Finance & Investment ClubTechnology SectorSummer 2012
Senior Analyst: Esther Tay
Radio frequency identification (RFID)
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Overview
The RFID Sub-Sector
Increasing demand for modernizing
RFID applications
Significant support from
mandates and regulations
Rapid growth of RFID usage in
emerging markets
Growing need for firms to improve
operational efficiency
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Industry Definition – Radio Frequency Identification (RFID)Firms in this industry provide real-time analytical solutions using
RFID technology to identify, track, and manage critical assets, supply chain logistics and business transactions
These companies serve the retail, manufacturing, transportation, security, electronics, telecommunications, laboratory/healthcare, industries and governments worldwide
Scansource, Inc. (NASDAQ: SCSC)
Zebra Technologies Corp. (NASDAQ: ZBRA)
Brady Corp. (NYSE: BRC)
Progress Software Corp. (NASDAQ: PRGS)
Intermec, Inc. (NYSE: IN)
Avery Dennison Corporation (NYSE: AVY)
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RFID Sector Industry Breakdown by Market Cap
Technology$125,079.5B
(100%)
Wireless communications$38,968.5B(31.15%)
RFID companies$3,814.9B(3.05%)
Focus RFID companies$9.1B
(0.007%)
Breakdown by 2011 Revenue
AVY49%
BRC11%IN
7%PRGS
4%
SCSC22%
ZBRA8%
AVY 6.026 B
BRC 1.340 B
IN 0.848 B
PRGS 0.534 B
SCSC 2.667 B
ZBRA 0.983 B
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Tags55.7%
Middle-ware and Software
24.9%
Readers19.4%
RFID Industry Model
RFID Middle and Software• Links and allows communication between RFID hardware and business
solutions • Processes tag data from the reader and filters duplicated tag information
RFID Readers• Handheld readers • UHF readers • RFID readers with embedded middleware • 99.9% read rate accuracy
Source: Frost and Sullivan, 2009
RFID Tags • Active • Passive • Semi-passive• Printed RFID tags are expected
to open up new markets
RFID Hardware
Tag data
“Clean” data
Enterprise applications •Warehouse management systems • Enterprise resource planning systems • Manufacturing execution systems
Global RFID Market: Percent of Revenues by Product Type
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Correlation coefficient = -0.323 Companies’ operations are weakly correlated to the RFID industry’s expansion Shows that selected companies are able to retain their operating margins
despite new entrants into the RFID industry
Time Series Analysis of RFID Sub-Sector
2006 2007 2008 2009 2010 20110
1000
2000
3000
4000
5000
6000
Total RFID Market Revenues VS. companies’ EBITDA
Total RFID Market Revenues ($M) Total EDBITDA ($M)
CAGR: 12.78%
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Trends overview
Increasing demand for modernizing
RFID applications
Significant support from
mandates and regulations
Rapid growth of RFID usage in
emerging markets
Growing need for firms to improve
operational efficiency
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Increasing Demand for Modernizing RFID Applications
Source: ABI research, RFID Annual Market Overview
Application Group 2008 2009 2014 (est.) CAGR (08-
14)
Traditional 4,456.3 4,454.4 6,729.8 7.1%
Modernizing 906.0 1,094.1 2,472.8 18.2%
Total 5,362.3 5,548.5 9,202.6 9.4%
RFID Systems Revenue: Traditional vs. Modernizing Applications ($M)
Total RFID Systems Revenue for Modernizing Applications ($M)
Contactless payment– American Express, MasterCard, and Visa,
are fully committed to contactless rollouts after significant consumer validation
– Largest CAGR 23.7% from 2008-14
Item-level tracking – High relevance to consumer businesses– Improve accuracy of inventory checks– Riding on the growth of eCommerce
Asset management – The RFID market’s truly horizontal
application– Potential to gain traction across regional
and vertical markets
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Significant Support from Mandates and Regulations 96 different countries, including the U.S., are now
embedding RFID into passports to fight forgery
US Department of Defense– Finalized Defense Federal Acquisition Regulation
Supplement amendment for supplier contracts requires RFID tagging
– An estimated 60,000 suppliers will be impacted
Walmart Inc.– Published requirements for vendors to place RFID
tags on all shipments– It is expected that over 3,750 Wal-Mart stores will be
equipped with RFID capability for item-level tagging
Target Corporation – Set requirement for top suppliers to apply RFID tags
on pallets and cases beginning late spring 2005– Suppliers are required to use UHF rags based on
EPC for shipments sent to its 1,200 stores
Perceived RFID Benefits in Supply Chain
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Rapid Growth of RFID Usage in Emerging Markets
North America and Europe – High awareness of RFID – High volume deployments in progress
Asia– Fairly advanced in RFID deployments – Technology innovation in active tags – Growth in consumer markets and increase in
supply chain activities South America and Middle East
– Emerging awareness – High growth potential – Growing number of pilot projects
Africa – Low penetration of RFID– Prospects of greenfield opportunities
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 20160.0
2,000.0
4,000.0
6,000.0
8,000.0
10,000.0
12,000.0
Global RFID Revenues
US EMEA APAC
CAGR: 19.0%
CAGR: 13.6%
CAGR: 13.7%
Global RFID Revenues ($ Millions)
Geographic Penetration of the RFID Market (2009)
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Growing Need for Firms to Improve Operational Efficiency
Business value of RFID technology 80% faster receipt of goods More than 99% chance of inventory
availability Inventory stock-taking can be completed
in minutes Multiple tag reads can be performed
simultaneously
Source:The challenges ahead of supply chains: McKinsey Global Survey results, Nov 2010
RFID technology directly addresses these two concerns in the long run
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RFID Industry RisksDemand-side risks Lack of end-user knowledge on RFID Lack of system integrator skills Budgetary constraints due to global recession Privacy and security concerns
Supply-side risks Vendors incur recurring costs to keep up with fast-moving RFID
technology innovation
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Key Financials
Ticker Symbol
Market Cap(B) % of 52 high Closing Price P/E EPS EV/ EBITDA Debt/ Equity Debt/ EBITDA LTM ROE (%)
AVY 3.18 98.96 31.37 15.76 1.99 7.18x 2.22 5.70x 11.50
BRC 1.49 71.34 20.39 19.19 1.48 6.61x 0.57 2.76x 0.001
IN 0.37 99.51 6.15 N/A -4.15 15.77x 3.49 10.93x N/A
PRGS 1.24 99.69 19.6 36.33 0.54 10.52x 0.36 1.87x 0.76
SCSC 0.84 99.25 30.55 11.49 2.66 6.81x 1.06 5.30x 9.64
ZBRA 1.93 99.76 37.32 15.24 2.45 8.49x 0.13 0.52x 17.20
High 3.18 99.76 37.32 36.33 2.66 15.77x 3.49 10.93x 17.20
Low 0.37 71.34 6.15 11.49 -4.15 6.61x 0.13 0.52x 0.001
Mean 1.51 94.75 24.23 19.60 0.83 9.23x 1.31 4.51x 7.82
Median 1.37 99.38 25.47 15.76 1.74 7.84x 0.82 4.03x 9.64
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RFID Industry Recommendation: POSITIVEThe RFID Subsector is still highly fragmented and survival of companies depend largely on the companies’ products
Revenue-side trends for the industry: Significant support from corporation mandates and government regulations provide a steady driving force for
the industry Operational savings from modernizing RFID applications in emerging markets and in the aftermath of the
economic crisis will boost growth in the industry
Cost-side trends for the industry: Increasing innovation is reducing the cost of producing and implementing RFID applications
Therefore, the RFID subsector can be recommended as a BUY.
Thank you
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