By Carey Wong
Tue, 18 Mar 2008, 11:35:13 SGT

We recently paid a visit to Electrotech Investments Limited (EIL) in Penang. EIL remains confident of expanding its Mechatronics and EMS business in Penang as management expects things to remain status quo i.e. still very business friendly, despite the recent change in state government. EIL runs its Mechatronics operations through Frencken Malaysia, which is not only an important internal support unit to the Frencken Group, but has also started to penetrate the Asian market on its own. As for its EMS business, EIL is in the process of changing its game plan. While EIL will retain Plastics as one of its core operations, it is working to reduce its dependency on its Keypad business. Instead, EIL wants to build up a critical mass of at least MYR100m in its OA (Office Automation) and AU (Automobile) businesses over the next two years to enhance long-term stability. However, this may come at the expense of short-term profit as EIL scales back its Keypad operations and retool some of the equipment for the OA and AU segment. EIL is sitting on a healthy cash hoard of S$44.0m, or S$0.14/share, which is more than adequate to fund its planned S$14m capex. We do not have a rating on the stock.

Penang Plant Visit. We recently paid a visit to Electrotech Investments Limited (EIL) in Penang to have a look at its Mechatronics and EMS operations there. According to management, things are expected to remain status quo in the Malaysian state i.e. still very business friendly, despite the recent change in state government, given that manufacturing activities contribute a significant portion (>50%) of the state’s GDP. As such, EIL remains confident of expanding its Mechatronics and EMS businesses in Penang.

Growing Frencken Malaysia. EIL runs its Mechatronics operations through Frencken Malaysia (FM), offering full turnkey electro-mechanical assemblies involving mechanical, electrical and plastic parts. Being an important internal support unit to the Frencken Group, which contributed some 60% of its MYR21m revenue in FY07, FM is also looking to get more product transfers from Frencken Netherlands over the next few years. In addition, FM is targeted to grow and penetrate the Asian market where the demand for such service is expected to grow rapidly in the future. We understand that FM on its own has secured several key Japanese customers in the analytical space. On the whole, EIL expects Mechatronics revenue to show growth in 2008.

Changing its EMS game plan. As for its EMS business, which it operates through the Precico Group, EIL is in the process of changing its game plan. While EIL will retain Plastics as one of its core operations, it is working to reduce its dependency on its Keypad business, which continues to face volatile revenue, short visibility and depressed margins. On the other hand, management wants to build up a critical mass of at least MYR100m in its OA (Office Automation) and AU (Automobile) businesses to enhance long-term stability (see Chart 1). We understand that EIL has already started to reap some fruits of its efforts started some two years ago (see Chart 2) and will be looking to harvest more in 2008 and 2009. However, this may come at the expense of short-term profit as EIL scales back its Keypad operations and retool some of the equipment for the OA and AU segments.

Healthy cash hoard. EIL is sitting on a healthy cash hoard of S$44.0m, or S$0.14/share, which is more than adequate to fund its planned S$14m capex (S$9m for Mechatronics, S$5m for EMS). We do not have a rating on the stock.