This article first appeared in The Edge Malaysia Weekly on May 27, 2024 - June 2, 2024

PRECISION parts manufacturer Notion VTec Bhd (KL:NOTION), which has been under the radar of investors in recent years, appears to be solidly back in favour with its stock price surging 225% since the beginning of the year.

Its peers in the manufacturing of hard disk drive (HDD) components — JCY International Bhd (KL:JCY) and Dufu Technology Corp Bhd (KL:DUFU) — have also enjoyed investor interest, even though the counters have gained only 81% and 25% respectively.

The stronger share price performance of the three stocks is believed to be partly driven by news reports in April of Western Digital Corp (WD) and Seagate Technology raising their pricing for new HDD orders owing to supply shortages.

Main Market-listed Notion VTec currently operates in several business segments, including HDD, automotive and electronic manufacturing services (EMS).

In an interview with The Edge, Notion VTec executive chairman Thoo Chow Fah reveals that the group is in advanced negotiations with potential Chinese partners over aluminium extrusion and machining ventures, driven by the latter’s need to relocate their operations out of China because of US-China trade tensions and US tariff hikes on specific Chinese imports.

According to Thoo, in a blue-sky scenario, the aluminium extrusion projects are expected to generate an additional RM500 million in annual revenue, thereby creating a fourth major pillar in Notion VTec’s business portfolio.

“We are in the advanced stage of discussing ventures with two potential Chinese partners in aluminium extrusion and machining as these partners are planning to move their operations out of China. We are quite close to deciding which partner we want to team up with,” says the 71-year-old mechanical engineer.

Notion VTec generated revenue of RM334 million in the financial year ended Sept 30, 2022 (FY2022) and RM345 million in FY2023, with 23% coming from the HDD business, 31% from the automotive segment, 44% from EMS and camera and 2% from personal protective equipment (PPE). For 1HFY2024 ended March 31, 2024, turnover amounted to RM205.388 million (see chart).

Thoo says that, internally, Notion VTec aims to achieve a top line of RM500 million in FY2025 and double the target by FY2026.

“Overall, we are positive on the company’s outlook over the next five years in terms of top and bottom line. It is our board’s vision and hope to hit the RM1 billion revenue mark and we believe it should happen by FY2026 or beyond,” he elaborates.

However, Notion VTec would need to finalise some of its joint venture plans as realising the targets solely through organic growth would be challenging.

“Let me put it this way: our existing businesses [HDD, automotive and EMS] are not likely to drive us to achieving RM1 billion in turnover. Our next growth catalyst could be the aluminium extrusion business. If the new ventures do come about, they will have a major impact on our revenue from FY2025,” says Thoo.

Nearly two decades ago, in February 2005, he was appointed to Notion VTec’s board of directors. He is the brother-in-law of managing director William Choo Wing Hong and executive directors John Choo Wing Onn and Choo Wing Yew. As at Dec 29 last year, the Choo brothers and Thoo collectively owned 20.338% equity interest in the company.

Notion VTec’s earnings performance has been rather lumpy since the Covid-19 pandemic. After reporting a net profit of RM6.3 million in FY2020, the group slipped into the red with a net loss of RM7.8 million in FY2021.

Although Notion VTec returned to the black in FY2022, with a net profit of RM9.4 million, it incurred a net loss of RM45.02 million in the following financial year, attributing it mainly to impairment of plant and machinery amounting to RM30.69 million and inventory write-off of RM8.5 million.

Thoo concedes that it was a “painful decision” for Notion VTec to fully impair its PPE assets and investments as the group “cannot wait for a recovery” of the PPE industry. Like other PPE players, it suffered a decline in average selling prices amid an oversupply in the market.

“We have cut our losses and completed the impairment and exited the healthcare business. A hard lesson learnt,” he acknowledges. Notion VTec was among the first to jump on the PPE manufacturing bandwagon in 2020 in response to the shortage of such equipment following the Covid-19 outbreak.

“Many things have happened over the past five years. Certainly, the pandemic took us all by surprise and the time needed to restore [normalcy] was long. That’s when Notion VTec entered healthcare out of little choice,” says Thoo.

“Our main markets were disrupted by shipping, lockdowns, disruption of supply chain, downtime and other factors. It was a very unproductive period. It was scary in the beginning but we managed to gradually restore and recover. It’s a great time to learn and reflect too.”

In early April, it was reported that American computer drive manufacturer and data storage giant WD was seeing higher-than-expected demand across its entire flash and hard drive portfolio.

In response to the supply chain challenges in the electronics industry, WD had reportedly issued formal letters notifying its customers of product price increases. The adjustments took immediate effect in some cases.

Due to the growing demand for high-capacity HDD products driven by the artificial intelligence (AI) hype, WD’s rival Seagate Technology joined the price hike party a few weeks later.

Notion VTec has direct accounts with WD and Toshiba, as well as indirect accounts with Seagate through its unit in Thailand.

Thoo says Notion VTec’s main supply is in high-volume manufacturing of HDD spacers and disk clamps for the enterprise segment, which supports cloud and data centre storage.

“We have seen strong demand in recent months and this will continue in the next five years or more, driven by new demand in the generative AI data needed for machine learning text, videos and imaging tech for ChatGPT, full self-driving (FSD) AI led by Tesla and humanoid AI robots in the coming years,” he elaborates.

In any event, Thoo anticipates exciting times ahead for Notion VTec’s HDD segment, which is expected to contribute about 30% to group revenue.

“There are reports suggesting that the HDD demand is trending upwards due to this new AI growth trend. I believe this supply shortage is a result of the recovery of cloud and new data centres,” he observes.

For the automotive segment, Notion VTec produces the electronic braking system’s (EBS) aluminium hydraulic plunger for major manufacturers, including for electric vehicle (EV) customers.

“This sector will continue to grow with our new customer in South Korea supplying volume production of solenoid valves for the auto sector starting 2HFY2024,” says Thoo, adding that the automotive division is expected to contribute 35% to the group’s top line.

In the EMS accessories business, although Notion VTec already has a major client in the segment, the group has taken on board a few new customers.

“These new EMS clients are also in the high-end electrical appliances sector and other niche industries. We expect a 35% contribution to our group revenue,” he says.

Looking at Notion VTec’s share price performance against that of its closest peers, namely JCY and Dufu, Thoo concedes that his company was a laggard before the recent surge. At market close last Thursday, Notion VTec had a market capitalisation of RM536.7 million, lower than that of JCY (RM844.3 million) and Dufu (RM1.25 billion).

“All three of these PLCs [Notion VTec, JCY and Dufu] are machinist companies serving the HDD sector. I would say Notion is the most diversified among them,” he says.

“But yes, Notion has been underperforming over the past few years, mainly because we had to struggle on with the new investment in healthcare, and as a result we took our eyes off precision machining. We are now back in force and we should see strong stable growth going forward.”

Except for a one-for-two bonus issue of ordinary shares in 2020, Notion VTec has not paid cash dividends since FY2019. The company is currently undertaking a one-for-10 bonus issue of free warrants.

“When you are losing money, there’s simply no money to fund dividends. It has been testing times. We know the pain, so investors need to stay patient while we work hard to restore and rejuvenate the business model,” says Thoo.

At end-December last year, Notion VTec had cash in the bank amounting to RM52.24 million. According to AbsolutelyStocks data, its net cash position stood at RM16.8 million. The latest warrant exercise, assuming full conversion, is estimated to bring in additional cash of RM23 million over the next five years.

“However, very few would convert to the mother share until the tail end. Free warrants are to reward shareholders and great instruments in a rising share price environment,” he says. 

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