Can Vitrox Corporation Bhd Keep On Winning?

Listed in 2004, Vitrox Corporation Bhd (Vitrox) has emerged as one of the most rapidly growing technology corporations in Malaysia. It is involved in designing, manufacturing, and exporting automated vision inspection equipment and also system-on-chip embedded electronic devices to over 300+ clients worldwide in the semiconductor and the electronic packaging industries.

Presently, Vitrox is valued at RM 3.15 billion in market capitalization. It is based on current stock price of RM 6.69 a share as at 2 February 2019. In this article, I would bring an update on its latest financial results and evaluate its investment potential with a handful of valuation tools.

Thus, here are 13 things to know about Vitrox before you invest.

1. Core Business Units
   Vitrox has four core business units. They include:
   
   – Machine Vision System – Standard (MVS-S)
   – Machine Vision System – Tray Based (MVS-T)
   – Automated Based Inspection (ABI)
   – Electronics Communication System (ECS)
   
   
   These products are designed to identify, diagnose, and prevent defects creation in manufacturing lines for both semiconductor and electronics industries with great speed and accuracy.
   
   
   
2. Major Shareholders
   Vitrox is founded by 3 major shareholders namely,
   
   – Chu Jenn Weng (Chu): 27.01%
   – Siaw Kok Tong (Siaw): 19.17%
   – Yeoh Shih Hoong (Yeoh): 10.29%
   
   
   They remain highly active in the management of Vitrox. Chu is serving as its Managing Director. Both Siaw and Yeoh are serving as Executive Directors of the company. Hence, they would remain influential to the direction and performance of Vitrox in the future.
   
   
   
3. Research & Development (R&D), Key to Vitrox’s Long-Term Growth
   Vitrox recognises that rapid and continuous development to its existing product offerings is critical to its long-term success. Hence, it increased its R&D expenditures to further grow its engineering team over the last 10 years, up from RM 3.6 million in 2008 to RM 40.2 million in 2017. Its proportion of R&D expenditures to total revenues had been kept about 10% – 15% per annum during the 10-year period.
   
   
   

Source: Vitrox’s Annual Report 2017

1. Key Markets
   In 2017, 75% of its total revenues are contributed from export sales. Its major export markets include China, Taiwan and the United States. The three countries have also served as key drivers of growth to Vitrox over the last 8 years. Their contribution to Vitrox’s total sales are as follows:
   
   
   
   

No.	Key Markets	Sales 2017 (RM ‘000)	Sales 2017 (%)
1	Malaysia	81,729	25.0%
2	China	84,728	25.9%
3	Taiwan	22,344	6.8%
4	United States	53,998	16.5%
5	Other Markets	84,689	25.8%
Total Revenues	327,489	100.0%

Source: Vitrox’s Annual Report 2017

1. Profitability
   Vitrox has achieved rapid growth in both sales and profits over the past 10 years. Revenues have increased from RM 26.4 million in 2008 to RM 327.5 million in 2017. It is contributed by continuous innovations made to its existing products and rapid increase in revenue from key markets as stated above. This has resulted in shareholders’ earnings, rising from RM 8.3 million in 2008 to RM 83.0 million in 2017, a CAGR of 29.1% per annum for the last 10 years.
   
   
   

Source: Vitrox’s Annual Reports

1. Return on Equity (ROE)
   Vitrox has generated a 10-Year ROE average of 22.07% per annum. This means, Vitrox has made, on average, RM 22.07 in annual earnings from every RM 100 in shareholders’ equity from 2008 to 2017.
   
   
   

1. Cash Flow Management
   From 2008 to 2017, Vitrox has generated RM 253.0 million in operating cash flows and has raised RM 70.2 million in net equities and long-term borrowings. Out of which, it has incurred the following expenses:  
   
   – RM 145.5 million on Capital Expenditures.
   – RM 72.5 million in Dividends to its Existing Shareholders.
   
   
   Vitrox had grown its cash reserves from RM 28.8 million in 2008 to RM 150.6 million in 2017. Thus, it indicates that Vitrox has been efficient in generating cash flows and investing them for greater profits for the last 10 years.
   
   
   

Source: Vitrox’s Annual Reports

1. Latest Happenings in 2018
   FY 2018 has been eventful for Vitrox. The following is a list of its recent happenings:
   
   a. Vitrox Campus 2.0
   On 5 July 2018, Vitrox has moved into Vitrox Campus 2.0, a new facility measuring 400,000 sq. ft. at the Batu Kawan Industrial Park, Penang.
   
   
   b. Expand Sales Channel to Canada
   Vitrox has appointed Integrated Alliance Inc as a Sales Channel Partner (SCP) of Advanced Optical Inspection System (AOI), Advanced 3D X-Ray Inspection System and Advanced 3D Solder Paste Inspection System in Canada with effect on 26 July 2018.
   
   c. Expand Sales Channel to Turkey
   Vitrox has appointed KMC Grup as a SCP of V510i AOI, V810i AXI and as well as V310i SPI in markets such as Turkey, Saudi Arabia, Algeria, Iran, Morocco, and Tunisia.
   
   
   
2. Latest 12-Months Financial Results
   Over the last 12 months, Vitrox made RM 380.0 million in revenue and RM 96.7 million in shareholders’ earnings, or RM 0.206 in earnings per share (EPS). As at 30 September 2018, Vitrox has reported to have RM 58.0 million in non-current liabilities and thus, having a gearing ratio of 14.8%. It has a current ratio of 3.95 with a cash balance amounting RM 134.6 million presently. As such, Vitrox remains highly profitable and a company with a solid balance sheet.
   
   
   

Period	Revenue (RM ‘000)	Earnings (RM ‘000)	EPS (Sen)
Q4 2017	95,893	20,698	4.40
Q1 2018	77,312	20,260	4.31
Q2 2018	105,020	27,757	5.90
Q3 2018	101,770	28,021	5.96
Total	379,995	96,736	20.57

Source: Vitrox’s Quarterly Reports

1. P/E Ratio
   Vitrox is trading at RM 6.69 a share. Thus, its current P/E Ratio is 32.52, near its highest over the last 10 years.
   
   
   

1. PEG Ratio
   At Point 5, I learnt that Vitrox had grown its earnings at CAGR of 29.1% a year. Thus, its PEG Ratio is 1.12, indicating that it is overvalued as the ratio is above 1.0 based on the PEG Ratio formula.
   
   Note:
   PEG Ratio = Current P/E Ratio / Earnings Growth Rate
   
   
   
2. P/B Ratio
   As at 30 September 2018, Vitrox has net assets of RM 0.835 a share. As such, its P/B Ratio is 8.01, which is close to its 10-Year Highest.
   
   
   

1. Dividend Yield
   In 2017, Vitrox has paid out 4.5 sen in dividends per share (DPS). Thus, its dividend yield is 0.67%, way below 3.0% in interest rates granted by local fixed deposits accounts presently.
   
   
   

VIA’s Verdict

Source: Google Finance

Evidently, Vitrox has delivered impressive sets of financial results over the past 10 years. Vitrox’s stock price had outgrown its growth in profits, thus, resulting in continuous rise in P/E Ratio and P/B Ratio and ongoing drop in dividend yield over time. This shows that its stock price has become less attractively valued as compared to stock prices in the past when it was much lower.

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