This article first appeared in The Edge Malaysia Weekly on August 12, 2024 - August 18, 2024

IN an interview in March, Cape EMS Bhd (KL:CEB) group CEO and managing director Christina Tee Kim Chin told The Edge that the group needed to work hard to deliver strong financial results in an effort to regain investor confidence. She pointed out that the company was relatively new to the corporate world and the management team needed to better manage market expectations.

Five months on, investors seem to have lost even more confidence in Cape EMS, looking at the hammering of its share price recently. Some say it was one of the worst selldowns seen by Bursa Malaysia-listed electronics manufacturing services (EMS) companies since that of ATA IMS Bhd (KL:ATAIMS) following its termination by Dyson Ltd in 2021.

Cape EMS’ share price plunged 46% from 97 sen on July 24 to an all-time low of 34.5 sen last week before bouncing back to 52 sen on Friday, resulting in RM441 million of the company’s market capitalisation being wiped off.

Over the past two weeks, the Main Market-listed company has found itself under intense scrutiny from investors, analysts and the wider business community. The Johor-based EMS provider is facing mounting concerns about its operational credibility and financial health.

As for Tee, she has sold more than two-thirds of her shareholding, reducing her equity interest to about 11% from around 38% previously. As a result of her selling spree, the investing community realised that she had pledged all of her shares with a list of securities firms.

The share price movements would have had a significant impact on Tee’s holdings given that all of her shares had been pledged. Conversely, any positive news that drives the share price higher would be a boon for those who pledge their shares for loans.

Market sources tell The Edge that one of the central issues plaguing Cape EMS is the perception of financial misguidance. The company, whose market capitalisation now stands at RM515.8 million, initially provided optimistic profit guidance that set high expectations among investors and analysts.

However, it appears that the company recently admitted to a certain group of investors that its upcoming financial results for the second quarter ended June 30 (2QFY2024) may fall short of expectations. This discrepancy led to accusations that its management may have misled stakeholders about the company’s financial performance.

“Cape EMS revised down its earnings guidance after our meetings just two weeks ago. Management’s inconsistent guidance caused the share price to tumble,” says an industry source.

It is learnt that Cape EMS’ initial revenue guidance was about RM700 million, but it was later revised to RM650 million after an operational review. Meanwhile, its net margin guidance has been adjusted down to 7% amid higher operational and administrative costs.

“The second quarter is expected to be weaker compared with the previous one due to a breakdown of a chiller, higher freight costs and chip shortages. Overall, the FY2024 revised earnings forecast of RM45 million to RM46 million will be flat year on year, against the consensus of RM74 million. But the question remains: Could this be revised again?” says the industry source.

Another market source concurs that the root of the problem seems to lie in Cape EMS’ ability to accurately forecast its performance in a volatile market. As a result, some fund managers and research analysts are questioning the credibility of its management.

It is estimated that before the recent selldown, institutional investors collectively controlled about 33% of Cape EMS, while retail investors held 18%. Simply put, the selling pressure on the company is expected to be substantial if fund managers begin offloading their shares.

Tee had not responded to The Edge’s queries at press time.

In what may be her latest public statement on July 26, she told The Edge that she acknowledged the selling pressure on the company’s shares and noted that rising costs could impact its FY2024 profit growth. Nevertheless, she emphasised that the company’s profit margin remained strong and expressed confidence in its continued revenue growth in FY2024 and FY2025, driven by demand from customers in high-growth sectors like green energy and data centres.

Since then, Cape EMS has done little to assuage the concerns of the investing community, who are increasingly wary of its future prospects. Adding to the company’s woes is criticism related to its production facilities in Johor.

Headquartered in Senai, the company specialises in EMS, contract electronics manufacturing, box builds, full turnkey projects and total supply chain management. It also has factories in Tebrau and Kempas in Johor, as well as a testing facility in Singapore.

Analysts and fund managers who have visited the plant have raised doubts about its status as a full-fledged EMS facility. Some have described it as a low-value-added operation, more like a basic contract manufacturing setup than a sophisticated EMS provider, as some might have thought.

Furthermore, there have been allegations that Cape EMS has outsourced a portion of its manufacturing activities to Chinese firms, which — if true — could undermine its claims of being a comprehensive EMS provider.

Cape EMS manufactures consumer products such as electronic cigarettes and vacuum cleaners, wireless connectivity transmission products, smart utility data collection equipment and industrial products like packaging tracking devices.

The company was listed in March 2023 following an initial public offering of 90 sen per share, raising RM155.7 million in the process. In mid-December 2023, it raised another RM73.83 million by placing out 69 million shares at RM1.07 apiece to fund its US$16.5 million acquisition of US-based EMS firm iConn Inc.

However, the acquisition has not yielded the expected results and there is growing speculation that Cape EMS may need to write off its investment in iConn.

The deal came with a profit guarantee of US$8 million for three years, from 2024 to 2026. However, Cape EMS booked goodwill on the acquisition amounting to RM79.45 million in the first quarter ended March 31, 2024, as iConn’s net liabilities stood at RM5.28 million.

The recent share sales by Cape EMS’ key executives did not help matters at all. The 57-year-old Tee, who founded the company in 2013, has been selling her shares as the stock price went spiralling down.

The sell-off has triggered concerns among investors, leading to speculation about the rationale behind it. Some fear that the share sales may indicate a lack of confidence in the company’s prospects, while others say it may be linked to personal financial pressures.

Further complicating the situation is the revelation that Tee had pledged her shares to multiple margin accounts. This led to concerns that the sharp decline in Cape EMS’ stock price could be attributed to margin calls which forced a further sell-off.

Tee’s overleveraging is seen as a significant risk factor. Apart from downward pressure on the share price that might be caused by margin calls, it also raises uncertainty over the company’s shareholding and management, given that she is the largest shareholder and helms the company.

Before the selldown, Tee held some 38% equity interest. Her shareholding had been pared to 11.16% on Aug 8 when she was still offloading shares.

Interestingly, the Employees Provident Fund (EPF) emerged as a substantial shareholder of Cape EMS after the selldown. The provident fund bought 3.5 million more shares, pushing its stake in the company to above 5%. Some quarters believe this may be a strategic move on the part of EPF, given that the company’s net assets per share is 47 sen.

At this point, apart from EPF, no other new substantial shareholders have emerged at Cape EMS. As it stands, Tee remains the single largest shareholder of the company and is expected to continue running the show — unless and until a new major shareholder comes into the picture.

Like it or not, the market’s confidence in Cape EMS has been shaken and it will take more than mere reassurances to restore faith among investors and analysts.

The company will release the financial results for its second quarter by the end of this month. The announcement will be closely watched as it could be the management’s one opportunity to convince the investing public that its prospects remain intact. 

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