48.8 billion (RM204.96 billion) in October 2021.

“Semiconductors or integrated circuits are usually not useful on the standalone basis; instead almost all are eventually assembled into end-user products.

“On the back of this strong correlation, the EMS market is expected to remain robust, taking a cue from the strong year-to-date semiconductor market growth registered and we expect an even more upbeat prospect moving forward,” Syifaa’ Mahsuri noted in a report yesterday.

The trade war between China and the US has caused companies to diversify their supply chains to escape risks.

Malaysian EMS companies have also been getting requests for quotations buoyed by increasing order diversions and HLIB Research believes there would be more discussions on borders reopening and how it would serve as a growth catalyst.

Unfortunately, the manufacturing sector is facing foreign labour shortages, especially those in the EMS.

To overcome this issue, VS Industry is hiring local workers instead, which Syifaa’ Mahsuri applauded.

“On the greener side, VS Industry expects strong outlook from its customers with order diversion from another contract manufacturer following the recent labour issue.

“Management expects to start production for the diverted four models in the third quarter of 2022,” she said.

HLIB Research has maintained its ‘Buy’ calls for both VS Industry and Uchi with a target price (TP) of RM1.78 and RM3.83 respectively and a ‘Hold’ on Panasonic with a TP of RM25.70.

VS Industry is HLIB Research’s top choice in the EMS universe due to its healthy orderbook and margin expansion.

“As the biggest EMS player in Malaysia with a solid track record, we opine VS Industry is a prime beneficiary from the intensifying trade diversion theme.