Friday, March 29, 2024
 
Columnist
Martin Hennecke
 
FITTEC
HKEx Stock Code : 02662 
 
Corporate Profile
Principally engaged in the provision of (i) pure assembly services; (ii) procurement and assembly services and (iii) repair and maintenance services; all for printed circuit boards and related products.

Business Review - For the year ended June 30, 2012

During the review period, the Group maintained focus on top-tier clients and products with high growing potential. HDD controllers, PC motherboards (include desktop, Tablet PC and notebook PC) and LCD TV remained the core products of the Group, contributing 97.9% of the total turnover. Other products, such as car CD and DVD player controller boards, were suffering drastic volume drops resulting from the major earthquake that hit Japan on 11 March 2011. And the flooding hit Thailand in the October of 2011 did make the situation even worse, as Thailand serves a major role in Japan's most important car and IT/CE industries' supply chain over the past few decades. As a result, the Group's Thailand HDD controller production factory had ceased production since Toshiba decided to divest its Thailand HDD operation, and sold its properties to the Western Digital.

HDD Controllers

This segment showed major decline since last October's Thailand flooding that caused the Group's Thailand operation to be suspended. The revenue was down by 2.3% to HK$1,021 million from last year's HK$1,045 million. The worst hit HDD manufacturers are Western Digital and Toshiba, which account for 25 percent of global production. The Group provides the back up solution to customer at once. Toshiba shift part of orders from our Thailand factory to our Shenzhen factory after the flood.

The Group is the major provider of PCB assembly service in China for Toshiba's 2.5-inch and 1.8-inch HDD controllers for more than nine years. This relationship has provided the Group the leverage to grow with the small form factor hard disk drive market driven by continued need for an increase in HDD storage capacity, bolstered by the rise of cloud storage and heaps of social media and corporate information that needs to be stored, not to mention growing media storage needs for video, audio and other types of files.

With the two mega-mergers between Seagate/Samsung and Western Digital/Hitachi GST, the two top suppliers held 85 percent of HDD market share in the first quarter of 2012. These two acquisitions consolidated the global HDD industry down from 5 vendors to 3 vendors. As the only one existing Japanese HDD vendor after the consolidation, Toshiba believes it would be the sole choice of the leading Japanese IT/CE vendors for new portable products design-ins, and should push up the volume gradually.

PC Motherboards

This year the PC motherboard industry reverses its trend of declining shipments year-on-year, to post a slight 0.2% growth. This upturn in fortunes was expected and came largely as the result of the improving global economy, but two major events, the recall of Intel's B2 stepping version of its new 6-series chipsets in the early part of the year, and the major flooding in Thailand which disrupted a significant proportion of the global's hard disk drive manufacturing facilities in the second half, both impacted demand for PCs through the year, which is why total shipments for the year, 102.2 million units, were only slightly above the previous year's total of 101.99 million units.

In a recent market study done by the US based marketing research firm, the Gartner Group in July, 2012, indicated that in the second quarter of 2012, the PC market suffered through its seventh consecutive quarter of flat to single-digit growth. Uncertainties in the economy in various regions, as well as consumer's low interest in PC purchases, were some of the key influencers of slow PC shipment growth. Consumers are less interested in spending on PCs as there are other technology products and services, such as the latest smartphones and media tablets such as iPad that they are purchasing. This is more of a trend in the mature market as PCs are highly saturated in these markets.

Digitimes reported that our customer ASRock is now the 3rd largest channel motherboard manufacturer, having set target shipments of 10 million motherboards for 2012. Though ASRock missed its goal of shipping 9 million motherboards in 2011 by 13.3% (7.8 million units shipped), the company is nipping at the heels of market leaders Asustek Computer and Gigabyte Technology.

Samsung sold 13.1 million notebooks in 2011, accounting for 6.1% of the global market share and ranked the seventh largest vendor worldwide, according to the sources citing IDC's latest figures.

PC sales, spurred by sales of Ultrabooks, Intel's Ivy Bridge processors and the impending release of Microsoft Windows 8 operating system.

Thanks to these, The Group recorded turnover of this segment grew from HK$254 million in 2011 to HK$275 million in 2012.

LCD TV

In the latest forecast update, total global TV shipments are forecast to fall 1.4% in 2012 to 245 million units, while LCD TV is expected to increase by 5% ¡V compared to 7% growth in 2011 ¡V reaching 216 million units. The decline in overall TV market demand and the slower growth in LCD TV shipments can be attributed to the slower rate of price erosion and cautious spending by consumers in Europe and Asia. The growth is also slower this year as the transition to digital broadcasting, which accelerated purchases in major markets over the past few years, has largely been completed.

Samsung and LG are No. 1 and No. 2 worldwide in the final quarter of last year, total with 39.7 percent of the market, according to NPD DisplaySearch. Samsung and LG were the only two companies to turn a profit from their LCD TV businesses with rivals Sony, Toshiba and Sharp all taking losses on their LCD TV divisions. Overall LCD shipments were down year-overyear, dropping from HK$44.6 million in Q1 2011 to HK$44.4 million in Q1 2012.

The strong yen, the March 2011 earthquake and tsunami, and the Thai floods have made it impossible for the Japanese to compete against their more nimble rivals from South Korea. The Japanese are fighting and losing a two-front battle against not just the Koreans but also the Chinese. And as newer, lesser-known competitors from China become stronger, the Japanese are going to feel the squeeze.

The competition in this market is keen. The Group's Japanese customers ceased to outsource in order to fill their excess capacity. Under such circumstances, the Group's turnover of this segment dropped from HK$456 million for year ended 30 June 2011 to HK$202 million for year ended 30 June 2012.

Business Outlook - For the year ended June 30, 2012

Global total contract manufacturing revenue this year is expected to decline to US$357 billion, down by slightly less than 1 percent from US$360 billion in 2011. This compares to 4.7 percent growth in 2011.

The EMS industry is prepared to face a challenging year. The good news for some EMS providers is that while overall industry will decline, there will still be growth opportunities in certain customer segments, which are just starting to outsource or will outsource more business to EMS providers. The Group is finding niches in the industry and tries to develop specialty talents within those niches. And also try to find customer relationship that will provide them a profitable long-term business.

Cost continues to remain the prime focus for EMS in China, for example, material prices have risen, labor wages have increased 20.0 percent in the Pearl River Delta, and supply chain costs are also going up. Over the past five years, employment costs in South China have risen by about 187.0 percent. Shenzhen increased the minimum wage to RMB1,500 per month from February 2012, a hefty leap of almost 15%, while Jiangsu province also increased the minimum wage 20% to RMB1,370 from June 2012. Looking forward, the Group believes the Chinese business environment would become even tougher as the minimum wages would climb up continuously, partially resulting from the sustaining labor shortage, and partially as the government's intention to offset the raising domestic CPI.

At the same time, EMS in China also faced the threats from labor shortage problem. Especially after the Chinese New Year indicates EMS companies' operation will be under capacity in the cycle, and requires overtimes works to pick up for the shortage, which will incur unfavorable high labor costs that erodes operational profitability. In order to maintain competitive, the Group will shift more labor intensive orders to Group's factory in Vietnam which is one of growing popularity of cost competitive countries. The Group expected to benefit from skilled labor pool and the labor wages in Vietnam is raising slower compared to China.

Although the challenges for the EMS in China, China is still the first choice for most of the international OEMs. China has already become the largest domestic sales and production market in the world and the manufacturing technology has reached the medium level. The high domestic demand and fast development of economy are expected to support increasing revenue trend for EMS industry in China. China's high GDP growth is likely to lift the purchasing power of Chinese consumers, as well as upgrade China's consumption structure. The Group believed that driven by the boom demand for tablets, desktop computer, notebook and smart phones in China, the OEMs will have reasonable growth rate that may increase the outsourcing to EMS providers.

Hard disk drive market will be driven by growing media storage needs for video, audio and other types of files. The application of Thunderbolt, Intel's Ivy Bridge processors and the release of Microsoft Windows 8 operating system would stimulate replacement demand for motherboard and notebook.

In summary, the Group believes the outlook for the global economy in FY2012/13 is clear, but it isn't pretty: recession in Europe, anaemic growth at best in the United States, and a sharp slowdown in China and in most emerging-market economies. The Eurozone recession is certain. While its depth and length cannot be predicted, a continued credit crunch, sovereign-debt problems, lack of competitiveness, and fiscal austerity imply a serious downturn. It will reduce the consumer purchasing demand. Looking forward, the Group expects that the global EMS industry is very tough in FY2012/13. With profitability remaining a challenge this year, outsourced manufacturers are also facing rising labor costs, shortage of labor, appreciation of renminbi and a pressing need for stronger revenues. Oversees the trend, the Group will keep on diversification of its production facilities outside of China, as well as improve its production efficiency by developing semiautomatic equipment, which would enable its competitive edge in the long run and expand our customer base.

Source: Fittec Int'l (02662) Annual Results Announcement
Chairman Lam Chi Ho Issued Capital (shares) 968M
Par Value HKD 0.1 Market Capitalisation (HKD) 281M
 
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