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This article first appeared in The Edge Malaysia Weekly on March 11, 2019 - March 17, 2019

FOR homegrown electronics manufacturing services (EMS) provider VS Industry Bhd, newly secured job orders from US-based Bissell International Trading Co BV could not have come at a better time.

Recall that the stock, which has been on a downward trend since January last year, got hammered to a three-year low of 64 sen in December.

The management had then issued a profit warning, telling investors that earnings for the second half of its financial year ending July 31, 2019 (2HFY2019), were going to weaken as the group anticipated that order flow from a key customer might decline.

Compounding this was speculation that the group may have lost some job orders from the European multinational corporation (MNC), best known for its home care products. Some even went as far as to say that VS Industry may have lost the global brand as a client.

Its share price declined 69% last year before staging a rebound, rising 42% year to date to close at RM1.04 last Thursday.

On March 1, VS Industry announced that it had signed a three-year master supply agreement with Bissell — a leading home appliance company in the US — to manufacture its home care products on a box-build assembly basis.

Although no contract volume or amount was specified, managing director Datuk Gan Sem Yam expects Bissell to become the group’s second largest customer, contributing about 15% to 20% to its turnover in the coming years.

“Bissell is our first new key customer in recent years. The new contract is expected to drive our future earnings performance, but we may not see a significant contribution yet in FY2020,” he tells The Edge in an interview.

Currently, the group’s top three clients are the European client, Keurig Green Mountain Inc (a US-based hot beverage system company) and Zodiac Pool Systems Inc (a global manufacturer of pool and spa equipment).

Based in Michigan, Bissell is a family-owned home care solutions company founded in 1876. It is known for supplying households and businesses globally with vacuum cleaners, carpet-cleaning machines, cleaning formulas and pet-grooming products.

Bissell currently has three contract manufacturers — two in China and one in Mexico. VS Industry will be its first in Southeast Asia.

According to Gan, US-China trade tensions have opened up opportunities for VS Industry as Bissell, for example, had to move out some of its production lines from Shanghai.

“I met CEO Mark Bissell (the fourth generation of the founding family) at its US headquarters and his key management members in Hong Kong to discuss how VS Industry could absorb its orders in Shanghai. Subsequently, they came to Johor to visit our plant. Within less than six months, we managed to secure the contract,” he says.

Gan firmly believes that the US and China trade dispute will bring many business opportunities to Malaysian manufacturers, and hence, the prospects for VS Industry in the next three years should remain bright.

“What I can say is that Bissell will not be our only new client this year. We are confident of securing at least another two contracts by the end of this year,” he says.

Johor-based VS Industry is the fourth largest EMS provider in Asean, and among the top 50 in the world, with in-house printed circuit board (PCB) and battery-pack assembly capabilities.

The group manufactures products such as vacuum cleaners, coffee brewers, robotic pool cleaners, air purifiers and automatic paper dispensers for its clients.

“In the EMS industry, if you can secure one new contract every   three years, you are considered doing very well. But we will be securing three new contracts this year alone. That’s something remarkable,” says the 62-year-old Gan, who joined VS Industry in 1982.

Besides Bissell, there are many other MNCs looking to relocate their production lines from China, he says.

Nevertheless, VS Industry will be selective as its production capacity is limited.

 

Assuaging investor concerns

Gan deems talk that it had lost the European MNC as a client as “simply ridiculous”.

“According to these people, we just lost them all of a sudden. Frankly, we were not worried at all, although we were quite shocked when we heard the rumours. We know our business model is sustainable, and we know that we still have the client,” he stresses.

He acknowledges that the European client had, towards the end of last November, revealed that it planned to shift a production line to a Taiwanese firm operating in the Philippines and another to a local competitor of VS Industry.

The European client, however, subsequently gave VS Industry a new production line — the world’s first and only one so far — to produce its latest groundbreaking product, which is currently sold out in the market.

Gan stresses that it is normal practice in the industry for clients to take away an old product from a manufacturer and replace it with a new product.

“All this happened when we were releasing our financial results in mid-December. Naturally, investors were concerned about the gap between the commencement of new jobs and completion of earlier ones. But to us, it is all about timing. If old things don’t go, new things will never come,” he says.

He points out that VS Industry was awarded “vertically integrated” status by the European customer in 2016.

“Logically, whenever the European client is launching a new product, it will come to us first.”

He admits that in the past, VS Industry had relied quite heavily on the European client. But today, the group has diversified its customer base. At the same time, the European client is making some changes to its business strategy.

“Certain people misunderstood. It is perfectly normal for MNCs to shift their production lines when they think the time is right,” Gan explains.

“But we view it positively. Think about it ... orders for old models will always decline whereas orders for new models will always increase. From our perspective, we don’t want old products to occupy too much capacity in our plant. We would rather be an EMS provider that is capable of making new products so that we can grow together with our client.”

Still, he warns that VS Industry may see a slight decline in earnings for FY2019 due to the six-month order gap from the European client between February and July this year.

“But we expect a double-digit recovery in both top line and bottom line come FY2020,” he states.

 

 

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