As a primarily Original Design Manufacturer (“ODM”), Uchi Technologies Berhad (“Uchi Tech”) Group specialises in the design, research, development and manufacturing of electronic control systems. As at 1 November 2019, the Group has a market capitalisation of approximately RM1.26 billion. In this article, we will take a closer look at the business, management and financial aspects of the Group, to see if it is worth an investment.
(Source: 2018 annual report)
Uchi Tech is an investment holding company with three 100% owned subsidiaries. These are Uchi Optoelectronic (M) Sdn Bhd (“UOM”), Uchi Electronic (M) Sdn Bhd (“UEM”) and Uchi Technologies (Dongguan) Co., Ltd (“Uchi Dongguan”). UOM is principally involved in the design, R&D and manufacturing of electronic control modules, while UEM and Uchi Dongguan are the assembly counterparts.
Operating sites at a glance:
(Source: 2018 annual report)
As an ODM, the Group prides itself in being a one-stop solutions provider offering and entire spectrum of service and solutions – from design and development right through to the delivery of the electronic control systems to its customers.
The Group’s products can be broadly segmented into three categories: Art-of-living (encompassing household and professional appliances), Biotech (for bio-technology products applications such as high-precision weighing scales, pipettes and deep freezers) and Others.
94% of its products are mainly exported to the European market, with the rest being sold in the US, Japan, China and India. Here are sample pictures of their products.
Source: Uchi Tech
Comments: Management believes Uchi Tech’s competitive strengths revolve around its R&D capabilities, as well as track record in its fast design cycle to design good electronic control modules. The Group views its customers as partners and prefers to work together to harness the strengths of both parties.
In fact, Uchi Tech has an almost “symbiotic” relationship to Jura (“Customer A”), a Swiss high-end coffee machine manufacturer. It is our understanding that Jura sources most of its internal technology and processors from Uchi Tech alone, hence the Group is able to price its products at a premium. However, as high end coffee machines are discretionary products at best, investors have to be mindful of the significant customer concentration risk, as sales to Jura comprise 78.1% and 71.0% of the Group’s revenue for FY2017 and FY2018 respectively.
Kao De Tsan (“Ted Kao”)’s interest in electronic design prompted him to establish Uchi Electronic Co. Ltd., Taiwan in 1981. He was joined by his brother, Kao Te Pei (“Edward Kao”) in 1982. Together with other partners, the two Kao brothers started off the company by designing a control module for electronic bathroom scales for their first customer, Krups. Subsequently, the company moved on to develop control modules for coffee makers. At that time, the company was also developing Switching Power Supply, a voltage converted for bar coding systems for Symbol Technologies Inc.
With their vision to “Look South”, the Kao brothers decided to set up a manufacturing base in Penang in 1989. The Group commenced operations in December 1989 at its factory in 187, Jalan Sungai Pinang, Georgetown. Subsequently, the Group shifted to Prai Industrial Estate, in 1996 when business expanded. At that time, the Group had already established a good customer base with long-standing relationships.
Today, the Kao brothers remain the two largest shareholders of Uchi Tech, holding indirect interest of 19.34% and 8.74% of the Group’s shares through their investment vehicles, Eastbow International Limited and Ironbridge Worldwide Limited.
(Source: 2018 annual report)
Comments: Both the Taiwanese founders are conservative in their approach, preferring to growth the business slowly, by targeting low single digit of revenue growth. Although both their plants have reached 80% utilization rate, management has no plans to expand capacity, choosing instead to outsource any excess production needs. Management has stressed that the Group’s policy is not to invest heavily on machine and equipment but on intellectual property.
We extracted the following list of top 10 shareholders from the Uchi Tech’s 2018 annual report (as at 20 March 2019).
The top 10 shareholders own 41.88% of Uchi Tech’s shares. To us, the presence of multiple institutional funds as shareholders is sometimes a “tell-tale” sign that a company is potentially a generous dividend payer.
Measure 1: Growth in revenue and profits
The Group has seen respectable growth in revenue of 10.04% and profit after tax of 14.53% over the past 5 years. As growth in profit after tax is slightly higher than growth in revenue, we believe that management is efficient in managing its costs.
Measure 2: Profitability
Uchi Tech’s enjoys superior net profit margins as it has effectively “locked in” its customers by constantly raising the bar of innovation to meet their requirements. In addition, return on equity ratios are well above 20% demonstrating that management is efficient in allocating and converting every dollar of investor capital into profit.
Measure 3: Liquidity
Uchi Tech has a conservatively managed balance sheet as it has recorded favourable current, cash and net gearing ratios for the past 5 years. In fact, the Group has short term deposits and cash & bank balances of approximately RM97.5 million and RM16.2 million respectively as at 31 December 2018.
Round 4: Dividends payout
The Group has been consistently paying out dividends every year, well in excess of its dividend policy to allocate at least of 70% of profits as dividends. Due to its generous dividend payout, many investors view the Group as an “income stock”.
With a closing share price of RM2.79 as at 1 November 2019, Uchi Tech is trading at a price of earnings (PE) ratio of 18.33, with an indicative yield of 5.02%. While valuations are not overly stretched, we would prefer to wait for a better price and yield, to compensate for the management’s guidance of low growth and high customer concentration risk. Nevertheless, investors looking for steady dividend distributions can place Uchi Tech on their stock watch list.
Source: Google Finance