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NOTION (0083) NOTION VTEC BHD : Part 2 - Orders Exploded together with CoronaVirus (Davidtslim)

1.0 Notion Vtec Berhad  - Introduction
My NOTION PART I Article covers the business models and products & services offered by Notion Vtec Berhad,for more information, please visit the link as follows:-
2.0 Notion Vtec Berhad – Beneficiary of the Coronavirus-Triggered Disruption
Electronic Manufacturing Services (“EMS”) segment will be the biggest growth catalyst to Notion. Notion’s European MNC client has been sourcing metal and aluminum parts, mainly from both Malaysia and China. Notion has the biggest market share and market leader in Malaysia as a metal part supplier to this European MNC client.
However, due to the outbreak of Coronavirus, it has affected the supply chain, especially from China, CNN has reported news as follows: -
Potentially More Orders Shift to Notion from China Suppliers
The virus situation in China may help to accelerate the relocation of metal parts currently made from suppliers in China to Malaysia. Notion would be a biggest beneficiary on this. We shall see Notion to receive more orders especially aluminum tubular products - surge in big volumes.
3.0 Notion Vtec Berhad’s Core Compentencies and Engineering Capabilities
Notion has spent around RM100mil and RM80 mil capex in 2018 and 2019 respectively to upgrade its precision machines and buy new machineries and equipment. The strong technical and engineering capabilities are one of the main reasons why NOTION is being selected as main supplier in Malaysia to this European MNC customer.
“For more information about the capabilities and to view pictures of new machines, please refer to appendix section in this article.”
4.0 Notion Vtec Berhad - SWOT Analysis
A SWOT analysis on Notion is as below:-
SWOT analysis (S-strengths, W-weaknesses, O-opportunities, and T-threats)
Strengths Weaknesses
  1.  Strong in-house expertise team in precision metal parts that able to provide fast response time services for its MNC customers.
  2. Complete spectrum of services from design to production, tooling development, quality assurance, surface coating and finishing, heat treatment and logistics.
  3.  One of the largest auto braking plunger suppliers in the world where they produce 30 million pieces of plungers annually.
  4.  Sophisticated machines which have high level of automation (require less workers and higher quality of products)
  1. Competition from other precision metal manufacturers.
  2.  Concentration risk by relying on European MNC customer
Opportunities Threats (Risk)
  1.  Potential beneficiary from US-China trade war where some of its potential new customers may shift their orders to Malaysia EMS player and machine part manufacturers.
  2.  Potential beneficiary from China CoronaVirus where there is a possible some orders divert from China to Notion from its MNC and plunger clients and due to stop of production in China due to long holiday.
  1. Expected to have strong revenue growth in EMS segment in coming 1-2 years due to sizeable orders from its MNC customer.
  1. Rising labour cost and hike in minimum wages in Malaysia.
  2.  Higher aluminum price which may affect its material cost. 

4.0 Analysis of Shareholdings – Directors and Prominent Investor, Mr.Fong Si Ling

In the past 1 year, table above has shown that most of the directors have been increasing their stake in NOTION, by showing strong confidence on the company’s prospect and fundamental.
The management has also expressed their views about bright outlook with strong growth within the Company in the latest Annual Report, under Management Discussion & Analysis, as follows:-
Annual Report 2019:
“This year, we have moved away from being a pure machinist to now include fabrication works as part of our core business. Procurement of a high profile European customer in the Electronic Manufacturing Services should auger well for us in the coming years as we expect this segment to grow significantly.
The Automotive segment is expected to grow following the addition of three new multinational customers in 2019.”
The prominent investor, Mr Fong Si Ling has also increased his stake by about 1 million shares in the past 1 year. The fundamental and growth potential of NOTION has been affirmed by Mr.Fong’s action, as a value investor.

5.0 Comparable Company Analysis and Valuation Model
Comparable Company Analysis
UWC Berhad and Dufu Technology Corp. Berhad have been selected as closest peer in KLSE, the reasons and basis have been elaborated on table below.

Comments: Dufu is selected as Notion's closest peer in HDD industry, however, they have different engineering capabilities. Dufu has done well in HDD spacers especially Seagate titanium spacers while Notion is not a supplier to Seagate directly. Lately, Notion has secured a new customer in HDD industry - Toshiba Storage.
Valuation Model  

Why Notion intrinsic value may worth PE 20x? High PE of technology related stock normally tie to high growth with normally with a rule of thumb of PE 20x = expected 20% growth. Like a company with PE40x may need to grow at 40% to justify its high PE valuation.
Prominent investor Coldeye (Mr Fong) also mentioned about high PE valuation is supported by high growth in his recent Nayang newspaper article as below:
Source:
https://www.enanyang.my/news/20200208/%E6%8A%95%E8%B5%84%E5%9D%9A%E6%8C%81%E6%AD%A3%E9%81%93%EF%BC%88%E4%B8%8B%E7%AF%87%EF%BC%89%E5%86%B7%E7%9C%BC/
Based on current strong EMS and automotive orders secured, it is expected the revenue of Notion to grow continuously in coming 1-2 years (YoY projected to grow 30%+ in 2020). The bright outlook is supported by high demands of its European MNC customer which their experience, modern machinery, response time and quality of their high precision metal parts.

Market capitalisation comparison for some precision metal players in Bursa:

Note: NOTION has the lowest market capitalization among all his closer peers in KLSE.

6.0 Conclusion
In Part II, it will give you a broader picture on valuation of NOTION compared to its closest peers, its Core Competencies and how it is possible to be benefited from the recent coronavirus outbreak which has caused supply chain disruption.
In Part III, I may discuss the followings: -
  1. A comprehensive technical capability comparison table between Notion Vtec Berhad and UWC Berhad.
  2. Products ranges supplied by Notion to its European MNC Customer.
  3. Balance Sheet and Cash Flows Analysis on Notion Vtec Berhad
  4. Mass Production on Multiple Projects by Notion Vtec Berhad – Growing on a Rapid Mode
If you interested on my analysis report, please contact me at davidlimtsi3@gmail.com
You can get my latest update on share analysis at Telegram Channel ==> https://t.me/davidshare
Disclaimer:
This writing is based on my own assumptions and estimations. It is strictly for sharing purpose, not a buy or sell call of the company and the contents of this report should not be considered as professional financial investment advises or buy/sell recommendations. I strongly encourage you to do your own research and take independent financial advice from a professional before you proceed to invest.
I make no representations as to the accuracy, completeness, correctness, suitability, or validity of any information on my report and will not be liable for any errors, omissions, or delay in this information or any losses and damages arising from its display or usage. All users should read the posts and analysis the information at their own risk and we shall not be held liable for any losses and damages.
Appendix:
A Glance of its machining and fabrication capabilities (Technical and Engineering Capabilities)
The capabilities of a precision parts company lies on its completeness of its machining and fabrication facilities. Notion has spent around 100mil and 80 mil capex in 2018 and 2019 respectively to upgrade its precision machines after the fire incident in 2017. Let have a look on some of its machines and facilities in its Klang factory as below:
Figure 1 (a) Machine to fabricate its own drill bit sets which are more optimize for customized products or requirements, Figure 1 (b) drill bit produced from the machine.
Figure 2: Laser cutting machine (for high precision metal part or special shape cutting products)
Figure 3: 6-axis CNC super precision tool grinders for the manufacturing and regrinding of round & non-round cutting tools, from 0.1mm to 16mm precision. one of the world's most reliable tool grinders on the market today.
        Figure 4: 4000mm length stainless steel CNC Vertical V Grooving machine and V cutting machine
Figure 5: Fully automatic EBS (braking system part) machine (yearly production of 30 mil pieces of EBS part for its customers Delphi Technologies, Hilite International and BorgWarner)
Figure 6 Digital SLR camera lens metal part (produced from one of its machines also)
There are also many highly automated machines using robotic arms to produce plunger (for EBS) and harkdisk spencer (metal parts).
       For me, the potential of Notion is lies on its capability of converting its Technical and Engineering capacities to     
       sizeable order from its MNC home appliances client. This order come with higher profit margin as compared to its
       traditional Hdd business which should provide sustainable growth in coming 1-2 years.


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