Aeoncr Q3 2020

• Revenue for 9 months increased by 17.8% however its operating expenses increased by 36.6% which is 2 times more than its revenue (the increase of operating expenses is due to increase in allowance for impairment on receivables of RM148 millions. If excluding the the additional impairment of RM148 million, the actual increase of operating expenses would be 10.7% which is in line with the increase of its revenue [RM779m - RM148m = RM631m; RM631m - RM570m = RM61m; RM61m / RM570m = 10.7%]).
• Interest expenses increased by 29% which is in line with its increase in bank borrowing of 20%.
• If excluding the additional RM148 million of receivables impairment, Aeoncr would have achieve RM351 millions of net profit which is 31% higher than 2018. 

• Revenue ⬆ 17%, net financing receivables ⬆ 15%, borrowings ⬆ 20% , total asset ⬆ 15% and total liability ⬆ 20% (the increase in net financing receivables is lower than its borrowings amount might due to higher impairment of receivables)  

• Core operating profit before working capital improved to RM919 millions for the first 9 months. An increase of 17% which is identical to its revenue (meaning to say the fundamental of Aeoncr didnt change as the operating profit actually increase)

• The impairment of its receivables due to MFRS 9 has slows down in current quarter as compared to its last quarter (this could means that it is about time to collect Aeoncr)

• Future prospects remain to be the same as previous quarter by focusing on growing quality assets and enhance operating efficiency. 

Comments

To conclude, Aeoncr did a great job where revenue increased by 17%. If excluding the additional RM148 million of impairment receivables (due to MFRS 9), Aeoncr is able to achieve RM351 million of net profits over the 9 months which is 30% higher than 2018. Core operating cash flow before working capital changes also increased by 17%. This has proven that the drop in net profit is just temporary and after 2019, Aeoncr might continue its growth legend.

To add on, the impairment of receivables has started to slow down in Q3.

valuation wise, at RM 14.70 a share with EPS of RM1.0915, Aeoncr is trading at PE of 13.46 which is quite fair at the moment. Assuming if Aeoncr achieve an EPS of 30 sen next quarter, its full year EPS is 106 sen. At PE 11, Aeoncr is worth RM11.66.

At RM14.70 with 45sen of dividend distribution, its DY is only 3%

Kronologi Asia Berhad (AR 2018)

• Krono is specialized in Enterprise Data Management (EDM) of Information Technology (IT) and Managed Services (MS). (In short, Krono is providing cloud services and other data management services)
• IT segment contributes 94% / RM 153 million of the group revenue. 
• MS segment contributes 6% / RM 10 million of the group revenue. 
• Milestone of Krono 
• 2014 - Listed on Bursa Malaysia (Revenue: RM54 million ; Net profit: RM6 million)
• 2016 - Acquire the remaining 80% of Quantum Storage (India) Pvt Ltd for RM26 million with a profit warranty of USD1 million / RM4.2 million per year. (Revenue increased by 48% to RM 81 million while net profit increased 18% to RM7 million)
• 2017 - Private placement to raise RM22 million. The money raised were used as below:

• 2017 - Acquire 100% Quantum Storage (Hong Kong) Limited for RM45 million  with a profit warranty of USD1.2 million /  RM5 million per year (Revenue increased by 77% to RM144 million while net profit increased 68% to RM12 million). 
• 2018 - Private placement to raise RM23 million. The money raised were used as below: 

• 2018 - Acquire 16.67% of Quantum China Limited for RM12.5 million (Revenue increased by 12% while net profit increased by 34%)
• 2019 - Acquire 100% Sandz Solutions for RM75 million (Sandz provides IT infrastructure solutions services in the Philippines through its subsidiary Sandz Solutions Philippines Inc. The planned acquisition comes with a warranty from the vendors that Sandz would achieve a profit after tax of US$1.5 million (RM6.11 million) for FY19.)
• Singapore remain as Krono major market with 61% followed by Hong Kong and Taiwan (17%) and Malaysia only contributes 0.9% of Krono's revenue. 
• From the information below, we can witness that the acquisition of Quantum Storage (Hong Kong) Limited has greatly increase it presence in HK and Taiwan where revenue improve from RM188k in 2016 to RM 28 million in 2018.
• In 2016, Krono acquire Quantum Storage (India) Pvt Ltd which give Krono the opportunity to enter the Indian Market. However from the revenue generated, it is obvious that the market in India is unstable as the revenue fluctuated.  
• In 2019, Krono acquire Sandz Solution to strengthen its footprint in Philippines (This is proven that the revenue from Philippines increased to RM41 million in 3 quarters).
• Questions for the management, why is it that corporate in Malaysia do not use cloud service? or they do just that they are using its competitors services? As its business in malaysia shrink from 2014 to 2018. 

Financial Highlight

• With a series of acquisition since 2016, Krono revenue increased 100% from RM81 million in 2016 to RM163 million in 2018. 
• Gross profit margin is around 20% - 25% while net profit margin is around 8% to 10%. 
• Krono distributed a final dividend of 2sen for the first time in 2018 which accounts for 45% dividend payout ratio. However based on its cash flow and cash status  i doubt there will be a dividend payout this year. 
• Although there is an increase in number of shares however the increase of shares do not actually diluted its earnings per share. Meaning to say that its acquisition actually helps to increase the shareholder values. 
•  Krono spend the most money in purchasing PPE in 2019 (But i am not too sure what kind of PPE are they)
• One thing that we need to take note is that Krono's goodwill accounts for 31% of its total assets in year 2019. 
• Cash flow remain tight and chances for it to distribute dividend is low however it is still posible for the management to do so as it is still in net cash position as at Q3 2019. 

• In 2018, there are 2 major customers, with customer B contributes 20% and customer C contributes 18% to the group revenue (not sure what happened to customer A that it suddenly contributes less than 10% to the group's revenue).

• Currently the company income tax rate is approximately 4.2% due to income tax exemption and allowance (However please take note that its 100% tax exemption in Malaysia ended in 2020 and the 400% tax allowance in Singapore ended in 2018).

Futures Prospect

• Acquiring Sandz Solution in Philippines will further strengthen their footprint in Philippines.
• Sandz Solution promise a profit guarantee of USD1.5 million / RM6.15 million.
• Quantum Storage (India) Pvt Ltd promise a profit guarantee of USD1 million / RM4.1 million.
• Quantum Storage (Hong Kong) Limited promise a profit guarantee of USD1.2 million / RM4.92 million. 
• Quantum China Limited delivers a profit of RM66k in 2018. 
• Prior to the series acquisition, Krono has a net profit of RM6 million in year 2014.
• With the above acquisition, Krono will have a net profit of RM15 million guaranteed by its subsidiaries. (In 2018, Krono has a net profit of RM16 million, we could conclude that 2019 will be a better year for Krono). 

Strength 

• The acquisition of its subsidiaries are done through both cash consideration and issue of shares for the management to become Krono's shareholders. This to me is a good arrangement as Krono's performance will benefits them as well. 
• The newly appointed CEO Mr Edmond Tay Nam Hiong, founder of Quantum Storage (India) Pte Ltd and formerly sat on the Information Technology Standardisation Board with Info-communication Development Authority of Singapore on e-payment and security chapter as well as Singapore Infocomm Technology Federation might have some expansion plan for Krono. 

Weakness

• Goodwill constitutes a huge portion of its total assets which may post as a risk if there is impairment on goodwill (this risk is not so significant)
• Cash flow management can be improved further to increase its free cash flow. 
• There are chances for another round of private placement and further dilute its EPS. 
• Less competitive as compare to the big boys such as Google Cloud, Amazon Cloud, Microsoft Cloud. (Honestly speaking i am not very sure of its competitive advantage)

As at Q3 2019

• Revenue increased by 37% however its admin, selling and distribution expenses only increased 5.8%. Net profit increased 35% (well done to the management on cost control). 
• Share of profit from associate is close to RM500k in 2019 vs RM 66k in 2018 (this is because of full year contribution of Quantum China Limited).
• Income tax rate is 17%. 

• Revenue increased by 37% however trade receivables increased by 201%. Trade parables increased by 45% (The increase in trade receivables might post as a concern to the company cash flow).
• Krono acquire Sandz Solution for RM75million and its goodwill increased RM58 million after the acquisition (Does this mean the net assets Sandz Solution in Sandz Solution worth only RM17 million while the remaining of it is for its goodwill?).
• Borrowings increased by 33% however Krono is still in net cash position. 

• As mentioned in 2018 annual report, Krono has higher income tax hence additional RM3 million of income tax payment is made which lower its cash flow from operating. 
• Krono spend RM18 million in purchase of PPE which is the highest amount since its listing in 2014. 

• Business from Singapore reduced 21% dunno for what reason. 
• Business from Philippines increase tremendously to RM41 million due to acquisition of Sandz Solution. 

• From the above information, we can do a rough calculation on the profit margin of EDM IT and EDM MS. Profit margin for IT segment is approximately 11% (17,968 / 155,651 = 11.5%). Profit margin for MS segment is approximately 37% (3,915 / 10,852 = 36.99%)

• Not much is being mentioned in its prospects. 

Valuation of Krono at RM0.74

• The market cap for Krono is RM362 million hence it is consider as a small cap company. Therefore i do not think Krono deserve a very high PE. Average PE for Krono is 13.32 (> PE18-20 is high, PE14 - 18 is fair, <13 margin of safety).
• Krono distributes a dividend of 2 sen in 2018, at current price of RM0.74, its DY is 2.7% if Krono announce a 2 sen dividend in 2019 Q4. However judging from its free cash flow, it is unlikely for Krono to distribute it. 
• Business model for Krono seems like unstable judging from its revenue fluctuation from Singapore & India. 

• My concern on Krono is that, is the business able to continue to grow the moment Krono ceased doing M&A? Because at the moment the growth is sustained by its constant M&A. 
• A lot of fund houses appear as Krono's top 30 shareholders in 2018 and most of them doesnt appear in 2017 AR. 
• Another highlight of Krono is that Krono is now eligible to to switch to main board from the ace market as it has fully met the requirements below:

上市公司如果要从创业板转至主板，有两种方式，第一种是透过公司自己原有的核心生意(core business),第二种是透过收购(acquisition)符合在主板上市的公司。

第一种转主板的方式要符合以下的任何一个条件:-

(1) 公司必须在过去的三或五个财政年拥有至少RM20 million的税后盈利(Profit after taxation), 和最新的财政年要有至少RM6 million的税后盈利。(profit test)

例子: 公司 A ：第1年税后盈利RM6 million, 第2年税后盈利RM8 million, 第3年税后盈利 RM10 million，所以3年税后盈利的总合是RM24 million,最后1年的税后盈利多过RM6 million,所以公司A符合这条件。

(2) 公司的市值要至少RM500 million。意思是在提交转板申请给证卷委员会前的1年期限里(这一年的期限是用月份来算，假设2015年4月12号提交申请，这1年的期限是从2014年4月1日到2015年3月31 日），每日的市值(必须根据每日的成交量加权平均股价）要至少RM500 million. (market capitalisation test)

注: 这个条件是很不容易符合的，很多在主板上市的公司市值都没有RM500 million。所以一般创业板的上市公司都不会用这条件转主板。如果是用这条件申请，证卷委员会会考量公司过去一年里有没有不寻常市场交易(unusual market activities)或者其他影响市场公平和有次序地交易该公司股票的事件，包括有没有被Bursa列为指定股项(designated stock)。

(3) 公司或其子公司，有权利在马来西亚或外国建筑和营运大型基建工程(infrastructure project),该工程的成本不低于RM500 million, 经营合约(concession)或执照(license)必须至少还有15年。(infrastructure project corporation test)

第二种转主板的方式所需要购买的公司必须符合第一种的profit test或infrastructure corporation test，只是profit test要加多一个条件，就是被收购的公司的盈利不间断性，即间中没有亏损。

不管是第一种还是第二种方式，上市公司都必须有良好的财政基础，即：

(1) 在接下来的12个月里有足够的流动资金 (working capital);

(2) 如果是用profit test来转主板，要有正营运现金流 (positive operating cash flow); 和

(3) 不可以有累计亏损(accumulated loss)。

另外，关于公众持股(public spread),ACE Market的要求是25%的总股数和不少于200个持有公司股份至少100 unit和少于5%的总股数的股东。Main market的要求则是25%的总股数和不少于1,000个持有公司股份至少100 unit和少于5%的总股数的股东。

Formosa Prosonic Industries Berhad (AR2018)

Corporate Profile

• FPI is a sound system manufacturer with 30 years of experiences specialized in original equipment manufacturing (OEM) services including woodworking, plastic injection, driver units, PCB assembly and finished-products assembly as well as Original Design Manufacturing ("ODM") services. (OEM means FPI make devices from components parts bought from other company; ODM means FPI designs and manufactures a product, as specified, that is eventually rebranded by another firm for sale). However, FPI is still mainly in OEM business as they have dispose their ODM business of Acoustic Energy. 
• FPI used to be an audio system and components manufacturer however diversified into musical instrument segment in 2014. 
• FPI products and services:

• Products

a. Musical Instrument Product: FPI clients include Roland, Casio, Korg etc. Roland contributes 80% of revenue to the musical instrument segment.  

b. Wireless Speaker Product: FPI clients include Sony, Panasonic, Bose, Sharp etc. Sony being their single largest customer.

c. Conventional Speaker Product such as home audio, speaker unit, plastic injection etc

• Services: 

• FPI derives its sales from Malaysia only after disposing its business in the UK (Acoustic Energy) 
  
• 64% of FPI sales are contributed by 2 single customers. Meaning to say if the sales of these 2 clients dropped, it will greatly affect FPI's performance.

• According to HLIB report, as at 2017, 22% of sales were from musical instrument segment while the 78% were from audio system and components (The management indicated that in 2018 AR, musical instrument segment continues to grow however the audio system and components business dropped in term of quantity delivered. Nevertheless, the sales increased. Details were not provided by the management). Suspect that Roland is customer B as if 25% of revenue were from musical instrument segment and Sony for Customer A according to article from Insider Asia. 
• FPI currently has 2 manufacturing side, one in Port Klang, selangor and another one in Sungai Petani, Kedah (Production capacity remain unknow as no information was provided by the management).




Financial Highlight



• Based on its revenue, FPI experienced a drop in sales since 2013 and recovered in 2017(This is because FPI sales is highly dependent on 2 of its major clients) 
• Gross profit margin is in the range of 7% to 13%.
• Net profit margin is in the range of 4% to 8% (We will do a net profit margin comparison with other EMS companies in Malaysia later)
• Dividend payout ratio is in the range of 50% - 80% which is consider high. 
• FPI is a net cash company with no bank borrowings. Net cash per share is 68sen. 
• FPI has strong operating cash flow over the years and always generate free cash flow (meaning to said FPI is able to do consistent high dividend payout)

• Impairment on trade receivables only constitutes  0.02% of its total trade receivables (meaning every RM100 of sales, only RM0.20 unable to recover)
• FPI will greatly affected by USD because:
•  30% of its cash is in USD
•  36% of its trade receivables are collected in term of USD
• 23% of its trade payables are paid in term of USD
• Hence the strengthening of USD by 3% will lead FPI to have an forex gain of RM900k

• Increase in minimum wage and foreign levy for foreign labor will greatly affect FPI as 75% of its employees are foreign labor. (currently the minimum wage for foreign labor is RM1100) 
• 2018: 2529 out of 3331 (75%) workers are foreign labor. 
• 2017: 1568 out of 2257 (69%) workers are foreign labor.

• Employees expenses increased tremendously by 54% or RM36 million mainly due to increase in number of employees (increased by 47%). Revenue increased by 22% only. (Increase in number of employees is due to the additional factory used by Roland)  
• FPI spend about RM1.7 million on R&D in 2018 which accounts 5% of its net profit. 

Future Prospects

•  Not too much is being mentioned in the annual report:
• Improvements across all its operations, including manufacturing, logistics, and quality systems.
• Invested substantially in new injection machines, CNC machines and some automated machines. 
• Work cells or Work Stations have also been reconfigured to reduce flow times and to eliminate Work-In-Process (“WIP”) within the production line
• Elimination of non-value-added activities to the production process.
• In December 2018, the new factory has commence operation with a 20% increase in production capacity to cater the new contracts received from Roland. 70% of the additional capacity will be taken up by Roland. According to HLIB report, Roland might shift some of its China and Indonesia operations over to Malaysia. 
• FPI only diversified into musical instrument segment in 2014 and this segment is still growing with Roland contributes 80% of musical instrument revenue (曾經在日本上市的Roland公司，目前在歐洲擁有約30%市佔率，其樂器主打專業人士市場，且品牌口碑和信譽良好。」值得一提的是， Roland公司此前只在印尼和中國的2家廠房以聯營方式生產樂器配件，因此對於海外業務的控制權有限。直到2014年， Roland才于大馬以獨資形式，設立海外的第3間廠房，并獲得了大馬投資發展局（MIDA）提供的「主要樞紐」（Principal Hub）的稅務優惠和福利。Roland公司已在我國做好了中長期部署，有意重點發展大馬業務，該公司發言人曾表示，將視大馬為繼日本之外第2個總部。大馬的廠房除了擁有所有股權，且政府也提供了多項津貼和獎掖，該公司料將原先于印尼和中國生產的配件，轉移到大馬生產，以降低生產成本。」)

• FPI acquire a piece of land (20 acres) besides Wistron which believes would be used to built factory to cater orders for Wistron (starting to do speaker sales to Wistron Group in 2019).
• Benefits from trade war if those MNC shift their orders to south east asia. 

Strength

• Strong balance sheet with a net cash per share of 62 sen. 
• Strong in generating free cash flow as proven over the years where FPI has the capability to distribute high dividend. 
• Low impairment on trade receivables which means FPI is able to convert 99.8% of their sales into cash. 
• Partnership with its major shareholder - Wistron Group which is a supplier of Apple, Dell, HP etc (starting to do speaker sales to Wistron Group in 2019). 
• FPI do not require heavy capital expenditure to do business. 

Weakness

• FPI is too heavily depends on individual customer as 65% of their sales were from 2 customers only. A reduction of their customer order will cause a huge impact on FPI's financial. 
• Lack of automation in its production process. FPI is heavily dependent on foreign labor where 75% of their employees are foreign labor. Increase in minimum wage and foreign levy will affect FPI operating cost. 
• Feels like the material cost of FPI fluctuate a fair bit by looking at its gross profit margin however it is still manageable(Gross Profit Margin for - 2015: 10%, 2016: 7%, 2017: 13%, 2018: 11%, 2019: 10%)

EMS peer to peer comparison

• FPI is the smallest company amount the 5 electronic manufacturing services industry however it offers the highest dividend yield with lowest PE ratio. FPI also has the most cash in hand. 

As at Q3 2019

• Revenue increased by 43% while distribution and administrative cost increased by 10% which is acceptable (i think increase in labor cost in 2018 was to prepare for 2019 contract orders)
• Increase in other income is mainly due to gain in forex. 
• Increase in other expenses is mainly due to impairment loss on receivable of RM3.3 million.

• Inventories were higher by 13% which means the contract order remain high. 
• Trade receivables increased by 100% however its sales merely increased by 43% (this means that debts recovery has taken longer than usual - suspect is from Wistron)
• Trade payable increase by 50%. 

• Main reason for the increase in revenue was due to sales to Wistron which is its major shareholder (as you can see in 2018, FPI didnt sell any speaker to Wistron however RM142 million of sales was made through Wistron, which account for 25% of FPI revenue).

• The management remain cautious due to rising raw material cost and rising operating cost due to minimum wage policy. 

Valuation at RM1.50

• Q3 usually serves as the strongest quarter for FPI. 
• At the price of RM1.50, its current PE is only 9.64 which is close to its 5 years average PE of 9.44. A fair PE for EMS company would be 14. At PE 14, FPI is worth RM2.19. [Undervalue]
• At RM1.50 a share, its price to book value is 1.25. [Fair]
• FPI has a net cash of RM152 million however its market capital right now is only RM375 million. Meaning to say its cash on hand already constitute 40% of its market capital. [Undervalue]
• Assuming if FPI payout 11sen of dividend for 2019, at RM1.50 a share, its DY is 7.3% [Undervalue]

GENM Q3 2019

1. Genm's revenue increased by 7% to RM7.9 billion with both Malaysia and US increased 12% and 6% respectively while UK revenue dropped by 7% 
• Malaysia -  the overall business volume from gaming segment declined in YTD Sept 2019 due to reduction in incentives offered to the players. The non-gaming segment revenue has increased by 36%.
• US & Bahamas - due to the strengthening of USD against RM. Excluding this impact, revenue would have increased by 2% mainly due to higher volume of business from RWNYC operations.
• UK & Egypt - due to lower hold percentage from its premium gaming segment in UK and lower revenue from Cairo, Egypt.
2. However its EBITA dropped by 2% mainly dragged by businesses in Malaysia due to higher casino duty. However if you look at its EBITA margin as compared to 2017 & 2018, the EBITA margin actually maintains.
3. There is a disposal gain of RM123 million from the disposal of a subsidiary in UK.
4. Lower interest income received in 2019 is due to impairment of the Group’s investment in the promissory notes issued by the Tribe in 2018.
5. Finance cost increased by RM76 million due to lower qualifying assets eligible for interest capitalisation during the period and there is an increase in bank borrowings.

1. Cash at bank reduced 11.2% and bank borrowings increased 1.9% (Its gearing ratio increased to 16% from 9%.) 

1. The management mentioned that the outlook for gaming business remain challenging. 
2. Outdoor theme park expected to open on time which is Q3 2020. 
3. Genm acquire LeoVegas Mobile Gaming Group's subsidiary Authentic Gaming for RM70 million to strengthen its footprint for online gambling in UK. 
4. Resort world NYC is still under expansion to maintain its market leader position in northeast US region. Starting 2020, RW catskill will start to contribute its revenue and losses. 

Comments: 

1. Overall speaking, Genm has reported a higher revenue with a stagnant profit which is considered as good (However its EBITA margin remain competitive which its there is no issue with its core operation).
2. However its gearing ratio increase from 15% from the previous quarter to 16% this quarter. Genm has a series of acquisition on UK Authentic Gaming and US Empire Resort which might prevent it from giving special dividend this year (This is the risk).
3. At current price of RM3.11 its PE is only 12.60. With PE 18, its share price will be RM4.44. If there is no special dividend, at RM3.11 a share, a dividend payout of 11 sen will be 3.5%.

ELSOFT 2019 Q3

1. Revenue and net profit dropped 58% due to lower demand of automated testing equipment (ATE) as explained by the management (On the positive side, its net profit margin actually maintain at 51%).
2. Elsoft reported a higher other income mainly due to forex gain and gain on fair value adjustment on other investment.
3. With lower revenue recorded, Elsoft also manage its administrative expenses with a drop of 27%.
4. Although the earnings dropped, Elsoft actually increase its dividend payout. Elsoft make 2.09 sen but payout 2.5 sen of dividend (Elsoft usually only pays about 70 - 80% of its profit as dividend). 

1. Elsoft remain as a company with no borrowings with a cash pile of RM63 million or net cash per share of 0.10 sen. 
2. Its inventories dropped from RM 5.7 million in previous year to RM 4 million as at Q3 2019 (Could this mean its business is experiencing further slowdown hence lower inventory level?)
3. When the sales is at RM 78 million its trade receivables is RM 14 million (trade receivables is 17% of revenue) , however in 2019, its sales is merely RM 27 million, its trade receivables is RM 10 million (trade receivables is 37% of revenue). 

1. Main reason for the drop in business is due to Malaysia based client. There is one single MNC client dominates 75% of Elsoft business in Malaysia (Obviously that client has purchased lesser testing equipment this year).

1. The company expect the demand remain weak and the situation remain challenging. 

Comments

1. The weak revenue reported is way lower than expected. The last time that Elsoft report a RM 4 million revenue in a single quarter was in Q2 2015. 
2. I think we could use the financial in 2014 as a reflection of Elsoft financial in 2019 - 2020. Its share price during that point of time is RM0.20. 
3. Assuming if there is another 0.5 sen of dividend being paid in Q5 which bring it up to a 3 sen dividend payout, at RM 0.9, its DY is merely 3.33%.
4. The average PE of Elsoft for the past 5 years is 17.5, hence at PE 17.5 and EPS of 3 sen, its share price is RM0.52. At 0.52, its DY is 5.7%

Weakness

1. Over rely on single client hence once the major client reduce its purchase, we will see a major decrease in sales. 
2. Over rely on single product - LED automated testing equipment, hence a drop in demand in ATE will cause a drop in sales.
3. Why would the demand for LED automated testing equipment for automotive and smart device drop when the automotive and smart device sales maintain? 

• Car sales in 2019 maintain at 600k vehicles however the sales of Elsoft dropped 60%? 

• Demand for smart device actually increased every year but sales of Elsoft dropped?