Friday 21 Jun 2024
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This article first appeared in The Edge Malaysia Weekly on January 29, 2024 - February 4, 2024

HOME-grown YBS International Bhd and California-based lithium-ion battery manufacturer Enovix Corp may be on different continents, but their fortunes are closely intertwined.

YBS houses a high-volume manufacturing line for Enovix, whose approach to solving the age-old question of how to incorporate silicon-anodes into lithium-ion batteries has been hailed by financial services firms and academia as revolutionary.

Now, all Fremont-based Enovix needs to do is capture the lion’s share of the market for wearables, portables and mixed reality. Thus, among its key requirements for YBS is to rapidly crank up production.

YBS’ success in securing this deal with Enovix was a result of Penang’s position as the electrical and electronic hub of Southeast Asia, with an outsized strength in outsourced semiconductor assembly and test (Osat).

“We already had contacts (connections) with the top management of Enovix many years ago, as we know them very well from their time at AMD (Advanced Micro Devices Inc) and Lumileds (Lighting LLC),” YBS group managing director Jackie Yong Chan Cheah tells The Edge in an interview.

AMD’s core business is in computing, graphics and visualisation technologies, while Lumileds Lighting manufactures automotive lighting and accessories, camera flashes for mobile devices, MicroLED and light sources for general illumination, horticulture and so on.

“When they had (secured) this project (high-volume manufacturing for Enovix), they got in touch with us,” says Yong, explaining the close nexus between the companies.

To put things in perspective, Enovix’s chief operating officer Ajay Marathe used to lead AMD’s operation in Penang. He was also the COO of Lumileds Lighting between November 2011 and October 2021. Both he and Enovix president and CEO Dr Raj Talluri have been quoted as calling Penang their “stomping ground”.

Meanwhile, Enovix’s Malaysian operation is headed by Loganathan Muniandy, who has more than 22 years of operations and leadership experience. He was recently the vice-president of operations at Lumileds Malaysia Sdn Bhd.

Offered the opportunity to scale up in the electronic manufacturing services industry, Yong decided to pivot YBS’ expansion from producing more of the same high-precision metals and plastic components at its seven-acre facility in Penang Science Park, towards battery manufacturing.

However, the US$100 million (RM472.9 million) capital expenditure required to embark on this venture is huge for YBS. In comparison, the group spent RM24.7 million for the financial year ended March 31, 2023.

“We are good with battery chargers, as we have been doing it for the last 15 years. But this investment is very big, it is about US$100 million. We are not capable of doing that, so the customer helps us with this,” says Yong.

Enovix invested US$30 million to turn YBS’ Penang Science Park plant into a high-volume manufacturing facility. It then provided a credit guarantee for YBS to raise US$70 million to fund the setting up and installation of machinery.

The manufacturing agreement signed between YBS and Enovix comes with a “take-or-pay” clause, says Yong. This means that YBS does not have to look for a customer to take up any additional products.

With a production capacity of 1,350 units per hour, Enovix’s Gen2 autoline will be able to produce up to 10 million units of batteries a year, he says.

The plan is for the line to start high-volume manufacturing in the second half of the year. By 2026, Enovix intends to have multiple lines that will generate multi-hundred million dollars in revenue for the group. Already, Enovix has committed to invest US$1.5 billion in Malaysia over the next 15 years.

“After this, with a successful run, we will be another Inari or ViTrox,” says Yong, referring to Malaysia’s home-grown Osat companies Inari Amertron Bhd, which has a market capitalisation of RM12 billion, and ViTrox Corp Bhd, which is valued at around RM6.8 billion.

However, this target is very much dependent on Enovix’s performance.

YBS gains traction

YBS’ share price has increased by 28.7% over the last one year. It traded at 70 sen apiece on Jan 24, valuing the group at RM178.38 million. The counter is not being covered by any research houses yet, indicating the market’s scepticism of its venture with Enovix.

As Enovix is a start-up, it is standard for the market to be sceptical about its potential, especially in the technology space where many so-called breakthroughs have not been realised, failing in mass adoption.

Is YBS taking up too much risk, being so closely linked to Enovix?

This seems so, as in order to prepare for the said contract, YBS had to raise debt to fund the facility. The loans were guaranteed by Enovix, but YBS will still have to service them, which will eat into its profits.

In the six-month period ended Sept 30, 2023, YBS’ finance costs jumped 77% from the previous corresponding period to RM1.4 million. Coupled with a higher cost of sales and administrative expenses, the company recorded a net loss of RM647,000, compared with a net profit of RM3.13 million in the previous corresponding period.

In Yong’s opinion, YBS’ financial health is still quite good. As at Sept 30, 2023, its gearing ratio was 0.76 times, only slightly higher than the 0.73 times as at Sept 30, 2022, which was a considerable jump from the 0.44 times as at Sept 30, 2021.

“We committed (to) debts because we want to invest in a big factory, so that we can secure this business. There is not much issue (with finance costs); we can pay as we got the project,” says Yong.

Enovix’s share price has been on a downward trend since it peaked at US$22.21 on July 18 last year. On Jan 23, the counter — which is said to have the potential to be as big as technology giant Nvidia Corp — closed at US$9.88, giving it a market valuation of US$1.66 billion.

Enovix’s Raj believes that the company is a leader in silicon batteries. “Based on customer feedback, the ecosystem is looking for a silicon replacement of graphite as the lever to unleash increased battery performance and we believe our progress this year has positioned Enovix as the leading contender in silicon batteries,” he said when announcing the company’s results for the third quarter ended Sept 30, 2023.

As the saying goes, the proof of the pudding is in the eating. While the market for lithium-ion batteries is expected to grow by over 30% annually to US$400 billion by 2030, according to McKinsey, the question is whether Enovix will secure — in the form of orders — a chunk of the pie. 

 

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