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4 Stocks This Week (Manufacturing) [17 August 2018] AEM; Hong Leong Asia.; Memtech; Yangzijiang 

Manufacturing is powering Singapore’s economic growth. Are SGX-listed manufacturers riding the momentum?

On Monday, the Ministry of Trade and Industry (MTI) released its economic survey for Q2 2018, announcing that it would maintain its forecast that Singapore’s GDP will grow between 2.5% to 3.5% for 2018. MTI reported that Singapore’s GDP grew 3.9% year-on-year for Q2 2018, largely driven by robust growth within the manufacturing sector, which swelled 10.2% YOY.

All clusters within Singapore’s manufacturing sector expanded in Q2 2018, with the electronics, biomedical manufacturing and transport engineering sectors being the key drivers of growth, contributing 4.6%, 2.7% and 1.4% respectively to the 10.2% growth rate of the entire manufacturing sector. Growth in the electronics sector was primarily driven by strong performance in the global semiconductor industry, helped by higher global demand.

Singapore’s manufacturing sector has benefitted from lower unit business costs and labour costs, which fell by 1.2% and 7.4% year-on-year (YOY).

Manufacturing continues to be a major part of Singapore’s economy, amounting to 20% of nominal GDP for the first half of 2018. This is in line with expectations set by the Committee on the Future Economy (CFE), which proposed in 2017 that the manufacturing sector should continue to contribute to a fifth of Singapore’s future economy for the medium term.

This is an ambitious target as according to McKinsey, manufacturing’s share of GDP tends to follow an inverted U pattern as countries develop, because citizens enjoy greater purchasing power from higher wages, which tends to accelerate the growth of the services sector.

According to the Economic Development Board (EDB), a net weighted balance of 7% of Singapore’s manufacturers are optimistic of a more favourable business environment for the second half of 2018, compared to Q2 2018. This was down from 13% for the period between April to September 2018. Companies in the Transport Engineering and Electronics clusters are amongst the most bullish.

On this week’s edition of 4 Stocks This Week, we will look at four manufacturing stocks listed on the SGX.

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AEM Holdings Ltd (SGX: AWX)

AEM Holdings is a company which provides handling and test solutions to advanced manufacturers in the world, to deliver products including microprocessors, high speed communications, IOT devices and solar cells.

On 30 July, AEM released its earnings report for the first half of 2018. AEM’s revenue increased by 32.4% YOY, to $138.3 million, on higher sales of test handlers from its major customer. This significantly outpaced the growth in cost of raw materials and other consumables, which increased by just 19.8%, to $106.3 million. This caused net profit to soar by 43.4%, or $5.4 million, to reach $17.7 million.

However, despite this good news, investors felt jittery about AEM’s business outlook, as AEM had said it expected volatility in its core business for 2019. This caused AEM’s share price to reverse all its gains since the year started, including when it tumbled by nearly 25% in a single trading day on 1 August. AEM closed at its lowest point this year of $0.65 per share on 13 August.

AEM responded to this selloff by stepping up its buybacks, buying 500,000 shares at nearly $348,000 in four separate transactions. Mr Loh Kin Wah, a non-executive board member of AEM, personally shelled out $136,000 to purchase 200,000 shares. This vote of confidence seems to have assuaged the fears of investors, as AEM’s share price recovered strongly this week.

With a current market cap of $232.9 million, AEM’s share price closed at $0.865 this week.

Hong Leong Asia Ltd. (SGX: H22)

Hong Leong Asia (HLA) is the Trade & Industry arm of Singapore conglomerate Hong Leong Group. HLA manufactures building materials, diesel engines and consumer appliances.

In July, HLA announced that its joint venture company had won a tender by the Building and Construction Authority for a 30-year lease of a piece of land at Pulau Punggol Barat, which will be used to develop an integrated construction and fabrication hub.

On Wednesday, HLA released its unaudited results for Q2 2018. Revenue rose 6.3% YOY to $997.6 million, mostly due to revenue growth recorded by its diesel engine unit Yuchai and building materials unit BMU.

Yuchai sold 11.1% more engines compared to the same quarter last year, which help to increase revenue by $43.6 million or 5.3% YOY. BMU on the other hand, saw its revenue grow by $16.8 million, or 18.6% YOY.

However, despite strong revenue growth, HLA ended the quarter in the red, recording a net loss of $33 million, which was greater than the $18 million net loss recorded for Q2 2017. This was mostly attributed to a $37 million loss from discontinued operations.

The news prompted HLA’s share price to tumble on Wednesday and Thursday, reaching lows last seen in 2016. Year-to-date, HLA’s share price has fallen over 36%.

With a market cap of $250.5 million, HLA’s share price closed at $0.67 this week.

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Memtech International Ltd (SGX: BOL)

Memtech is a Singapore-based electronics components manufacturer.

Since 2013, Memtech has transformed itself from being primarily a consumer electronics supplier to becoming a car parts manufacturer, supplying automotive companies with car parts which made cars lighter and more fuel efficient. As of March 2018, Tesla amounts for 3% of Memtech’s revenues.

In Q2 2018, Memtech reported that its revenue increased by 19.1% YOY, to US$44.9 million ($61.6 million), which was mostly due to strong performance in its Automotive and Industrial & Medical segment, which grew by 32.6% and 79.1% respectively. However, the Telco segment was a drag on the company’s overall performance, declining by 14.8% YOY.

However, a rise in raw material prices and product packaging costs, higher staffing costs and greater outsourcing of tooling weighed on the company’s overall profitability. The absence of a one-off net gains from the sale of its land and factory in Huzhou, China also meant that Memtech saw its net profit decline by 56.9% YOY, to US$2.1 million.

Memtech’s share price has declined by nearly 40% since its peak in March. On Friday, Memtech’s Executive Director Teow Joo Hwa indirectly acquired an additional 100,000 shares for $115,500, increasing his stake in Memtech to 0.07%.

With a market cap of $159.7 million, Memtech’s share price closed at $1.14 this week.

Yangzijiang Shipbuilding (Holdings) Ltd. (BS6)

Yangzijiang (YZJ) Shipbuilding is an investment holding company which specialises in shipbuilding based in China.

On 10 August, YZJ released its Q2 2018 financial results. YZJ announced that its revenue skyrocketed 110% YOY, mostly on the back of the construction and delivery of several large-size vessels. YZJ also said that its revenue from its trading business also increased due to higher trading volumes. This helped to boost net profit by 38% YOY to reach RMB994.9 million ($198.7 million) for Q2.

Looking forward, YZJ says that rising global seaborne trade and higher charter rates for major vessel categories will help the shipbuilding market to recover. Year-to-date, YZJ has secured new orders worth USD982 million ($1.34 billion) for 22 vessels, which is expected to provide a stable revenue stream for at least the next 2.5 years.

On the trade war, YZJ said while the company’s order book does not have exposure to sectors which have been targeted by US tariffs, YZJ is monitoring the situation closely.

On May 30, YZJ acted on its buyback mandate and commenced its equity buyback plan, buying 5 million shares for $4.5 million. YZJ said in a press release that it was prepared to buyback more shares to strengthen its share price and affirm its confidence in the company’s value.

YZJ stayed true to its promise and continued its aggressive buyback efforts, buying over 8.1 million shares in June and nearly 10 million shares in July, at between $0.82 to $0.978 per share.

With a market cap of $4.2 billion, YZJ’s share price closed at $1.06 this week.

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