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Can Valuetronics Holdings Limited Continue to Grow Its Business?

Valuetronics Holdings Limited (SGX: BN2) is an electronic manufacturing service (EMS) provider that provides original equipment manufacturing (OEM) and original design manufacturing (ODM) services for its clients. The group is headquartered in Hong Kong with its main manufacturing facility in Huizhou City, Guangdong Province, China. The company’s business focuses on two main divisions: industrial and commercial electronics (ICE) and consumer electronics (CE).

With the electronics cycle showing signs of a slowdown and other electronic companies such as AEM Holdings Ltd (SGX: AWX) and UMS Holdings Limited (SGX: 558) reporting year-on-year net profit declines, investors might be wondering if Valuetronics might be a victim as well. I decided to review how the group’s two main divisions had fared in the last five fiscal years and to assess if the group will be able to weather a slowdown. Note that Valuetronics has a 31 March fiscal year-end.

Divisional revenue trend

Note that the ICE division has shown steady and sustained growth over the past five years, even as other electronic companies have somewhat faltered. This is because of the wide breadth of clients ICE has taken up over the years, including automotive clients Delphi Technologies PLC (NYSE: DLPH) as well as clients that deal with barcode printing devices and thermal label printers.

CE has seen a more volatile five-year stretch, though. Revenue plunged by 44% year on year in FY 2016 thanks to its main customer, Koninklijke Philips NV (AMS: PHA), phasing out its mass-market light bulbs as they reached the end of their life cycle. However, in FY 2018, Valuetronics’ CE division regained its mojo by taking on the manufacturing of smart LED lighting products with Internet of Things (IoT) features.

The above illustrates the resilience of the ICE division despite headwinds in the electronics cycle, and it also showcases management’s innovativeness in looking for new products to replace the sharp fall in CE’s revenue due to the loss of Philips’ business.

Divisional margins

The ICE division has managed to maintain its segment margins around the 17% to 18% range, even as the division grew its revenue. This demonstrates good pricing power as well as discipline in expense management. Segment margin for the CE division has stabilised around the 10% mark even though revenue fluctuated significantly in the last five years, which also demonstrates effective cost control.

Investors should feel confident

From the above findings, investors should, therefore, feel confident about the group’s prospects. Valuetronics has shown an ability to continue to clinch contracts from existing and new clients and has also broadened its ICE client base over time. As for CE, the group was able to jump on the smart LED bandwagon and tag onto the IoT trend, and this demonstrated management’s nimbleness in adapting to current trends.

Both of the group’s divisions have also reported stable margins over the years, an indication that Valuetronics is not a victim of strong competition eroding its margins. Hence, there are good reasons to believe the group can continue to grow its business in the years to come.

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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned. The Motley Fool Singapore has recommended shares of AEM Holdings Ltd.