Formosa upbeat on prospects
Ho Chung Teng 
Formosa Prosonic has caught investors’ attention with its improved results in Q2

Formosa Prosonic Industries Bhd, a manufacturer of audio systems and musical instruments, is expected to benefit from the growth in the global musical instruments market. For a start, the company turned in better-than-expected results for its second quarter ended June 30.

The improved results did not go unnoticed by investors. The counter rallied to a 52-week high of RM1.35 on Aug 21 from 84 sen on May 16. The company announced its Q1 results on May 17. The counter closed at RM1.25 on Oct 4.

For Q2, Formosa’s net profit rose 177% to RM8.42 mil from RM3.03 mil a year earlier on the back of improved revenue of RM102.5 mil versus RM76.07 mil. The company attributes the better profit to higher sales, gain on foreign exchange and absence of loss from its UK subsidiary.

Analysts and fund managers are positive on Formosa’s outlook. This comes as the largest audio system parts manufacturer in the country looks set to ride on the growth in the global musical instruments market.

Global market research firm TechNavio expects the global musical instruments market to be worth US$18 bil (RM75.72 bil) in 2021, based on a three-year compound annual growth rate of 8.9%.

The London-based firm said the growth will be supported by the development of more advanced instruments, growing popularity of music-related activities and the rising number of musicians in the world.

An analyst says Formosa is in a good position to tap into the opportunities in musical instruments as it has formed strategic long-term alliances with various global musical instrument brands.

“Formosa mentioned that there are musical instrument companies that are aiming to introduce new products locally, and some are planning to expand their manufacturing facilities in Malaysia. This will benefit Formosa. It can benefit through tie-ups with their preferred parts supplier,” he adds.

Formosa disposed of its associate Acoustech Bhd (27.79%) last year and 60%-owned FP Group Ltd in 2015. Following the disposals, Formosa was no longer required to recognise losses from its loss-making subsidiary.

With the disposal of both stakes, the analyst says Formosa plans to focus on its core competencies which are original equipment manufacturing (OEM) and original design manufacturing (ODM).


New factory in Klang

He adds that Formosa is also working on a new range of smart audio systems with its major shareholder Wistron Corp, a major ODM in Taiwan.

The analyst says Formosa plans to expand its smart audio system production line. The company will house the new production line at a factory to be built on its vacant land in Klang. The factory is slated for completion early next year with production to start towards the middle of next year.

At present, the company operates two manufacturing facilities in Port Klang and Sungai Petani, Kedah.

CIMB Investment Bank Bhd, in its recent report, points out that Formosa’s H1FY17 net profit has surpassed its FY16 net profit of RM16.1 mil. The research house says Formosa does not appear to have any direct rivals globally, given its unique exposure to consumer electronics sub-segments of audio systems and musical instruments.

“We see consumer electronic stocks as comparable listed peers,” the research house adds.


Disposal of non-core businesses

Over the past few years, Formosa has divested its non-core businesses to focus solely on manufacturing of audio system and musical instrument components.

The sale of its stake in FP Group for US$14.3 mil (RM59.35 mil) led to the closure of its China operations. Formosa said the disposal of the subsidiary would allow the group to centralise its entire operations in Malaysia, which could result in better cost savings.

The Hong Kong-based FP Group is a wholly-owned subsidiary of Winmax Holdings Group Ltd, which is in turn a 60%-subsidiary of Formosa.

A fund manager says Formosa has stated it is expecting its music instrument components segment to be its key revenue driver in the future. As such, Formosa invested RM16 mil in FY16 to enhance its production capabilities.


Q3 the strongest quarter

Formosa has two main product segments - audio systems and musical instruments. The bulk of its revenue is derived from the resilient and mature audio system business, which contributed about 83.6% of its total FY16 revenue.

The fund manager adds that the musical instrument components segment has shown exceptional revenue growth, of between 112% and 120.2% in FY14-16, reaching RM56.6 mil in FY16.

The fund manager points out that Q3 is seasonally the strongest quarter for Formosa, in terms of profitability, mainly due to increased orders in preparation for the peak year-end period that includes Christmas.

Apart from better performance, the company is cash-rich. As of June 30, Formosa’s net cash position stood at RM155.34 mil, translating to about 62 sen net cash per share. However, this is lower than the cash pile of RM171.4 mil or 69 sen per share as of June 30 last year.

This article first appeared in Focus Malaysia Issue 253.