As the world starts to experience a gradual push towards new industries such as Internet of things, 5G, autonomous vehicles, and cloud computing, there is a greater requirement for more and more advanced electronic components and circuits to support them. These components are made up of many different parts and processes which they have to undergo before they can be supplied as standalone products or critical components for larger devices or machines.
As a result of the complexity of these manufacturing operations, a wide variety of supporting activities are required to assist and value-add in the procurement, testing, and manufacturing of these components. Here are 3 stocks which the savvy investor might want to examine for future opportunities.
Nanofilm Technologies Intl (SGX:MZH)
Nanofilm is a leading provider of nanotechnology solutions such as Advanced materials surface coatings and Nano-fabrication for certain optical components. The company also provides Industrial equipment to selected customers for them to utilize in their production lines.
Over 80% of their revenue comes from their Advanced materials business unit where they provide protective and decorative surface solutions for a wide range of products such as smartphones, laptops, piston rings in vehicles, and fuel cells. Their other bright spot is their Nano-fabrication business unit which managed to grow it’s revenue by 90% year-on-year. The Nano-fabrication BU produces optical components such as Fresnel lenses and optical sensors which are used as critical components in more advanced products.
The company has managed to grow it’s total revenue from S$107m in 2017 to S$218m in 2020, representing a revenue growth of 103% over 4 years, with a similiar increase in profit as well. Nanofilm also achieved a profit margin of 26.4% for 2020, increasing from 23.9% in 2018. Increasing profit margins for such companies mean that the company was either able to drive more efficiencies or economies-of-scale, or that the components they produce enjoy great demand, thereby allowing them to transact for higher prices, both of which are great news for investors.
The company intends to continue to focus on R&D while they look for opportunities to enter into the design, manufacturing and assembly of vital components and modules in industries where their advanced materials are key enablers. Nanofilm has also identified future possible markets such as new energy, biomedical, aerospace, and Internet of Things optics.
With it’s great track record, proprietary technologies, the ability to achieve high value-add advancements in their end-products, and a total addressable market (TAM) which is experiencing significant growth, Nanofilm is well positioned and set to continue to outperform and expand well into the future.
Valuetronics Holdings Ltd (SGX:BN2)
Valuetronics is a is an integrated EMS (electronic manufacturing services) provider with a focus on consumer electronics products and also industrial & commercial electronics products. Some products which the company produces are smart lighting products, printers, temperature sensing devices, communication products, automotive products, and medical equipment.
The EMS business model is to specialize in large economies of scale in manufacturing, raw materials procurement, industrial design expertise as well as value added services such as warranties and repairs. This frees up the customer who does not need to manufacture and keep huge inventories of products, therefore allowing the customer to respond to sudden spikes in demand more quickly and efficiently.
Valuetronics manufactures it’s components from their facility in Guangdong province in China, while they await their upcoming facility in Vietnam to be completed in March 2022. With the trade war tariffs affecting their products in China, the opening of the Vietnam facility would allow current and potential customers to diversify their production operations into Vietnam instead, avoiding the China tariffs.
At the moment, the company has cash equivalents of HK$1,129m, which is equivalent to more that 75% of it’s market capitalization. This cash hoard would allow Valuetronics to maneuver through tough business conditions, and seize new opportunities, all while continuing to pay investors dividends annually. The company was also able to increase it’s net profit margins from 6.8% in 2017 to 8.2% in 2021. Last but not least, Valuetronics has a track record of being able to constantly generate strong free cash flow to continue to build up their cash stockpile which allows them to execute their dividend policy of declaring 30%-50% of net profit as dividends.
Although the supply side shortage and loss of an automotive customer seem to have temporarily affected the outlook for the share price, Valuetronics is still forging ahead while continuing to make steady profits and pay out dividends. At a PE ratio of 7.8x, the stock seems to have priced in those negative factors and is undervalued. Investors who believe in the company might want to take a closer look.
AEM Holdings Ltd (SGX:AWX)
AEM is a semiconductor and electronics test solutions provider for Intel; the world’s largest semiconductor chip manufacturer, as well as companies producing advanced devices related to Microsystem technologies, Fibre optic cabling, and semiconductor chip-based memory devices.
Testing is an essential process for all electronic components as there is a need to ensure that the component functions according to design and also meets the performance standard required. Testing also includes various quality control measures such as burn-in and safety tests. This tests are even more important for advanced components such as semiconductors and microdevices which contain large amounts of different electrical components working together. Such testing also greatly minimizes the chance of unexpected system failures and mass product recalls.
AEM provides it’s customers with comprehensive test and handling capabilities and are able to accelerate their product delivery cycles and enhance quality. They are able to handle testing for both advanced R&D and engineering, as well as high-volume manufacturing. With it’s recent acquisitions, AEM now has the capabilities to engage in advanced system level testing for a full suite of application specific test solutions across advanced computing, 5G, and AI markets. This puts them in a position to benefit from the growth of various industries such as mobility, communications, 5G, automotive, and computing.
The company has been able to harness the surge in demand for it’s services, resulting in a rise in total revenue from S$221m in 2017 to S$518m in 2020. Their Profit margins have grown as well, from 14% in 2017 to 18.8% in 2020. AEM looks set to continue it’s growth journey due to the increased demand for component testing for various industries which require integrated circuits to function.
With it’s global presence around the world, and it’s ability to innovate and offer advanced test solutions for customers, AEM should be able to stay relevant and tap into more opportunities for growth from various other industries, allowing it’s share price to outperform well into the future.