[Technology Stock] Cape EMS

Some netizens have been asking me recently, why do so many companies perform well, but their stock prices are still falling?

For example, the Cape EMS Berhad (CEB, 5311), which we are investigating, is a good example; the company reached a new high in FY2024 Q1, and profit after tax (“PAT”) also returned to RM13.4 million, but the stock price still fell from a high of RM1.080 to the key support point of RM1.000, which closed at RM0.970 last Friday.

Today, let's discuss CEB's business, and in the final part, we'll further discuss the topics of rising performance and falling stock prices.

Let me give you an overview; CEB is a company that mainly focuses on electronic manufacturing services (“EMS”), and investors with some experience in Malaysian stocks are certainly not unfamiliar with the term EMS. There are also many people who understand EMS as an “OEM” service for an electronic product. For example, a British hair dryer brand has given huge orders to many EMS companies before, and “achieved” very good results.

However, I'll also share with you here. This hair dryer brand is about to slowly move its main production line out of Malaysia, so if the company you invest in depends on this company, you need to pay more attention.

Back to the topic! Speaking of the EMS industry, there are many services included in this industry, including:

It doesn't matter if you can't read it, just dance and read it~

There are quite a few EMS companies in the Malaysian stock market, and each company's strengths are different. For example, some have invested a large amount of money in SMT and can receive orders requiring SMT services, while others are major shareholders, which have a great advantage in purchasing raw materials, and at the same time, they are not afraid that there will be no orders.

So the whole EMS industry is really very broad.

Our main protagonist today, CEB, mainly procures the raw materials needed and then provides Box Build services; of course, the company also provides SMT, precision parts processing (“CNC Machining”), and aluminum casting to complete the customer's final product.

According to the prospectus, CEB's customers include Mimosa's communication products, Tastar Electronics' POS devices, K & Q vacuum cleaners (brand Eureka), smart utility data collection equipment (“Smart Utility Data Collection Equipment”), and e-cigarettes with the customer's name mentioned.

According to AmInvestment Investment Bank's report, CEB is currently also providing EMS services for LED production; at the same time, within FY2023, the company has also acquired a new customer T to jointly develop miniature wind and hydroelectric power generation systems. This customer also appears to be quite a small company. According to Xiaodao, the customer was brought by a newly acquired subsidiary of the company.

Within FY2023, CEB also reached a joint venture agreement (“JV”) with a Singapore company, and CEB will hold the JV, or Vectrix Technology Pte. Ltd. (“Vectrix Technology”) shares 60.0% of the shares to co-generate electricity, produce electric motors (“LEV”), and systems to replace electricity.

In theory, it should have reversed FY2024's Q1 results.

However, I personally think the next CEB has the most potential is iCONn Inc. (“iCONn”), which they bought last year for RM76.6 million.

According to the understanding of the publisher limited, iCONn is a company that mainly “manages the EMS production chain”; they can provide customers with product design services, and also find suitable EMS companies for customers through their “virtual” production chain (that is, linking customer needs with EMS supply) to complete product manufacturing.

For example, according to the information mentioned above, customer T is requesting iNN to provide EMS services, and if iConn can do it themselves, they will do it themselves (or hand it over to CEB), and the rest will be done by other EMS companies in the form of outsourcing.

But more importantly, during the product development process, all electromechanical (“Electromechanical”) designs will be retained by iNN as intellectual property (“IP”), and can be improved and reused by the next customer.

At the same time, iCONN itself will also provide profit guarantee (“Profit Guarantee”) from FY2024 to FY2026, making a profit of about RM12.0 million every year, which will also strengthen CEB's performance!

Overall, CEB's prospects and performance are actually very good, but why is the stock price still falling recently?

With the stock price falling this time, I personally summed up two main points:

First, CEB's performance has declined (referring to FY2023 Q4), which has led many institutional investors to sell. In particular, some investors issued private placements (“Private Placements”) at the company to acquire iCN, and even sold the company's shares at a lower cost, which is very intriguing.

Judging from the stock price, in fact, CEB itself has had some selling pressure during this period.

Second, CEB had high expectations with many companies before the results were released. It is true that the company also delivered performance that exceeded expectations. PAT increased by 57.71% and 143.55% year-on-year and quarterly, but at the same time, favorable conditions were reached, triggering arbitrage conditions, causing its stock price to fall to the RM1.000 mark.

The above is just speculation. Whether it's true, you have to ask institutional investors to understand it. Anyway, judging from the FY2023 annual report, many institutional investors are right.

Well, if we look at the FY2024 Q1 quarterly report, we can see that CEB is still optimistic about future prospects. With CEB's new Turkish customer (customer T), future performance is expected to continue to grow.

So, I wonder if readers will be optimistic about CEB?

In my opinion, I think it would be best if the valuation could be cheaper.

Photo Credit: Taken from iConn Technologies website

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