Globetronics stays optimistic in the face of headwinds

This article first appeared in The Edge Malaysia Weekly, on November 26, 2018 - December 02, 2018.
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INVESTORS continue to be concerned about the future of the technology sector based on general expectation of slower global economic growth, continued trade tensions between the US and China and signs of lacklustre tech earnings.

It is noteworthy that the tech rout in the US has been severe, with the Nasdaq Composite Index crumbling almost 15% between Aug 29 and Nov 20 to 6,908.82 points.

In the home market, the FBM KLCI Technology Index has also stumbled, losing 18.6% between Oct 1 and Nov 21 to 34.05 points. However, industry observers say the local tech index has been affected more by declining crude oil prices than the rout in the US.

Nevertheless, local electronic component manufacturer Globetronics Technology Bhd remains optimistic about the year ahead.

“For 2019, we are looking at our existing sensor volume to increase and we are also hopeful that our ‘in-development’ products will be designed into new models, which would lead to more content per device,” corporate director Ng Kok Yu tells The Edge in an email interview.

“Furthermore, we have begun mass production of our laser light component for auto headlamps since October. As the product gains traction, we expect it to contribute positively to the group’s performance.”

Globetronics’ sensor division has been a leading contributor to its top line since last year, rising above its timing quartz device division as sensors make up about 40% of the group’s revenue. This year, says Ng, sensors have so far contributed a low 40% to revenue, followed by timing quartz devices (30%) and LED (20%). Integrated circuits account for the rest of the revenue.

The company’s sensor division got its big break when it secured a Switzerland-based customer that supplies proximity sensors to a leading smartphone maker in the US, according to a report by AllianceDBS Research.

Recently, it was whispered that Apple Inc had cut production orders for all three iPhone models launched in September as a result of lower-than-expected demand for them.

Apple also stunned investors when it released its Christmas quarter’s sales forecast a few weeks ago that came in below Wall Street expectations. Subsequently, several suppliers issued warnings of lower earnings.

Production cuts or forecasts of lower sales by a major smartphone producer like Apple tend to make component suppliers and investors alike jittery.

As a sensor manufacturer, how will this impact Globetronics?

“Well, I think there would always be a concern when a key customer has a reduction in volume. We actually have not seen any volume softness on our side so far but eventually, all the volume has to go to an end product and I believe we will see the adjustment happen, possibly in 1Q2019,” says Ng, adding though that sensor volumes are quite seasonal and typically soften in the first and second quarters after the Christmas sales period.

“We saw that this year and we expect something similar in 2019, meaning a softer first half followed by a strong second half. The reason for this is that typically our ‘in development’ products would go into mass production around mid-year, which is followed by a strong ramp up to contribute to our performance,” he explains.

In the third quarter ended Sept 30, Globetronics’ net profit jumped 65% year on year to RM23.6 million on the back of higher contribution from its sensor division. Revenue inched up 0.8% to RM87.7 million.

While some opine that Globetronics has a high single-customer risk because its sensor division is reliant on its Swiss customer, AllianceDBS Research believes the company’s relationship with its customer is strong, given that Globetronics is included in, and has visibility of, its customer’s product roadmap.

According to Ng, apart from the sensors, another division that is expected to see healthy growth next year is its LED for SORRA.

The production of LEDs for SORRA began in October and will be used in the automotive headlights of a luxury car model by a German carmaker, says AllianceDBS.

“For now, SORRA is expected to contribute about 5% to Globetronics’ FY2019 sales. The potential for volume to scale up is there if laser diode adoption becomes more widespread among global carmakers,” adds the research house.

Interestingly, Globetronics is likely to be a beneficiary of the ongoing trade war between the US and China, similar to some of its Southeast Asian counterparts.

Ng shares that the production of existing products has not been impacted by the trade war. In fact, customers have actually made enquiries about the possibility of Globetronics taking on some of their customers’ products currently being manufactured in China in order to avoid the tariffs that have been imposed.

However, AllianceDBS says if this materialises, it would take two to three quarters of lead time before the new production capacity can be turned on.

While Globetronics may be an early beneficiary of the trade war, Ng says in order for the industry to move forward, more clarity is required of the US-China position.

“Of course, the ongoing trade war between the US and China is bad for sentiment and subsequently, it would hit demand, which would then impact the volume of our products. Furthermore, the uncertainty of how it is going to end will lead to companies deferring their capital expenditure and expansion plans, further depressing the business environment,” he says.

Over the last one year, Globetronics’ share price has shed 22.38% to close at RM1.96 last Thursday. Of the research houses covering the stock, two have “buy” and seven have “hold” calls with an average target price of RM2.55.

 

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