Friday, 6 May 2016

JHM Consolidation (3) - Right Smack In The Middle of Industry Sweet Spot

Publish date: Sat, 16 Jan 2016, 02:43 PM 

(This is boring....)

(This is cool... To understand why, please read on....)

1. Introduction

JHM first attracted my attention because of its past three quarters good profit. When I wrote Part 1, I knew very little about the company. All the information I have was from public documents.

Forum member Ven Felix later on referred an article posted on The Sun in 2014 to me. Based on the new information, I wrote Part 2 to discuss the group's capex programme and growth plan.

I later learned from Ven Felix that another PLC, D&O Green Technologies Bhd's automotive LED division is doing well.

Based on that lead, I Googled for more information and found something interesting that greatly enhances my understanding of JHM and its market position.

That is how I decided to write Part 3.

2. Automotive LED - The Super Star of LED

In JHM's annual report, the subsidiary (wholly owned) that is involved in Light Emitting Diodes (LED) manufacturing is called Jingheng Electronic Precision Technology Sdn Bhd. The annual report describes it as "Original design manufacturer of High Brightness LED components". This subsidiary is the star performer, it is responsible for the group's recent turn around.

Ok.... "High Brightness"... I can tell from the description that their LEDs produce strong, bright light. But other than that, I can't feel any other thing else (can't smell the money).  

As mentioned above, I learned from D&O's quarterly report that its automotive LED division is doing well. Curious, I decided to Google for "automotive LED demand". A few articles turned up. As I moved my mouse down the paragraphs, the smell of money began to come out.

It seemed that among the so many type of LEDs, the automotive LED segment has the best prospects.

When come to automotives, there are actually two types of LEDs.

One type is the Interior LEDs, which are used for lighting up the dashboard and other interior compartments.

The other type is Exterior LEDs, which are used for shining the road. THIS is the type of LEDs that is facing strong demand worldwide and command high profit margin.         

What is the main feature of Exterior LEDs ? High Brightness !!!

That is exactly what JHM is involved in !!!

Now we know why JHM is profitable when other LED related manufacturers such as MMSV are not doing so well. 

After that Eureka moment, I suddenly realised why the group is investing RM25 mil to set up a production facility in Sungai Petani (please refer to Part 2). According to the Sun Article, "the plant is to cater to rising demand" and "the company was currently in talks with car makers from the US and that prospects for the future were positive".

JHM is investing in a new plant to tap into the fast growing automotive Exterior LEDs segment !!!  

3. Information From The Relevant Articles

I have extracted some important points from an article dated 23 December 2015 by industry expert, LEDinside, for your consumption :-

(a) LED manufacturers are branching into the niche application markets as the competition in their industry expands. Currently, entering the automotive LED market is regarded as a blue ocean strategy because the market has relatively few contestants and allows for higher pricing. 

(b) According to latest research, the worldwide market value of exterior automotive LEDs for 2015 is expected to reach US$1.21 billion. This figure is projected reach US$2.29 billion in 2020, translating to a compound annual growth rate (CAGR) of 8% during the 2015~2020 period. 

(c) Additionally, the market value of standard-power LEDs is gradually declining in contrast to the rapidly rising market value of high-power LEDs. In the future, automotive LED application will take off in the high-power LED market.

(d) Exterior automotive include directional signals, fog lights, headlights (high/low beams) and position lights. The volume of high-power LEDs used for this application has been growing each year. The annual volume increases have also beaten the annual declines in high-power LED prices, thus helping to drive the market value of exterior automotive LEDs to grow at a CAGR of over 8% from 2015 through 2020. The penetration of LED products in the exterior automotive market is currently less than 15%, so the growth potential is huge. High/low beam LEDs in particular will see the highest growth in market value, with CAGR reaching 11% during the 2015~2020 period.

(e) The total LED volume used in the exterior automotive application worldwide has reached 2.79 billion pieces this year and will grow to 3.67 billion pieces in 2020. From 2015 through 2020, the LED volume used in headlights and position lights will grow by a CAGR of over 15%. During the same forecast period, high/low beam LEDs will have the highest CAGR, reaching 23%.

(f) As for interior automotive LEDs, most products on the market still use standard-power LEDs. With the average sales prices of standard-power LEDs in a tailspin, the worldwide market value of interior automotive LEDs is expected to suffer negative growth in the next five years. LEDinside estimates that the market value will reach US$605 million this year but will later drop to US$603 million by 2020.
To read the full article, please click on the link below

In an older article written by LEDinside, I pick up another piece of interesting information. 

"automotive-use LED certification periods are long and the entry barrier for entering the supply chain is high"

It seemed that automotive LEDs is not an industry that anybody can enter as he wishes. You need to be properly certified.

4. Concluding Remarks

(a) Certain readers used to question the motive behind my article series. One speculated that I must have been trapped in the stocks and I need to promote them to offload. I would like to clarify that this is not the case.

I like to write additional articles when I discover new information. It is to slowly build up knoweldge of the companies, one piece at a time. Better understanding leads to better decision making in the future, as simple as that.  

(b) Please do not have the impression that the more articles I wrote, the safer it is for you to invest in the stock. My experience so far is mixed. I studied and wrote about Thong Guan extensively, it turned out to be a super star. However, GOB and Johotin disappointed. Gadang so far is doing ok.

There is no direct correlation between the number of articles I wrote and the performance of the stocks. As an arm chair analyst, I face limitation on how accurate my view of the future can be.

(c) Despite the latest set of positive information, I wouldn't recommend you to jump big time into this stock. My personal feeling is still 50% 50%. The overall theme looked interesting, but we need to wait for more details (we can't even tell for sure whether the RM25 mil capex is still on).

No need to rush in. I suggest you keep this stock in your watchlist. Afterall, market sentiment is bad.      

Take it easy.


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