JHM Consolidation (4) - High Brightness LED For Architectural Lighting

Publish date: Mon, 18 Jan 2016, 12:01 PM 

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I tried to dig out more information about High Brightness LEDs (HB LEDs). According to this 14 January 2016 article, HB LEDs are increasingly being used for architectural lighting. I don't know whether JHM is involved in this segment. However, it is good to know more about the industry.

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14 January 2016

LED (light emitting diodes) lighting solutions are among the most exciting technological innovations of the recent past. The extremely long lasting (an average of 60,000 hours life span) and energy efficient (90% more efficient than incandescent, neon and compact fluorescent lights) LED lights are rapidly becoming the preferred lighting solution for a large number of general lighting applications. LED lights are also known to develop nearly 90% less heat as compared to incandescent light bulbs. Thus, LED lights, by extending the time between lighting replacement, generating less heat, and consuming less power, lower the overall cost of lighting of any installation.

These factors, coupled with the mounting demand for energy- and cost-efficient lighting systems from buildings and communities, is fuelling the demand for LED lights. For architectural projects, high brightness and small form factor of LED lights, along with the endless array of colors in which LED lights are available in the market make LEDs the perfect solution.

Owing to this set of benefits of LED lights, their demand has continued to rise at a significant pace across many industries in the past few years. So much so that LEDs have led to an almost complete phase-out of incandescent light bulbs. A majority of the new architectural projects employ different kinds of LED lights for a variety of applications.

Government Intervention and Phasing-out of Incandescent Lights Increase Adoption of LEDs

A recent market research report published by Persistence Market Research states that the global architectural LED market will expand at an exceptional 17.9% CAGR between 2015 and 2021. The market, which had a valuation of US$3,421.2 mn in 2014, is expected to rise to US$10,751.1 mn by 2021. Volume-wise, the architectural sector consumed nearly 25.5 million LED light products in 2014.

Along with the numerous benefits of LED lights, government interventions legally banning the use of incandescent lights across many regions have also led to an increased demand for LED lights in the architectural sector. Governments in countries like Thailand, China, Brazil, and the U.S. have introduced regulations that are encouraging construction companies to deploy LED lighting systems in their new projects, driving the growth of the global LED products market.

Competitive Pricing Model and Frequent Innovations in Technologies Make Competition Tough in Global Architectural LED Market

The market for architectural LEDs features a large number of market participants active across numerous product segments. Leading companies are heavily investing in research and development activities to innovate advanced LED lighting solutions that would cater to the specific demands of distinct lighting requirements in the architectural segment. The market is also highly competitive owing to the low-cost and high-life of LEDs. If the past few years, especially, after cost-competitive LED lights started entering the market, the market has witnessed a rapid expansion. The market, thus, features a highly competitive cost model, which could become more intense over the course of time.

Some of the prominent companies in the global architectural LED market are Cooper Industries PLC (Eaton Corporation), Epistar Corporation, Verbatim Ltd., GE Lighting Solutions, Osram Lict AG, Philips Lumileds Lighting Company, Toshiba Lighting & Technology Corporation, Samsung Electronics Co., Ltd., Galaxia Electronics Co. Ltd., and Cree, Inc.

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In Part 3, I discussed the exciting propsects of Automotive HB LEDs. However, according to this Digitimes article dated 12 January 2016, automotives only account for 5% of HB LEDs demand. I interprete this information positively - apart from the exciting prospects of automotive LEDs, there are many many other usage for HB LEDs. The potential is mind boggling.

Just like the products it manufactures, it seemed that JHM has High Brightness prospects, LOL.

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There will be an estimated 245.237 billion high-brightness LED chips shipped globally in 2016, increasing 31.8% on year, and the corresponding shipment value will reach US$12.821 billion, growing 3.4%, according to Digitimes Research.

Lighting applications will account for 58.7% of shipments, of which usage will be 35.9% for LED light bulbs, 34.7% LED light tubes, 25.6% LED projection lamps and 3.8% LED street lamps, Digitimes Researchindicated.

Among other applications for high-brightness LED chips, mobile terminal devices will account for 13.4% of the shipment volume, display boards 6.5%, LCD TVs 5.7%, automobiles 5%, tablets 3.2%, notebooks 2.5% and LCD monitors 1.3%.

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

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

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(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
http://www.ledinside.com/node/24379

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"

http://www.ledinside.com/intelligence/2014/12/ledinside_2018_automotive_use_led_market_value_to_reach_2_b

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.

JHM Consolidation (2) - Growth, Growth, Growth

Publish date: Fri, 15 Jan 2016, 02:13 PM 

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1. Introduction

I first wrote about JHM not too long ago. Subsequently, a forum member furnished me with further information, which I think warrants another write up to discuss. 

According to this article dated 27 May 2014 below ("Sun Article"), JHM intends to spend RM25 mil to establish a production facility in Sungai Petani, Kedah. My objective for this article is very simple - I want to do a quick analysis of where JHM is now with regard to the abovementioned expansion plan. 

This will allow me to have a feel of whether JHM's growth has peaked, or there is more to come (with the rest of the expansion, if any, coming onstream).

Following the publish of the Sun Article (which was made after released of March 2014 quarter), JHM has altogether released 6 quarterly results : June, September, December 2014 and March, June, September 2015. 

Clear signs of revenue and profit growth was witnessed from March 2015 quarter onwards (I have discussed this in my previous article) :-

Quarter Result:

F.Y.	Quarter	Revenue ('000)	Profit before Tax ('000)	Profit Attb. to SH ('000)	EPS (Cent)
2015-12-31	2015-09-30	34,696	845	1,324	1.08
2015-12-31	2015-06-30	31,962	2,102	1,461	1.19
2015-12-31	2015-03-31	25,049	1,848	1,786	1.45
2014-12-31	2014-12-31	20,118	81	163	0.13
2014-12-31	2014-09-30	16,268	-1,325	-968	-0.79
2014-12-31	2014-06-30	18,842	-611	-433	-0.35
2014-12-31	2014-03-31	16,598	117	118	0.10

Will there be any more growth ? Has the company reached a plateau ?

2. Keeping Track of The Capex Programme

The table below sets out the relevant items of the Group's balance sheets, cahflow and P&L which should allow us to have a feel of the status of the Capex programme :-

Key observations :-

(a) My earlier impression was that the turnaround seen since March 2015 was a result of capex (resulting in additional capacity, etc). However, the spreadsheet told a slightly different story.

It seemed that the improvement in profitability was achieved with minimal capex spending - total capex from June 2014 until March 2015 was only RM3.29 mil, lower than total depreciation charges of RM4.17 mil during that period.

This means that the money spent was most likely for wear and tear replacement, instead of new capacity.

In other words, the group achieved turnaround by becoming more efficient, without the need to inject capital to buy growth.

I give that a BIG LIKE. 

(b) Despite making known to the public as early as May 2014 about the intention to spend RM25 mil for growth, it seemed that the group did not really embark on the massive capex until June 2015 quarter. 

During the June and September 2015 quarters, serious money was committed to increase capacity. Closed to RM8 mil was spent in that two quarters, resulting in PPE growing by 23% from RM26.2 mil to RM32.3 mil.

(c) The capex spending needs to be funded. This showed up in the balance sheets, with net loans increasing from RM2.9 mil in June 2014 Q to RM11.3 mil in September 2015 Q.

I am not alarmed by the increase in borrowings as the group has been doing it in an incremental manner, increasing capacity when demand justifies it.

Nevertheless, it is still good for us to try to have a feel of how the capex will affect balance sheets, which is what I will discuss in the next section. 

3. Funding The Capex

Before we proceed with the analysis, let's first take stock of the Group's financial position.  As at 30 September 2015, the group has net assets of RM34.4 mil, cash of RM3.2 mil and loans of RM14.5 mil. As such, net gearing is 0.33 times. 

The gearing is not considered high, but if they proceed to spend further, balance sheets might be stressed. 

Probably because of that, the company announced that it will be undertaking a Special Issue of up to 21 mil new shares to Bumiputra Investors. For illustration purpose, based on latest closing price of 46 sen, the Special Issue could raise up to RM9.66 mil.

On 8 January 2016, the company announced that it has submitted draft circular to shareholders to Bursa. Once cleared, an EGM will be convened and the Special Issue will be implemented after shareholders vote in favor of it. 

The Special Issue will allow the company to meet the bulk of its funding requirement. Just to have a feel of the figures, I have done up a financial model to facilitate discussion.   

As shown in table above, there will be a minimum and maximum scenario. This is because we don't know the exact amount the group has spent on the RM25 mil capex so far. As discussed in Section 2 above, the group has purchase PPE amounted to RM11.3 mil. However, some might be for replacement of existing equipment (wear and tear), so we can't really say for sure that the RM11.3 mil was entirely for the RM25 mil capex.

Under the minimum scenario, the Special Issue, existing cash and internal cashflow (future) will be sufficient to meet the funding requirement, without the need to draw down additional bank loans.  

(Note : A quick analysis of the group's cashflow showed that the assumption of up to RM2 mil from internally generated cash is reasonable. Please refer to Appendix below)

  

Under the maximum scenario, the group needs to draw down loans of RM3.8 mil.

Pro forma effects on balance sheets will be as follows :-

As shown above, even under the maximum scenario, net gearing will increase to 0.42 times only. Of course, this is just our guesses. Actual figures should be some where in between. But the overall concept is that with the Special Issue in place, the group will be able to grow without unduly stressing its balance sheets.

4. Concluding Remarks

(a) One thing that has so far held this stock back was that it is not an export play. However, this is exactly what I like about it. I have many export stocks in my portfolio, this stock allows me to diversify.

(b) The group has an ambitious plan to grow its business. The various sections above had discussed the possible ways they can fund it. That takes care of the Supply side.

The question now is the Demand side - will they be able to get new customers / orders to soak up the additional production capacity ?

Unfortunately, I don't have access to insider information to provide you with a definitive answer. However, I have chances to speak to CEOs of PLCs before. Based on my observation, PLCs (or in general, established businesses) usually have very good understanding of their operating environment.

When they said that they plan to spend certain amount to expand production capacity, they should have more or less sorted out the specifics. Instead of vague concepts like "getting new customers", they usually would have already initiated discussions with potential customers and have a good feel of potential demand.

(c) It is common for PLCs to tell investors about their plans and ambitions. Sometime, those plans never materialise, they forever remain as concepts.

For example : I find one of the most silly things that a PLC can say is "We intend to secure RM1 billion contract this year". In my opinion, the PLC should only say something after securing the contracts. Saying what you intend to achieve is meaningless.

However, in JHM's case, the Special Issue is a strong signal that the Capex programme is on track. The Special Issue will dilute the company's EPS, but the additional production capacity should (hopefully) be able to boost profit and bring down PER at a later stage.

A nice growth story. 

Appendix - Group Historical Cashflow

Key observations :-

(a) Except for FY2014, the group usually relied on net operating cashflow to finance capex. In FY2014, the group drew down RM5.9 mil borrowings as net operating cash flow in that year was not strong.

(b) For the 9 months ended September 2015, net operating cashflow was RM7.3 mil, which allowed the group finance the bulk of its RM8.3 mil capex.

(c) In Section 3 above, it was assumed that RM2 mil of the RM25 mil capex will be funded by internally generated cash. This assumption appeared to be reasonable as the cashflow table above showed that during reasonablly profitable period, it is not difficult for the group to generate net operating cash flow of more than RM5 mil. 

JHM Consolidation

Capex Bearing Fruits. Growing Like A 16 Year Old

Author: Icon8888   |   Publish date: Wed, 30 Dec 2015, 06:37 AM 

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1. Principal Business Activties

JHM is listed on the ACE market. It is principally involved in design and manufacturing of the following microelectronic components ("MEC") :-
(a) components related to High Brightness Light Emitting Diode;
(b) fine pitch connector pins; and
(c) others.

JHM's strength is in its design and development capabilities for complex MEC. The Group would normally be involved from the conceptual phase to the designing and ultimately commissioning of the components for mass production at optimal cost efficiency.

The cutting edge capabilities in designing have enabled the Group to not only penetrate multinational corporations (“MNCs”) but also allowed the Group to enlarge its customer base to cover larger market applications. MEC are catered to a wide base of industries such as electronic, telecommunication, semiconductor and automobile.

The company's head office is in Penang while its factory is located in Sungai Petani.



2. Background Financials

Based on 123 mil shares and price of 46 sen, JHM has market cap of RM57 mil.

The group has reasonably strong balance sheets. Based on net assets of RM34 mil, cash of RM3 mil and borrowings of RM14 mil, net gearing is approximately 0.32 times.

The group's past few quarter P&Ls are as set out below :- 



Note : the company stopped providing segmental breakdown for revenue and EBITDA in its latest quarterly report


Key observations :-

(a) Since the beginning of FY2015, both the Group's revenue and profitability improved substantially. EBITDA margin expanded from the previous average of approximately 3.8% to 12%.

The dramatic turnaround was mostly due to its capex programme in 2014. The following was what the company said in its FY2014 annual report :



(b) In the latest quarter ended September 2015, the group incurred forex loss of RM1.66 mil. This is not surprising as according to FY2014 annual report, the group has net exposure to USD liabilities :-


The company did not provide details of USD liabilities in its quarterly reports. However, the Ringgit depreciated by closed to 15% in Q3 vs. the USD. So the impact was quite severe.

(c) The group reported net profit of RM1.3 mil in the latest quarter. However, if you add back the RM1.66 mil forex loss, and after making relevant tax adjustment (assume 25%), adjusted net profit for the quarter should be approximately RM2.5 mil.

As the Ringgit has not changed much in Q4 of 2015 (October to December), the coming quarter should not have any major forex losses. As a result, I believe RM2.5 mil is a good estimate of the coming Q4 earnings.

If that is the case, FY2015 net profit could potentially be RM7.1 mil (being RM1.8 mil, RM1.5 mil, RM1.3 mil and RM2.5 mil for Q1, 2, 3 and 4 respectively).

Based on market cap of RM57 mil, I would argue that prospective PER is approximately 8 times.

(d) The group derived the bulk of its revenue from Malaysia :-





3. Concluding Remarks

This counter is not an export play, which is all the rage now.

But this is exactly what I want. A forum member asked me recently why I bother to write about Mudajaya ? And the following is my answer :-



I found this little company simple and nice. It seemed that its recent capex has put it on stronger footing, allowing it to grow its revenue and profitability at an impressive rate. 

With the recent devaluation of Ringgit, Malaysia's manufacturing industry is experiencing a renaissance of sort. Even though the group currently does not directly benefit from export market, spill overs from other exporting companies could potentially benefit it. As a small size ACE company, there is room for further growth.

Balance sheet strength is reasonable. Prospective PER is also not demanding.

For me, the stock is a BUY at this price.