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Genetec may need to diversify revenue source
Ho Chung Teng 
Fund managers say Genetec is a ‘hidden gem’ as the company is benefitting from the China automotive growth
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Genetec Technology Bhd, a builder of factory automation process equipment with integrated inspection systems, is eyeing a slice of the lucrative China’s automotive market. Despite this, funder managers are divided whether it is indeed a “hidden gem” on Bursa Malaysia’s ACE Market.

The consensus appears to be that the company will need to diversify its revenues beyond its hard disk drive (HDD) business segment and successful in tapping into the growing automotive market in China.

One fund manager who spoke to FocusM says that Genetec will benefit from the growth of China’s automotive market, comparing the company to companies such as Vitrox Corp Bhd, Elsoft Research Bhd, MMS Ventures Bhd and Pentamaster Corp Bhd.

“China’s automotive sector is fast-growing and has huge demands,” the fund manager says. Genetec’s two main business segments are HDD and automotive, both of which have many competitors. Products sold under the two segments are also non-recurring in terms of revenue.

William Capital Plt chief investment officer William Ng Kok Kiong does not view Genetec as a “hidden gem”. According to Ng, Genetec is currently fairly priced. This is mainly due to uncertainties over its HDD business segment. “HDD is a sunset business,” Ng adds.

 

China’s automotive sector

Genetec currently retails its brake and centralised control unit testing machines to a China automotive assembler. Hence, analysts say that the company will need to expand and capitalise on the potential of China’s automotive sector to produce sustainable future earnings.

 Ng does not view Genetec as a ‘hidden gem’

“Genetec’s management has said that moving forward they will focus on the automotive segment. Growth catalyst is backed by China’s population growth, and high demand for cars,” the fund manager says, explaining that it is no mere feat that a Malaysia-based machine-test company could expand into China, as it is a highly competitive sector.

In FY17, Genetec’s HDD segment contributed 52% of its revenue, while the automotive sector contributed 42%. The company’s overseas activities accounts for about 52%, with China being its largest market.

With the China expansion plans, the share price of Genetec rallied to a 52-week high of RM1.75 on Nov 1, from a 52-week low of 82 sen on Nov 23, 2016. The counter closed at RM1.63 on Nov 9.

At RM1.63, Genetec is trading at a forward price-to-earnings (PE) ratio of 7.37 times. Ng says that currently there is no comparable company on the local bourse for Genetec. He adds that the average PE for ACE Market companies is about eight times.

Other machine-test companies such as Vitrox is trading at a PE of 32.64 times, Elsoft (21.96 times), MMS (16.93 times) and Pentamaster (19.97 times).

Most of Genetec’s assets are machinery, which depreciate over time. “Net asset will not be a good benchmark for technology companies, as most of their assets are machinery which depreciate quickly. [Hence] the focus on Genetec will be on its earnings,” Ng adds.

For Q2FY18 ended Sept 30, Genetec’s net loss widened to RM968,000 from RM589,000 a year ago. Its Q2 revenue was RM19.46 mil, compared to RM16.1 mil for the corresponding period last year. Genetec attributes its net losses to lower gross profit margin and an increase in administration cost.

Despite this, Genetec’s cumulative half-year FY18 net profit increased to 978,000 from RM336,000 a year earlier. For Q1FY18, Genetec reported a net profit of RM1.94 mil. The company attributes the profits in Q1 to higher sales volume and improvement in operational efficiency.

For FY17 ended March 31, revenue from the automotive sector increased to 42%, from 29% a year earlier. During the period, Genetec reported a net loss of RM3.63 mil against a net profit of RM6.79 mil a year earlier.

According to Ng, China has introduced various vehicle policies, requiring automakers to invest into electric vehicles (EV). “China wants to turn themselves into an EV hub,” says Ng, adding that Genetec could take advantage of the opportunity.

However, another analyst with a local investment bank says that due to the nature of Genetec’s business, its automotive segment could see its profit fluctuating based on project completion and jobs secured.

 

Investments needed

“While automotive is a growing sector, Genetec is in the retailing of production line, which has no recurring income,” the analyst observes.

In FY14, Genetec’s automotive segment reported a revenue of RM42.99 mil. However, the revenue declined significantly to RM13.12 mil in FY15. For FY16 and FY17, revenue from its automotive segment were at RM37.41 mil and RM29.66 mil respectively.

Despite the declining revenue from its automotive segment, Genetec will still be able to benefit in the short- to mid-term. “Present petrol-automotive car manufacturers will have to invest into new plants and production line to produce such futuristic vehicles,” the analyst adds.

France and the United Kingdom have already announced that they will ban petrol vehicles by 2040. Germany will enforce the petrol car ban by 2030. In September, China announced that it is also mulling a ban on traditional fuel vehicles.

 

Battery-powered vehicles

China has also introduced wide-ranging automotive regulations. Beginning 2019 automakers in China will have to increase production quotas for battery-powered vehicles. The move is part of China’s new industrial policy, ‘Made in China 2025’. The policy is part of a strategy for China to have national champions in 10 high-tech industries, including robotics, semiconductors and EV.

Despite this, JP Morgan head of Asia Auto Nick Lai in a research report says China’s automotive growth is likely to see a sharp deceleration moving forward, compared to its previous years.

Lai expects demand for China passenger cars to grow at a compound annual growth rate (CAGR) of 3% to 27 million vehicles in 2020, from 21 million vehicles in 2015. From 2000 to 2010, China passenger car CAGR is at 36%, and 2011 to 2015 was at 10%.

Nevertheless, Genetec is positive on China’s automotive sector. “This sector has maintained a steady growth momentum for the past few years, amid the softening of the current global economic conditions, we remain positive on the prospect of the automotive industry,” Genetec adds.

Genetec’s HDD segment is something that analysts are concerned about. Ng says the global demand for HDD is limited, as it is a mature industry where growth is muted. “Storage size has reach its growth limit. Consumers are also moving towards cheaper alternative, such as Cloud services and solid state drives.

“Genetec’s earnings is affected by HDD. They have to reduce the reliance on HDD. If they don’t it will continue to affect them. HDD business in Malaysia is very challenging,” Ng adds. “To sustain HDD, Genetec must be selective in terms of selecting customers, and making sure that the segment does not report losses,” Ng adds.

Analysts say Genetec will have to amortise its goodwill from HDD business if the future value of the HDD business continues to decline. In FY17, Genetec attributes its losses to a RM5 mil goodwill impairment.

In its latest annual report, Genetec says a 1% drop in future planned revenue would have increased the company’s impairment cost by RM1.2 mil. “The group anticipates the HDD industry to continue to be challenging with the softening of global demand,” Genetec adds.



This article first appeared in Focus Malaysia Issue 260.