Management Discussion and Analysis by the CEO Print E-mail

CEO2021

FY2020 had to be one of the most unique and volatile year we have faced in a long time. What started out as a normal year quickly turned into one of the biggest global disruptions ever witnessed as Covid-19 pandemic spiked, spread and turned into a global pandemic in early 2020.

Gaining approval to operate through the MCOs and with our Sensors Division’s passionate dedication and seamless executions amidst the volatile global supply chain, our Group’s biggest and most important customer managed to flawlessly receive supply of all of their critically needed products from our Group to fully satisfy their own end-customer, further reassuring them our solid business continuity plan. Without any shadow of a doubt, our Sensors Division’s operational excellence thus contributed outstanding performances to our Group while enabling our customer to enjoy similar level of successes due to our Sensors Division’s seamless support to their supply-needs throughout this challenging year. The most powerful testimony of our Sensors Division’s outstanding contributions came in the form of the customer’s recognition of GMSB as one of their key partners which is backed up by their consistent and strong product-loadings and co-product developmental projects to our Group throughout FY2020 and into FY2021/22.

We remain committed to invest in the latest technologies and are planning to spend more than RM35 million to achieve a fully automated or “lights off” factory for some of our key product lines within the next three years. On this front, we also managed to win government support in the form of grants for modernization, Research and Development (“R&D”) and Training as our efforts are in line with their vision of Industry 4.0. In the midst of all the challenging activities, our dedicated teams of technical and operations teams extended their contributions to our Group with an impressive CAPEX avoidance through various productivity improvement and improvisations.

Furthermore, our Group’s two other key subsidiaries (GSB and ISO) managed to triumphantly conquer all the crippling effects caused by the Covid-19 pandemic to their key customers, and successfully turned around their 1H 2020’s weak performance by end FY2020!

In the midst of the challenging year, our teams have continuously and successfully developed and pursued new co-developmental and diversification businesses with encouraging foundation laid for FY2020 and beyond. On the ESG front, we will be putting focus on moving toward carbon neutral in our operational activities with new programs moving toward this area. In terms of corporate governance, the Group reiterate its position of zero tolerance on corruption and bribery. An anti-corruption and bribery prevention program according to the five principles for Adequate Procedures contained in the Ministerial Guidelines on Adequate Procedures has been implemented to ensure that we work to the highest ethical standards. There were also many sessions conducted for all our employees throughout the year so that all of them are now familiar with this new Act and are aligned with the Group's anti-corruption stand.

As always, it is imperative for our Management team to convey our heartfelt gratitude and sincerest appreciation to every one of our highly respected Board members for their meticulous guidance, timely support and invaluable motivation provided to our Leadership and Management teams and in bringing about the very best out of our Group’s workforce through all these past years.

GLOBETRONICS MANUFACTURING SDN BHD

Our operational team faced with one of the most challenging tasks in March’20 till June’20 with MCOs hampering our operations with restricted number of employees allowed to work in the factory. Supply chain constraint also impacted our operational productivity. In spite of all the restrictions and challenges, GMSB consistently delivered 100% delivery commitment to our customer’s product and service demands.

A new generation light sensor (4th Generation) was launched during the year as part of our continuous efforts to improve the product quality and efficiency of our components to remain globally competitive. Due to lockdowns globally as a result of the pandemic, the entire supply chain for our end customer’s product was delayed. The mass production schedule for this new generation light sensor was therefore also delayed by a couple of months from the usual May timeframe to only starting mass production in July 2020. We similarly experienced a weak 1H 2020 with a strong recovery in 2H 2020 as per previous years for all generations of the light sensor. The difference this time was as the mass production for the end customer’s product launch occurred later, we saw more stable volumes for Q4 2020 period where we usually see some inventory adjustments in December.

The gesture sensor for wireless accessories continued to show healthy demand and an increase in loading again during the current year. The additional CAPEX spent to expand this product line was timely as it continued to operate at maximum capacity throughout the year. This would be the third straight year of growth for the product as the demand and acceptance for the end product gains traction globally for its sound quality and also as a trend accessory.

For existing and matured sensor operations, there was also a third generation motion sensor launched and started mass production in May 2020. This component is used in the wearable product of our end customer, and so far the combined motion sensors loading for Year 2020 has shown a steady growth over last year.

All the above accomplishments were achieved despite border closure and overseas travels restrictions hindering face-to-face interactions with our customers. We are happy with our progress for the year and look forward to keeping 3 New Product Introduction (“NPI”) projects intact for Year 2021 and Year 2022. Our GMSB team prevailed and excelled throughout FY2020 to achieve 100% performance for all the critical lines and ensured zero customer-linesdown situation throughout the whole period during and after spite of MCOs, shutdowns and disruptions. The most powerful testimony of our Sensors Division’s outstanding contributions came in the form of the customer’s recognition of GMSB as one of their key partners which is backed up by their consistent and strong product-loadings and co-product developmental projects to our Group throughout FY2020 and into FY2021/22.

As the next step toward achieving manufacturing excellence, we have finalized and would be initially investing around RM15 million to automate our lines with Industry 4.0 initiatives, one of the first steps for us to move toward “lights off” operations. The investment will be to set up a prototype line that will incorporate the latest technologies and utilizing most of the pillars of Industry 4.0 like AR, big data analytics, cybersecurity, robotics, cloud, predictive analytics to significantly automate a lot of current processes to make our lines more efficient and robust.

Industry2021

GLOBETRONICS SDN BHD / GLOBETRONICS (KL) SDN BHD

FY2020 has been an equally tough and challenging year for GSB. GSB faced similar challenges from MCOs and supply chain disruptions. In assisting Penang’s more critical needs to meet important customer’s business-orders, GSB transferred some of their headcount for support shutdowns during MCOs, resulting in weak financial performance for Q2 2020. GSB also experienced cost down pressure from its customers while entertaining higher prices from their other direct material suppliers during this period. Thanks to team efforts, GSB executed tough cost and overheads controls which helped to mitigate the weak performance incurred during MCOs and shutdown especially in 1H 2020. In 2H 2020, through stepped-up efforts in implementing effective cost controls as well as strict tier-pricing management, GSB was able to turn around its financial performance. We have also successfully secured and qualified another new customer for our plating business unit in FY2020. Going forward, GSB will continue to face the urgency of business transformation due to the existing product lines continuing to reflect average selling price (“ASP”) erosion and market shrinkages. On another note, GKL also managed to improve its performance through the rental of some excess production space.

ISO TECHNOLOGY SDN BHD (“ISO”)

ISO similarly experienced a very challenging year due to production lines being affected by the MCOs, volume drop and loading volatility. The Covid-19 pandemic situation has also caused many companies globally into massive cash flow difficulties, and our customers were not spared as well as one of our customers also had to exit a product line in LED segment which resulted in a drop in volume for us.

Customers are very focused on cost at this juncture, and we faced many cost down requests to keep our customers competitive. As a result, we also had to spend some CAPEX to automate further some of our lines to satisfy our customer’s requirements to remain competitive.

The laser automotive headlamp division went through challenges of its own. The lockdowns in the wafer fabrication plant in California caused supply disruption of dies, which resulted in the inability to produce the components on our side and hence, volumes falling short of earlier projections. Our customer was still struggling to get the dies supply back to normal at the end of Year 2020. We expect the supply only to normalize by Q2 2021.

Border closures also disrupted our new projects like the bio sensor that faced multiple delays due to performance issues during the prototype stage, with our customers not able to travel to troubleshoot the problems. We are now looking at a mass production date sometime in 1H 2021 for this product.

Overall, we believe the worst is over for ISO and the company will have better days ahead once the issues that we faced this year are behind us and the world slowly goes back to normal with vaccinations of the population in sight.

RISKS

With US’s new president taking over in Year 2021, we do not think the US-China trade war will take any major directional changes and the uncertainty of Covid-19 pandemic may continue to threaten and curtail economic recovery, therefore most of our customers remain very cautious and conservative in their business projections and expectations for FY2021. Their near-term and long-term guidance and forecast for FY2021 thus remains flat.

As such, we expect volatility to continue at least in the first half of FY2021 as most of the world is still in lock down mode with vaccinations starting to take place. Our new product developments may also continue to experience delays as long as border closures are in place as progress will be limited without the ability to do face to face meetings. This would affect our ability to produce and ramp up our new products in which could result in us not being able to meet our internal projections of financial performance.

The weakening of the USD would also be a potential risk as most of our receivables are in USD. We may experience forex losses in the event of the continued devaluation of the USD. Hedging policies will be implemented to mitigate the impact of the currency movements.

PROSPECTS

The adoption of technology will continue regardless of the state of the global economy. In fact, during the current covid-19 pandemic, demand and use of electronic gadgets, connectivity, cloud and virtual meetings actually accelerated.

This would in turn accelerate the progress of 5G to be implemented as the increased need for speed, connectivity and automation would provide the necessary demand to proliferate this new technology quickly. Our experience in miniaturized sensors with co-product development exposure in the areas of bio sensing and 5G, is poised to reap the benefits of this technology rollout. We also expect our existing product of laser headlamp components, which experienced wafer shortages during the Covid-19 pandemic, to show healthy growth as the situation normalizes with demand for new power efficient technology increase drastically.

In line with this, we are also prepositioning ourselves for new products and new loadings with a space extension project to add approximately 25,000 square feet of additional manufacturing space in our existing factory in Phase 4 of the Free Industrial Zone, Penang. The expected cost of the project is RM10 million and the estimated completion date is August 2021. Total CAPEX for the Group is expected to be in the range of RM30 – 50 million, depending on the qualification of new products and the timing of mass production schedule.

Machine2021