This article first appeared in The Edge Malaysia Weekly on August 5, 2024 - August 11, 2024

QES Group Bhd (KL:QES) is set to expand its presence in the front-end wafer fabrication (fab) market, aiming to boost this segment’s contribution to more than 20% of the group’s turnover in the coming years.

Despite a slow start in the first quarter ended March 31, 2024 (1QFY2024), owing to delayed shipments, QES co-founder and managing director Chew Ne Weng expects a strong rebound in 2Q and wants it to surpass its FY2023 earnings of RM18.5 million, aiming for a figure closer to the record RM26.4 million profit of FY2022.

“Our revenue for the front-end wafer fab market contributed 17% of our group’s turnover in FY2023. We expect its contribution to increase further to at least 20% in the coming years as our top line continues to grow,” he tells The Edge in an interview.

Chew, 61, started his career in 1987 as an engineer at Cairnhill Precision Private Ltd, Singapore, before he co-founded QES in October 1991.

Headquartered at Hicom Glenmarie Industrial Park, Shah Alam, Selangor, QES operates two main divisions: distribution and manufacturing.

The group distributes analytical instruments, materials and engineering solutions, as well as inspection, test and measurement equipment. It also manufactures semiconductor inspection and measurement equipment, as well as semiconductor automated handling equipment.

QES has an order book of more than RM103 million, of which about 25% comes from the manufacturing division. Notably, equipment for the front-end wafer fab market makes up about 70% of its manufacturing order book.

Chew, who is also the major shareholder and president of QES, sees many opportunities in the front-end wafer fab segment, given that it is less competitive and provides better profit margins. “From my observation, the test and assembly (T&A) market is very competitive. We need to move up the value chain by producing equipment for the wafer fabs.”

In 2022, QES launched the wafer inspection equipment of its Automatic Optical Inspection (AOI) series, dubbed PPI 3300.

“PPI 3300 has attracted significant interest from front-end wafer fab customers and from wafer bumping processes. We have secured two orders from wafer fab customers and are working with more than 20 inquiries arising from the recently concluded Semicon SEA.

“There are not many Malaysian-listed companies manufacturing these wafer inspection AOI and therefore there is less competition. We hope we can be successful, since QES has a strong Asean presence, and we will gradually move outwards to East Asia, Europe and, possibly, the US as well,” says Chew.

He adds that the PPI 3300 platform can also be customised to meet requirements with different sensors, widening the application coverage and also reducing initial costs if some customers have simple requirements.

According to Chew, most wafer fabs in Malaysia and Singapore today are customers of QES.

“We have just secured a big European semiconductor firm with operations in Malaysia for our newly developed wafer fab equipment under the Automated Handling System (AHS) series. We expect more to come,” he says.

“If we do a good job, who knows? In the future, we may want to introduce this to wafer fabs in Europe. We believe we have the cost advantage over European equipment makers but, for now, our focus is the Asean market.”

After Malaysia and Singapore, QES may introduce its equipment to the wafer fabs in China.

“We plan to aggressively pursue the China market, as we do not have a significant market share compared to some of the Malaysian-listed automated test equipment (ATE) companies,” he says.

While Chew believes the China market will experience strong growth from FY2025, he says QES needs to be mindful that Chinese equipment makers have also been aggressively venturing out of the country in the past few years. “We will continuously look for collaboration with suitable Chinese companies that can work closely with QES to penetrate the wafer fab market segment in China.”

Apart from the PPI wafer inspection AOI, QES has also launched new products such as automated wafer stockers, wafer sorters and advanced metrology systems for wafer bumping and advanced packaging metrology requirements.

The annual capacity at the group’s Glenmarie plant is 50 to 60 pieces of equipment and it is running close to 90% loading now, based on space availability and engineering man hours.

Although QES has a significant presence in the T&A segment, Chew says the group had decided to move up the value chain by allocating more research and development resources to develop equipment for the front-end wafer fabrication market.

“We can confidently state that QES is one of the few local Malaysian ATE companies that manufacture equipment for wafer fabrication customers.

“We are also developing automated metrology equipment for advanced packaging processes and hope to capture market share, competing with established US companies because of lower cost of ownership and flexible configuration,” he says.

QES saw its earnings decline 30% year on year (y-o-y) to RM18.5 million in FY2023, down from a record profit of RM26.4 million.

In 1QFY2024, the company’s net profit fell 47% y-o-y to RM2.5 million, from RM4.7 million. As at end-March this year, its cash and cash equivalents stood at RM71.7 million, versus total debts of RM39.4 million.

“Our 1QFY2024 profit was quite low because of delayed shipments, but we remain confident that we could still see bottom-line growth for the full year. We should be able to see a strong rebound in our 2QFY2024 results.

“Hopefully, our FY2024 earnings will do better than FY2023’s RM18.5 million and [be] at least closer to our record profit of RM26.4 million in FY2022,” he says.

Chew is the largest shareholder of QES, with a 30.12% stake, of which 26.13% is held through his private vehicle WA Capital Sdn Bhd. Its second-largest shareholder is QES executive director Liew Soo Keang, who has a 22.87% direct stake.

According to QES’ 2023 annual report, its top 30 shareholders include Eastspring funds, TA Islamic Fund and low-profile investor Chee Sai Mun.

With a large equipment installed base of more than 8,000 active pieces of equipment, Chew says, QES could generate recurring income of more than RM55 million yearly through parts replacement and service maintenance contracts.

“With both stable recurring income and distribution revenue as our base, we can gradually build QES’ manufacturing capacity and capability over the next three to five years with minimal risks. The semiconductor market segment is projected to grow significantly better in FY2025 and FY2026,” he says.

So far this year, shares in Main Market-listed QES have gained 18 sen, or 34%, to settle at 68 sen apiece last Thursday (Aug 1), giving it a market capitalisation of RM571.39 million. The counter is currently trading at a historical price-earnings ratio (PER) of 35 times.

In comparison, ViTrox Corp Bhd (KL:VITROX) is trading at a PER of more than 70 times, whereas Pentamaster Corp Bhd (KL:PENTA) and TT Vision Holdings Bhd (KL:TTVHB) are trading at a PER of about 40 times.

“I usually don’t comment on QES’ stock price performance. We focus only on delivering good sets of financial results and I believe the share price will reflect accordingly. In the next few years, we are confident but cautious about delivering and meeting our internal target of 15% CAGR (compound annual growth rate),” says Chew.

In line with sustainability reporting requirements, he adds, QES is working towards net-zero carbon. The group has installed a sizeable solar roof on its Glenmarie building, along with a rain water harvesting system to reduce the use of water, and also digitalised almost all its internal processes, thus reducing the use of paper.

“Even our company vehicle will be at least hybrid plug-in or full electric vehicle to further reduce carbon emission,” he says. 

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