This article first appeared in The Edge Malaysia Weekly on March 22, 2021 - March 28, 2021

IN the recent tech rally, Globetronics Technology Bhd’s share price gain had lagged that of its outsourced assembly and test (OSAT) peers.

Companies including Malaysian Pacific Industries Bhd, Unisem (M) Bhd and Inari Amertron Bhd enjoyed share price gains of at least 40% during the rally, which went on for three to four weeks, while Globetronics’ appreciation was less hefty, rising 24% from RM2.65 on Jan 8 to a peak of RM3.28 on Jan 27.

A subsequent correction saw the tech counters fall by a similar percentage.

Performance-wise, Globetronics’ peers had posted superior profits in recent quarters, with Inari showing the largest jump of 140%.

Globetronics’ profit rise was a modest 16%, which CEO Datuk Heng Huck Lee attributes partly to the way Globetronics operates — serving niche customers by co-developing and producing customised products.

“We continue to focus on producing customised products. We have multiple streams of ongoing co-development with niche customers, which we believe will translate into high and stable margins. Capital expenditure (capex) risk and shorter ROI (return on investment) periods are our key investment approach.

“As such, the performance in profitability and share price would tend to track more customer- or product-specific indicators,” he explains in an email reply to The Edge.

Heng says Globetronics’ longer-term plan is to focus on digitisation and modernisation, which he thinks will boost the company’s ability to serve a different level of customers.

While Globetronics may be in the same OSAT space as the other listed OSAT players, he believes they compete in a different space. “Our technology platform and co-development with customers are unique in our segment of customers and we’re not directly competing with other local players,” he notes.

In fact, he believes Malaysian OSAT players compete as a whole with the global market instead of cannibalising each other locally.

For now, Globetronics — which derives over 50% of its revenue from its smart sensor division: it produces light, gesture and motion sensors — is undergoing a factory expansion that will add another 30,000 sq ft of floor space. This will increase capacity by 25% to 30%, says Heng.

Some RM50 million in capex has been set aside for FY2021 for the expansion, which is targeted to be completed by August this year, according to AmInvestment Research in a March 1 report.

This comes as the company is anticipating a stronger demand in sensor capacity. In a Feb 24 report, AffinHwang Investment Bank Research notes that the outlook for Globetronics in 2021 looks favourable, with a “sustained strong sensor production pipeline”.

While the light, gesture and motion sensors will continue to be the bread-and-butter business for its smart sensor division, many see potential upside from Globetronics’ new sensor products from both its existing and new customers.

The company is currently in the process of qualification with a new customer from China — a process that was delayed because of the Movement Control Order as borders were closed, says Heng. This has prevented customer visits and limited progress on product development.

“We expect the situation to improve as vaccination gains pace and are hopeful of seeing the product being qualified towards the end of the year,” he says.

Heng expects earnings growth to continue to be driven by existing products in Globetronics’ smart sensor division and its next-generation sensors. Laser headlamps and the introduction of new products like biosensors will also add to profit growth.

“Our new smart sensor applications will be extended beyond smartphones after 2021 into areas like Lidar (light detection and ranging) and the IoT (Internet of Things) market space,” says Heng.

Apart from smart sensors, Globetronics’ other segments include quartz crystal timing devices, solid state lighting/light emitting diode (SSL/LED) components as well as integrated circuits and small outline components.

In the fourth quarter ended Dec 31, 2020, analysts say Globetronics’ earnings were partly dragged down by the SSL/LED segment, which saw lower volume loadings from customers.

Heng reveals the company has five customers in this segment and that profitability will continue to be challenging, depending on the spectrum of application, because of the high penetration of Chinese manufacturers.

“We have also seen some diversification of application into the VCSEL (vertical-cavity surface-emitting laser) and laser space, which is an area we are working on actively. Overall, we expect this segment to be stable in FY2021,” he notes.

Currently, the world is experiencing a shortage in chips, as soaring demand from consumer electronics makers has led to production halts in the automotive industry with chips increasingly harder to come by.

But Heng says Globetronics has not been affected by the shortage in the automotive industry so far as these products only form a small portion of the company’s total revenue, and there has not been any material impact.

Its SSL/LED segment contributes about 18% to total revenue.

“We are monitoring this space to assess if reallocation of capacity to support the automotive segment in the next few quarters will impact other business segments. In the longer term, there is more incentive from fabs to increase capacity in line with increased global demand, which may create potential opportunities,” Heng states.

Going forward, he believes that if new products are able to come on board in 2021 as planned, year-on-year growth in earnings can be expected.

For FY2021, AmInvestment Research has pegged Globetronics’ core net profit at RM69.3 million against revenue of RM333.7 million, which is one of the higher forecasts among analysts covering the stock.

It has a “hold” call on the stock, with a fair value of RM2.84.

For the financial year ended FY2020, Globetronics chalked up revenue of RM227.52 million while net profit came in at RM50.8 million. It had net cash of RM163.66 million and no borrowings.

Last Thursday, Globetronics closed at RM2.78, valuing the company at RM1.8 billion.

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