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EMS sector gains from supply shift to SE Asia

EMS sector gains from supply shift to SE Asia

17 Jun 2021

Customers aim to double product portfolio by 2025, expanding their existing product categories and venturing into new areas

Electronic manufacturing services (EMS) providers have received more orders as supply chains shift away from China to South-East Asia.

AmInvestment Bank Bhd (AmInvest) analyst Dalilah Fairoz said the EMS sector has been a beneficiary to the supply chain diversification away from China to South-East Asia.

She said the reconfiguration has led to higher orders and new customers.

Dalilah further said customers aim to double their product portfolio by 2025, expanding their existing product categories and venturing into new areas such as artificial intelligence, robotics and batteries.

“We believe this would benefit ATA IMS Bhd due to the group’s position as the main customer’s largest contract manufacturer globally, producing the broadest range of products,” Dalilah said in a sectorial report yesterday.

The analyst said ATA was recently awarded its third project for its key US customer to produce a yet-to-be-launched full-sized machine, which is currently undergoing test runs, while its first and second projects have been running since the third quarter of the calendar year 2020 (3QCY20) and 2QCY21 respectively.

She noted that the group continues to be in discussion to secure a new original design manufacturer project for the said customer.

AmInvest has maintained an ‘Overweight’ recommendation on the EMS sector due to positive prospects amid strong order expectations from multiple customers supported by capacity expansion plans.

The investment bank viewed that the recent share price pullback presents a window of opportunities for investors.

It may downgrade the sector to ‘Neutral/Underweight’ if Covid-19 weakens global economic conditions, which could dampen demand in customers’ products, mainly if vaccine progress delays.

Dalilah also cited risks of labour costs and worker shortages, sudden loss of orders and/or key customers and worsening performance of overseas operations due to longer than expected recovery in sales orders.

She wrote Covid-19 restrictions limit production capacity with the extension of the Movement Control Order to June 28 and the 60% workforce capacity rule.

AmInvest’s top pick is ATA with a ‘Buy’ call and a target price (TP) of RM3.34.

It liked ATA’s purest proxy to its main customer’s growth prospects by virtue of being its largest contract manufacturer; efforts towards being vertically integrated; and customer diversification efforts driven by strong order momentum for both its key customer and other customers, which is supported by the group’s modular expansion strategy.

The group has a three-year profit compound annual growth rate of 22% for the financial year 2021 (FY21)-FY24 forecast (FY24F).

Dalilah noted that ATA’s 228,000 sq ft factory and 150,000 sq ft warehouse in Pasir Gudang are both operational, with the factory expected to be fully utilised by mid-2021.

ATA — one of the largest EMS companies in South-East Asia and ranked 23rd among the top global EMS providers — is also looking for a new factory to cater to order growth.

Furthermore, she said ATA aims for a more diversified customer base in FY22, projecting its main customer to contribute 70% of its top line while the remaining 30% from other customers.

ATA’s FY22F growth is expected to be chiefly driven by order growth for both its main customer and key US customer.

The company has also denied allegations of forced labour, citing it complies strictly with Malaysian labour laws.

ATA also said its foreign worker recruitments comply with international standards with a zero-recruitment cost policy.

Source: The Malaysian Reserve

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