SINGAPORE (June 11): Th e earnings profile of Catalist-listed Miyoshi is set to switch gears after the company scored a major electric car contract that could see an extra $200 million in annual revenue for the next three years.
In May, Miyoshi announced that its 15%-owned, China-based joint venture, Core Power (Fujian) New Energy Automobile, had won a contract from Jiangxi Changhe Automobile, a subsidiary of Beijing Automotive Group (BAG). Core Power will build 50,000 electric cars. The first 2,000 units will be delivered by year-end, with the remaining orders fulfilled by 2021.
The vehicles will be made at Core Power’s plant in Fujian province and sold under BAG’s brand name. The cars, which will have a top speed of 100kph and a range of 250km, will be positioned as a price-competitive new entrant in an increasingly crowded sector, Miyoshi says. Most China-made electric cars sell for between RMB150,000 ($31,237) and RMB220,000.
But the BAG car will be priced lower to attract price-conscious buyers, says Mark Khoo, Miyoshi’s chief financial officer, in an interview with The Edge Singapore. From annual sales of $200 million, Core Power is targeting a net margin of between 5% and 6%, he adds.
Controlled by Beijing’s municipal government, BAG is one of China’s largest vehicle manufacturers, with its own design capabilities and production capacity. But it is also happy to outsource production to Core Power as a way of building up inventory quickly, Khoo says. “If they produce [the cars] themselves, they have to build their own factories or rent and put in new facilities, then develop the car model and start production. That will take two, three years,” he explains.
Meanwhile, there is also the possibility that BAG will place more orders with Core Power, Khoo says. In addition, other car brands have approached Core Power to explore similar production arrangements. But Core Power will review customer requests carefully, Khoo says. “We want to make sure we can execute [the orders].”
New growth engine
Miyoshi expects the electric car venture to start generating earnings in 2019. Apart from investing in Core Power, the company has also secured an international distributorship agreement, to run for three years. Miyoshi plans to sell electric cars made by Core Power into the large emerging markets such as those in Central and South America, as well as Central
and South Asia. The new business will be an additional growth driver for the company, as parts of its original business of precision parts making grapple with a mixed bag of results — depending on the industry segment.
For FY2017, the largest revenue contributor was the legacy hard disk parts division, which generated 39% of total turnover, or $19.7 million, up 1.4% from the year before. Khoo says the better performance came after a period of industry consolidation, where weaker players exited the market.
The second-largest segment by revenue was consumer electronics, which generated $17.6 million for the year. That was down nearly 20% from the year before, as certain products that Miyoshi helped produce reached the end of their life cycle. But that decline was offset by the relatively new but fast-growing automotive segment. Turnover from this unit grew 70.5% y-o-y to hit $13.3 million. As a whole, revenue for FY2017 ended August 2017 amounted to $50.7 million, 3% higher y-o-y, and earnings grew 91.4% to hit $2.2 million.
Game changer?
The growth rate of electric cars started to pick up a couple of years ago, when global stock more than doubled to two million in 2016, from one million in 2015, according to estimates by the International Energy Agency. According to IEA, there is a “good chance” that global electric car stock will range between nine million and 20 million by 2020 and 40 million to 70 million by 2025.
Also in 2016, with active government support, China overtook the US to become the world’s largest market for electric vehicles. From the perspective of China’s economic planners, a strong domestic electric vehicle industry is also a potential export China can call its own. The growing EV market has created many new opportunities for investors keen to ride along (see “Taking the new road with electric vehicles” in Capital on Pages 22 and 23).
Miyoshi’s management has also caught the trend in time, paying $8.8 million for its 15% stake in Core Power in April 2016. It has taken two years, however, for the first contract to come through. And, Miyoshi is planning to pump in more funds by raising its stake in Core Power to as much as 49%, which will allow it to take a bigger portion of the company’s earnings.
Khoo did not give a timeframe for this move, but Miyoshi recently raised $6.82 million through a placement of 115 million new shares at 6.13 cents each. The placement broadened Miyoshi’s share base by 18.8%, and diluted the holdings of CEO Andrew Sin, the company’s largest shareholder, from 32% to 26%. “To him, this is a very good opportunity,” Khoo says. “We are looking at the much bigger picture.” In fact, on May 25, Sin bought an additional 500,000 shares from the open market, bringing his stake to 158.8 million shares, or 26.1%.
Sin’s most recent purchase, at six cents each, was 2.1% lower than the placement price, which was in turn a 9.99% discount to Miyoshi’s pre-placement trading price of 6.81 cents as at May 8. The placement price of 6.13 cents was itself a 45% discount to the company’s net asset value of 11.24 cents as at Feb 28.
Miyoshi is now trading at 9.5 times its historical earnings. Will the electric car venture give the stock a boost? For 2QFY2018 ended Feb 28, the company’s earnings surged fourfold to $0.5 million from $0.1 million from the year earlier, as finance costs were halved in the period.
How much earnings growth can Core Power drive? If all goes well, the BAG order for 50,000 units will just be the start. “This contract is a game changer,” says Khoo.
