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2 Risks That Investors Should Know About Valuetronics Holdings Limited’s Business

Valuetronics Holdings Limited (SGX: BN2) recently published its annual report for its financial year ending 31 March 2018 (FY2018). Given that reading an annual report is one of the best ways to keep up with a company’s developments, I decided to go through Valuetronics’s latest annual report to understand the company’s prospects, and how it had performed in the previous year.

In this article, I want to share an area that I found interesting after reading the report: The risks faced by Valuetronics.

Global supply chain challenges

Valuetronics is an integrated electronics manufacturing services provider that is headquartered in Hong Kong. The company offers a combination of design, engineering, manufacturing, and supply chain support services for electronic and electro-mechanical products. One of the key risks affecting the company in the near-term is the shortage of components because of an increase in demand and slow expansion in supplier-capacity. Here’s what Valuetronics’ management had to say about the impacts of the components-shortage to the company’s business:

“……the market today is constrained, especially for components such as multilayer ceramic capacitors (MLCC), resistors, transistors, diodes, and memory chips, etc. This high demand has created widespread supplier allocation and although suppliers have added additional capacity, the situation will likely continue in the coming 12 months. Therefore EMS providers like the Group, while benefitting from the IoT trend, have to contend with longer procurement lead times and price increases for components.”

Here is Valuetronics’ plan to mitigate the impacts:

“In order to mitigate this situation, the Group has employed several strategies including leveraging its supplier relations and working very closely with customers. This includes enlisting the customer’s cooperation to build buffer stock reserves for affected components and to obtain their authorisation to order components in advance.”

Human capital

As a manufacturer based in China, Valuetronics had, in the past, benefitted from having access to a rich supply of engineering resources at a reasonable cost. But, labour costs in China are rising quickly with an improvement in the country’s economy and standard of living. Furthermore, Valuetronics expects competition for skilled professionals to increase going forward. See management’s comment below:

“The China government’s “One Belt, One Road” initiative has also been accelerating the rate at which Chinese companies are going global and these unprecedented levels of expansion will see the demand for skilled, bilingual professionals continue to rise across all sectors and employment grades.

There is also an increasing preference for Chinese candidates to work for Chinese companies because of their growth potential and local culture. If this trend continues, it will likely create a shortage of suitably skilled candidates, which will end up driving up salaries.”

To mitigate the impact of a tight labour market, Valuetronics plans to increasingly automate its operations, as well as improve its employee retention through strengthening its HR policies in areas such as career development and remuneration packages.

The Foolish Bottom line

It is important to understand the risks faced by a company we’re invested, or interested in investing. Current or potential investors in Valuetronics may want to pay attention to the supply chain and labour challenges that are affecting the company.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.