The Master of Hard Disk: Dufu Technology Corp. Berhad

Dufu Technology Corp. Berhad (Dufu) (KLSE:DUFU) specialises in the manufacturing of precision machining parts and components for the Hard Disk Drive (HDD), industrial safety and sensor, telecommunications, computer and consumer electronics industries. 

Since its listing in 2007, the stock has been a multi-bagger for its investors, its share price has grown over 1,100% in value. In this article, we will take a closer look at Dufu’s business profile, management, and financials, to assess whether the company is suitable for an investment now. 

Business overview

Dufu group is made up of seven entities. The listed entity is principally involved in investment holding while the principal activities of its six subsidiaries are as follows: 

(Source: 2019 annual report)

The group manufactures the following products:

Market Segment	Product
HDD components	Spacer
Clamp and spring washer
Circular latch
Swage pin
Ground pin
Extreme coil pin
Hexagon nut
Industrial safety and sensor components	Heat and gas sensor housing
Infra-red sensor housing
Sensor terminal pins
Sensor cap
Lead frame
Telecommunication components	Battery connector
Balance weight
Computer peripheral components	Contact solder
Consumer electronics components	Mounting bar
	Reflection plate
	Back cab
	Chassis
	Heat sink
	Bracket
Others	Terminal (Automotive)
Shunt resistor (Automotive)

(Source: IPO prospectus)

More than 75% of Dufu’s revenue comes from the HDD segment where the group has established long term business relationships with its major customers such as Seagate Technology International (Singapore), Seagate Technology (Thailand) Ltd, Western Digital (M) Sdn Bhd, Western Digital (Thailand) Ltd and MMI Holdings Ltd. In fact, two of its major customers (unnamed) contributed 61.53% and 67.44% of the group’s revenue in 2018 and 2019 respectively. 

	2019 RM	2018 RM
Customer I	122,621,649	114,207,846
Customer II	45,393,505	34,323,740
	168,015,154	148,531,586
Group revenue	249,122,579	241,451,305
% of group revenue	67.44%	61.53%

(Source: 2019 annual report)

Dufu derives most of its revenue from abroad, 95% of which is denominated in US dollars (USD) while the bulk of the group’s expenses are paid in the respective local currencies where it operates. Therefore, the gradual strengthening of USD versus the Ringgit is a favourable trend and should give the group a lift in its operating margins. 

	2019 RM	2018 RM
Malaysia	18,187,477	22,967,833
China	41,050,764	39,498,571
Singapore	19,022,641	19,470,894
Thailand	142,599,974	127,535,840
Other countries	28,261,723	31,978,167
Total	249,122,579	241,451,305

(Source: 2019 annual report)

Industry players and market position

HDD manufacturers source HDD components from a handful of suppliers only. They are stringent in their selection of component and parts suppliers as quality, reliability and delivery time are crucial in this competitive market. The production volume allocation for the component or part is determined on a quarterly basis. Quality and cost are two primary determinants for an increase in production allocation for a given quarter from its existing qualified suppliers.

The closest competitors to Dufu for the supply of HDD disk spaces and clamps to Seagate and Western Digital are seen as:

• Disk Precision Industries Pte Ltd (DP), Singapore and Global Primax, China (for Seagate); and
• DP and Notion VTec Berhad (KLSE:NOTION) (for Western Digital).

To the best of knowledge of its directors, the group estimates that it is one of the top suppliers of HDD disk spacers and has a 20-30% market share globally. 

Future prospects and strategies

Dufu’s prospects are very much tied to the HDD industry. International Data Corporation (IDC), in its Data Age 2025 report, predicts that worldwide data creation will grow to an enormous 163 zettabytes (ZB) by 2025, which is 10x the amount of data produced in 2017, where hard drives will be central in managing 70% of the data-sphere. 

Internet of Things (IoT), real-time data, cognitive artificial intelligence (AI) systems, increased security data requirements, and big data analytics are among the key trends that should result in strong demand for high capacity HDDs. Therefore, Dufu, which manufacturers HDD-related components, is set to ride on this increasing demand. 

Despite the positive projections in HDD, Dufu acknowledges that it faces significant business and customer concentration risks. The group intends to diversify its product portfolio and penetrate into the automotive segment following its International Automotive Task Force (IATF) 16949:2016 certification on 15 April 2019. While discussions are in progress for its automotive products, this segment is still at a very nascent stage to contribute positively to the group’s top-line growth.  

Major shareholders and leaders

Dufu’s largest shareholder is Mr. Lee Hui-Ta (also known as Li Hui Ta) with a direct and indirect equity stake of 20.67%. Ms. Wang Kuei-Hua is Mr. Lee Hui-Ta’s spouse. Mr. Lee Hui-Ta is the Executive Chairman and Co-founder of the group and has more than 28 years of experience in precision tooling and precision machining. 

(Source: 2019 annual report)

Key senior management personnel include Mr. Wu Mao-Yuan who serves as Executive Director since 2015. Mr. Wu is also the Managing Director of Guangzhou Futron Technology Co. Ltd, a subsidiary of the group. He owns an equity stake of 3.42% in Dufu. 

Separately, Mr. Yeoh Beng Hooi is the Chief Executive Officer (CEO) since 2015, after serving as Chief Operating Officer (COO) since 2004. He has a 0.02% equity stake in the group.

(Source: 2019 annual report)

Financials  

Measure 1: Growth in revenue and profits

Dufu has achieved growth in revenue and profits at compounded annual growth rates (CAGR) of 12.87% and 47.84% from 2014 to 2019. These are commendable growth rates. 

Measure 2: Profitability

Dufu’s net profit margins have tripled from 6.3% in 2014 to 20.7% in 2019. Meanwhile, the group’s return on equity ratios has improved substantially over the same period from 4.6% in 2014 to 17.9% in 2019. 

Measure 3: Liquidity

Dufu’s current and cash ratios are at healthy levels. The group also does not have gearing issues as it is in a net cash position. As at 31 December 2019, Dufu has cash and cash equivalents of RM43.5 million versus total borrowings of RM17.5 million.

Round 4: Dividends payout

Dufu has rewarded shareholders with increasing dividend per share in line with increasing profits. In recent years 2017 – 2019, the dividend payout ratio has been above 40% of profits. 

Conclusion

With a closing share price of RM7.19 as at 21 July 2020, Dufu is trading at a price to earnings (PE) ratio of 34, with a market capitalisation of RM1.9 billion. 

Dufu’s operations were affected in Q1-Q2 2020 as its plants in China and Malaysia were temporarily shut down due to the preventive measures towards the Covid-19 pandemic. Both plants have subsequently recovered back to full workforce but the group remains cautious of potential supply chain disruption risks since the scale and length of the pandemic remains unresolved. 

Over the long term, Dufu’s growth is underpinned by higher demand for storage solutions given the huge growth in data consumption as well as technological advancements in increasing the number of components within an HDD platform. Investors with knowledge and expertise in this area could find Dufu of interest.   

(Source: Google Finance)

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