Despite a lacklustre IPO in 2019, Grand Venture Technology has turned out to be one of the better performing manufacturing stocks in the past year. Will the company’s recent acquisition spree help keep this uptrend intact?

When Grand Venture Technology (GVT) launched its IPO back in January 2019, it got a cool reception from investors. Total subscription demand was a mere 1.3 times the total number of shares offered. Indeed, given it was seeking $13.2 million in proceeds from a Catalist listing, this was not an IPO that would make investors sit up and take notice. Moreover, the company was in manufacturing, which was not the most exciting of industries, compared to high-tech start-ups vying for unicorn status that were very much in vogue at that time. Then came the pandemic which worsened the fortunes for many companies in the electronics manufacturing sector overnight. GVT was not spared either, seeing a dip in its share price to about 21 cents from its then-usual trading levels of 26-27 cents at the start of 2020. However, as the company started to deliver better numbers in the second half of 2020 and 2021, its share price climbed sharply. On Sept 7 last year, the stock hit an all-time high of $1.45. For investors who bought GVT at its IPO offer price of 27.5 cents, they would have seen its share price surge nearly four-fold based on the Jan 19 closing price of $1.06, valuing the company at $350.6 million. Since Nov 30, 2021, the company has been upgraded to the Mainboard. One beneficiary — and driver — of GVT’s share price appreciation is private equity fund Novo Tellus Capital Partners, better known for turning around and growing the business of AEM Holdings. In January 2021, Novo Tellus acquired a 29.6% stake in GVT for $29.87 million or 33 cents per share. As at Sept 14, Novo Tellus holds a 27.4% stake. In an interview with The Edge Singapore, Novo Tellus managing partner Loke Wai San says the fund invested in the company because, firstly, it saw that GVT had a great management team that “says what they do, and does what they say”. The second reason was that Novo Tellus believes GVT is one of the winners in the global semiconductor supply chain as it shifts to Southeast Asia. Loke points out that GVT is a beneficiary of this shift, both in the front and back ends of the semiconductor industry, as well as the life sciences market. He also highlights that GVT “goes beyond precision metals, they are also into precision ceramics and quartz, and the advanced materials [space] which is very interesting”. To be sure, GVT’s share price gains have been backed by its earnings growth. In FY2019 ended when the year the company went public, it reported earnings of $3.1 million and revenue of $40.1 million. In FY2020, the numbers improved to $5.2 million and $61.4 million respectively. GVT has a December year-end. In the most recent 3QFY2021 ended Sept 30, 2021, GVT reported earnings surged by 250.9% y-o-y to $5.17 million. This came on the back of a 90.9% y-o-y jump in revenue to $31.88 million. For the nine months ended Sept 30, 2021, earnings and revenue came in at $13.68 million and $85.42 million, representing a 95.9% y-o-y and 270% y-o-y increase respectively.

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‘Great acquisition adventure’ When The Edge Singapore last spoke to GVT back in April 2021, CEO Julian Ng said the funding from Novo Tellus will be used for possible M&As that are complementary to its existing business. If not, the funds would be used to beef up areas where it can grow more quickly. If GVT were to only plan for organic growth, it would probably need a few more years to reach the same scale, said Ng during the interview. “This is where we have an acquisition target to shorten the learning curve. We might also look at a new industry that probably the target is in but we are not, but we are planning to go in.” Besides the money from Novo Tellus, GVT also raised some $28.5 million last September by issuing 25 million new shares to new investors at $1.14 each. Ten million vendor shares were also sold at the same price. Armed with the enlarged war chest, M&A activity started in earnest. In a space of just two weeks towards the end of 2021, as most people were winding down for the year, GVT announced three acquisitions, with a total deal value of some $24.4 million. On Dec 17, GVT announced it was buying precision engineering firm J-Dragon Tech (Suzhou) for $12.2 million. This would be funded by $8 million in shares and $4.2 million in cash. Following the acquisition, J-Dragon’s founder Lee Boon Kwong and director Eng Pau Yuen will each hold 1.02% of GVT. J-Dragon designs and makes parts, modules and tooling for the aerospace, medical and semiconductor industries. The acquisition will give GVT access to its patents, know-how and R&D capabilities, and also broaden GVT’s moves into the aerospace and medical business segments. “With the addition of J-Dragon’s capabilities and partner network in China, GVT will be in a good position to tap the huge market potential and positive trends in the aerospace and medical industries, initially in China and then internationally,” says GVT in a press statement on Dec 17, 2021. A report by CGS-CIMB Research on Jan 12 echoed this view, with analyst William Tng believing that the acquisition will help GVT grow its medical business segment and enable the group to enter the aerospace industry. “We believe that J-Dragon is serving an existing back-end customer of GVT. Hence, this acquisition could further increase GVT’s wallet share with this existing customer,” writes Tng, who has an “add” call and a $1.74 target price on the stock. While the China acquisition is breaking new ground by venturing into new markets, the other two acquisitions are aimed at trying to enhance its existing capabilities. The other acquisition announced on Dec 17 together with J-Dragon was Formach Asia, a Malaysia-based precision metal sheet maker. For this deal, GVT will spend $7.8 million in a mix of $6.8 million in cash and $1 million in shares. Upon completion of the transaction, Formach’s founder Leong Yoke Choy and director Gan Lee Kim will each hold a 0.13% stake in GVT. Formach makes sheet metal and provides welding and electro-mechanical machine assembly services. As at December 2021, it has a 90,000 sq ft plant in Johor and this is expected to supplement GVT’s manufacturing nodes, capacity expansion and complementary capabilities for customers. In an interview on Jan 11, Ng says the Formach acquisition allows GVT to quickly ramp up its capacity and complement the company’s Singapore operations by quickly acquiring its capabilities, compared to if GVT had to set up new operations in Malaysia by itself. “With the addition of new sheet metal capabilities, I think we can increase wallet share in terms of our life sciences customers and our current semiconductor customers,” Ng says. “We could use this additional capacity to attract new customers in the area of front-end [semicon manufacturing].” According to Ng, there is “already a lot of interest with the new capacity” GVT had acquired. Ng observes that there is a labour crunch in terms of operators here in Singapore and as such, he plans to utilise Formach’s facility to take on the more labour-intensive work, while the Singapore facilities can be freed for more high-value tasks such as working with new potential customers to qualify new products before actual production. GVT expects the two acquisitions to be completed by the first quarter of this year, subject to regulatory requirements. In a report dated Dec 20, 2021, KGI Securities’ research team says GVT is embarking “on a great acquisition adventure”. KGI, which has a “buy” call and $1.37 target price on the stock, estimates that as a result of these acquisitions, its FY2021 and FY2022 earnings per share will grow by 124% y-o-y and 60% y-o-y respectively. As a result, GVT’s forward earnings multiple will be brought down to 24 times for FY2021 and 15 times for FY2022 respectively. In contrast, GVT’s peers are trading at average of 19 times forward earnings. The third acquisition is a 74,000 sq ft manufacturing facility in Penang for $4.4 million. It will be GVT’s third facility acquisition in Malaysia in two years, after the first two acquisitions in February 2020 and March 2021. At the same interview, GVT’s CFO Robby Sucipto explains that the new Penang acquisition is a plot of land that is in between two other facilities already acquired by GVT. With the entire combined plot of land, the company will be able to combine all of its Penang operations into this giant facility, close to its first factory located up the street. With the acquisition, GVT will have a manufacturing hub in Penang with an aggregate floor area of more than 350,000 sq ft to serve existing and potential new customers. “What we can do next is we can then implement architectural changes to synergise these factories to be able to take on larger scale and volume. In the past when we were smaller, larger companies were not able to engage us because our capacity is not big enough,” Sucipto points out. GVT could have shifted to another location to expand its capabilities and capacity but Sucipto says this would have led to a lot of downtime and extended lead times for its manufacturing operations. What exactly does GVT plan to do with the extra space? Ng says that the company is currently renovating this plot of land and when it is completed, GVT is looking to put in manufacturing capabilities that can suit newer industries such as the front-end semiconductor manufacturing sector as well as cleanrooms for the next generation of IC chips. “We are talking about system-on-chip (SoC) and heterogeneous packaging, where there is going to be blurring between the front and back ends. As GVT wants to be in the business, we would need a cleanroom. and if we do a full-on front-end [solution], we may even need a cleanroom with higher requirements going forward,” says Sucipto. Collectively, the facilities will provide a complete range of precision machining, sheet metal fabrication, complex assembly and testing services as well as cleanroom facilities for the manufacture of semiconductor OEM equipment. Or in the words of management, a “one-stop solution” for customers. In his report, CGS-CIMB’s Tng is positive about the acquisitions, saying he believes that GVT remains “committed to growth” and also foresees that there are plans to work towards securing customers involved in the front end of the semiconductor industry. He notes that GVT has also established relationships with more banks, providing additional funding options if suitable M&A opportunities arise. To manage the company’s gearing exposure, he thinks that GVT will target a debt-to-equity ratio of 1.5 times. In the longer term, Tng is of the view that GVT will work towards providing its own proprietary module solutions to further cement its competitive position with customers and improve margins.

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ETLA and Norelco In many ways, GVT has been doing what a publicly-listed entity should be doing: making good use of the capital markets to seek an IPO and then letting the price discovery mechanism of the open market find a fair value for the company’s business and prospects. In a vote of confidence, executive chairman Ricky Lee, having trimmed his stake with the entry of new investors, replenished his stake by buying on the open market. On Dec 23, Lee acquired 50,000 shares at $1.18594 each, and the following day, he acquired another 50,600 shares at $1.19401 each. This brought his total stake to exactly 52 million shares, equivalent to 15.72% of the company. For long-time investors and market watchers, Lee, who has nearly 40 years of experience in the industry, is a familiar name. Before starting GVT, Lee had already had key roles with two other listed companies. He was one of the founders of Norelco Centreline, which was listed on what was then called the Sesdaq back in 2001. In 2004, it was merged with UMS Semiconductor and the combined entity is known today as UMS Holdings. Lee then joined what was then called Eng Tic Lee Achieve, which was listed in 2007 as ETLA. Lee was the listed company’s executive director and substantial shareholder. ETLA was delisted in 2009 after it was acquired by Electrotech Investments — now known as Frencken Group — in a deal worth around $30 million. Under terms of the acquisition, ETLA shareholders holding 1,000 shares will receive 508 new ElectroTech shares. Given these past two episodes, one might wonder if Lee has a similar plan for GVT. “While I also want to build up this company [GVT], I don’t think I’ll just throw to someone and say ‘bye’. For GVT, I hope, with this team, I can go further and grow bigger,” says Lee. For Norelco Centerline, Lee explains that the company was worth about $180 million in 2003. While this was considered “quite a big size”, Lee felt that the acquirers had very capable people who would be able to take over and grow the company further by merging with UMS. As for ETLA, Lee says he has in his time there helped build a strong team, adding that some of them were better than himself and are capable of running their own show on a bigger platform. “Why not I pass the company to them,” he reasons. “Their success is also my success … and I’m proud that these two companies are now quite big,” says Lee.

Global vision In a sense, GVT is Lee’s third act. When the company was incorporated in 2012, the founders, including Ng, who worked with Lee at both Norelco and ETLA, had a vision, one befitting the imagery conjured up by its name. “It has been our dream, from day one, to build a Singapore brand that can go global,” says Lee. GVT plans to achieve this by not just having manufacturing facilities in key markets but by expanding its customer base by providing essential precision manufacturing services, sheet metal components and mechatronic modules to users from the semiconductor, electronics, analytical life sciences, medical and industrial automation industries. “We want to build a Singapore name in mechatronics capabilities as well as contract manufacturing with added capabilities like advanced materials, ultra-precision and nano-level capabilities,” says Ng. “If you look at the current landscape of all our peers, they do not have all the added capabilities I just mentioned. This could differentiate ourselves among our peers and we can compete globally,” he adds. As GVT’s string of fundraising and acquisitions have shown, the execution of the growth plans via this virtuous cycle is well underway. With the transfer to the Mainboard, GVT is also attracting new investors, with Sucipto saying more institutional investors have contacted the company to understand the business better. “Many large institutional investors do not have the mandate to invest in Catalist or small-cap companies. GVT’s transfer to the Mainboard and growing market capitalisation put it in a better position to appear on the radar screens of these investors,” he adds.

Diversification from ‘bread and butter’ By most measures, GVT’s most recent 3QFY2021 earnings growth of 250.9% y-o-y was significant. However, management is careful to maintain a conservative stance, preferring to stress long-term sustainable growth than to be a “one-trick wonder”. When asked if the recently reported growth rates could be maintained, Sucipto would rather say “anything could happen” and that one day, there would be “normalisation”. He also pointed out that the 3QFY2021 numbers have to be seen in context, as earnings for the year were coming off the “low base” of FY2020 where GVT was affected by the trade war between the US and China. What the company has achieved for FY2021 thus far has been “against all odds”, says Sucipto, as he lists a litany of issues the company had to deal with, including a suspension of operations at its factories due to the Covid-19 pandemic, sending its workers for vaccination, as well as an energy shortage in China that crimped normal production. “When you see a very nice number, you don’t see what’s behind driving it. It is actually a lot of blood and sweat; it is also a lot of management diligence in delivering these numbers,” he says. While management refused to be drawn into forecasting growth rates, they can say they are on a constant lookout for new growth areas such as the so-called front-end semiconductor manufacturing market, which is estimated to be seven times larger compared to the current back-end market that GVT is serving. GVT is also building up its resilience by reducing reliance on just a couple of core industry segments. While the semiconductor industry will remain GVT’s “bread and butter”, it is actively diversifying into different segments such as medical diagnostics and aerospace sectors. “Today, everybody is just very dependent on semiconductors and everybody wants to ride on the trend,” says Ng. “We’ll just stick to our original strategy: to build a company that is going to last through good and bad times,” he adds.

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