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JADI

A POTENTIAL TURNAROUND COMPANY?

MAYBE. KEEP IN VIEW.

KEY POINTS

    JADI, A WORLD CLASS INDEPENDENT TONER MANUFACTURER, IN ADVANTAGEOUS POSITION TO SELL TONERS TO CHINA

    CONTRARY TO POPULAR BELIEF, OFFICE PRINTING IS NOT A SUNSET INDUSTRY, INSTEAD BUOYED BY SUSTAINABLE DEMAND

    FUTURE 3-YEAR REVENUE SECURED FROM NINESTAR, A GLOBAL PRINTING GIANT

    2020 & BEYOND – TONER’S COMPETITION RISK MITIGATED

    RIGHT TIMING: VENTURING INTO PREMIUM STATIONERY DURING THE WORK FROM HOME TREND AS THE MALAYSIA EXCLUSIVE DISTRIBUTOR OF NUSIGN, SALES ARE GOOD

    FORWARD-LOOKING: VENTURING INTO 3D PRINTING AS THE MALAYSIA EXCLUSIVE DISTRIBUTOR OF ANET 3D PRINTERS, TARGETING EDUCATIONAL INSTITUTIONS

    DISTRIBUTING & SELLING CHINESE-MANUFACTURED FACE MASKS, SOME SOLD OUT

    AFTER LARGE-SCALE WRITE-OFF, JADI’S NTA IS NOW STANDING AT 11 SEN PER SHARE – WORST COULD BE OVER

    MANAGEMENT BELIEVE THEIR SHARES ARE UNDERVALUED, SHOULD BE WORTH 18-20 PER OF EARNINGS IN COMING YEARS
   
    BUSINESS RISKS: CANCELLATION OF COMMITTED TONER ORDERS, OPERATIONAL INEFFICIENCIES

    CONCLUSION: JADI MAY TURN AROUND. WORTH TO KEEP IN VIEW FOR TURNAROUND INVESTMENT


JADI, A WORLD CLASS INDEPENDENT TONER MANUFACTURER, IN ADVANTAGEOUS POSITION TO SELL TONERS TO CHINA

Located in Shah Aham, JADI develops, formulates and manufactures toners for laser printers, photocopiers, facsimile machines and multi-function office equipment.

Toner manufacturer is strictly discouraged in China due to environmental impact. This puts JADI in an advantageous position to sell their toners to the Chinese customers. 95% of JADI’s sales in terms of volume and value come from exports, with China contributing about 65%. JADI expects China’s contribution to increase to 85% to 90% within the next 3 years.


CONTRARY TO POPULAR BELIEF, OFFICE PRINTING IS NOT A SUNSET INDUSTRY, INSTEAD BUOYED BY SUSTAINABLE DEMAND

On 23 October 2019, JADI’s executive chairman and CEO Liew Kim Siong stated while digitisation had been replacing hardcopy printing, office printing would be here to stay. For example, companies in most countries need to keep hard copies of their financial statements for the last seven years. However, the public is having a negative perception of the printing industry.

Today, Canon, Xerox and Minolta are making more laser and multi-function printers rather than just standalone analogue photocopy machines. These digital printers provide various functions such as photocopying, faxing, scanning and emailing – fulfilling significant office demand.

Jadi is making dry-powdered toner for laser printers and multi-function printers, which are used in the office environment.

Could the negative perception of the printing industry make the market overlook JADI?


FUTURE 3-YEAR REVENUE SECURED FROM NINESTAR, A GLOBAL PRINTING GIANT

On 13 August 2019, Ninestar bought 9.09% of JADI’s total shares at 13 sen per share.

Source: The Star

As of 28 August 2020, JADI’s share price is traded at 13 sen per share too.

Shenzhen-listed Ninestar, which has a market capitalisation of 30.9 billion yuan, is a global printing giant that owns Lexmark, a globally-renowned printer brand, as well as Pantum, a top printer brand in China. Willing to buy JADI's shares at a 13 sen, perhaps Ninestar sees something in JADI that is overlooked by the market.

Based on an agreement, Ninestar will be buying a committed quantity of 250MT, 325MT and 420MT of chemical toners in the first, second and third year respectively. The amount of toner supplied each year is increasing. With that, we can expect JADI to have clear, strong revenue visibility for the next 3 years.

We guesstimate this segment to generate a total revenue of around RM80-120 million over the next 3 years, with a PBT margin of around 20%

To achieve the revenue Ninestar and other customers provides, JADI had invested RM16 million to expand its chemical toner annual capacity from 100MT in 2019 to 800MT.

According to JADI's latest quarterly report released on 29 July 2020, JADI's chemical toner production plant is completing in the 2nd half of 2020. It is expected to position JADI with favourable prospects in the toner manufacturing industry globally.

At a debt-to-cash ratio of 1.19x, JADI is currently a net debt company. It is having RM9.7 million of cash and RM11.5 million of total loans. However, this should not be an issue because the expansion will complement in the 2nd half of 2020. Moving forward, JADI should be able to generate significantly higher revenues through their 8x toner production capacity.

With a current ratio of 8.61x, JADI should have no issues meeting short term financial obligations.


2020 & BEYOND – TONER’S COMPETITION RISK MITIGATED

JADI’s competitors are based in Japan, China and Taiwan. In terms of capacity, only one company in China is equivalent to Jadi but the Chinese firm does not have chemical toner technology. Toner manufacturer is strictly discouraged in China due to environmental impact. This puts JADI in an advantageous position to sell their toners to the Chinese customers.

As JADI is the first toner manufacturer that Ninestar has taken an equity stake in, JADI is the preferred supplier of conventional and chemical toners, with access to a ready market. According to JADI management, if the partnership between goes well, Ninestar may consider taking up an even bigger stake in JADI in future.

Besides selling toner to Ninestar, JADI will also sell toners to other customers in Malaysia and a few Asian customers.


RIGHT TIMING: VENTURING INTO PREMIUM STATIONERY DURING THE WORK FROM HOME TREND AS THE MALAYSIA EXCLUSIVE DISTRIBUTOR OF NUSIGN, SALES ARE GOOD

Due to the recent COVID-19 pandemic and the New Normal, more and more people start to work from home. Spending most of the time at home, people start to have increased expectation of their furniture, electronic gadgets and stationery supplies – calculators, pens, files and folders. People start to look for premium, minimalist stationery supplies to keep their home-workplace clean, comfortable and inviting.

In July 2020, JADI has become the exclusive distributor of the Nusign premium stationery products across Malaysia. Nusign products include minimalist-designed and pastel-coloured premium writing instruments, adhesive products, files and folders, and more.

Nusign is a brand of Ningbo Deli Import & Export Co Ltd (Deli). Headquartered in Ningbo, China, Deli is the largest stationery manufacturer in Asia with more than 2,000 products sold in more than 100 countries through seven facilities.

The partnership with Deli offers an excellent opportunity to strengthen the group’s position in the marketing and distribution of high-quality curated products in the office, home office, school, and IT supplies industry via e-commerce and brick-and-mortar sales channels.

Based on unofficial yet reliable sources, JADI’s premium stationery products are selling quite well in this period of New Normal and working from home.

As an exclusive distributor, JADI enjoys the exclusivity rights, reasonably higher profit margins and low financial risks.


FORWARD-LOOKING: VENTURING INTO 3D PRINTING AS THE MALAYSIA EXCLUSIVE DISTRIBUTOR OF ANET 3D PRINTERS, TARGETING EDUCATIONAL INSTITUTIONS

The global 3D printing market size stood at USD 8.6 billion and 2018 and is projected to reach USD 51.8 billion by 2026 at a CAGR of 25.8%. 3D printing is continuously growing at a rapid rate due to its accuracy in printing objects and ability to manufacture custom products according to exact consumer needs by optimising raw materials.

Increasing research and development activities in the field of this advanced technology and growing demand for prototyping industries such as healthcare, automotive, aerospace and defence are driving the 3D printing market growth.

Source: Fortune Business Insights

On 5 August 2020, JADI has become the exclusive Malaysia distributor of ANET 3D printers and supplies. Headquartered in Shenzen, China, Anet is a leading 3D printer manufacturer with strong international certifications (i.e. CE, FCC, ROHS, ISO 9001) and exports to more than 70 countries.

The partnership with Anet will kickstart JADI’s venture into the 3D printing industry by introducing 3D printers as a new educational tool in Malaysia. Anet’s range of 3D printers for education purpose will play a key role in introducing the technology to the younger generations.

As an exclusive distributor, JADI enjoys the exclusivity rights, reasonably higher profit margins and low financial risks.


DISTRIBUTING & SELLING CHINESE-MANUFACTURED FACE MASKS, SOME SOLD OUT

We also found out that JADI is selling face masks online. After interacting with some people involved in the sales of face masks, we gather that JADI is distributing face masks manufactured in China.



Some of JADI’s face mask are currently out of stock.


AFTER LARGE-SCALE WRITE-OFF, JADI’S NTA IS NOW STANDING AT 11 SEN PER SHARE

Due to stiff price competition, JADI has been making losses for 5 continuous quarters. In the latest quarter ending March 2020, JADI recorded its largest loss of RM23.3 million. This piqued our interest.

Looking into it, we realised that JADI’s revenue has decreased by 35% mainly attributed to COVID-19 pandemic lockdown in China. JADI also made a total writeoff of RM15.8 million in inventory, plant and equipment and a RM765k fair value adjustment on employee share options (ESOS). With such level writeoff and fair value adjustments, the worst for JADI could be over.

After large-scale write-off, JADI’s NTA is now standing at 11 sen per share.


MANAGEMENT BELIEVE THEIR SHARES ARE UNDERVALUED, SHOULD BE WORTH 18-20 PER OF EARNINGS IN COMING YEARS

Based on a coverage from the Star, we noticed that JADI’s management feels their shares are undervalued.

Below is the exact information extracted from The Star:

    “Despite the good news that Jadi is teaming up with Ninestar, which will provide us earnings visibility for the next three years, we are not seeing any interest in our shares, and that is disappointing,” says a visibly upset Kim Siong.

    “The fact that the Chinese firm is buying our shares at 13 sen speaks a lot about how undervalued they are. Perhaps we have not done enough on IR (investor relations), and we will try to improve that when the earnings kick in,” he adds.

    “To me, if we can deliver the results in the coming years, I believe our shares will be valued properly at about 18 to 20 times. If they are not, that means the market does not appreciate our stock, and it may not make sense for us to remain listed anymore. Don’t get me wrong, I am not saying that we plan to privatise the company. But we have to remain open to all options,” he says.

Source: The Star


BUSINESS RISKS: CANCELLATION OF COMMITED TONER ORDERS, OPERATING EFFICIENCIES

No company is spared from business risks. We believe JADI's business risks are cancellation of commited toner orders and operating inefficiencies, which will impact its top and bottom lines.


CONCLUSION: JADI MAY TURN AROUND. WORTH TO KEEP IN VIEW FOR TURNAROUND INVESTMENT

To sum up,

    JADI’s main business, toner manufacture and distribution has secured 3-year orders with increasing yearly values from Ninestar, starting from October 2020. Revenue visibility from this section is clear for the next 3 years.

    JADI’s new venture into premium stationery in July 2020 seems to be doing well in the era of New Normal and working from home.

    JADI’s new venture into 3D printing distribution to education institutions in August 2020 seems be a forward-thinking and strategic move into the new era of 3D manufacture.

    As an exclusive distributor, JADI enjoys the exclusivity rights, reasonably higher profit margins and low financial risks.

    JADI’s is selling face masks, with some of them sold out.

    Large-scale writeoff has taken place. The financial-worst could be over.

JADI’s management also believes that their shares are undervalued, but we can’t take their words for granted. Due to lack of forward-looking financial data points, we have no opinion on JADI’s valuation.

That said, JADI is indeed showing some prospects and proactiveness in capturing new business opportunities. JADI has been low-profile, but with recent development, we believe JADI would be making announcement in near future. We think that JADI may have a turnaround, but no one can say for now.

By monitoring JADI performance in the upcoming quarters, the answer would be clear.


DISCLAIMER

This article is produced based on our own study, analysis and guesstimates based on information available, for sharing purpose only. Our views could be impartial and/or inaccurate. There is no buy/sell recommendation.


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https://klse.i3investor.com/blogs/jomnterry/2020-08-31-story-h1512629213-JADI_A_POTENTIAL_TURNAROUND_COMPANY_MAYBE_KEEP_IN_VIEW.jsp
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