Why You Should Add Uchi Technologies Berhad Into Your Watchlist BUT…
December 4, 2019
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
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
(Source: 2018 annual
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.
An accountant by training, F.I.R.E 2030 is a student of value investing since 2012. She believes that successful investing requires discipline and patience. But with the right knowledge and temperament, ordinary investors can achieve extraordinary results. These articles are her journals on stocks and the investing journey toward financial freedom in 2030.