Monday 22 Apr 2024
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This article first appeared in The Edge Malaysia Weekly on September 4, 2023 - September 10, 2023

HAVING achieved its years-long goal of hitting RM1 billion revenue for the past two financial years, electronic manufacturing services (EMS) outfit PIE Industrial Bhd is fast-tracking its growth trajectory to cross the RM1.5 billion line soon, with an eye on the RM2 billion mark and annual net earnings of RM100 million within three years.

That may be a tall order, but certainly not “pie in the sky” as the Penang-based player appears to be riding the “EMS boom in Malaysia”, having managed to secure major contracts from new quality customers, says managing director Alvin Mui Chung Meng.

Speaking to The Edge in a virtual interview, Mui explains that PIE has been a beneficiary of the booming EMS industry in Malaysia in spite of the downward revision of global semiconductor sales. He attributes this to the “progressive migration of global supply chain from China” to other countries amid the US-China trade war, and businesses’ China plus one [strategy of investing not just in the world’s second most powerful nation]”.

“Because of that, PIE has been a beneficiary of new orders from clients who have had to source for new EMS suppliers during the phenomenon.

“In the last three years, PIE secured major orders from new customers in the US, Germany and Japan, which collectively led to the growth in our EMS segment. Some of the recent new customers are in the business of drones, smart-home and medical devices, respectively. There are several other potential customers in various stages of discussion and as our resources are limited, PIE is careful to identify and select the best fit in businesses,” shares Mui, declining to name the clients.

PIE is 51.42%-owned by Taiwan’s Pan-International Industrial Corp, which in turn is 27.33%-held by iPhone maker Foxconn, more formally known as Hon Hai Precision Industry Co Ltd.

For the second quarter ended June 30, 2023 (2QFY2023), PIE’s net profit grew 50% to RM12 million from RM8 million in the same period last year on slightly lower revenue of RM286.5 million from RM296.3 million last year.

The company’s net profit for the first six months ended June 30, 2023, amounted to RM26.1 million, a touch lower than RM27.1 million last year, on the back of higher revenue of RM619 million from RM563.3 million last year. PIE attributed the lower revenue in the second quarter to lower demand recorded for the EMS, raw wire and cable products segments, which the player said was partly offset by higher revenue from wire harness products.

“But we are seeing good signs of business picking up [as new enquiries pour in]. Now, in the third quarter, we continue to hold discussions with potential new customers and prepare the necessary capacity to cater for them. There will be a rebound in the fourth quarter,” Mui forecasts.

The company’s EMS and raw wire and cable divisions are based in Penang, and the wire harness business, Pan-International Thailand (PIT), in Thailand.

“Although expansion and growth are [vital] to PIE, much attention goes into improving our margins,” says Mui, who was appointed to PIE’s board in May 2000.

Tapping EV market in Thailand, tackling margin compression

Having established its base in Malaysia in 1989, the Taiwan-based company started with wire and cable manufacturing, and cable assembly operations in two self-owned factories in Seberang Jaya Industrial Estate in Prai, Penang. Within the decade, PIE began acquiring more factories in the vicinity as it extended its core competencies in wire and cable to other manufacturing capabilities to encompass plastic injection, metal stamping, surface mounting technology (SMT), mould/die fabrication and converters.

“Over the years, PIE has evolved into an integrated one-stop EMS provider. Within a span of 30 years, our yearly revenue [grew] from RM5 million in 1992 to RM1.3 billion in 2023,” Mui points out.

Currently, PIE owns eight factories: seven in Seberang Jaya Industrial Estate in Prai, Penang, are used for its manufacturing activities, while the eighth, located about 7km away, is leased out on long-term rental. The group also owns three factories in Thailand, with two on long-term rental and one used for manufacturing activities in wire and cable assembly, plastic injection and SMT.

Two of the seven factories in Penang are undergoing expansion in preparation for future orders and PIE has reportedly spent RM60 million on the renovations. One of the factories undergoing expansion will be ready for production in the fourth quarter, and the other, by the second quarter of next year.

“Our potential customers need to see ready facilities [and capacities] before awarding the business. We are doing that. Upon completion, that seventh facility will be our largest [to date] with a built-up area of 270,000 sq ft. These two upcoming facilities will be utilised for PIE’s growth plans for the next five years,” Mui explains.

He expects EMS to continue to take the lead as the fastest-growing revenue contributor to the group, at 78.15% for FY2023, while growth for raw wire and cable manufacturing (20.27%) is anticipated to be gradual, “providing a strong foundation and stable earnings to the group”.

The wire harness and cable assembly business in Thailand (PIT) is expected to contribute about 1.58% to the group. The anticipated segmental revenue contributions are similar to current levels, Mui says.

“[As we] anticipate good potential for EV wire harness in Thailand from next year onwards, PIT is preparing to capitalise on the upcoming opportunity. The existing PIT plant is undergoing an expansion programme for an additional administrative and production block to cater for the possible new business opportunities,” Mui says.

His confidence stems from Foxconn’s joint venture with state-owned Thai energy conglomerate PTT PCL in a US$1 billion (RM4.6 billion) deal to produce battery electric vehicles. As part of the JV, a plant is being set up in Thailand that will be ready by 2024, he says.

“Pan International Corp has been a major player in automotive wire harness manufacturing with three dedicated plants in China. It is with this expertise that PIT will venture into [the EV] arena,” Mui explains.

When asked how PIE would tackle the margin compression, Mui explains that the group’s continuous efforts to optimise processes to reduce labour dependencies and increase productivity will ultimately lead to a lowering of product costs while producing quality products.

“This will further enhance competitiveness and improve [PIE’s] margins,” he assures.

In addition, PIE is installing solar panels in the five operational factories, with an estimated set-up cost of around RM3 million a factory, totalling about RM15 million for the five plants.

“It will shave about 30% to 40% from our electricity bill. Those are substantial savings, and we expect to get our return on investment in just 2½ years,” Mui says.

He adds that the material shortage issue has also subsided gradually this year while any price increases will be borne by the customers.

“After numerous discussions with various customers to cost up on selling prices due to the drastic increase in minimum wages in May last year, most of them had agreed by the end of last year to help mitigate the impact of the wage increase.”

Mui adds that PIE’s severe labour shortages in 2022 have been fully resolved with the incoming batches of foreign workers since approvals were obtained last August. Currently, PIE has no immediate plans to expand geographically to other regions.

On competition in the local EMS market and PIE’s comparative advantage, Mui explains that local players are not a concern and that most of the company’s customers are “major MNCs that understand the EMS providers in different countries well”.

“They travel all over the world to source for suitable EMS companies to undertake their project[s], therefore we are up against global players. [They look to us] because technology-wise, PIE and Malaysian EMS companies have achieved high global standards and competitiveness. And secondly, yes, cost is a factor in our favour. PIE’s ties with [Foxconn] give us privileges in bulk purchasing,” Mui acknowledges.

For the financial year ended Dec 31, 2022, PIE paid dividends of seven sen per share. It paid out five sen per share annually from FY2018 to FY2020, but did not declare any payout in FY2021.

“PIE does not have a fixed dividend policy as we are constantly in expansion mode, which [tends to] require more cash reserves to fund the various expansion programmes. In the 23 years of being listed, we have typically paid out at least 50% of our earnings,” Mui says.

Year to date, PIE’s share price had fallen 23.7% to RM2.84 last Wednesday from a high of RM3.72, valuing the company at RM1.1 billion. 

 

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