UCHITEC (7100): Author's Review

As a primarily Original Design Manufacturer (ODM), Uchi Technologies Berhad specialises in the design, research, development and manufacturing of electronic control systems, including software development, hardware design and system construction.

It is an one-stop solutions provider offering an entire spectrum of services and solutions – ranging from research & development, tool design and set-up to engineering support and the production of finished electronic control systems.

There are three operating sites which fully owned by UCHITEC:

1. UOM – the main operating plant located in Malaysia, principally involved in design, research & development and manufacturing of electronic control modules
2. UEM – the assembly counterpart for UOM
3. UCHI Dongguan – also the assembly arm of UOM located in Dongguan City, GuangDong Province of China Asthe main subsidiary

Both UOM and Uchi Dongguan are ISO9001, ISO14001 and OHSAS 18001 certified.

UCHITEC exports more than 94% of their products to European market, with the rest being sold in US, Japan, China and India.
Switzerland remains as the biggest customer to UCHITEC with a contribution of 44% revenue during the year of 2018 (2017: 46%), followed by Portugal at 37% and Germany at 13%.

The Group’s revenue is denominated in USD, with an approximate 30% of it being allocated for payables in USD-natural hedge.
The balance 70% is exposed to currency fluctuation and is managed via a Forward Contract Management Policy.

Financial Highlights

Over the past 5 years, the profits before tax are in-line with the revenues. 

There are three product groups categorised under UCHITEC's business:

• The art-of-living product group, comprising electronic control systems for household appliances as well as professional appliances for office and office services sector
• The biotech products, including electronic control systems for high precision weighing scales, centrifuges, pipettes and deep freezers
• Others i.e. new innovations

Generally, there were no significant changes to the revenue analysis by product group in 2018 compared to the prior year, with the contribution rate from the art-of-living product group, continuing to take the largest slice of the pie at 81% (2017: 84%).
Consequently, there was a slight increase in the percentage of contribution from Biotech products at 18% (2017: 16%).
Meanwhile products in the Others category made up the balance of 1%.

UCHITEC has continuously achieved profit margins of more than 40%.
The Group once hit the 50% profit margin in year 2017.
When it came to year 2018, UCHITEC still able to maintain a net profit margin of nearly 50%.
Besides, the management has reported that the Group achieved a 0.12% customer reject rate in 2018, which surpassing the initial target of 0.15%.
This has marked the sixth consecutive year that the Group has recorded a customer reject rate of below 0.20%.
Anyhow, the Group remains their target for year 2019 at 0.15%.

There was only a slight increase in material cost (2018: RM44.2 million; 2017: RM43.5 million) despite the 9% increase in USD revenue.
This can be attributed to the strengthening of the USD against the RM, which resulted in lower
material cost in RM.

However, a trade war between US and China has caused a global shortage of multi-layer ceramic capacitor (MLCC) components and labour shortages.
This has impacted the Group in on-time shipment performance, which deteriorated to 53.51% (2017:
88.81%).

Meanwhile, the Group has successfully mitigated RM463,048 electricity costs with Grid-Connected Photovoltaic Power System, which was installed since 2016.
This Solar System continues to fulfil commitment to reducing carbon dioxide emission by an estimated 451 tons in year 2018.

Ever since the Group's listing in year 2000, the Group has recorded an average Operating Profit Margin of 45%, despite going through challenging economic scenarios that include the global economic downturn, foreign currency fluctuations and technical challenges.

A cornerstone of the Group’s operations is research & development.
The Group has allocated a budget of 7% of their revenue in research & development activities.
In 2018, RM4.3 million was spent for this purpose (2017: RM4.1 million).

UCHITEC has completed a capital repayment of RM89.7 million to their shareholders in 2018.
The Group intended to return excess cash to their shareholders as a reward for their continuous support through the years.
Other than resulted in reducing of shareholder's equity, there is no change in its financial standing, including cash and cash equivalents, reserves and zero gearing, future financial obligations and operational requirements.

Future Outlook

1. As most of the manufacturing plants facing, manpower shortage is an issue for UCHITEC. The Group plans to address this issue by outsourcing production processes or engaging contract manufacturing services.
2. Although the MLCC component shortage has been moderated, the Group anticipates that the effects of the shortage, together with the US-China trade tension, will continue to reverberate in years to come, potentially causing further material price fluctuations and global shortages of other components. In view of this, The Group is taking several preventive measures, including the implementation of a Safety Buffer Stocks System, for long lead time components in order to facilitate the operations.
3. The Group opts to review the timing, trade terms and country of origin provision in their contracts, while also expanding our supplier base to include South East Asian countries. 
4. The Group also aims to evaluate the demand forecast and enhance visibility to their suppliers.
5. Besides, the Group shoring up the supply chain by seeking alternative supply sources and consistently performing contingency and scenario planning.

Author's Perception

1. It has been the Group’s Dividend Policy to allocate at least 70% of their net profit as dividend since 2003. Total dividend declared for 2018 is 14 sen (2017: 25sen), which is equivalent to a payout ratio of 91%. Thus, it is expected good dividends when the Group's business grows.
2. In terms of business nature of the Group, households and office appliances, as well as biotech products are generally always a demand in market. As a manufacturer of electronic control system of these products, it is no doubt that the Group able to achieve continuous growth as long as the consumers' ability to spend remain strong.
3. The revenue of the Group is 100% in USD, while material cost is nominated in RM. The business will see benefited when USD goes strong.
4. UCHITEC is a debt-free company without a single borrowing. It is a cash rich company. 
5. The top thirty shareholders occupied the market shares in 55.76%. Technical trend is generally significant for this stock.

Technical Comment

The current share price has moved into correction waves.
The resistance line is at RM2.90 (Red Line).
As long as the price is still moving above the support line (Blue Line), this stock is still in a bullish trend.