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This article first appeared in The Edge Financial Daily on June 5, 2017

KUALA LUMPUR: Key Asic Bhd, which has been in the red for the last four years, is banking on securing recurring sales for its Internet of things or IoT products, which it has spent the last five years developing, to return to profitability, which it expects to happen by the second half of its financial year 2018 (FY18).

According to Key Asic chief executive Eg Kah Yee, the group, which designs and manufactures chips for IoT products, has failed to turn a profit in the last four years because the IoT industry is still new.

“It takes time [to make a profit] because IoT is at its infancy, not only in Malaysia, but everywhere in the world. It takes a longer time because the end users in the market are usually non-IT users and they do not have the correct infrastructure [yet to make use of our chips],” he said in an interview with The Edge Financial Daily.

“We have invested a large amount, over US$20 million (RM84.4 million) to develop our products, but it will take time to [see the benefits]. However, our outlook for FY18 looks profitable, based on the recurring contracts we hope to secure for our chips,” he added.

Among the IoT products the group has developed in the past five years are its system-in-a-package or SiP chip, SPG101, and system components like WiFi SD Card called K-Card, and its wireless USB flash drive, K-Drive 9.

Last month, it announced that two more new chips have gone into production, namely its Numeric matrix (NM) CPU and PCI-e SoC (system-on-a-chip), which took four years to develop, with a collective investment of about US$3 million.

The chips were co-designed with RC Module, a leading system and chip design company in Russia.

“The NM CPU chip, in particular, is very interesting as it involves scientific calculations. [Up until now,] it has been used on much larger scales, such as in satellite and aerospace products, like to track the weather for forecasts, and for image and voice detection,” he said.

“The technology now has been taken down to the ground [and used for smaller-scale products], such as in the world of IoT, and it can be done at a lower cost,” he said.

Eg said the significance of these chips going into production is that customers can begin to place orders once initial logistics issues are resolved.

So far, Key Asic has secured RM7 million worth of contracts for the initial shipping and production of the two newer chips, which will see the deployment of 10,000 units of each chip into the market, from which it can gather feedback and work out any logistical issues — a process likely to take at least six months — before recurring sales orders will come in.

“It works like this: our customers will pay us a fee for designing the chip, called a non-recurring engineering fee. When we design the chip, we own the design, but we manage the production of the chip for the customer, which is where we begin to see recurring revenue [through sales contracts],” he said.

After the spate of investment spendings in the last five years, Eg said the company is now in a firm footing to court customers.

“We will know if the products can secure recurring sales contracts from our customers, from between the fourth quarter of this year to the first quarter of 2018, for all our chips,” he said, adding that though he is optimistic, he is also conservative on the group’s outlook.

For its three months ended March 31, 2017, the group’s net loss narrowed on a quarter-on-quarter basis to RM953,000 with a turnover of RM4.46 million, from a net loss of RM2.07 million in the three months ended Dec 31, 2016, when it clocked in a revenue of RM3.52 million.

There were no year-on-year comparative figures as the group had changed its financial year end from Dec 31 to May 31. As at March 31 this year, the group’s accumulated net loss stood at RM45.28 million.

Malaysia’s government investment arm Khazanah Nasional Bhd remains a substantial shareholder of Key Asic, with a 23% stake as at May 4, while former chairman of China Development Industrial Bank, Taiwanese Benny T Hu @ Ting Wu Hu, has been an independent non-executive director of the group since 2009.

Eg has an indirect interest of 39.06% in Key Asic, together with three others, by virtue of his deemed interest in Key Asic Ltd, the group’s largest shareholder with a 39.06% stake as at April 6 last year. Eg also has a direct stake of 0.18% in Key Asic.

Key Asic shares closed at 13 sen last Friday, up one sen or 8.33%, with a market capitalisation of RM110.68 million. Year to date, the stock has jumped 62.5%.

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