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 QES 0196 QES GROUP BERHAD ramps up ATE manufacturing to drive higher returns

SHAH Alam-based QES Group Bhd is one of the few automated test equipment (ATE) players that have been relying more on their distribution business to help generate revenue, but that’s about to change. The group is shifting its focus to its manufacturing segment to drive higher returns going forward, says managing director and president Chew Ne Weng.

QES started in October 1991 as a distributor of test, inspection and measuring equipment before becoming a manufacturer about 10 years later. The distribution segment is now its bread and butter, accounting for 85% of its revenue, with the rest coming from its manufacturing division.

“Over the past few years, I have been trying to pivot QES’ business model towards manufacturing. If you look at our capacity expansions and factory relocations, all these are part of our effort to increase our manufacturing revenue,” the 59-year-old tells The Edge.

Chew sees the revenue contribution from its manufacturing segment increasing to 35%-40% within the next two to three years. “As a group, we are aiming for a blended CAGR (compound annual growth rate) of 15% for top and bottom line over the next three to five years. I don’t think our manufacturing business has reached an inflection point yet, which means the room for growth remains very high.”

QES’ revenue and earnings reached all-time highs in the financial year ended Dec 31, 2021 (FY2021). Revenue grew 43.6% year on year to RM222.8 million, while its net profit doubled to RM19 million.

“FY2021 was a good year for us. Our group chalked up record revenue and net profit last year because we are in the right sector, as both our divisions are serving mainly semiconductor clients,” says Chew.

Chew is the single largest shareholder of QES with a 30.12% stake, of which 26.13% is held through his private vehicle WA Capital Sdn Bhd. This is followed by its executive director Liew Soo Keang, with a 22.87% direct stake.

QES’ annual report for FY2021 shows that its top 30 shareholders include Hong Leong Asia-Pacific Dividend Fund, Public Strategic Smallcap Fund and TA Islamic Fund. On June 1, the group proposed a transfer from the ACE Market to the Main Market of Bursa Malaysia.

“We don’t have many institutional investors. We believe the transfer to the Main Market will increase our profile and allow us to be on their radar. Ideally, I wish they would take up a 15%-20% stake in our company,” says Chew.

QES is particularly excited about its new automatic optical inspection (AOI) series’ wafer inspection equipment, dubbed PPI 3300, which had a soft launch at the Semicon SEA 2022 event in Penang last week.

“We could sell this equipment to both front-end and back-end players. From what I have gathered, only QES and another one or two listed ATE firms are developing this type of equipment at the moment, and the Asean region alone needs at least 80 wafer AOI tools — which are worth about US$80 million (RM352 million) — every year,” says Chew.

The counter has fallen 26% year to date to close at 50 sen last Thursday, giving the company a market capitalisation of RM417.07 million. It is currently trading at a historical price-earnings ratio (PER) of 22.2 times.

In comparison, its larger peers ViTrox Corp Bhd and Pentamaster Corp Bhd are trading at PERs of over 30 times, while its smaller peers VisDynamics Holdings Bhd and MMS Ventures Bhd are trading at a PER of 10 times and 13 times respectively.

With the advent of technology, including electric vehicles and the Internet of Things, Chew expects QES’ businesses to continue growing in the coming years.

“Obviously, there has been a selldown on technology stocks since the beginning of this year. But to me, this is just a matter of stock valuation. The bright prospects of the tech sector and the fundamentals of tech companies are still there,” he stresses.

Chew expects QES to continue riding the global semiconductor boom, as the group intends to make more automated or semi-automated wafer inspection equipment and wafer sorting machines for its front-end clients, including wafer fabrication companies, as well as some back-end customers.

“There are a couple of wafer fabs in Malaysia, some of them are expanding, which is good news for equipment players like us,” he notes.

QES had last year formed a 30:70 joint venture with Applied Engineering Inc from the US to set up high-technology electromechanical contract manufacturing operations in Batu Kawan Industrial Park (BKIP), Penang. The 18,000 sq ft, rented factory has been in operation since April.

Meanwhile, the group had acquired a two-acre parcel at BKIP from the Penang Development Corp for around RM5 million and budgeted RM15 million to put up a 90,000 to 100,000 sq ft factory there. Construction should start by the end of this year and is slated for completion by end-2023.

QES also moved to its new headquarters at Hicom Glenmarie Industrial Park, Shah Alam, on March 23. The new HQ has a production space of over 80,000 sq ft, with a capacity to produce 80 to 100 machines a year.

Mercury Securities analyst Ronnie Tan likes QES for its attractive growth prospects, strong presence in the Asean region and stable recurring income.

Tan is forecasting QES’ earnings to grow further to RM22.4 million in FY2022, RM27.9 million in FY2023, and RM31.4 million in FY2024. “Key risks, however, include material supply chain disruption and slower-than-expected contract flows,” he says in an April 21 report.


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