This article first appeared in The Edge Malaysia Weekly on December 19, 2022 - December 25, 2022

THE first half of 2023 could be a challenging period for semiconductor equipment players, including automated test equipment (ATE) makers such as ViTrox Corp Bhd.

ViTrox co-founder, president and CEO Chu Jenn Weng acknowledges that the group will experience a slowdown. But Chu remains optimistic that it is unlikely to be a long, cold winter. He believes the recovery will come within six to nine months, therefore, the group needs good strategies in place to prepare for the rebound.

“In a best-case scenario, we are hopeful that the decline will bottom up in 1QFY2023 or 2QFY2023, and to rebound in [2H2023]. In a worst-case situation, however, the downturn could be prolonged up to 12 to 18 months. Nonetheless, if you look at our past financial results, we have never experienced two consecutive years of decline,” he tells The Edge in an interview at the company’s headquarters in Batu Kawan, Penang.

“For 2023, we will put more emphasis on long-term growth strategies while preparing for a mild downturn. It is time to serve more rather than to take,” says Chu, a former Hewlett-Packard (HP) Malaysia engineer.

Nonetheless, ViTrox’s earnings remained on the growth path in the first nine months of the year. For the nine months ended Sept 30, 2022 (9MFY2022), the company generated revenue of RM560.3 million, which grew by RM65.9 million, or 13%, year on year from RM494.4 million. Net profit in 9MFY2022 expanded 23% y-o-y to RM152.21 million from RM123.54 million. The strong financial performance was due to the strong US dollar and favourable product mix.

ViTrox has more than 600 installed bases by products in more than 40 countries, including Malaysia, China, Taiwan, the US and Mexico. The group has two main business segments — machine vision system (MVS), which provides component-level inspection solutions; and automated board inspection (ABI), which offers board-level inspection solutions.

Its MVS target market is semiconductor manufacturers, including integrated device manufacturers (IDMs) and outsourced semiconductor assembly and test (OSAT) players, whereas its ABI business unit serves electronics manufacturing service (EMS) providers and contract manufacturers.

In layman’s terms, ViTrox makes machine vision inspection systems that scan for defects in semiconductors and other hi-tech gear.

Product-wise, research analysts believe the delivery for ViTrox’s ABI machinery is likely to decelerate from the record high of 3QFY2022, owing to the uncertainty in general business outlook. The shift in preference towards local brands among Chinese firms and price wars waged by competitors may also limit the segment’s near-term upside.

ViTrox’s MVS segment faces a similar threat, as competition from Chinese machine makers intensified, particularly in the lower-end and cost-sensitive space. Moreover, the already soft demand from the mobile and PC segments could worsen as demand for the end-products remains sluggish, following the expectations of a global economic slowdown.

Fortunately, the well-diversified revenue base and exposure to high-growth industries remain ViTrox’s bright spots. Chu says the trade war between the US and China — the two biggest powers in the world — will continue for many years to come.

“If this turns out to be a competition, I believe it is good for Malaysian companies and we will continue to be the beneficiary. If this becomes a conflict, however, we may have to choose a side [between the US and China], and it might be a big issue. This is something that nobody can predict,” he says.

Nevertheless, Chu highlights that, this year, ViTrox continued to do well, as the group’s products experienced strong demand from many regions, including the US, China, India and Asean.

“That’s a very good sign to show that the trade tension between the US and China has [had a positive impact on us] so far,” says Chu, the company’s single-largest shareholder, with a direct stake of 26.89%.

ViTrox co-founders Steven Siaw Kok Tong and Yeoh Shih Hoong — both of whom sit on the board as executive directors and executive vice-presidents — own 19.05% and 10.24% equity interest respectively.

Chu was ranked 47th in Forbes Malaysia’s 50 Richest list, with a net worth of US$280 million in 2020, before climbing to 35th, with a net worth of US$460 million in 2021.

Despite seeing his net worth drop to US$430 million (RM1.88 billion) this year, the 52-year-old remains the 35th richest man in the country.

ViTrox’s headquarters is located at its 450,000-sq-ft Campus 2.0 in Batu Kawan Industrial Park (BKIP), Bandar Cassia.

Notably, the group had in August 2021 kicked off the new expansion phase of its existing land to build ViTrox Campus 3.0, which is an extension of Campus 2.0, consisting of three blocks of multi-storey buildings and is slated for completion by 2H2023.

Campus 3.0 will add 442,000 sq ft of floor space for production, business development, design and development, and shared services activities at the plant.

In May 2021, ViTrox had also acquired a 21.04-acre land adjacent to Campus 2.0 for RM48.33 million as part of its 10-year expansion master plan (2021 to 2030).

The land acquisition is expected to further strengthen ViTrox’s technology and product research and development (R&D). The group is also enhancing its global business expansion, worldwide service and support, supply chain development as well as smart and lean manufacturing.

Chu points out that ViTrox’s 10-year master plan is still a work in progress.

“For the next two years, our biggest capital expenditure (capex) investment will be for our new facility — Campus 3.0, for which we have allocated RM150 million for building and interior design. We have allocated RM110 million for capex next year, followed by RM40 million in 2024.”

He says Campus 3.0 will double ViTrox’s manufacturing floor, R&D and warehouse space, as well as shared services.

“On top of that, there will be new elements such as an accelerator programme for growing tech start-ups here,” he adds.

Asked about what comes after Campus 3.0, Chu says ViTrox still has 10 acres, its last remaining tract in Batu Kawan.

“That will very likely be used for the business expansion of our manufacturing and R&D facilities. We have no issue of growing three to five times here before the end of our 10-year master plan, which is scheduled to be fully completed by 2030,” he discloses.

Amid concerns of a chip shortage-turned-chip glut and fears over a recession, many global semiconductor stocks, including semiconductor-related counters in Malaysia, have been battered since the beginning of this year. Most of them are down 30% to 40% so far this year.

Year to date, ViTrox had declined 21% to close at RM7.80 last Thursday (Dec 15), giving it a market capitalisation of RM7.37 billion. The counter is trading at a historical price-earnings ratio of 39 times.

In a report dated Nov 11, AmInvestment Bank research analyst Muhammad Afif ­Zulkaplly downgraded his recommendation on ViTrox to a “hold” from a “buy”, with a lower fair value of RM7.10, from RM8.96 previously.

“Given slower earnings growth prospects over the upcoming years, the stock’s risk/reward profile looks less compelling at this juncture, in our view. We cut our FY2023 and FY2024 earnings by 11% to 13% after imputing a more conservative sales assumption, owing to softer global economic growth expectations in the coming months amid uncertainties in the China market,” he wrote.

Of the 10 analysts who track ViTrox, Macquarie’s target price of RM9.35 is the highest and that of CLSA, which advises investors to reduce investments in ViTrox, is the lowest at RM7.05.

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