Tek Seng Holdings Bhd
(Dec 22, 83 sen)
Initiate “buy” with a target price (TP) of RM1.30: Based in Penang, Tek Seng has been listed on Bursa Malaysia since 2003. The initial listing was on the second board and it was transferred to the main board in 2006. The company has been principally engaged in the manufacturing and trading of polyvinyl chloride (PVC) andpolypropylene (PP)  non-woven-related products. It has a track record of more than 30 years in sucessfully growing this traditional business.

While strengthening the core business, Tek Seng has embarked on a diversification strategy. Since 2012 the company has been engaged in the manufacturing and sales of photovoltaic (PV) products — solar cells, panels and modules — to capitalise on the growing worldwide demand for clean, efficient and renewable sources of energy.

Its solar business subsidiary, TS Solartech operates in a 4,096 sq m plant in Penang Science Park, employing some 40 workers. Presently the plant is running a 24-hour shift, producing 52,000 pieces of solar cells a day.

On Sept 11 this year, Tek Seng announced that it had entered into a memorandum of understanding (MoU) with Taiwan-listed Solartech Energy Corp (SEC), that will invest RM100 million in TS Solartech.

In the same deal, SEC also sold two solar cell turnkey lines to Tek Seng. A leading German solar power player, Schmid is the technology partner for the new venture.

The RM87 million investments for two new production lines would be ready by February and April 2015. With the additional two production lines, the total eight production lines will enable Tek Seng to produce 50 million solar cells per annum next year, compared with 16.6 million presently, representing a three-fold increase.

Tek Seng expects its solar cell business to contribute more than 50% to group revenue for 2015, compared with about 30% now.

We think Tek Seng is benefiting from trade disputes as the US International Trade Commission has imposed anti-dumping and countervailing duties against China and Taiwan’s solar makers. As such, SEC has roped in TS Solartech as a manufacturing partner to sidestep the trade barriers. TS Solartech will gain immensely from this partnership as Taiwanese solar players are already established globally as high-efficiency cell producers.

With the injection of SEC’s investment, Tek Seng has established itself as a major solar player in Malaysia. We foresee very limited competition here as the barrier to entry into solar cell manufacturing is high. Tek Seng can then ride on the growing demand for its PV products.

Global PV end-market demand continues to set new records, restoring investor confidence in the PV industry after several years of overcapacity and declining profit. The demand in 2015 is forecast to hit the 60GW mark, representing 20% annual growth compared with 2014.

Tek Seng’s past and current earnings are wholly anchored on the traditional PVC segment. The profitability reflects steady local and overseas demand for the products, as well as having a strong market share for these niche products.

Tek Seng has been paying out dividends at around 1.5 sen to 2 sen. It will have a dividend payout ratio of at least 30% of group net profit from financial year 2015 (FY15) onwards.

One of the risk factors is that prices for PV products are exposed to the vagaries of demand and supply. However, oversupply (currently not the case) can exert pressure on the prices. The falling of fossil fuel prices may create a misconception about the demand for solar energy. The business might face fluctuations in raw material prices such as resin and silicon wafers too.

Tek Seng is proposing to undertake a corporate exercise to issue 120 million free bonus warrants on the basis of one free warrant for every two existing shares with an exercise price of 25 sen.

This is to reward existing shareholders and also to raise additional capital when the issued warrants are exercised. The proposal was approved by Bursa Malaysia on Dec 4 and is pending implementation. We are of the opinion that this is an attractive proposition to shareholders as the free bonus warrants will effectively lower the cost of acquisition of the shares. — SJ securities, Dec 18

This article first appeared in The Edge Financial Daily, on December 23, 2014.