Investment Highlights

• We maintain BUY on ViTrox Corp (ViTrox) with a lower fair value of RM8.96/share (previously RM9.89/share). This is pegged to an unchanged forward FY23F PE of 36x, in line with its 3-year average. We ascribe a 4-star ESG rating to ViTrox, which further adds a 3% premium to our valuation (Exhibit 4).

• The lower fair value stems from our FY22F–FY24F earnings reduction by 9% as we reverse our FY22F machine vision system (MVS) growth assumption to -13% YoY from +30% YoY while increasing our forecast revenue contribution for automated board inspection (ABI) by 12%.

• Recall that ViTrox’s 1HFY22 revenue continued to be strong, mainly contributed by a 45% YoY growth in the ABI segment. In tandem with the lower sales from MVS, ABI sales contribution increased to 60% of 1HFY22 revenue, compared to 48% in 1HFY21.

• The lower MVS sales in 2QFY22 was primarily due to the softer mobile and PC segments, coupled with lockdowns in China which resulted in delayed customer orders. While the group expects a strong QoQ recovery in 3QFY22 as China eases on its lockdowns, we remain cautious on the overall slowdown in China’s mobile market.

• In addition, the segment faces fresh threats from China machine makers who offer cheaper vision inspection systems, albeit less technologically developed in their local market. This could potentially lower the group’s MVS demand, especially from price-sensitive customers.

• Nevertheless, market demand for ABI remains robust, supported by the growing telecommunication and automotive segments. As of 15 July this year, ViTrox’s ABI order book has grown to RM279mil (from RM254mil in 3 Apr 2022).

• The group’s 1HFY22 service revenue expanded 12% YoY to RM41mil, representing 11% of total revenue. We expect service revenue to continue to grow as more ViTrox machines are being introduced to the market.

• ViTrox’s overseas market is increasingly prominent, representing 81% of 1HFY22 revenue compared to 74% a year ago. This is primarily contributed by the Mexico and US markets, which grew 2.6x and 1.5x YoY. The local market, on the other hand, shrank 15% YoY to RM71mil, as the group faced stiff competition in retaining talent.

• In terms of working capital, the group’s cash conversion cycle (CCC) has exceeded 300 days as of 2QFY22, as days sales outstanding (DSO) increased by 23 days to 147 days compared to Dec 2021. Days inventory outstanding surged by 15 days to 227 days as the group increased its safety stock buffer in view of raw material shortages. We expect 3QFY22 CCC to fall below 300 days as management guided significant collections in July 2022, which should drive DSO back to 1QFY22 level of 137 days.

• In the face of material shortages which resulted in higher raw material prices, the group has strategically raised its selling prices to mitigate margin erosion. In an effort to increase average selling prices (ASP) in the long run, the group focuses on value-adding features such as AI and IR 4.0 capabilities to its products, complemented by its V-One data analytic platform.

• ViTrox’s headwinds continue to be talent and supply shortages together with demand slowdown from China, particularly in the mobile segment in which MVS is highly exposed to. In addition, we remain mindful that the slowdown in semiconductor market could potentially drag ABI’s near-term growth.

• Nonetheless, we continue to like ViTrox for its attractive ABI and MVS product offerings with a strong focus on developing AI capabilities. Along with its V-One data analytic platform, we believe that this will create a whole manufacturing ecosystem to attract new customers while retain existing ones. Prospects are further enhanced by the group’s diversified sales in terms of geographical presence and its continuous effort to reduce customer concentration risk.

Source: AmInvest Research - 2 Aug 2022