Management Discussion and Analysis by the CEO Print

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Financial Year (“FY”) 2019 was a challenging year for the Group as the trade war caused tremendous volatility to global trade which in turn also made it very volatile for us in terms of production loading. As a result, we needed to adopt a very prudent and micro-managed approach with a very tight weekly control on human resources, material planning, inventory control and production planning as well as obtaining more real time data in relation to cost control.

The US-China trade war effect was felt most in the matured product lines segment as there were many relocations by companies in China to South East Asia to avoid the tariffs, causing supply chain disruptions along the way and also impacting some of our product loadings as well as material supplies. This volatility and uncertainty challenged us to be more creative with our asset utilization, whereby we managed to modify and requalify our existing equipment to cater for new projects during the year. As a result, we managed to minimize our new CAPEX investment projection of around RM40 million to a very reasonable figure of only RM12 million in FY2019, and helping to preserve our cash resources during this uncertain period. I am glad to report that our solid team had risen to the challenges of these uncertainties and delivered a satisfactory set of financial results for the Group in FY2019, with revenue coming in at RM216 million and net profit of RM44.7 million.

Our team continue to achieve success in winning new sensor projects for future smartphone and smart devices. Three new smart sensors were designed into our customer’s smart device and accessories products in FY2019, and continuing to cement our position as a key and reliable supplier to them in consistently delivering good, high quality miniaturized sensors in a timely manner. On top of this, our design and NPI team has continued to work on our developmental pipeline, with breakthroughs seen through sample/prototype/small volume builds of biosensors and 5G sensors that are expected to go into mass production in Year 2020 and 2021.

GLOBETRONICS SDN BHD/GLOBETRONICS MANUFACTURING SDN BHD/GLOBETRONICS (HK) LIMITED

Our smart sensors division continue to be the most exciting business unit for the Group, delivering a set of stable performance and contribution for FY2019. Similar to FY2018, we saw a weak Quarter 1 2019 which was a result of the inventory adjustment by our customer. Quarter 2 saw gradual improvement for certain product lines with higher expectations on second half ramp coming from new smartphones being launched in Quarter 3. The impact of the US-China trade war started to be felt in the supply chain as the year progressed, resulting in the actual second half performance being lower than our original forecast.

Due to the perseverance and solid performance of our technical and NPI team, new generation light sensors was successfully qualified for mass production in May 2019 and was one of the key components for the new smart devices for our end customer.

The gesture sensor for the wireless accessories have witnessed another superb growth of >30% during the year, after having shown a similarly strong growth number in FY2018. This is the area where we have optimized our asset allocation from other lines to minimize the capex investment needed to facilitate this growth. Based on the customer indications and market reports on projections, we expect to see further strong upside for the gesture sensors in FY2020, and are expected to incur additional capital expenditure (CAPEX) of RM12 million to prepare for it as we are already operating at maximum capacity.

For existing and matured sensor operations, our newly launched motion sensor shows strong and stable volume. The new wearable product of our end customer is doing well in the market, and we continue to design in new features that is expected to improve the performance of the next generation wearable product for FY2020 and FY2021.

Despite being a challenging year for our other business division due to the volatile external environment, we have managed to secure a next generation optical component that will be designed into the next generation smartphone expected to be launched in Quarter 3, 2020.

With the uncertainty of the trade war improving, we are expecting to see a better FY2020. The unforeseen outbreak of Covid-19 is now bringing back the uncertainty that had affected the entire global market for the whole FY2019. It is everyone’s hope that Covid-19 which had disrupted global demand and global supply chain will be contained soon.

Barring more uncertainty from Covid-19, we are looking ahead to a better FY2020 based on the current available customers' information and forecast made available to us. The demand across our product lines seem to have stabilized, and we have new products in the pipeline which are expected to drive growth for the year.

GLOBETRONICS (KL) SDN BHD (“GKL”)

GKL had to adjust to the new realities after the decision to transfer out some of the matured and high labor intensive product lines back to the customer. The transfer resulted in a substantial drop in volumes from Quarter 4 2018 to Quarter 1 2019, where we had to realign our resources and also to incur some separation costs to our employees. This resulted in excess production space we have to carry in which we are identifying new businesses to backfill.

We have come up stronger after this realignment exercise. GKL would now be a less labor intensive business, with 1-2 new business expected to start production in FY2020 as the first step in this back filling process. These would be some of the new technologies we are targeting to move into higher value added segments for our Group. With the new activities that have been set up, we are growing more positive for the prospects of GKL in the near future.

ISO TECHNOLOGY SDN BHD (“ISO”)

ISO had a very challenging FY2019 as its business performance was hit hard by the weakness of the LED division, in particular the general lighting segment. Most of the customers in this segment were impacted by the weak market demand, excess inventory, pricing pressures which was exacerbated by the tariffs imposed from the USChina trade war. The low loadings with a lack of economies of scale lead to a weaker year on year performance for this division.

The laser automotive headlamp division went through some learning curves after it started mass production in FY2019. Over the course of the year, it had overcome many of the initial challenges faced when ramping up from the prototype stage. We have since started the next stage ramp up in November 2019 after overcoming these challenges, and the line is expected to ramp further in FY2020 as the product gains traction with more customers adopting the product and is currently still trailing in backlog orders.

For the bio environment sensor, the progress has been slow in FY2019 as we are still trying to overcome the product performance and reliability concern. Initial end customer design success was very exciting and promising with 2 global smart devices companies committing to adopt into their respective next generation smart devices for FY2021.

A recent breakthrough is that a big global consumer electronics company is looking to adopt it into their air conditioners and we are hopeful to start some small mass production by end of FY2020.

Machine

Prospects

Our new generation sensors are expected to lead us to growth in FY2020. We are looking to produce three new generation sensors for the light, gesture and motion sensor lines which are the staple components of our end customer’s smart devices and accessories. The outlook for these products are strong as evidenced by the improved performance of our end customer’s recent order forecasts which is further supported by the agreement reached in the US-China trade war compromise. Despite the challenging environment, the technology industry would still head into FY2020/2021 with optimism in anticipation of the adoption of new technologies such as 5G.

The laser automotive headlamps continue to gain encouraging traction and progress, and with the initial mass production issues largely ironed out, we are ready for bigger volume ramps going forward.

The trade war has also presented us many new opportunities as many quality MNCs have relocated to Penang, bringing with them some of the latest technology and products. We are hoping to collaborate with some of these companies to penetrate into new areas like power chips, medical applications and 5G components and are optimistic that these will drive us into new growth areas that are higher in the value chain and less labor dependent going forward.

On a whole, we are expecting to see overall performance for FY2020 to be better than FY2019 due to new project wins and recovery from the trade-war slow down. We are hoping the negative global impact caused by Covid-19 will be contained soon.

Risks

The biggest risk affecting the global supply chain and sentiment has partially abated. With the signing of the Phase 1 trade deal between the US and China, this has removed one of the biggest obstacles to trade and investment - “Uncertainty”. The uncertainty that caused so many companies to delay their investment plans would hopefully have been allayed now that the escalation of the tariff fights has come to a temporary stop.

The gesture sensor for the wireless accessories have seen very stable volumes and proceeded to see a further spike up in volume of more than 50% during the year. Our customers have indicated further strong upside potential for these volumes in FY2019, and we may have to invest additional CAPEX to cater for the additional volume growth.

The continual shifts of supply chains from China may also affect the end demand of components, as well as disrupt some of the supply of raw materials for our existing as well as potential new products. In summary, the trade war would continue to provide both risks and opportunities as we try to navigate through these turbulent conditions in the best manner possible.

The sudden outbreak of Covid-19 from Wuhan, China has caused massive supply chain disruption and demand uncertainty. While we are not directly being impacted due to our pro-active strategy to have alternative second source, there may be potential slow down with our customers where their downstream operation/production may be more severely affected by the supply chain disruption from China.