QES Group: Riding on semiconductor recovery

by RHB INVESTMENT BANK BHD 

WE INITIATE coverage on QES Group Bhd with an ‘Outperform’ recommendation. Our target price of 86 sen is pegged to 26x FY25 EPS, a 10% discount to the industry average of 29x, which we deem justifiable given the: i) lower earnings base; ii) relatively small manufacturing earnings compared to its industry peers; and iii) higher risk given the low entry barrier for its distribution division. 

Nevertheless, we think the distribution division can be a two-pronged sword for the group as the business environment is recession-proof and there is low investment requirement while the turnover period is short. It can provide steady recurring cash flows for the company to drive its manufacturing growth going forward. 

Background 

QES Group, was founded in October 1991 under the leadership of group MD Chew Ne Weng, who is also the largest shareholder in the company with a 30.1% stake. The homegrown company was listed in 2018 and transferred to Main Market of Bursa Malaysia in December 2023. 

The company, which has only one manufacturing facility in Hicom-Glenmarie Industrial Park, Shah Alam with a total floor space of 86,806 sq ft (8,064.5sq m), specialises in manufacturing, distribution and provision of engineering services for inspection, test, measuring, analytical and automated handling equipment. 

The group started off with distribution of third-party equipment products and this segment remains the bread and butter of the company on May 23. 

Under the helm of Chew, the group has diversified into a leading integrated solution provider with manufacturing capability. 

Through an extensive network of distributors and representatives, it has a strong presence in the Asean region with an established customer base of more than 4,000 across Malaysia, Singapore, the Philippines, Vietnam, Thailand, Indonesia and China. To cope with the rising orderbook and part of risk diversification, the group is in the middle of setting up a second manufacturing plant, which is based in Batu Kawan, Penang. 

The new plant is expected to be ready for commercial operation by March 2025 and is mainly to cater for larger orderbook sizes from India, China, Europe and US. 

Business Overview 

QES has two core business divisions, namely, distribution and manufacturing with exposure to semiconductor, electrical and electronics (E&E), automotive and metal, academia and research, petrochemical, pharmaceutical, environment and renewable energy markets. 

Clients consist of various industry players such as local outsourced semiconductor assembly and test players, steel makers and aluminium producers as well as global tech giants such as Infineon Technologies AG, Intel Corp, Osram GmbH, ON Semiconductor Corp, Carsem and others. It has a pool of broad customer base as none of its customer made up more than 10% of its sales. 

Currently, the existing plant in Shah Alam, Selangor is 90%-utilised based on floor space and manpower. Close to 50% of its revenue is derived from semiconductor, followed by automotive (22%) and E&E (18%) segments. Under the semiconductor segment, sales from the test and assembly and wafer fab equipment in the financial year 2023 accounted for 64% and 36% respectively. Its semiconductor applications consist of: i) optoelectronics, sensors and discrete; ii) auto-motive IC; iii) mobile 5G; and iv) memory and microprocessors. Boosted by the demand for artificial intelligence (AI) chipset, management sees robust growth in memory and microprocessor segment, led by the surging demand in high-bandwidth memory chips and AI-enhanced microprocessors. 

Penetrating Markets 

Penetrating into new markets. Management has indicated its plan of venturing into aerospace engineering and medical technology for automation projects by the second half of 2024. We believe the entry barrier of both industries are relatively high and it might take a while before they can secure the first purchase order. Alternatively, they can take over an industry player to transfer the patents to Malaysia. 

Benefitting from growing recurring maintenance income. QES’ recurring income segment, comprising of service, maintenance and sales of consumable parts, has contributed RM55m-RM60m per annum to the group. We expect this to expand further, leveraging on its sturdy sales in the past, once the maintenance cycle kicks in. It’s after-sales team currently comprises of 129 technical personnel. The group is also looking to roll out a customer relationship management software to better monitor its customers’ equipment status and initiate service calls. Thus, in our view, it would help to improve the repair and maintenance revenue and supply of spare parts in the long-term. 

Ramping up manufacturing revenue. Management has been putting in efforts to develop new products or introduce enhanced version under its manufacturing division, mainly for the semiconductor industry. These products are advanced equipment aimed at reducing operating cost and improving product yield through higher precision, integrated processes as well as automation. We believe the successful launching of these products could help to expand its manufacturing earnings contribution, which typically commands relatively superior profitability. Going forward, it expects the manufacturing segment to grow at double-digit and aims to expand manufacturing revenue contribution from the current 13% to 30%-35% of Group revenue. 

Major shareholders: Chew Ne Weng (30.1%), Liew Soo Keang (22.5%) and East- spring Investment Small Cap (0.5%). 


  • This article first appeared in The Malaysian Reserve weekly print edition