THE electronics manufacturing services (EMS) sector may see a slower than expected recovery in the second half of 2020 due to fears of a second wave of Covid-19 causing subdued demand, according to AmInvest.
“We believe that the demand for the sector’s customers’ end products – household consumer products such as floor care and personal care products, coffee machines, and pool cleaners – might see a slower than expected recovery due to fears of a second wave of Covid-19 infections globally impacting consumer sentiments,” said AmInvestment Bank.
AmInvest maintains an underweight call on the sector for the second half of 2020, with no top picks.
The research house also shared that the two EMS players under its coverage, VS Industry Bhd and ATA IMS Bhd, have advised that a slowdown in orders is expected, due to weak consumer sentiments.
“Both EMS players advised caution on expectations of weaker global sentiments to translate to subdued demand for its customers’ end products overall,” said AmInvest, citing a McKinsey & Co report that net consumer optimism has decreased despite countries reopening.
The slower recovery for the sector in 2H2020, AmInvest notes, is despite the sector’s positive longer term prospects.
The positive prospects come from the sector’s ties to a key UK customer’s growth prospects supported by its product launches, as well as a potential to diversify the manufacturers’ customer bases with opportunities to be secured following the US-China trade war diversion and the changes in the global supply chain following Covid-19 shocks.
Still, negotiations with prospective customers for the sector have been disrupted due to the travel restrictions imposed, as this means limitations on conducting audits and site visits. This, AmInvest notes, follows the US-China trade war diversion.
“We anticipate negotiations will only start to show progress when travel restrictions have been significantly eased globally,” said AmInvest.
The research house also noted that VSI has two to three of its prospects in the later stages of discussion, with communications able to be continued online.
“At the same time, VSI had also recently secured a new automotive customer which is expected to contribute less than RM50 mil in revenue for VSI’s 2021 financial year.
“Although the initial contribution is only about 2% of revenue, VSI is positive on the long term potential for this customer,” shared the research house.
At the same time, EMS players have brought production operations back up following the restrictions imposed by the movement control order (MCO), with VSI noting its Malaysian operations are back to full capacity, according to AmInvest.
“As for VSI’s overseas operations, its China operations have resumed since mid-Feb 2020, albeit still facing challenges of underutilisation of its facilities, which will be offset by its lower operational expenditure on cost optimisation efforts.”
“Overall weaker revenues, coupled with still having to incur fixed expenses, caused a dent in VSI’s 1Q2020 earnings, dragging VSI into the red and recording a core loss of RM15 mil in the third quarter of its 2020 financial year (ended April 30),” said AmInvest.
However, this still led to production for newer models of one of VSI’s key US customers being pushed back by between one to two months due to the MCO, but production has since resumed in May, according to the research house.
“The group has two more models slated to begin production by end-2020, with another in Feb 2021, having secured a total of five models from said customer,” said AmInvest.
The research house noted that the sector may see an upgraded rating from several factors, such as if consumer sentiments improve significantly, which translates to higher demand for the sector’s customers’ end products.
Other factors include the companies managing to secure major orders or key customers that would boost box-build orders, or there are improvements in the performance of overseas operations. – July 28, 2020
