trio industrial electronics group ltd - great roc rn.pdf · 1/p.28 p. trio industrial electronics...

P.� /P.�1 28

Trio Industrial Electronics Group Ltd27 December 2017

THIS DOCUMENT MAY NOT BE DISTRIBUTED IN THE UNITED STATES, CANADA OR JAPAN. THIS DOCUMENT HAS BEEN FURNISHED TO YOU SOLRLY FOR YOUR INFORMATION AND MAY NOT BE REPRODUCED OR REDISTRIBUTED TO ANY OTHER PERSON.

P.� /P.�2 28

Table of contentsCompany Profile Page 3BUY, 12 Months TP HK$1.90 Page 4SWOT Analysis Page 5Financial Highlights Page 7Peer Group Comparison and Valuation Page 10Future Plan Page 13Use of ProceedsPage 14Certifications Page 14Business Overview Page 15Production Facilities Page 16Products Page 17T-MICS Page 19UL Traceability Record System Page 19Customers, Geographical and Coverage and sales and Marketing0Industry Overview Page 21Corporate Structure Page 27Disclaimer Page 28


P.� /P.�3 28

Company Profile❖ Founded in 1983 with headquarter in Hong Kong, Trio Industrial Electronics (“Trio”) is engaged in the

provision of EMS, specialised in the manufacturing and sales of customised electronic components and products for industrial use. They offer services covering procurement of raw materials, manufacturing and delivery of products to customers. In addition, Trio also provides technical advice and engineering solutions to customers at customers’ product R&D stage. The group produces OEM electro-mechanical products, switch-mode power supplies and smart chargers for its customers. Besides, Trio designs, produces and sells ATE under its own brand.

❖ Trio raised gross proceeds of HK$155.0m by offering 250m new shares or 25.0% of its total number of issued shares, at HK$0.62 each in November 2017, which brought its total number of issued shares to 1.0b.

❖ At the closing price $0.95 on 27th December 2017, Trio's market capitalisation and FY18 PE stands at HK$950M and 9.4x.


P.� /P.�4 28

BUY, 12-Months TP HK$1.90❖ We initiate coverage on Trio with BUY recommendation and 12-month target price of HK$1.90. Our target

price equivalents to 18.7x of FY18F net earnings of HK$100.8m, presenting potential upside of 100%. ❖ Trading at 9.4x of FY18F earning projection, valuation of the counter is seriously underestimated,

comparable to peer group’s weighted average one-year forward PER of 18.7x. ❖ Net earnings CAGR is conservatively projected to be 31.8% between FY17F and FY19F. Its FY18F

earnings is projected to increase 43.8% YoY to HK$100.8m.❖ Trio has been focusing on manufacturing and sales of industrial electronic components which commanded

higher GPM, comparable to electronic components for consumer electronic products. Its blended margin stood above 25.0% for the past three fiscal years and is projected to rise above 30.0% going forward.

❖ Payout ratio of more than 50.0% is expected from FY18F onward on robust growth in earnings and strong free cash flow.

❖ Trio’s smart chargers are mainly used to charge battery used in commercial freight equipment, construction equipment as well as transportation vehicles. As a specialist of smart chargers, outlook of Trio is buoyant on EV boom.

❖ Smart Chargers are definitely the key growth driver of the group’s sales and profit. Between FY14A and FY16A, Trio’s smart chargers sales CAGR was 101.3%.

❖ Almost all smart chargers produced by Trio were sold to the global leader in stored energy solutions for industrial applications. Trio are fulfilling 70.0% of the latter’s demand.

❖ The customer offers extensive categories of batteries for motivate power and reserve power, specialty batteries as well as DC power products including chargers, electronic power equipment and a wide variety of battery accessories. Growth in revenue generated from sales to the customer is expected to be strong on its products upgrading.

❖ Besides sales to the customer, Trio is expected to launch ODM smart chargers for charging batteries which installed in heavy duty and commercial EV in imminent future.

❖ With expected GPM of around 30.0%, the ODM smart chargers are designed and produced for bus manufacturer in Europe.

❖ The group’s medical/health care related products commanded GPM of 50.0%. A few of its products were certified by FDA.

❖ The group is producing power supply components for mobile refrigerating system as well as inverter for solar power devices.

❖ Trio is likely to be among the first few industrial EMS providers in Hong Kong to achieve Industry 4.0 accreditation.

❖ With OBM ATE (automatic testing equipment) product introduced in 2015, Trio has differentiated itself among its peers and broadening its sources of revenue.

❖ The opening of new offices in Dublin and Paris and expansion in sales and marketing team in Dublin would expand Trio’s sales in EU, lower its procurement costs and secure component supplies.

❖ The group is supplying electronical mechanical components with high-double GPM to gaming machine makers.

❖ The group is on its way to assemble and supply in-flight electronical toll collection system to airlines.❖ We expect that the group would successfully be acknowledged as the status of “high-tech” enterprise” by

the local tax bureau from FY18F onward, allowing it to enjoy a tax concession of 10.0ppts.


P.� /P.�5 28

SWOT AnalysisCompetitive Strengths

❖ Provision of comprehensive scope of services. Trio is an integrated industrial EMS provider with profound industrial experience and expertise, offering comprehensive scope of services to its customers. It continuously expands the product category and scope of services it provides.

❖ In-progress to achieve Industry 4.0. Industry 4.0 stands for the fourth industrial revolution, which is an on-going evolution of the value chain of a product and driven by continuous sensor, computing and memory capacity improvement, digitalisation of analogue technologies, real-time data analysis and inter-connectivity throughout the entire product cycle; according to the Hong Kong Productivity Council, certification to Industry 4.0 is classified into five levels from Level 0 to Level 4. The group has been striving to reach standard of Industry 4.0. Based on the assessment by the relevant German appraisal institute and the progress information available, Trio is likely to be certificated by the German institute for an Industry 4.0 level appropriate to its operations and standards in imminent future. Trio will be among the first few industrial EMS providers in Hong Kong achieving Industry 4.0 accreditation and that will strengthen its competitiveness as well as enhance its reputation in the industry.

❖ Application of T-MICS enhances Trio’s operational efficiency and flexibility, allowing it to formulate precise production schedules and plans.

❖ Quality control system Trio has obtained a number of certifications and qualifications from ISO, UL, IPC and VDE in respect of its superior quality control system. Thanks to its comprehensive QC system, Trio is able to consistently deliver quality products that meet customers’ expectation.

❖ Traceability record system has enabled Trio to accurately trace all raw materials and production to its origins. This is particularly useful to locate the defective parts of the products; the system can promptly ascertain the part of production process where the source of defect is and take appropriate remedial measure to rectify the issues and to prevent future recurrence.

❖ Provision of technical advice and engineering solution to customers during R&D stage. Through exchanging idea with customers, Trio obtain market intel. Further, provision of technical advice and engineering solution to customers would foster long-term relationships with customers and differentiate Trio from its competitors.

❖ Self-produced transformers. Transformer is a crucial part of electronic device as it has direct effect on performance and quality of the final product. While other industrial EMS providers generally outsource the manufacturing of transformers, Trio is producing transformers on its own, allowing it to deliver quality products to customers, shorten production and delivery lead time and increase profitability.

❖ OBM ATE. Trios own brand ATE was introduced into the market in 2015, tailored-made to accommodate different quality control standards and procedures or according to the specifications provided by customers, ATE's products are able to carry out burn-in process and conduct performance and quality tests on products of varying sizes and functionalities. Trio’s OBM ATE differentiate itself from other industry players and broaden its sources of revenue.

❖ Focus on industrial electronic components. Trio specialises in manufacturing and sales of industrial electronic components which command higher GPM than consumer EMS.

❖ Long-term and stable business relationships with customers. Trio’s major customers include reputable multinational corporations. It has been in business relationships with some of them for more than 10 years.

❖ Management team with extensive industry experience. Majority of members in senior management team have more than 20 years of experience and some of the executive directors have over 30 years of experience in the electronics industry.


P.� /P.�6 28

❖ FDA approved. A few of Trio’s medical device products have been registered with the U.S. Food and Drug Administration, implying some of the group’s products obtain the pass to the world most rigorous medical devices market.

❖ Management team with multinational background. Mr. Mac Carthy, an Irish electronic component traders based in Ireland who are familiar with the EU market has been appointed as the group’s Executive Director and the director of marketing since 2016. Mr. Shahpour Javanmard Emamghissi, an English gentleman who has over 30 years of experience in the electronic engineering industry and specialises in manufacturing, quality control and business development management is the group director of project development. Management team member with EU origin would facilitate the group’s sales in EU and the acquisition of market intelligent from clients and peers in EU region.

Weakness❖ Concentration on customers. Top five customers accounted for 81.0% of Trio’s revenue for FY16A. ❖ Focus on OEM. Trio main focus was on OEM industrial EMS and has just started its OBM ATE business.

Opportunities ❖ Growth in demand. Given the surging demand for medical devices, telecommunication and networking

equipment as well as automotive electronics, global sales value of the industrial EMS industry is expected to grow at CAGR 4.2% from 2017 to 2020.

❖ Boom in electric vehicle market. The boom in electric vehicle market is expected to boost demand for smart charger substantially The group is expected to launch ODM smart charger for charging batteries installed in heavy duty and commercial EV. Such smart charger is designed and produced for bus manufacturer in Europe.

❖ Automation. Increased automation and data integration enable industrial EMS providers like Trio to conduct their manufacturing activities more lean, efficiently and cost-effectively.

❖ Transitioning to niche markets. A transition to ‘low volume high mix’ production of more sophisticated and technology-intensive products and targeting niche market where threshold and GPM are high.

❖ Diversification of products and services portfolio. Trio are expanding products portfolio and scope of services, providing value-added services to customers. Extensive products and services categories offered by the group differentiate it among its competitors, broaden its sources of revenue and help it to acquire more customers.

❖ Demand from renewable energy sector. Global investment value in renewable energy is expected to increase at CAGR of 3.8% from 2017 to 2020.Booming in renewable energy sectors is boosting demand for renewable energy equipment, benefiting industrial EMS industry. Indeed, Trio is supplying inverter for solar energy generation devices to its customers.

❖ Demand from heath care sector. Given the ageing population and rising number of diseases worldwide, demand for home medical devices is expected to expand substantially. Global sales value of medical devices is expected to increase at CAGR of 5.1% from 2017 to 2020, benefiting the EMS industry.

❖ Demand from security sector. CAGR in sales value of home security sector is expected to be 9.9% between 2017 and 2020. Demand for EMS services from this sector is expected to increase.

❖ Demand from water industry. CAGR in global sales value of water filtration systems is expected to be 7.0% for the period between 2017 and 2020, on increase in global population and urbanisation. Demand for EMS services from this sector is expected to increase.

❖ Expanding client base. Trio is expanding its customer base in the European market and explore new markets in China, U.S. and other Asian countries. Following the opening of its offices in Dublin and Paris, the group’s sales and client base in EU region would are expected to expand further.

Threats❖ Rising costs for production inputs in China. Rising labor and production costs in China has

deteriorated profitability EMS providers.❖ Price competitions. Industrial EMS providers with facilities in China have recently been threatened by

counterparts with production facilities in other developing counties due to the favourable investment policies and relatively cheaper labor costs there. Further, some industrial EMS providers tend to offer prices below costs, creating strong price competition in the industry.

❖ Fluctuations raw material prices. Hikes in raw material costs would deteriorate Trio’s profitability.


P.� /P.�7 28

Financial highlights


Revenue (HK$M)

0

200

400

600

800

2014 2015 2016 5 M/E 2017

297.3

744.9657.6

517.5

Revenue

GP (HK$M) & GP%

0%

35%

0

55

110

165

220

2014 2015 2016 5 M/E 2017

Gross profit Gross profit margin

30%28%

25%26%

89.7

208.5165.3

134.4

26% 25%28%

30%

NP (HK$M) & NP%

0%

12%

0

20

40

60

80

2014 2015 2016 5 M/E 2017

Net profit Net profit margin

7%

10%

5%4%

20.3

75.3

29.821.9

4% 5%

10%

7%

Current ratio

0.0

0.5

0.9

1.4

1.8

2014 2015 2016 5 M/E 2017

1.40 1.40

1.80

1.50

Current Ratio

Gearing & Net debt to equity ratio

0%

8%

15%

23%

30%

2014 2015 2016 5 M/E 2017

13.8%

10.3%

3.7%

28.6%

19.7%

14.5%

10.5%

Gearing Net debt ratio

ROA & ROE

0%

13%

25%

38%

50%

2014 2015 2016

20.3%23.8%

48.6%

7.9% 9.6%

25.6%

ROA ROE

P.� /P.�8 28

Sales❖ Trio generates majority of its revenue from the sales of electro-mechanical products, switch-mode power

supplies as well as smart chargers. ❖ Driven by the strong growth in sales of smart charger, Trio’s two-year sales CAGR was 20.0% from 2014

to 2016. ❖ Despite rise in sales volume, sales of electro-mechanical products down at compound annual rate of 0.6%

between FY14A and FY16A, due to ASP drop.❖ Sales of switch-mode power supplies down at compound annual rate of 9.5% between FY14A and FY16A,

due to drop in both sales volume and ASP. ❖ Meanwhile, sales of smart chargers surged at two-year CAGR of 101.3%, thanks to the substantial

increase in both sales volume and ASP. ❖ Trio’s revenue dropped 9.3% YoY for 5M FY17A, due to: 1.) High comparable base for the corresponding

period last year, due to one of its customers had placed large orders to Trio as it launched new products, and no such exceptional orders were placed in this year. 2.) Trio generated substantial sales from one of its customers based in China in FY16A.This customer delayed his procurement to 2H 2017. 3.) One of Trio’s customer has been phasing out one of its existing product line, resulted in decrease in orders to the group.

Gross profit and GPM❖ Trio’s gross profit increased at a two-year CAGR of 24.5% between FY14A and FY16A.❖ Its gross profit increased by 1.7% YoY for 5M FY17A, despite the drop in turnover due to margin

enhancement. ❖ GPM enhanced from about 26.0% for FY14A to 28.0% for FY16A, which was mainly attributable to

increase in sales of smart chargers.❖ GPM of electro-mechanical products enhanced from 34.8% for FY14A to 36.5% for FY16A. ❖ GPM of switch-mode power supplies enhanced from 18.5% for FY14A to 21.5% for FY16A.❖ GPM of smart chargers enhanced from 13.2% only for FY14A to 23.7% for FY16A due to better economic

of scale on bulk orders.❖ Blended GPM for 5M FY17A was 30.2%, compared to 26.9% for 5MFY16A


Revenue by product category (HK$M)

0

200

400

600

800

2014 2015 2016 5 M/E 2017

1.3

12.19.5

4.7

127.2

336.6178.783.0

58.7

138.5163.1

169.0

110.0257.7306.3260.7

Electro-mechancial productsSwitch-mode power suppliesSmart chargerOthers

Revenue by geographical segment

0%

25%

50%

75%

100%

2014 2015 2016 5 M/E 2017

1.9%1.1%1.3%0.5%4.9%4.3%4.7%5.6%

20.8%28.9%26.1%17.0%

70.3%62.4%60.7%71.3%

2.1%3.3%7.2%5.6%

PRC Europe North AmericaSouth-east Asia Others

P.� /P.�9 28

Net profit❖ Trio’s net profit surged at two-year CAGR of 85.5% for the period between FY14A and FY16A.❖ Its net profit dropped 37.9% YoY for 5M FY17A, due to 1.) 9.3% YoY drop in turnover.2.) 1.7% YoY growth

in gross profit. 3.) a 33.5% YoY increase in administrative expenses, due to increase in staff costs as well as incurrence of IPO expenses.

Factors affecting Trio’s sales and profitability ❖ The change in demand for industrial electronic components and products.❖ Production costs, such as fluctuation in raw materials costs. Raw materials and components consumed by

Trio include integrated circuits, metal parts, capacitors, plastic parts, PCB components, connectors, transistors, cables and cores.

❖ Production capacity and capacity utilisation.❖ Product mix and product's GRM.

Financial condition❖ Trio’s net equity increased at two-year CAGR of 19.8%.Its net equity as of the end of May 2017 stood at

HK$145.4M, dropped 6.0% from HK$154.8 as of the end of December 2016 due to payout of dividend of HK$30.0M to shareholders.

❖ As of the end of May 2017, Trio had HK$27.3m net cash in hand. ❖ Trio’s dividend payout ratio exceeded 45.0% during the track record period.

Source : Company's prospectus

IPO Expenses❖ Trio’s had incurred listing expenses of HK$8.1M, HK$4.0M and HK$6.1M, which were recognised as

administrative expenses in P&L statements for FY15A, FY16A and 5M FY17F, respectively.❖ Additional listing expenses of HK$21.4M is expected to be incurred in FY17F, of which HK$8.1M is

expected to be recognised as administrative expenses in FY17F and the balance is expected be recognised as a deduction in equity directly upon listing.


2014 2015 2016 5 M/E 2017

Trade receivable turnover days (Day) 48.8 49.9 51.8 57.4

Inventory turnover days (Day) 90.7 90.0 76.3 79.3

Net current assets (HK$M) 63.9 72.1 107.7 101.5

Net cash/(net debt) (HK$M) (12.5) (8.6) (2.3) 27.3

Dividend paid (HK$M) 18.1 14.5 47.0 30.0

Payout ratio % 82.7 48.7 62.5 147.8

P.� /P.�10 28

Peer group comparison and valuation (As at 27 December 2017)

❖ Trio’s HKEx mainboard listed peers are trading at weighted average current PER and one-year forward PER of 25.9x and 18.7x, respectively. At HK$0.95, Trio is trading at 9.4x of its FY18F earnings of HK$10

❖ 0.8m.Its FY18F PE multiples is at about 50% discount to the sector average.❖ Trio, given its solid fundamental, should trade in-line with its peers, in our view.❖ Our 12-month TP of HK$1.90 is equivalent to 18.8x of FY18F projected earnings.

Company Ticker Market-cap (HK$M)

Historical PE (X)

Current PE (X) 1 year forward PE (X)

BYD Electronic 285 37,628.5 16.1 11.8 9.9

Tongda Group 698 11,861.4 12.4 11.0 8.4

Q Tech 1478 11,985.8 31.9 20.2 13.8

Cowell E 1415 2,203.5 8.0 5.8 4.8

AAC Tech 2018 172,057.6 30.2 27.0 19.8

Sunny Optical 2382 109,700.0 46.2 34.9 24.0

Sun King Power 580 2,822.8 10.7 10.4 7.0

Trigiant 1300 1,916.9 5.9 6.0 6.0

PC Partner 1263 1,645.9 10.0 6.9 5.8

Ten Pao 1979 1,800.8 9.3 8.3 6.4

Fit Hon Teng Ltd 6088 35,285.4 22.3 21.0 16.4

31.4 25.9 18.7


P.� /P.�11 28


Income statement FY ended 31 December

FY14A FY15A FY16A FY17F FY18F FY19F

HK$M

Revnue 517.5 657.6 744.9 800.2 926.8 1019.5

COS (383.0) (492.3) (536.4) (563.4) (648.5) (717.8)

Gross profit 134.5 165.3 208.5 236.8 278.3 301.7

Other income 1.0 5.1 6.0 1.4 2.0 3.0

Selling & distribution

(12.2) (18.5) (15.7) (18.8) (32.4) (51)

Administrative expenses

(66.7) (89.9) (90.1) (113.0) (110.0) (100.1)

Operating expenses

(21.2) (11.1) (1.9) (8.3) (13.0) (4.0)

EBIT 35.4 50.9 106.8 98.1 124.9 149.6

Interests expenses

(6.9) (8.4) (9.5) (4.9) (4.9) (4.6)

EBT 28.5 42.5 97.3 93.2 120.0 145.0

Income tax (6.6) (12.8) (22.1) (23.2) (19.2) (23.2)

Profit for the year 21.9 29.7 75.2 70.0 100.8 121.8

Balance sheet as at 31 December


HK$M

PPE 49.1 54.1 47.8 47.5 94.7 117.9

Other NCA 2.8 2.8 2.9 2.8 13.9 11.7

NCA 51.9 56.9 50.7 50.3 108.6 129.6

Inventories 120.1 122.7 101.5 114.3 132.4 145.6

TR 84.6 109.4 114.4 119.7 138.6 152.5

Cash 14.0 11.8 16.7 204.7 207.4 233.9

Others 7.5 8.0 11.0 10.5 13.8 14.3

CA 226.2 251.9 243.6 449.2 492.2 546.3

Trade payables

119.5 133.3 99.6 122.3 140.8 155.8

Borrowings 26.6 20.4 19.0 12.6 12.5 12.0

Tax payables 2.0 9.5 13.0 24.8 20.5 12.0

Other NCL 14.3 16.6 4.0 3.8 3.6 3.6

CL 162.4 179.8 135.6 163.5 177.4 183.4

NCL 8.0 4.1 3.9 3.9 3.9 3.7

Net assets 107.7 124.9 154.8 332.1 419.5 488.8

Cash flow statement FY ended 31 December


HK$M

EBT 28.5 42.5 97.4 93.2 120.0 144.9

Depreciation 8.9 11.5 12.5 11.0 8.8 14.1

Finance cost 7.0 8.4 9.5 4.9 4.9 4.6

FV & DD & Disposal 20 10 0.3 0 0 0

EBITDA 64.4 72.4 119.7 109.1 133.7 163.6

Working capital change

(45.6) (5.2) (31.8) 5.0 (21.8) (12.6)

Income tax paid (6.2) (5.4) (18.6) (11.4) (23.5) (31.7)

Interests paid (7.0) (8.4) (9.5) (4.9) (4.9) (4.6)

Operating CF 5.6 53.4 59.8 97.8 83.5 114.7

Capex (10.6) (14.9) (4.6) (10.8) (55.9) (37.3)

Others (1.7) (11.5) (11.3) 2.2 0.2 0.0

Investing cash flow

(12.3) (26.4) (15.9) (8.6) (55.7) (37.3)

Fund raised 0.0 0.0 0.0 141.7 0.0 0.0

Dividend paid (18.1) (12.5) (49.0) (30.0) (25.0) (50.4)

Others 28.8 (21.3) 13.0 (6.4) (0.1) (0.5)

Financing cash flow

10.7 (33.8) (36.0) 105.3 (25.1) (50.9)

Change in cash 4.1 (6.9) 7.8 194.6 2.7 26.5

Beginning in cash

(3.0) 1.1 (5.8) 2.0 196.6 199.3

Ending cash 1.1 (5.8) 2.0 196.6 199.3 225.8

Financial ratio


HK$M

Revnue growth (%)

N/A 27.1 13.3 7.4 15.8 10.0

Gross profit growth (%)

N/A 23.0 26.1 13.6 17.5 8.4

EBT growth (%) N/A 49.2 129.0 (4.2) 28.7 20.8

Net profit growth (%)

N/A 36.0 152.9 (6.9) 43.8 20.8

Gross margin (%) 26.0 25.1 28.0 29.6 30.0 29.6

Operating margin (%)

6.8 7.7 14.3 12.3 13.5 14.7

EBITDA margin (%)

7.2 8.2 14.7 13.0 13.9 15.6

Pre-tax margin (%)

5.5 6.5 13.1 11.7 12.9 14.2

Net margin (%) 4.2 4.5 10.1 8.8 10.9 11.9

ROE (%) 20.3 23.8 48.6 21.1 24.0 24.9

ROA (%) 5.6 6.9 19.9 11.4 15.1 16.7

Net cash/(debt) (12.5) (8.6) (2.3) 192.1 194.8 221.9

Net debt to equity (x)

0.1 0.1 0.0 N/A N/A N/A

Payout ratio (%) 82.7 48.7 62.5 71.4 50.0 50.0

Inventory turnover days (days)

90.7 90.0 76.3 52.1 52.1 52.1

AR turnover days (days)

50.9 51.3 46.2 54.6 54.6 54.6

P.� /P.�12 28

❖ We project the group’s sales increased at a two-year CAGR of 12.9% between FY17F and FY18F.❖ Revenue for FY17F and FY18F are projected to grow by 7.4% and 15.8%, respectively. ❖ Some of the group’s customers were hesitated following Brexit referendum which was held in 23 June

2016. Some customers , including TDK, deferred their orders which were supposed to be placed in 2H 2016 and 2017 to 2018. Thus, backlog is projected to rebound in FY18F.

❖ Smart Chargers are definitely the key growth driver of the group’s sales and profit. Between FY14A and FY16A, revenue generated from the sales of smart chargers increased at two-year CAGR of 101.3%. Sales growth in smart chargers is expected to accelerate on increase in demand from EnerSys as well as the launching of ODM smart chargers for commercial EV.

❖ Two-year net profit CAGR between FY17F and FY19F is projected to be 31.8%.❖ Our net profit CAGR projection are based on the GPM assumption of about 30.0% for the projected

period, an effective tax rate of 16.0% for FY18F and FY19F and our forecasted sales CAGR . ❖ We expect that increase in sales of high GPM products for EV sector, medical sector, renewable energy

sector as well as gaming sector and better economic of scale following capacity expansion would boost Trio’s blended margin above 29.0% throughout FY19F.

❖ Trio is expected to launch ODM smart charger for charging batteries installed in heavy duty and commercial EV in imminent future. Such smart charger is designed and produced for bus manufacturer in Europe. The product is expected to command a gross profit margin of about 30.0%.

❖ The group is producing power supply components for Danfoss’s mobile refrigerating system as well as inverter for Danfoss’ solar power devices. Both products command lucrative GPM.

❖ GPM of products for medical devices are expected to be above 50.0%.❖ The group is also supplying electronical mechanical components with high-double digits GPM to gaming

machine makers. ❖ The group is on its way to assemble and supply in-flight electronical toll collection system to airlines.❖ We expect that the group would successfully be acknowledged as the status of “high-tech” enterprise” by

the local tax bureau from FY18F onward, allowing it to enjoy a tax concession of 10.0ppts. ❖ Earnings for FY17F are projected to ease slightly by 6.9% YoY, due to the incurrence of IPO related

expenses as well as increase in other administrative costs. Ex-IPO expenses FY17F earnings are estimated to be HK$81.0m.

❖ ROE as of the end of December 2017 is projected to drop to 21.1% on dilution following the issuance of new shares and a slight drop in net profit.

❖ FY18F bottom line is projected to increase by 43.8% YoY, under the assumptions of 15.8% YoY increase in sales, blended margin of 30.0%, a 2.7% YoY drop in administrative expenses due to the absence of listing expenses and effective tax rate of around 16.0%.

❖ FY19F net profit is projected to grow by 20.8%, on 10.0% increase in sales and a blended margin of about 30.0%.

❖ We expect the group’s payout ratio to be 50.0% or above from FY18F onward. ❖ With the aid of T-MIC, the group can manage its inventory efficiently and shorten the inventory turnover

period. As a result, the group reduces cash outlay and retains more cash for dividend payout and investments.


P.� /P.�13 28

Future Plan❖ Enhance its presence in EU while expand into new markets. Trio plans to penetrate into Europe

market further and expand its customer base there, as well as explore opportunities in markets such as China, U.S. and other Asian countries. The group is in the process of establishing new offices in Dublin, Ireland and Paris, France. The two new offices would provide technical support and advice to European customers and explore business opportunities in Europe. Dublin is strategically located on one of the major sea and air routes between Northern Europe and North America. Establishing an office in Dublin enable Trio to serves its customers promptly while explore opportunities in both Northern Europe and North America. Paris is located in Central Europe, which will facilitate Trio to expand into adjacent but untapped markets such as Germany, Switzerland, Northern Italy and Northern Spain. Further, since Ireland and France are both EU members, Trio would no longer need to pay import duty on sales made in other EU countries should the company have office at Dublin and Paris. French government also offers various incentives to encourage foreign investors to start business there. Management of Trio also intend to explore markets such as China and the U.S. by participating in industry exhibitions, forming working relationship with design and innovation companies as well as seeking business referrals from existing customers. When opportunities arise, management may consider exploring new markets in other Asian countries.

❖ Develop high-end products. Management of Trio intend to deploy more resources to develop industrial electronic products with high value-added, GPM and production yield such as smart chargers and electro-mechanical products.

❖ OBM ATE. Since 2015, Trio has been selling its OBM ATE. In order to boost its ATE sales, Trio would participate more industry exhibitions to promote and market its ATE, recruit more salespersons in China to promote its ATE, seek business referrals from existing customers and engage a Scandinavian-based company as its agent in the sales of ATE.

❖ Increase the level of automation. To enhance production efficiency and meet the requirement of Industry 4.0, Trio intend to raise the level of automation in production process by upgrading and enhancing the machineries and equipment in its existing production facilities. When the production line become more automated, labor cost would be lower, and level of flexibility of the production increase.

❖ Capacity expansion. Management of Trio expected that the production capacity of Trio’s existing plant would be fully utilised in 2018. Management of Trio plan to convert certain of its leased properties with a total GFA of approximately 5,720.0 sq.m. into a 5-storey factory building with a GFA of 9,570.0 sq.m. and a 3-storey factory building with a GFA of 6,912.0 sq.m.

❖ Strategic talent office. Trio will establish a strategic talent office in Guangzhou City, China. The talent office will be divided into three divisions, namely strategic IT, strategic purchasing and strategic finance. The strategic IT division will be mainly responsible for analysing its IT system requirements and establishing a big data analysis center; the strategic purchasing division will be mainly responsible for formulating and implementing Trio’s procurement policies, exploring new suppliers and strengthening business relationships with existing and future suppliers; whereas the strategic finance division will be mainly responsible for enhancing financial management systems, establishing appropriate standard and facilitating the implementation of internal audit works. Trio plans to recruit more personnel, including engineers, IT technicians, procurement specialists, accountants and internal auditors, for strategic talent office.

❖ Strengthen sales and marketing function. Management of Trio intend to participate in more industry exhibitions and trade fairs to promote the group’s products.


P.� /P.�14 28

Use of proceeds❖ 36.4% of net proceed raised from IPO would be spend on installation of two automated SMT production

lines, six interchangeable PCB assembly production lines and other machineries and equipment in its new production base.

❖ 9.7% of the proceeds would be used as advance payment of rental deposit, electricity installation charges and rental prepayment in respect of Trio’s

❖ 9.1% of net proceed raised will be used for the configuration of Trio’s new production base, including leasehold improvements.

❖ 23.2% of it would be used to upgrade Trio’s existing production facilities. 7.6% of estimated net proceed would be used to establish offices in Dublin, Ireland and Paris, France and for the expansion of customer base in Europe.

❖ 7.6% of estimated net proceed raised would be used to establish strategic talent office in Guangzhou City ,China and to recruit high caliber personnel such as engineers, IT technicians, procurement specialists, accountants and internal auditors,

❖ Balance would be used for working capital and other general corporate purposes.

Certifications


Certifications for certain aspects of operations

Certification Scope Issuing authority

ISO 9001:2008 Quality management system - Assembly of electric parts and components

British Standards Institution

ISO 14001:2004 Environmental management system - Assembly of electric parts and components


OHSAS 18001:2007 Occupational health and safety management system - Assembly of electric parts and components


Certifications of the company’s products

Certification Scope Issuing authority

ISO/TS 16949:2009 Quality management system - Manufacture of printed circuit board assemblies (PCBA)


ISO 13485:2003 Quality management system - Assembly of electronic parts and components for medical applications


Registration with the U.S. Food and Drug Administration

Medical device U.S. Food and Drug Administration

UL Certification Component - Printed wiring assemblies

UL

UL Certification Component - Systems, electrical insulation

UL

Certificate for China Compulsory Product Certification

Switch-mode power supply

China Quality Certification Centre


Power supply China Quality Certification Centre


AC/DC power supply China Quality Certification Centre


Switching power supply



Power supply for building- in (open frame)


P.� /P.�15 28

Business overview❖ Founded in 1983 and headquartered in Hong Kong, Trio Industrial Electronics (“Trio”) is an EMS provider

specialising in the manufacturing and sales of customised industrial electronic components and products. As an OEM of industrial electronic components and products, Trio offers services covering procurement of raw materials, manufacturing and delivery of products to customers. In addition, Trio also provides technical advice and engineering solutions to customers in customers’ product R&D stage.

❖ The group produces OEM electro-mechanical products, switch-mode power supplies and smart chargers for its customers and those products are manufactured according to the specifications provided by customers and are incorporated into their end products or sold as stand-alone products under customer’s own brands. Besides, Trio designs, produces and sells ATE under its own brand.



P.� /P.�16 28

Production facilities❖ Trio has one production base located in Nansha District, Guangzhou City, Guangdong Province. It

operated four fully-automated fixed production lines and 66 interchangeable production lines which can be adjusted according to its production schedule. As at the prospectus date, the group had 1,679 employees.

❖ Utilisation rate. Since SMD (surface mount device, an electronic device that can be directly mounted onto a PCB through the application of SMT) process is a fundamental step in the manufacturing of Trio’s products, the production volume of products is subject to the output volume of its SMT lines (surface mount technology, a soldering technology whereby electronic components are mounted or soldered directly onto the surface of PCB ).The utilisation rate of Trio’s production facilities is calculated as dividing the productive SMT machine hours at Trio’s plants by the available SMT machine hours:


2014 2015 2016 5 M/E 2017

Number of SMT lines 3 4 4 4

Number of available SMT machine hours 18,840 20,380 22,800 9,440

Number of productive SMT machine hours 14,114 16,814 17,679 7,362

Utilisatoin rate (%) 74.9% 82.5% 77.5% 78.0%


P.� /P.�17 28

Products❖ Electro-mechanical products provided by Trio include various assemblies for equipment such as access

and security control systems, control parts for water filtration systems, convertors and filters for renewable energy facilities, industrial pumps for air conditioners and medical devices. These products could be applied into:

❖ Access and security control systems in hospitals and commercial buildings.❖ Neighbourhood or campsite water filtration systems❖ Wind turbine and solar energy systems❖ Medical devices such as DVT devices

❖ Switch-mode power supplies produced by Trio include various switch-mode AC/DC box-built and module-built units, which are used in various equipment such as medical devices, renewable energy facilities, telecommunications equipment and commercial freight equipment. Areas of application of Trio’s switch-mode power supplies include Medical devices such as DVT (deep vein thrombosis) devices, renewable energy facilities, telecommunications equipment and commercial freight equipment.

❖ Smart chargers of Trio are heavy duty which are used in commercial freight equipment, vehicles and construction equipment such as fork lift trucks and hoist cranes, sea vessels and other industrial electric vehicles and mobile power equipment.


P.� /P.�18 28

❖ Trio also produces power switch gear boards and catering equipment control boards, which are applied into automobile.

❖ ATE is used to test whether the functions and performance of circuit boards, integrated circuits, wafers and other electronic components meet the required standards. Trio’s ATEs are sold under its own brand and tailor-made for customers to carry out burn-in process and conduct performance and quality tests on products of varying sizes and functionalities.


P.� /P.�19 28

T-MICS❖ T-MIC is Trio’s self-developed manufacturing execution system. It is applied throughout the entire

production process. Composed of specialised work stations, T-MICS connects different aspects of the production process by various scanning, electronic and verification devices, and is highly integrated through collecting, storing and analysing real time data at each critical stage of production. Each work station carries out a specific task assigned to it by the control center, which coordinates the entire production process and is configured by an initial input of instructions based on the intended product design. In such highly automated process, the scanning devices register all QR codes as easily identifiable records. Meanwhile, the electronic devices check if the raw materials are properly assembled in accordance with the instructions, monitor the production efficiency in real time and give off alert to the electronic devices in other work stations when production efficiency dropped; and verification devices ascertain the quality of the assembled or partially assembled products.

❖ Benefit of T-MICS❖ Trio can optimise production efficiency with application of T-MICS. T-MICS collects real time data and

closely monitors achievement of targets regarding production and quality.❖ If production staffs fail to reach targets, supervisors are able to promptly identify the source of the

problem and take appropriate remedial actions. ❖ By setting a standard timeline for each step of the production process, supervisors and management

are able to objectively evaluate worker’s productivity and maximise that by assigning them with appropriate tasks.

❖ T-MICS also closely monitors the utilisation and efficiency of machineries and equipment, allowing management to identify bottlenecks in production process, evaluate production plans and make better arrangements with respect to the use of such machineries and equipment.

❖ T-MICS manages a traceability record system, which records the production data of products as they flow through the manufacturing process, enabling management to accurately trace products to their origins.

❖ Through the application of T-MICS, production processes can be adjusted at short period, allowing the group to handle customers’ purchase orders efficiently.

❖ Since sensors are installed in major machineries and equipment, any malfunction or breakdown of such machineries and equipment will be promptly identified, enable management to take immediate remedial actions to reduce idle time and minimise disruption in production.

UL Traceability Record System❖ UL traceability record system is one of the modules of T-MICS. It records data and information such as

type of raw materials used, manufacturing date of raw materials, raw material reception date, batch number of raw materials the products into which such raw materials were incorporated, manufacturing date of products, responsible workers at each stage of manufacturing process as well as delivery date of products.

❖ Benefit of UL traceability record system ❖ Management is able to accurately trace products to their origins.❖ UL traceability record system allows management to promptly ascertain the source of the defect,

identify the defective products and take appropriate remedial measures to prevent future recurrence.❖ Trio’s traceability record system is recognised by UL (the Underwriters Laboratories Inc., a global

independent product safety testing, validation and certification organisation). When its customers manufacture UL-recognised products with the components and products supplied by Trio, customers’ end products will not require further UL investigation.


P.� /P.�20 28

Customers, geographical coverage and sales and marketing❖ Trio has broad clientele. Most of its major customers are reputable international corporations principally

engaging in the manufacturing and sales of industrial electronic products, and Trio has have maintained business relationship with some of them for more than 10 years.

❖ For FY16A and 5M FY17F, five largest customers accounted for 81.0% and 81.5%, respectively of Trio’s total revenue. Meanwhile, the largest customers accounted for 45.2% and 42.8% of Trio’s total revenue. Below are the introductions of the group’s top five customers for FY16A and 5M ended May 2017.

❖ Customer B provided revenue of HK$336.6M and HK$127.2M to Trio, respectively, accounting for 45.2% and 42.8% of Trio’s revenue for FY16A and 5M ended May 2017. Headquartered in the U.S, it is a industrial batteries manufacturer, a global leader in stored energy solutions for industrial applications with 32 manufacturing and assembly facilities world-wide. Shares of which are listed on the NYSE and with a market-cap of approximately US$3.1 billion as at the latest practicable date.

❖ Customer A provided HK$125.5M and HK$53.2M revenue to Trio for FY16A and 5M ended May 2017, respectively, representing 16.9% and 17.9% of the group’s respective revenue. Customer A design is a multinational electronics enterprise with headquarters in Japan whom is engaged in manufacture and sales switch mode power supplies. Shares of which are listed on the Tokyo Stock Exchange and with market-cap of ¥970.6B as at the latest practicable date.

❖ Customer C provided HK$57.2M and HK$25.3M revenue to the group, respectively, accounting for 10.0% and 8.5% of the group’s total turnover for FY16A and 5M ended May 2017. Headquartered in Denmark, customer C engaged in manufacturing of cooling and heating equipment as well as power solutions and drives. Customer C is selling its products to over 100 countries with a workforce of 25,000 employees. Its net profit for FY16A was EUR394.0M.

❖ Customer D provided respective revenue ofHK$49.4M and HK$20.1M for Trio, accounting 6.6% and 7.0% of Trio revenue for FY16A and 5M ended May 2017. Based in UK, customer D is engaged in design, manufacturing and sales of pumps and accessories for the air conditioning, heating and refrigeration industry. Its sales covers over 100 countries.

❖ Customer E is founded in 1991 and based in Ireland. It produces electronic intruder and life safety products, with presence in Ireland and U.K. Trio generated HK$34.4M of sales from such customer, representing 4.6% of its total revenue for FY16A.

❖ Customer G engaged in the manufacturing of products for the professional beauty and barber salon trade, consumer personal care and animal grooming. It has more than 1,500 employees worldwide and its products are being sold in more than 165 countries. Such customer provided HK$15.9M revenue to Trio, accounting 5.3% of its turnover for 5m ended May 2017.


P.� /P.�21 28

Industry overview❖ EMS refers to services that include the manufacturing of electronic components and products. The EMS

industry emerged as electronic product and component manufacturers outsourced parts of the manufacturing process so that they could focus on brand and distribution channel management and reduce production costs. EMS providers offer a variety of services, including product design, prototyping, manufacturing, assembly, testing, repair, supply chain management and other after-sales services to electronic product and component manufacturers and distributors.

❖ The EMS industry can be classified into consumer and industrial EMS. Industrial EMS providers can participate in the entire manufacturing process, including the manufacturing of industrial electronic components to the manufacturing of electronic products. Industrial EMS providers can also be contracted at various stages in the manufacturing process. Some industrial EMS providers may only require the product or component design brief and will then undertake prototyping, raw materials sourcing, manufacturing, assembly, testing and delivery. Alternatively, other industrial EMS providers may require customers to provide the design, components necessary for manufacturing and an assembled sample. Industrial EMS providers may offer other services such as supply chain management and repair and rework services to customers.

❖ The major customers of industrial EMS providers include: (i) electronic components manufacturers and distributors who require electronic components and assemblies for further processing and distribution; and (ii) electronic products manufacturers who require processed electronic components, assemblies and products to manufacture industrial electronic products. There are no direct sales of manufactured goods from industrial EMS providers to end users.

❖ In 2016 global sales value of the industrial EMS industry accounted for 58.3% the global sales value of the overall EMS industry.

❖ The global sales value of the industrial EMS industry from 2010 to 2016 increased at a CAGR of 4.9%. ❖ Given the growth in demand for medical devices, telecommunication and networking equipment and

automotive electronics, Ipsos expected that the global sales value of the industrial EMS industry to grow at a CAGR of 4.2% between 2017 and 2020.

❖ Global sales value of the industrial EMS industry

Source : Ipsos research and analysis THIS DOCUMENT MAY NOT BE DISTRIBUTED IN THE UNITED STATES, CANADA OR JAPAN. THIS DOCUMENT HAS BEEN FURNISHED TO YOU SOLRLY FOR YOUR INFORMATION AND MAY NOT BE REPRODUCED OR REDISTRIBUTED TO ANY OTHER PERSON.

P.� /P.�22 28

❖ Sales value of the industrial EMS industry in North America

Source : Ipsos research and analysis

❖ The sales value of the industrial EMS industry in North America increased at CAGR of 2.2% for the period between 2010-2016. Ipsos expected that sales value of the industrial EMS industry in North America to increase at CAGR of 4.6% between 2017 and 2020 on drop in outsourcing from North America to Asia Pacific.

❖ Sales value of the industrial EMS industry in Europe


❖ The sales value of the industrial EMS industry in Europe increased at a CAGR of 1.4% for the period between 2010 and 2016. Ipsos predicted that total sales value of the industrial EMS industry in Europe to grow at CAGR of 3.1% for the period between 2017 and 2020, on positive industrial outlook and drop in outsourcing.


P.� /P.�23 28

❖ Sales Value of the Industrial EMS Industry in the PRC and Hong Kong


❖ Sales value of the industrial EMS industry in China and Hong Kong increased at a CAGR of 8.2%, thanks to the rising demand from the medical and telecommunication and networking market segments. Ipsos forecasted that sales value of the industrial EMS industry in China and Hong Kong to increase at a CAGR of 4.0% between 2017 and 2020, on expected growth in medical device market due to the rising aging population, and increase in demand for robots.

❖ Global sales value of SPSUs


❖ SPSUs include various devices such as chargers, adaptors, converters and inverters. Industrial SPSUs are generally manufactured at a higher technological level than those applied in consumer electronic products in order to fulfil the stricter technical requirements.

❖ The global sales value of SPSUs increased at a CAGR of 3.3% for the period between 2010 and 2016.

❖ SPSU sales CAGR between 2017 and 2020 is expected to be 2.9% by Ipsos.❖ Increasing demand for transportation and renewable energy equipment is likely to support the growth

of the global industrial SPSU market.❖ Smart battery charger is able to respond to the conditions of a battery and modify its charging actions

by real-time monitoring and control of the temperature, voltage and current of the battery.❖ Smart battery chargers can be applied in various types of electronic equipment including medical

devices, industrial equipment, military equipment as well as consumer electronics.❖ Growth in electric vehicle market is expected to provide boost to demand for smart battery charger.


P.� /P.�24 28

❖ Global sales value of medical devices


❖ Medical device is any instrument used for the diagnosis, prevention, monitoring, treatment or alleviation of medical conditions.

❖ Major types of medical device include diagnostic imaging devices, dental equipment, orthopaedic and prosthetic devices and patient aids.

❖ Global sales value of medical devices increased at a CAGR of 3.3% from 2010 to 2016. ❖ Global sales value of medical devices is expected to increase at CAGR of 5.1% from 2017 to 2020,

given ageing population and higher health awareness.

❖ Global investment value in renewable energy equipment from 2010 to 2020


❖ Renewable energy equipment includes devices or components used in renewable energy facilities, including generation, transmission, distribution and energy storage equipment.

❖ Due to the increase in environmental awareness and adopting of hybrid renewable energy systems, global investment value in renewable energy is expected to increase at CAGR of 3.8% from 2017 to 2020.


P.� /P.�25 28

❖ Global sales value of home security solutions from 2010 to 2020


❖ Home security solutions refer systems and products such as alarm systems, access control systems, surveillance systems, electronic locks and motion and infrared sensors.

❖ Global sales value of the home security increased at CAGR of 9.3% between 2010 and 2016.❖ Due to rising security concern in emerging market as well as advancement in mobile technology

which allow integration of home securities functions into mobile devices, CAGR of sales value of home security sector is expected to be 9.9% between 2017 and 2020.

❖ Global sales value of water filtration systems from 2010 to 2020


❖ Water filtration systems require electronic equipment and components such as control systems and sensors that are manufactured by industrial EMS companies.

❖ Global sales value of water filtration systems increased at CAGR of 11.3% between 2010 and 2016. ❖ CAGR of global sales value of water filtration systems is expected to be 7.0% for the period between

2017 and 2020, on increase in global population and urbanisation.

❖ ATE function❖ ATE is the equipment for testing whether functions and performance of circuit boards, integrated

circuits, wafers and other electronic parts meet the required specifications.❖ ATE is composed of control hardware, software and sensors to send test signals.❖ Major end users of ATE include semiconductor manufacturers, integrated device manufacturers and

test houses which specialise in quality assurance testing.


P.� /P.�26 28

❖ Sales value of ATE in China and Hong Kong


❖ Sales value of ATE in Hong Kong and China increased at CAGR of 1.9% between 2010 and 2016.❖ Sales value of ATE in Hong Kong and China is expected to increase at CAGR of 3.3% between 2017

and 2020, on potential demand from automotive, consumer products and IT and telecommunications industries.

❖ ATE is the equipment used to test whether the functions and performance of circuit boards, integrated circuits, wafers and other electronic parts meet the required specifications. ATE encompasses control hardware, software and sensors to send test signals. The equipment also measures the response, giving a binary pass/fail outcome. The scope of ATE is wide, from complex automation and algorithms to digital multi-meters. ATE devices can be divided into three main types, which are (i) memory ATE; (ii) non-memory ATE; and (iii) other ATE.

❖ Raw material suppliers provide base plastics and metal to ATE manufacturers. Component suppliers supply pre-made components to ATE manufacturers and these component suppliers could also be the customers of ATE manufacturers. In the midstream, the ATE manufacturers design, manufacture and perform quality control on ATE before they pass the final products to distributors and wholesalers or directly to the end customers. Depending on the manufacturers, they may outsource the distribution or sales functions. The major end users of ATE include semiconductor manufacturers, integrated device manufacturers and test houses which specialise in quality assurance testing.


P.� /P.�27 28

Corporate structure


TRIO INDUSTRIAL ELECTRONICS LIMITED

75%

PUBLIC

75% 25%

P.� /P.�28 28

DisclaimerThis report has been issued by the Research Department of Great Roc Capital Securities Limited (“Great Roc”) from source that it believes to be reliable but no guarantee or undertaking, express or implied, is made or given to its fairness, accuracy, completeness or correctness by Great Roc. All opinions in this report are subject to change without notice. The information given is for reference and information purposes only and it is not as any advice, offer or solicitation to buy or sell, or deal in any of the securities or investments mentioned herein. Great Roc and their employees and their relatives or associates may from time to time have positions in, and buy or sell, the securities of companies or related products or investments referred to in this report to the extent permitted under the market practice. Investment involves risk. Investors should note that value of investments and the price of a security may move up or down and past performance is not necessary indicative of future performance. Investors should seek independent professional advice and Great Roc shall not under any circumstances whatsoever be liable in any way for any loss of profit may sustain by the investors in connection with using the information on such report. The intellectual property rights of any contents in this report shall belong to Great Roc. Without the permission by Great Roc, no one will be allowed to copy, publish or redistribute the contents in whole or in part of this report for any purpose. The views expressed in this report is prepared by SFC’s licensed analyst and it is accurately reflect the analyst’s personal views of the subject securities. Except as otherwise disclosed, the Analyst of this report has no interest in the securities of the companies discussed in this document or member companies with the same group of such companies as the date of issuance of this report.

Great Roc Capital Securities Limited Address : Suite 1601-1603, 16/F, West Tower, Shun Tak Centre, 168-200 Connaught Road Central, Hong Kong Tel：(852) 3423 0000 Fax：(852) 3423 0099 Email：[email protected]


mailto:[email protected]

trio industrial electronics group ltd - great roc rn.pdf · 1/p.28 p. trio industrial electronics...

Documents