This article first appeared in The Edge Financial Daily, on February 15, 2016.

KUALA LUMPUR: Penang-based electronic manufacturing services (EMS) provider PIE Industrial Bhd is poised for growth this year, underpinned by its capacity expansion and its efforts in vertical integration over the past few years.

The company started off with the manufacturing and assembly of cables and wires, but has since evolved into an integrated one-stop EMS provider, whose current capabilities include, among others, printed circuit board assembly, mould and die fabrication, and clean room electronic product assembly.

In a recent interview, its managing director Alvin Mui said only one out of 10 prospective customers would place orders with PIE after visiting its manufacturing facilities previously.

Now, many new customers are impressed with the group’s set-up and manufacturing capabilities through PIE’s one-stop vertical integration service after their visits.

Notably, phase two of its fully automated plastic injection production line is coming on stream soon. The operation started two years ago, with 30 machines in the first phase. Phase two, which has just been completed, will see the addition of another 40 injection machines.

PIE’s Thailand plant will also commence plastic injection operations this year. The Thailand plant is mainly involved in the cable assembly and wire harness business, and caters to multinational corporations in Thailand.

In addition, PIE’s metal stamping division is slated to commence in the first quarter of this year, allowing the company to produce metal stamping products in-house rather than outsourcing them. This will reinforce its position as a vertically integrated one-stop EMS provider.

As such, Mui believes the financial year ending Dec 31, 2016 (FY16) will be another record year for PIE, which has charted strong growth for the past five years, with a compound annual growth rate (CAGR) of 18.3% from RM287.2 million in FY10 to RM561.7 million in FY14. Likewise, net profit expanded from RM25.7 million to RM38.5 million, a CAGR of 10.7%.

“We are optimistic and confident that 2016 will be another growth year for PIE. Our projection is a further growth of 10% in the top and bottom lines in 2016,” he said.

However, PIE is mindful that the rapid expansion of its revenue base comes at a price. According to Mui, timing discrepancies between its accounts receivable and accounts payable could put some strain on working capital, though it is still manageable currently.

FY15 already saw signs of strong earnings growth. For the nine months ended Sept 30, 2015, PIE’s net profit grew 33.4% to RM33.8 million from RM25.3 million a year ago, though revenue was largely flat at RM400 million, compared with RM404 million previously.

The company attributed the earnings rise to a higher-margin product mix, higher investment and miscellaneous incomes. However, the increase in profit was partially limited by lower foreign-exchange (forex) gains, higher operating expenses, lower proceeds from scrap sales and higher provision of doubtful debts.

Currently, about 80% of PIE’s revenue is derived from EMS, while its raw wire and cable, cable assembly and wire harness business contributes the remaining 20%.

For its EMS segment, PIE generally focuses on production of a lower volume and higher mix of products, which typically commands higher margins. Its main markets are the United States, Europe and Japan.

PIE has also secured a new German industrial electronics customer. “We are expecting to commence business with this customer in 2016. This customer has the potential to be one of the major customer[s] of PIE,” said Mui.

The company is also developing a new product — an electronic whiteboard — with a customer. With mass production expected to start this year, the product could be a potential replacement for the traditional whiteboards.

One known competitive advantage PIE has is its ability to leverage Foxconn Technology Group, listed as Hon Hai Precision Industry Co Ltd in Taiwan.

Foxconn has a 26.51% stake in Taiwan-listed Pan-International Industrial Corp, which holds a 51.42% stake in PIE through Pan Global Holding Co Ltd.

Through the relationship, PIE can benefit from Foxconn’s technical support and tap the latter’s purchasing power to secure more attractive raw material prices.

PIE expects most of its major expansions to be completed this year, which should see capital expenditure (capex) declining going forward. For FY16, the company expects to spend around RM15 million for capex, excluding working capital.

Of the RM15 million, RM5 million will be on expanding its mould and die fabrication division to enable the company to produce its moulds in-house.

The company currently has seven factories in Seberang Perai, Penang, including one that it purchased last year. Four are in operation, while two are rented out.

PIE is also benefiting from a stronger US dollar, as most of its sales are traded in the currency, though some of its forex gains will be offset by its purchase of raw materials, which are also traded in the US dollar.

PIE shares shed two sen to close at RM10.16 last Friday, valuing it at RM783.45 million. Over the last 12 months, its share price has appreciated by 49.2%.