Memtech International is a leading component solutions provider for the mobile phone, consumer digital and automotive industries. Over the recent years, we see the company transforming itself to better suit the changing environment of the technological sector. As of late, the company has two business divisions – keypads and plastics divisions, with major clients from both the mobile communications and automotive industry (e.g. Lenovo, Huawei, Alcatel, GM, VW and Tesla). The company has shut down its loss making touch screen division after the fire incident in 2012.
In this analysis, all figures are in USD and data from FY2004 to FY2007 were obtained from company’s website and not cross-referenced with the annual report. Through research, some of Memtech’s competitors would be Scintronix Corporation, Juken Technology and Fischer Tech all listed on SGX (Juken Technology was delisted in 2012, Scintronix Corporation is in the midst of getting delisted).
Looking at Memtech’s earnings, we would see how volatile and inconsistent it is, and may immediately strike it out of our consideration. However, to get a better feel of these numbers, we have to understand how the business has been transforming over the years. First off, the huge decline of 48.3% and 95.9% in gross profit margins and net profit margins (NPM) respectively in FY2007 was due to the Global Financial Crisis. During this period, there was much weaker demand during the last two quarters of 2008, resulting in lower selling prices, increases in raw material cost and sales & marketing expenses. Following that, as we see the economy improving, margins begin improving in tandem. Despite markets recovering in FY2011, the blip in NPM was attributable to exchange rate losses.
Subsequently, in the technological sector, 2012 was a year we see increase dominance of the smart phones. If I were to remember correctly, 2012 was the year I witness an increasing number of people around me carrying iPhones. Before, that it was still the good old days of using the indestructible Nokia phones (I remembered using the N95, which to date I still have and it is still workingJ). That aside, to put some figures to this, the global market for mobile phones grew 1.2% on shipments of more than 1.7bn units shipped, of which 712.6mn were smart phones, indicating an increase of 44.1% compared to 2011. Memtech recognizing this trend, made the strategic decision to switch their manufacturing capabilities from that of resistive to capacitive touch screens in 2011 (pretty technical here, however in layman terms, before the touch screens we are so used today, touch screens back then weren’t that smooth scrolling).
Therefore, in FY2012, we see margins declining due to the lower demand for mobile phone keypads (Memtech’s main division). Another point to note would be before FY2013, Memtech never supplied to the automotive and consumer digital sectors but only to the mobile communications sectors. Hence, with the growth in smart phones, we see a huge decline in demand for keypads in the mobile communications sector. We observe revenue contracting by 38.2% and that accounted for two-thirds of their total revenue, showing how the keypad division is Memtech’s main business segment. With regards to the plastics division, it was growing steadily, reporting a 9.5% growth in revenue and 33% rise in net profits. Due to operational issues, the touch screen division reported net losses. While I am no expert in this area, my observation is that Memtech did not have the expertise within this business segment. Given a fire incident in the touch screen factory, management decided to shut down this loss making division. In some ways, this fire might have been a fortunate event for the company and shareholders alike.
In FY2013, with management diversifying their clientele, making inroads to the automotive, industrials & medical and consumer digital products, we see a huge improvement in gross profits. However, in that year, we still net losses due to exchange rate differences. It is my view that management has been pretty successful in this regard, having just started venturing into the automotive industry and been able to bag major clients like GM, VW and Tesla. Furthermore, the increase in gross profits was partially due to their restructuring efforts in FY2012 of their Huzhou operations. Management initiated a restructuring exercise of their keypad division production facilities, transferring their operations in Huzhou to the Dongguan and Nantong plants, consolidating group’s total production capabilities.
Going forward, we see in their 1Q2014 results, revenue was up 30.9%, gross profits up a whopping 292.6% and the company has reported a net profit. Revenue has been up mainly due to the automotive sector resulting in increase in sales figures and the company now offering a better product mix.
Overall, I would say given how volatile the mobile communications is, it has resulted in the volatility in the company’s earnings. However, given how the management has started to get a mix of industries such as exposing themselves to the automotives, consumer digitals and industrials & medical sectors, we should be able to see less of this. However, the major concern for me would be exchange rate differences, as this alone seems to be able to affect the company’s overall profitability.
Comparing Memtech to her competitors, one would observe that in this industry, how inconsistent the gross profit and net profit margins are. While to better understand why the margins are changing every year, we would have to understand how the business has been evolving every year, I did not conduct studies with regards to this.
Some common trends we can observe would be that during the Global Financial Crisis, none of the companies were spared from the decline in demand. However, Memtech fared much better where their decrease in net profits was much lesser. In FY2012, where there was a huge change in demand and increase in raw materials costs, none of the companies were prepared for this, resulting in their net profits decreasing. In this aspect, I would say Memtech fared much better again, due to the smaller decline in net profits and Scintronix Corp having started to discontinue most of their operations. In terms of margins, it can be seen how small the margins are within this industry and is not just something Memtech faces.
Something that Memtech is better than the other companies would be how Fischer Tech and Scintronix faced more than 2 years of negative net profits.
(II) Balance Sheet & Cash Flows:
As we can see, the company’s cash levels have been constantly fluctuating given the inconsistency in company’s profitability. However, a good point to note would be that management has been paying down their debts over the years, though they did take