Stock Watch: Vitrox Corporation Bhd (“Vitrox”) [KLSE Stock Series]

One of the solid company in Malaysia is Vitrox Corporation Bhd (Ticker Vitrox).

ViTrox Corporation Berhad is a Malaysian based electronics company located at Penang, Malaysia. Vitrox specializes in designing and developing automated vision inspection system and equipment testers for the semiconductor and electronic packaging industries as well as electronic communications equipment.

Vitrox is one of the leading global automated vision inspection equipment suppliers to global semiconductor and EMS players. The company is constantly optimizing its inspection equipment machine to remain industry competitive.

Listed on MESDAQ (now known as ACE) market of Bursa Malaysia in 2005, Vitrox is one of the leading solution providers of automated vision inspection systems and equipment for the semiconductor and electronic packaging industries.

Vitrox was established in 2000 to design, develop and manufacture cost effective automated vision inspection equipment and system-on- chip embedded electronics devices for worldwide semiconductor outsourced assembly and test companies, printed circuit board manufacturers, electronic assemblies companies, original equipment manufacturers, original design manufacturers, electronic manufacturing services providers and contract manufacturers around the world.

Vitrox’s core products today are its Machine Vision System (MVS), Automated Board Inspection (ABI) and Electronics Communication System. Currently, the group has an extensive distribution network globally and a wider customer base.

Serving diverse sectors to mitigate downturn risks –Providing effective vision inspection to industrial systems to ensure product quality and yields improvement, Vitrox’s automated inspection systems have been widely used in the final inspection for automotive, consumer, healthcare, telecommunications, electronics products.

Currently, Vitrox has 40 to 45% market share in Advanced 3D Optical Inspection (AOI) space (a duopoly market with a Korean company).

Over the years, Vitrox has built a strong presence in more than 40 countries and 685 installed customer base.

Encouragingly, Vitrox has a well-diversified geographical and consumer base that has largely kept it insulated from supply chain bottlenecks.

Aside this, through heavy R&D commitment (more than 10% of revenue over the years), Vitrox manages to maintain a competitive advantage in this business with its extensive knowledge in lighting, optics/ imaging, sensors/cameras, electronic and mechanical handling and software systems.

Hence, it has created proprietary hardware and software algorithm that enable Vitrox to stay ahead of the competition.

Vitrox is one of the leading global automated vision inspection equipment suppliers to global semiconductor and EMS players. The company is constantly optimizing

its inspection equipment machine to remain industry competitive.

While we expect value stock to take the front seat in 2022 amid rotational plays in a rising rate environment and persistently high inflation, the steep de-rating growth of technology stocks to a level of unseen since 2019 was surprise, since the sector fundamentals remain sound.

Hence, it may be considered a great opportunity for investors to buy into Vitrox, which is backed by technology mega trends, core competencies, favorable product mix and sensible valuation of 33.0x PE FY22E.

Laudable profitability record in a volatile industry – Since the operating in 2000, Vitrox has displayed

uninterrupted annual profitability amid a volatile industry, global financial crisis and pandemic (see

Figure 2).

For 1HQ22, Vitrox recorded turnover of RM374.7m (+14.9% y-o-y) and core earnings of RM98.7m (+19.2% y-o-y), underpinned by continued growth in its ABI systems (see Figure 3).

Notwithstanding potential material shortages and shipment delays, the MVS and ABI segments (accounted for 53%/ 45% of total revenue in FY21, respectively) are likely to perform well for the remainder of FY22.

With this, many analysts remain optimistic on Vitrox outlook as global semiconductor equipment sales reached an all-time high of USD102.6b (+44% y-o-y) in 2021, as per SEMI.

This was underpinned by aggressive capacity expansion and a structural shift towards high performance computing/ IoT/ 5G applications.

Meanwhile, as shipment backlogs remain sizeable, SEMI is forecasting the global semiconductor equipment sales to reach a record USD117.5b (+15% y-o-y) in 2022. Hence, analysts believe Vitrox is poised to record another growth year for its net profit in FY22.

Favourable industry dynamics – Rising labour costs and increasing complexity of semiconductor packages are key drivers for more advanced test and inspection automation in search of optimum production yields.

Meanwhile, high barriers to entry from extensive domain knowledge requirement, will cap competition and price erosion especially in the advanced inspection equipment segment i.e. AOI and Advanced 3D X-Ray Inspection System (AXI).

As per Market Analysis and Insight, due to Covid-19 pandemic the global semiconductor inspection

equipment market size is estimated to be worth USD9.7b in 2022 and is forecasted to a readjusted size of USD12.7b by 2028, hence opening windows of opportunities for Vitrox.

Net beneficiary of strong USD – Vitrox is exposed mainly to fluctuations in the USD against the RM as approx.

75% of its revenue is denoted in USD. While, raw material purchases that account for approx.

30% of COGS act as a natural hedge, the remaining portions such as wages and overheads are denoted in local currency.

Consequently, a weaker RM against the USD exchange is favourable to Vitrox.

Though some raw materials are experiencing price increase due to supply shortage, the company is able to pass on some cost increase to its customers.

Aside this, Vitrox is also focusing on value-adding features such as AI and IR 4.0 capabilities to its products, complemented by its V-One data analytic platform, in an effort to increase ASP in the long run.

Strong balance sheet to fund future expansion – Vitrox’s existing facility, Batu Kawan Campus 2.0 (existing floor space of 400-450k sq. ft.), is currently over 80% utilised and with its solid net cash war chest of RM200m as at end Mar 2022, it has commenced its expansion project on its proposed 450k sq. ft. Campus 3.0.

The company intends to invest between RM80m and RM100m in this new expansion project.

Management indicated that Phase 1 of the approx. 100k sq. ft. will be completed by 3Q23.

This new area will be dedicated for production as it seeks to widen both its customers and products portfolios in order to cater for sustainable business growth prospects of 2022 and beyond.

Its overall customer base continues to expand with its top 10/20 customers now making up to 56%/76% of its 2Q22 sales.

Recommendation – While analysts expect value stock to take the front seat in 2022 amid rotational plays in a rising rate environment and persistently high inflation, the steep de-rating growth of technology stocks to a level of unseen since 2019 was surprise, since the sector fundamentals remain sound.

Hence, this presents a great opportunity for investors to buy into Vitrox, which is backed by structural growth catalysts, favourable forex and sensible valuation.

Overall, analysts like Vitrox for its well-diversified revenue stream and strong net profit, fuelled by strong capacity scale-up, core competencies in vision inspection technology driving a more favourable product mix and technology mega trends.