Positive trend from trade war should be coming through PIE Industrial and VS Industry

The early impact of trade war can be seen now. While companies are scrambling to reorganize their supply chain, within the short run we see deterioration of international trade. Yesterday, Malaysia announced a 4.4% GDP growth - not bad given the circumstances. Export sector has seen a drop expectedly. As discussed in my previous article, we will see some companies benefiting from the trade war while others may suffer. I foresee those that are benefiting in the long run would be

• PIE Industrial
• VS Industry
• Globetronics
• Pentamaster has shown a surprisingly positive results

While those whom will be immediately impacted are:

• Inari Amertron
• KESM
• Unisem
• Carsem (MPI)
• Aemulus

The announcement provided by Statistics Department which is not a surprise,

Malaysia’s exports of goods in the third quarter of 2019 recorded a decrease of 1.9 per cent to RM247.0 billion as compared to RM251.8 billion registered in the same period last year. The main products which attributed to the decrease were electrical & electronic products and crude petroleum that shrank by 4.9 per cent and 43.9 per cent respectively.

For PIE, it announced a better 3rd quarter results yesterday against previous quarter of 2Q19 as well as last year's quarter of 3Q18. While its profitability improved (due to foreign exchange gain, lower administrative costs, reversal of impaired collection), its revenue dropped a little.

It is a decent result given the circumstances. It is expected as US imposed additional tariff starting on 1 September 2019 causing companies to scramble to readjust. We seen the results impacting some companies but still VS and PIE are not affected as much. In the long run they will gain.

What is more important as has been provided by PIE is a guidance on what it expects for 2019 and beyond as below. From what we read, PIE may not increase its revenue substantially, but potentially the profit margin will increase. It is more selective in its business orders - something which one can do when times are better. It is better times potentially for Malaysian EMS companies. We see the same through VS Industry.

Current Year Prospect - PIE Industrial (3Q19)

The major source of revenue and profit of the Group is from its manufacturing segment (99%). For EMS activities (80%), orders are expected to increase in the long run from existing customers and potential new customers through its fully built-up vertical integrated manufacturing facilities which have been improved in operation for the past 5 years. Due to the beneficial effect of USA-China trade war, this division is expected to receive more orders from new overseas customers in 2019. This division will cancel certain new low-margin, high-volume products since beginning of 2019 and focus on profitable projects from potential new customers. The serious shortage of certain electronics component in 2018 is expected to be smoothen in coming quarters. However, any drastic fluctuation of Ringgit Malaysia against USD will be the main factor affecting its performance in the near future. 

I see better performances for these companies in the EMS sector throughout next few years as the global trend is changing and for the better.

Performance of VS Industry will give us where some of the businesses will be heading

I have in the past mentioned about focus on businesses that has sales to overseas or in short exports. This however does not include stocks dealing in palm oil as it has other challenges themselves. When I mentioned these, I was more of referring to the Guan Chong's of this world, the semiconductor stocks such as Globetronics, MPI, Unisem, Vitrox, Pentamaster, PIE and maybe rubber gloves - although I am seeing some oversupply position among the rubber gloves makers in the short term.

Anyway, as we know - the world is transitioning. We are seeing the clash of two superpowers - US and China. When two superpowers collide, are we the pelanduk (mousedeer) that will die in between (a Malaysian proverb - Dua Gajah bertarung, pelanduk mati in tengah-tengah).

Malaysia, coincidently is not taking sides - particularly in business. We are exporting to both countries. We do business with both countries - business and politically.

In dealing with trade wars, we have to be really in the know what type of companies and business we are dealing with. Semiconductor company - in this particular case - VS Industry - a downstream player - also called a box builder. It is one of the largest South East Asian owned box maker - i.e. the one that assembles, value adds and helps one of its customers, Dyson to manufacture its vacuum cleaners. Dyson for your knowledge does not own a single factory - just like Nike's model - or closer Apple.

In this article, I am not going to mention in detail the business of VS but what it has announced recently and where some of our companies in Malaysia will be heading - not the next few quarters alone but the next few years at least. As a summary, VS Industry has businesses in three countries - Malaysia, China and Indonesia (as below latest results - 4Q19).

Malaysian revenue comprise of 80% of its total revenue. Surprisingly, revenue from Indonesian operations has dropped while unsurprisingly revenue from China dropped even further. As we can see, Malaysia is highly profitable and China is making losses. Indonesia is barely breaking even. China's losses as it has mentioned is because the company seems to be downsizing in that country - not surprising. VS is taking a financial hit in China as it seems that they are focusing harder in Malaysia.

So, what we are seeing is a business where Malaysia is somewhat strong in among our competitor countries like Singapore, Indonesia, Thailand and China (which overtook us by far in the last 2 decades). As below is the explanation as provided by the management of VS which I tend to believe and agree. (no point rewriting them as I can make use of the wonders of cut and paste)

As mentioned above, we know already given that if we do some "reading and watching" and if we know the geopolitical and cross border business perspective, it is the start of where we see what we may see more in the near and medium term future.

More and more businesses are looking out of China - still the factory for the world, and Vietnam and Malaysia will get more queries. The above performance, I see as just the beginning - for VS and few more companies in Malaysia. This is the reason why I am betting on PIE Industrial. PIE, to me could be even better as it is largely only Malaysian operation and does not have operations in China - the setback that we see through VS. The weakness for PIE though is that it is smaller than VS and it is Taiwanese controlled.

Given that if I have time, I will share more of my opinion on export businesses in Malaysia and the trade which I have been spending a lot of time and my current dealings in.

I am though a little bit not satisfied that we start to see this trend as above through VS and several more, but I do not think the "G" i.e. "government, side is doing enough. There are opportunities I think with this trend, moving forward. VS, by the way is doing quite well as a company and management given that they are managing the transitioning - it is not easy.

Confusion on VS Industry

On 21 February 2015, one JXX (not real name) claimed that he (and wife) purchased 15 million shares of VS Industry due to its fantastic latest quarterly performance (Table 1 below).

Table 1 (Blog on 21 Feb 2015)

At that point of time if one was to have around 15 million shares, it would have triggered disclosure to Bursa as the number of shares would have exceeded the 5% threshold. Total number of shares for VS Industry at that time was 205.3 million shares - 15 million / 205.3 million = 7.3%.

1 April 2015, VS Industry announced that it planned to issue around 10% shares via private placement. I would say this is a good move as if it raised them at a good (high) price, would be beneficial to the company. If however, it was issued at below what its value should be, then a bad move. 10% comes to about 20 million shares.

That private placement was completed sometime around June 2015 with 20.58 million shares issued (as below Table 2). (It was issued at RM3.83. Recently, the stock was split into 5 shares hence the placement by today's price should be RM0.69. At its latest trading price of RM1.55, the buyer should stand to earn a handsome 1.25x. Not bad but to sell some 10% or more assuming the largest shareholders would like to sell as well is not an easy task. It will need small shareholders to believe in the stock.)

Table 2. Private placement of VS Industry

Around the same time, JXX (again not the real name) announced that he bought 20.446 million shares (Table 3 below) through a single transaction (I think). Could this be purchased through the private placement? If yes, could he be purchasing almost all the shares offered through the placement?

Table 3

Now my confusion is, if the same person claimed that he and wife bought 15 million shares prior to 21 February 2015, then why the 29A submission tells otherwise? He should have declared prior. Were these bought through proxies?

The same JXX also has been promoting the shares since February 2015 but did he owned any or could some of those shares be bought by the wife?

Note that the claim of purchase was done in February 2015 while the private placement was done in June 2015. I refuse to think that something is not right here, but these are things that does not seem right.

I stand to be corrected. If however the placement was made to JXX, then it is definitely not right or ethical.