This article first appeared in The Edge Financial Daily on June 13, 2017

KUALA LUMPUR: Last Friday, JF Technology Bhd’s share price hit an all-time high of RM2.07 before settling at RM1.86 at the closing bell. This marked a whopping 313% year-to-date (YTD) gain, boosting its market capitalisation by some RM177.6 million to RM234.36 million.

The rally makes JF one of the top performing semiconductor stocks on Bursa Malaysia this year. However, its sudden spike raised an unusual market activity query from the regulator, to which JF responded that it was unaware of any corporate development that could have accounted for the trading activity.

On a positive note, the group’s fundamentals have been improving. For the nine months ended March 31, 2017 (9MFY17), JF posted a net profit of RM4.22 million, a more-than-fourfold increase from the RM1.01 million booked in 9MFY16. Meanwhile, revenue for the same period rose 26% year-on-year (y-o-y) to RM17.99 million.

This is a welcome turnaround. In FY16, the group reported a 66% drop in net profit to RM1.04 million from RM3.05 million in FY15 due to expenses for an ongoing legal case in the US, while its revenue grew 8.8% to RM19.03 million from RM17.49 million.

Following its share-price rally, JF’s historical price-earnings ratio (PER) has risen to about 56 times. This is moderately high compared with its three-year average PER of 47.87 times.

For perspective, other semiconductor stocks, such as Vitrox Corp Bhd and Inari Amertron Bhd, have PERs of 24.73 times and 20.23 times respectively. However, it is slightly cheaper than Globetronics Technology Bhd, which has a PER of 66 times.

But going forward, will JF’s financial and operational performance live up to its share price rally?

One thing for certain is that the sun is far from setting on the global semiconductor industry, which reported a year-on-year growth of 20.9% in semiconductor sales to US$31.3 billion (RM131.77 billion) in April this year, and this works out in favour of JF, which provides customised test contacting solutions for the semiconductor industry.

JF executive chairman and managing director Datuk Foong Wei Kuong said the group’s business model is one that is sustainable not just in good times, but when the industry faces tough times, as well.

This is because semiconductor houses are constantly developing new integrated circuit (IC) devices with new applications for smartphones, tablets and wearables, as well as the automotive industry and the ever-evolving Internet of things. Regardless of whether good times or bad, there will always be investment in developing better ICs.

JF has the capability to customise working solutions to test these newly developed prototype IC devices. Once they are adopted, they will then be transferred to high volume manufacturing (HVM).

The group’s customers have grown to 85 today, up from 69 in 2015. They include integrated device manufactures such as Texas Instruments Inc, Maxim Integrated Inc, Infineon Technologies AG and NXP Semiconductors.

“Currently, an estimated 70% of our revenue is derived from prototypes of new products. IC designers, which are our customers, need to continue to develop new IC devices that have to be tested before they are supplied to their customers,” he told The Edge Financial Daily in an interview recently.

“Therefore, our test contacting solutions are present at this stage before they get approval and proceed to the HVM stage,” he added.

HVM presently makes up approximately 30% of the group’s revenue.

Foong said the percentage contribution from the HVM segment increases gradually, due to the lag time of around two-and-a-half years for a product to graduate from prototype stage to HVM.

The group’s test sockets are categorised as patented test consumables. Thus, once a customer’s prototype ICs are approved and are ready to go for HVM, the customer must use JF’s test contacting solutions that were applied at the prototype stage. After all, JF holds the patent for the technology.

JF currently has eight international patents with another 31 patents pending approval, making it among the top patent holders in the semiconductor industry.

“This year, our aim is to have at least two more patents in hand,” said Foong.

These patents are a key advantage for the group, creating a high barrier to entry for competitors.

However, having patents has its downside in terms of lawsuits, and JF has been embroiled in such a case in the US.

On June 20, 2014, an action of patent infringement was filed against JF Microtechnology Sdn Bhd, a wholly-owned subsidiary of the group, by its competitor, US-based Johnstech International Corp.

Johnstech asserted claims of infringement of a patent, which was in connection with test contact products sold by JF under the brand name ZIGMA.

On Sept 27 last year, following a trial on the suit, a US jury awarded damages of US$636,807 against JF. However, no payment has been made yet and the case is still ongoing as the presiding judge, James Donato, had indicated that he would not enter a final judgement in the case until all post-trial motions were resolved.

“The hearing for the post judgement from the court is expected in August this year ... we have not infringed the patent, and we believe the truth will prevail ... if [the judgement is not in our favour] then we will appeal,” said Foong.

Considering that the group was in a net cash position of RM6.6 million as at March 31, 2017, the potential legal damages will not sting too badly. Foong, however, is more concerned about the potential long-term ramifications for the group.

“It is more of reputational risk for us as it would tarnish the name that we have worked hard to build for ourselves in the US since we entered the market in 2011. It has already affected our sales in the US,” said Foong.

JF derives 65% of its revenue from export markets, of which the US is its largest. The expensive legal costs incurred during the three-year lawsuit have also eroded the group’s bottom line.

“We have spent close to RM6.6 million on legal fees, and I would say it has been a painful past three years,” said Foong.

Foong and his wife, Datin Wang Mei Ling, control some 61% of the group, and the couple have not sold a single share in JF since its listing in 2008.

Barring any major unforeseen circumstances, the ACE Market -listed company is eyeing a transfer to the Main Market and it is optimistic about the prospect.

And, with JF’s tagline of “We bring possibilities”, this, again, could be another possibility.