ROBUST demand for chips in 2021 has seen QES Group Bhd posting stellar results, as the group saw its net profit jumping 113% year-on-year (y-o-y) to RM10.8mil, while revenue grew 36% to RM106.91mil in its first half ended June 30, 2021 (H1) of financial year 2021 (FY21).
QES managing director and president Chew Ne Weng is confident that H2 of FY21 will still be strong, based on the outstanding orders that QES has in hand, despite the current global supply chain disruptions and the looming energy crisis, as well as shipment delays and critical components’ longer delivery lead time.
“With the strong financial balance sheet of QES, we can mitigate some of the issues by purchasing ahead, but we cannot entirely eliminate the issues we face in this pandemic,” he says.
“The continuation of high demand for electric vehicles, sensors, 5G devices and Internet of Things or IoT will definitely provide a strong base for QES to have another double-digit growth in revenue for 2022 and hopefully beyond that as well,” says Chew.
For H1 of FY21, earnings per share jumped 92.5%, from 0.67 sen to 1.29 sen.
Besides recovery in Malaysia, QES’ growth in H1 of FY21 was driven by strong semiconductor growth in Singapore and China, as well as the electrical and electronics (E&E) and automotive market in Thailand.
However, Chew says the commodities or materials price surge in recent months would affect the group’s profit margins.
“Our raw material costs or bill of materials (BOM) will increase and we are now simulating how much it will impact our profit margins. If it is not substantial to the selling prices, we usually will absorb this on behalf of our customers. If this cost increment is substantial, we will find ways to share the increase in a win-win situation with our customers,” he explains.
Listed on the ACE Market in 2018, the Shah Alam-based automated test equipment manufacturer has two core business divisions, namely, distribution and manufacturing.
It has a base of more than 12,000 equipment installed globally and key verticals are the semiconductor, E&E and automotive segments.
We are putting a lot more resources, time and money to build the China market for our own QES manufactured semiconductor equipment. - Chew Ne Weng
QES has over 350 employees and subsidiaries in Asean supplemented by a dealer network in China, Taiwan, France and Germany.
In FY20, Malaysia remained as QES’ biggest revenue contributing country at 36.3%. Another 53.3% of its revenue was from other Asean countries, and the remaining 10.4% is contributed by China and other countries.
Chew expects that in the next few years, QES’ revenue growth will be faster outside Malaysia. “We are aggressively growing capacity and capabilities of our manufacturing division. Inherently, this will grow faster compared to the distribution division where our market place will be restricted to Asean, whereas our own manufactured products can be exported worldwide.”
Chew points out that the targeted blended compounded average growth rate (CAGR) for the QES group should be at least 15% over the next five years.
“We have very solid recurring income of around RM40mil yearly (from spare parts and service – a part of its distribution division). We expect this recurring income to grow steadily together with our distribution division,” he says.
Regarding the group’s overseas growth plans, Chew is very happy with the 300% y-o-y jump in revenue in China for H1 of FY21 (from RM1.9mil a year ago to RM7.6mil).
“We are putting a lot more resources, time and money to build the China market for our own QES manufactured semiconductor equipment. We have recently appointed additional sales channel partners there to cover specific customer accounts or defined geographical areas,” he says, adding that the group sees a lot of room for further growth in the China semiconductor market.
In Europe, QES is working with two distributors that cover a handful of semiconductor companies which have factories spread across multiple locations, and Chew expects this to generate over RM4.5mil revenue for FY21.
QES also plans to establish sales channel partners in the United States from 1QFY22 onwards.
“With electric vehicles (EVs) demand anchoring automotive IC growth especially power switches such as IGBT and MOSFET chips, QES has developed specifically a few series of automated inspection and handling equipment where we expect these new products to fuel our growth in the coming years,” says Chew.
Regarding the group’s distribution division, Chew wants to focus on industrial segments’ recovery as Asean markets gradually move to Covid-19 endemic status in the next few months.
“QES has grown and established our Asean infrastructure over the years. We strongly believe Asean which has close to a 780 million population, will have much room to grow over the next five years,” says Chew.
In 1HFY21, QES also took over Nikon Corp’s industrial metrology business in Malaysia after the Japanese multinational shuttered its Malaysian unit’s operations.
Chew expects this would add another RM7mil to RM8mil annual revenue to QES.
It is worth noting that 1HFY21 has seen a RM3.8mil revenue contribution from the new industrial metrology business.
Meanwhile, based on its 2022 - 2026 roadmap, QES aims for its manufacturing division to contribute at least 35% of its revenue within the next three to four years (from 16.2% of RM155.2mil revenue in 2020).
Chew says the group will be spending at least 7% to 8% of its manufacturing division’s revenue on research and development (R&D).
“We should be seeing many more exciting and new products to be launch in the coming years,” he says.
In September 2020, QES had announced a private placement exercise of up to 10% of its issued ordinary shares to third party investors, to raise up to RM20.47mil for its business expansion.
The group’s annual report 2020 says for FY21, utilising the private placement proceeds, its manufacturing division is expected to double its capacity in the new factory in Glenmarie, Shah Alam as well as to develop new products and solutions such as contactless warehouse management system, production electronic travelling system and vending bunny suit system, which will capitalise on the semiconductor growth and Industry 4.0 related projects.
However, due to the various lockdowns in 2021, refurbishment at the new Glenmarie, Shah Alam factory was disrupted and the group now plans to move in around end of 1QFY22.
Regarding the group’s joint venture (JV) in Penang with American technology company Applied Engineering Inc, Chew says the JV is still on track to start initial pilot manufacturing by end-December 2021 and full-fledged operations by 1QFY22.
The JV company Applied Engineering Technology (M) Sdn Bhd aims to provide high-tech electromechanical contract manufacturing services, from prototype to high volume production, for the semiconductor equipment manufacturing, life science and medical devices, defence and aerospace market segments.
QES has a minority 30% stake in the JV, with Applied Engineering (AE) holding the remaining 70%.
Chew says the group was introduced to AE by MIDA (Malaysian Investment Development Authority) San Jose, California.
“We don’t have the exact forecast details at the moment and therefore, are not able to comment on time line of the JV to be profitable,” he says.
In September 2021, QES had bought from Penang Development Corp a 87,120 sq ft industrial land at the Batu Kawan Industrial Park, Seberang Perai for RM4.79mil cash.
Chew had stated that the newly acquired land would complement both QES’ joint venture with AE and its existing business unit in Penang.
The group’s gearing ratio has increased from 0.26 (end-2020) to 0.34 (end-1HFY21).
“At 0.34, we are very comfortable. We don’t plan to take on more debt. We have allocated an increase in capital expenditure (capex) for our second factory in Batu Kawan, Penang in mid-2022 onwards.”
As for the various movement restrictions in 2021, Chew says they had not impacted QES’ business severely.
“Except for manpower capacity reduced to 60% earlier, we can still manage. We don’t have any contracts cancelled due to this.”
Meanwhile, talent acquisition and retention is a challenge when it comes to the group’s growth plans.
“As a responsible organisation, we will always do our best to provide a comfortable working environment and equitable opportunities to all our employees. By that, we hope our employees will respond in kind and will contribute through their dedication and quality of work,” says Chew.
He points out that the group’s competitive strengths include its management team which has cohesively and diligently work to grow the business for three decades.
“We are very customer oriented and we have more than 3,800 active customers as well as stable recurring income every year from the more than 12,000 machines installed base,” notes Chew.
“With application know-how built through decades of working closely with our customers, we can research and develop new products or improve existing products. All these strengths of QES Group will ensure long term sustainability of the group going forward.”