JF Technology eyes more business opportunities in China

Elbert Grims

a man in a suit standing in front of a store

© Provided by The Edge

FOR JF Technology Bhd, having the chance to work with global smartphone giant Huawei Technologies Co Ltd is testament to its competitive edge in the high-performance test socket segment. But its vision is not confined to just that as founder and managing director Datuk Foong Wei Kuong believes the business partnership with Huawei will open up more opportunities for the test contacting solution provider.

Last Monday, JF Technology signed a business collaboration agreement with Huawei’s wholly-owned Hubble Technology Investment Co Ltd to set up a plant in Kunshan, in China’s Jiangsu province. The plant will design, develop and manufacture integrated circuit test sockets and test interface solutions for Huawei.

This will be done through JFH Technology (Kunshan) Co Ltd, of which JF Technology and Huawei will own 55% and 45% respectively. JF Technology and Huawei are committed to injecting US$500,000 (RM2.08 million) and US$1.5 million respectively to fund the plant operations, including the equipment.

JF Technology CEO Dillon Atma Singh says production at the new plant is expected to commence in the third quarter of 2021. Products from the plant will cater solely for Huawei in the first two years, but it may start supplying to other customers in China thereafter.

Dillon notes that a minimum of 600 test sockets will be supplied to Huawei in the first year before doubling to 1,200 in the second year. “It is a conservative number in view of Huawei’s much larger requirement. We have the capacity to produce more.”

At a selling price of US$2,500 to US$3,000 per test socket, the new plant could rake in at least US$4.5 million in sales in the first two years.

© Provided by The Edge

Dillon says the Chinese government, which has pledged to inject US$1.4 trillion for technology investments amid the trade dispute with the US, is supportive of the manufacturing plant and has provided tax incentives as well as a 50% rental subsidy.

JF Technology’s partnership with Huawei did not come overnight though. In fact, the relationship started in July 2019.

“Last year, Huawei sensed that it would be punished by the Trump administration, so it started looking for alternative sources. Then, our name surfaced and it started some projects with us. It was impressed by our products that perform much better and reduce its costs,” Foong tells The Edge in an interview.

“We are the first Malaysian manufacturer of high-performance test contacting solutions to set up a manufacturing site in China. Huawei is riding on our technology,” he adds.

“The test contracting technology for the 5G network will be taken care of by us. For the 6G network, we will co-develop together with Huawei.”

JF Technology provides test contacting solutions for integrated circuit (IC) testing for the automotive, 5G, Internet of Things and home appliance segments. It has more than 100 customers across the globe, including integrated device manufacturers, test equipment manufacturers and outsourced assembly and test providers. It has filed for 63 patents for radio frequency and cantilever sockets around the world, of which 28 have been granted since 2011.

“In terms of cost and yield of testing, we outperform our competitors by far because we have sockets with very good design. We are one of the leaders in producing short rigid and cantilever sockets,” says Dillon.

Riding on China’s semiconductor localisation

Given that China is targeting to produce 70% of the ICs consumed by 2025, from the current 19%, Dillon sees good prospects of having a physical presence there as it will reduce lead time and enhance supply chain efficiency.

Despite Huawei being placed on a trade blacklist by the US last May on national security concerns, Foong does not foresee any negative impact on its exports to the US. “Huawei invests in the supply chain only and we do not use US technologies,” he points out.

More than 70% of JF Technology’s products are for export, with China (34%) overtaking the US (11%) as the largest revenue contributor in its financial year ended June 30 (FY2020), while Malaysia accounted for 25%. “In just three years, from FY2017 to FY2020, we saw a 300% jump in revenue from China,” says Dillon.

The company’s expansion at its existing plant in Kota Damansara, Selangor, is underway, and will nearly double the built-up to 90,000 sq ft when it is ready in March 2022, from 46,000 sq ft currently. The expansion is being funded by a private placement exercise, which has raised more than RM50 million.

On the newly established subsidiary JF TestSense Sdn Bhd, which provides test interface solutions, Dillon says it will start contributing in FY2022. “The new subsidiary provides total turnkey solutions to our customers. Besides sockets, there are also other components that make up the test interface.

“In the past, the company was primarily in the hardware space. But now, we are also on the software side with JF TestSense. We intend to bring this business to China as well.

“This market is very engineering-centric. That’s why we have human capital development to upskill the engineering capability.”

JF Technology has also set its sights on merger-and-acquisition (M&A) activities locally and overseas, bringing partners in the technology sector to serve a bigger market. Another growth driver for the company is its new testing solutions such as Bellmat, Unicon and Zigma 0.5.

Main Market transfer by mid-2021

Foong says the company aims to migrate to the Main Market from the ACE Market by mid-2021 as it needs to fulfil the requirement of having a market capitalisation of at least RM500 million for a period of one year.

In FY2020, JF Technology saw a 165% jump in net profit to a record RM8.02 million from RM3.02 million in FY2019, thanks to new key customers, strong adoption of product lines and lower operating expenses as a result of the absence of legal fees incurred in the preceding year. Its net profit margin rose to 29.9% from 13.1%.

Looking back, things have not been plain sailing for the company, which was established in 1999. Around that time, the technology sector was hit by the dotcom bust.

Foong recalls the challenging business operations in the early days when he couldn’t hire any staff for the company. “It was just a one-man show by myself; nobody wanted to join me in my 700 sq ft office. So, I had to do everything on my own.

“Due to my chemical background in glue making, I picked up things very fast, playing different roles from design and production to sales and delivery. I almost gave up the business because sales were so low.

“A breakthrough came in 2003. Stocks of test contactors in the market were depleting. That was also when smartphones started to emerge.”

He says the company rose up the value chain in 2005, when it moved away from the original equipment manufacturer model and developed its own products, before being listed in April 2008.

In June 2014, rival Johnstech International Corp filed a patent infringement suit against its test socket product that was being sold under the brand name Zigma. While JF Technology maintained in court that it did not infringe on anything, it lost the case in July 2019, resulting in US$1.51 million in damages.

High valuation, conservative earnings guidance trigger heavy selling pressure

Ironically, selling pressure was swift to emerge after JF Technology Bhd’s partnership with Huawei was announced last Monday. Amid profit-taking activities, its shares were sold down by as much as 26.2% to RM3.78 last week, from an all-time high of RM5.12 on Oct 23.

It is worth noting that the stock had been on the rise from a low of RM3 in mid-September before the announcement of the partnership. Based on its closing price of RM4.10 last Wednesday, the counter is still up 169.7% year to date, translating into a market capitalisation of RM925.57 million.

“We are not concerned about the share price movement. It is a free market. We just focus on our business, which is still robust,” says JF Technology managing director Datuk Foong Wei Kuong when asked to comment on the selldown.

He assures that the management have not sold down their shares during the current 30-day closed period, which started on Oct 17. “We don’t know who is selling the shares in quite a substantial quantity. It could be retailers because we don’t have many institutional investors, [who account for] only 7% to 8% [of the total shares].”

Foong and his wife, executive director Datin Wang Mei Ling, are the largest shareholders of the company, with a stake of 36.69% and 9.93% respectively.

JF Technology is currently trading at hefty valuations. Its historical price-earnings ratio (PER) of 107.53 times is significantly higher than the 33.11 times of its closest peer, FoundPac Group Bhd.

FoundPac recently expressed interest in listing its 75%-owned laser stencil manufacturing subsidiary, Dynamic Stencil Sdn Bhd, on the ACE Market. Based on the stock’s closing price of RM1 last Wednesday, FoundPac’s market capitalisation stood at RM542.32 million.

A fund manager contacted by The Edge opines that investors were doubtful whether JF Technology’s profit growth could catch up with its lofty valuations. “The share price has run up ahead of this announcement. The company has been talking about this [Huawei deal] since last year, so the market has known about it for some time. We don’t think there will be an immediate profit from this and the guidance on profit may not be high as well.

“Even if it can
double its profit, the PER is still high at 50 times. There will be a capital injection before it can start generating earnings, so investors took profit first.”

JF Apex Securities technology analyst How Chi Hoong notes that JF Technology’s valuation is much higher than that of other technology players such as Vitrox Corp Bhd (74.67 times), UWC Bhd (64.57 times) and Frontken Corp Bhd (51.83 times). “While the plan is good, it is still a relatively small company to invest in compared with its peers.”

Nonetheless, JF Technology remains in a healthy financial position, registering cash and cash equivalents of RM13.77 million as at end-June, with zero borrowings. It is targeting at least a 50% dividend payout ratio starting in FY2021. A 1.5 sen dividend was declared for FY2020.

“The business clarity is better now as we don’t have to do provisions after the lawsuit [with Johnstech International Corp]. We don’t have a dividend policy for now, but we want to pay out 50% of the profit. So, more dividends will be declared going forward,” says Foong.

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