Vincent Chong is steering the company into robotics, smart cities and high-tech defence solutions. Will that lift the stock out of its slump?

SINGAPORE (Dec 11): Vincent Chong recently passed up a chance to appear in Jack Neo’s latest movie, Ah Boys to Men 4. Acting does not suit him, he says. The CEO of Singapore Technologies Engineering also declines to divulge what role he might have played. Instead, he prefers to talk about the military technology featured in the film.

As one of the co-presenters of the film, which is centred on a military reservist stint, ST Engineering received a prominent product placement. The characters in the movie include an NSman who is working at ST Engineering. While training with his armour unit, which is finding faults with their tank, he tells his fellow reservists about a new and improved tank that his company is building — a Next Generation Armoured Fighting Vehicle (NGAFV).

Chong points out that ST Engineering’s military vehicles are competitive enough to be used globally today. “Our Terrex 2 is competing with BAE Systems now for the US Marine Corps’ [Amphibious Combat Vehicle 1.1] programme. And along the way, we actually beat a few other international companies to be shortlisted,” he says. “That speaks volumes.”

It is a fitting reference given ST Engineering’s renewed focus on defence. The company, which celebrates its 50th anniversary this year, was established in 1967 as Chartered Industries of Singapore to manufacture 5.56mm ammunition for the M16 rifle. Various other early units that later combined to form ST Engineering were also engaged in work for the Singapore Armed Forces. Over the years, ST Engineering grew its portfolio dramatically to include commercial work such as the conversion of passenger planes into freighters and the building of passenger information systems for metro trains. Chong has, however, recently identified defence exports as a key pillar as he attempts to restart the company’s growth.

“In our efforts to grow the business, we have identified [two new growth] levers,” he says. Defence exports is one of them; smart cities is the other. “The scale of our defence exports in the past has been quite modest. A bigger push into defence exports will help us in strengthening our capabilities and give us international experience to make our products and solutions even better.” Smart cities, meanwhile, represents a relatively new category for the company with immense potential for growth. Sub-sectors that ST Engineering intends to target include robotics, public safety and security, cybersecurity and smart transportation.

As many industries are disrupted by new, digital technologies, Chong believes ST Engineering has a unique opportunity to stand out. Defence and smart-city solutions are technology-driven sectors that play to the company’s strengths. “As the world gets disrupted by technological advancements in the digital age, many companies are very anxious. But for us, because technology and innovation have been our lifeblood for the last 50 years, we are very excited,” he says. “We will contribute to developing new technologies that will make the world a better place to live in.”

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Robotic world Some of those new technologies are being developed internally. For instance, Chong says, ST Engineering has significantly stepped up its hiring of software engineers to develop solutions for both internal use as well as for sale. Its aerospace maintenance, repair and overhaul teams have digitised their workflows, helping to cut the number of man-hours in projects. ST Electronics, the company’s electronics unit, has software that helps it generate software codes automatically and write new software more quickly.

But the company has also put its balance sheet to use with acquisitions. Among ST Engineering’s biggest headline-grabbing moves this year was the purchase of Aethon, a robotics company based in Pittsburgh, Pennsylvania in the US. Aethon is best known for its TUG smart autonomous mobile robot, which can carry a load of up to 635kg.

Chong explains that after identifying smart-city solutions as a growth driver, ST Engineering had sought out a company with unique capabilities in the robotics space. “We expect the market for autonomous mobile robots to be a billion-dollar market in four to five years,” he says.

The TUG T3, Aethon’s newest robot, is in use in more than 140 hospitals in the US. Chong explains that the T3 is an autonomous mobile robot, which means it can move independently and navigate obstacles. This differs from an autonomous guided vehicle, which has to be guided by tracks or some other kind of infrastructure and comes to a stop when something is in its path. The T3 can even interface with WiFi-enabled elevators, which means it can travel from one floor to another independently.

“I visited one of the hospitals, which has deployed 35 of our robots over the last two to three years. And I saw how amazing it was, for the robots to co-exist with the hospital staff, and the patients and the visitors to the hospital. And I asked them how long it took for their investment to pay off, and they said, one and a half years. That’s very good. And the nice thing is the hospital management said this robot is very well received because it allows their hospital staff to engage in higher-value-added work instead of pushing things around in the hospital,” Chong says.

Aethon will now be able to take advantage of ST Engineering’s global distribution network to scale up its business. RHB Research Institute Singapore analyst Shekhar Jaiswal expects Aethon to make a material contribution to ST Engineering’s revenue in three to four years. -“Assuming a 10% market share [of a US$1 billion market], Aethon could contribute US$100 million [$135 million] in revenue,” Jaiswal adds. That would make up 2% of his 2022 revenue estimate. At present, Aethon has an estimated market share of over 30% in autonomous mobile robots.

Chong says ST Engineering is also exploring new ways in which Aethon’s robots can be deployed. “What we want to do is to deploy the robot in three different sectors. One is in hospitals, where it is already very much proven. But we want to expand beyond the US, and into Asia-Pacific and Europe. We also want to deploy the robots in the manufacturing sector. It has already been deployed in a few manufacturing plants around the world, and now as we speak, we are developing newer models to fit different manufacturing requirements. The third sector is hospitality, [specifically] hotel logistics — transportation of linens, which can be heavy, and other logistics activities — can be fulfilled by the TUG.”

In Singapore, ST Engineering is working with StarHub to deploy the TUG at three hotels: Capri by Frasers Changi City Point, Four Points by Sheraton and Grand Copthorne Waterfront. The robots will be used to streamline the laundry supply chain process, delivering both clean and dirty linen and laundry to the laundry room, central storeroom and guest floor storerooms.

“At the same time, we are also developing new use cases. There are actually other applications that have not been developed yet,” Chong adds. For example, he says, autonomous mobile robots have the potential to significantly alter the manufacturing process. A lot of manufacturing work today takes place in large facilities with conveyer belts to move parts from one area of work to another. Robots that can pick up and move parts around may give engineers more flexibility in designing factories and workflow. Even at ST Engineering’s own facilities, robotics has the potential to improve efficiency. For instance, in the aero-space sector, some work still has to be done by hand because airframe components are so large. An autonomous mobile robot could do the same work as a human, but more quickly or at a lower cost.

“We have built partnerships with several companies to explore these possibilities,” Chong says. And given that robotics is such a nascent field, he sees the company’s investments in robotics potentially fuelling long-term growth across all its business units.

Defensive position ST Engineering has some experience parlaying technological capabilities in one sector into growth at another. Its defence business has anchored many of its non-defence products, Chong says. “Many of our solutions are dual-use. For example, autonomous [military] vehicles can also be [modified into autonomous buses]. It is from our defence business that we develop engineering and technological capabilities that also support our non--defence business,” he adds.

Back in 2005, the defence business accounted for 46% of ST Engineering’s revenue. Designing weapons and vehicles to support the armed forces was a reliable money spinner, with good margins, but it was a business with limited scope for growth. To grow, ST Engineering pushed into the commercial and non-defence sectors, acquiring companies such as BR Lee Industries, a North Carolina-based road construction and maintenance equipment maker; SAS Component, an airplane repair service provider; and iDirect, a Virginia-based satellite communications unit. In FY2016 ended December, commercial business accounted for 65% of ST Engineering’s revenue.

While Chong is not saying explicitly that this revenue mix will change, he does think there should be more emphasis on growing the defence business. “We want to up it in terms of intensity,” he says. “Having both [defence and commercial businesses] gives us the scale to sustain our engineering capabilities because the defence business tends to be lumpier. But the capabilities that we build in the defence business have given us a lot of strengths and benefits in the years past, and that will continue to be the case.”

ST Engineering is in the running for several important projects. Together with its teammate, Science Applications International Corp, it has delivered 16 Terrex 2 prototypes to the US Marine Corps for the engineering and manufacturing development phase. The prime contract, awarded to SAIC, is worth US$121.5 million. “We did eliminate a few big names to be selected,” Chong says. The result of the bid should be known from the middle of next year to early-3Q2018.

Separately, SAIC has teamed up with ST Engineering and CMI Defence to develop a lightweight vehicle solution to meet the US Army’s requirement for a new mobile protected firepower capability. The vehicle will be based on ST Engineering’s NGAFV chassis. “The request for proposal is out, so we have to start developing our strategy and efforts in the months ahead,” Chong says.

Weak growth weighing on stock Chong, who joined ST Engineering in 2014 as president of strategic plans and business development at the group’s aerospace arm, assumed the position of CEO in October last year. He has had a tough year. In February, ST Engineering reported an 8.4% decline in FY2016 earnings to $484.5 million in spite of a 5.5% increase in revenue to $6.7 billion. The lower earnings were mainly a result of impairments and provisions related to the closure of JHK, a road construction equipment business in China.

For 9MFY2017, the company’s numbers have improved. Revenue increased 1% y-o-y to $4.9 billion while earnings grew 9% to $343.4 million. However, its earnings continue to be below consensus expectations. And as the Straits Times Index has soared on bullish investor sentiment surrounding banks and property stocks, ST Engineering has lagged significantly. It is among the 10 worst-performing component stocks within the STI this year, up just 0.3% against a 19.4% gain in the STI. The stock has fallen 14.7% from its all-time split-adjusted high of $3.7974 in May this year — it closed at $3.24 on Dec 5.

Chong addressed the company’s shortcomings head-on in its annual report for FY2016. “In the last few years, with the exception of some businesses, our growth has been flat. The macroeconomic environment has partly contributed to this but that is not the only reason. Some of our businesses are facing fundamental challenges, due in part to the pace of change in technology or structural changes in the industries they serve,” he said. “We need to think differently and change the way we do some things so as to keep ahead of global competition.”

Among other things, Chong says, it is important that ST Engineering adopt a different approach to innovation. “Solutions are more complex than before, and they are also multi-disciplinary in nature. For example, you cannot have a smart-city solution without cyber-security capabilities. Plus, technology is moving so fast. The traditional approach of weighting our research and development efforts towards in-house efforts has to be adjusted,” he says. “In the areas [where] we have traditional strengths, we continue to undertake significant R&D efforts. But beyond that, we also need to look at partnerships with others [and the acquisition] of technology and intellectual property.”

To that end, ST Engineering has set up the ST Engineering-NTU Corporate Lab to develop advanced robotics and autonomous systems and the ST Electronics-SUTD Cyber Security Lab to enhance cyber security solutions and technologies.

In July, the company also announced a $150 million corporate venture capital (VC) unit and an open innovation lab called Innosparks. ST Engineering calls this a “through-train incubator programme” as it will help individuals and start-ups take products and solutions to market.

“We believe that to come up with disruptive breakthrough technologies, new spaces have to be carved out where engineers are free to experiment and create without the burden of the typical bureaucracy and red tape in a company,” Chong explains. Innosparks therefore serves as a platform for enterprising engineers both within and outside ST Engineering to create new technologies. Teams that qualify will receive up to $500,000 in funding and resources, and will gain access to the company’s equipment and space for ideation, design, building, prototyping and launching.

Perhaps more importantly, teams working at Innosparks will have access to a pool of more than 30 experienced engineers dedicated to helping them commercialise their ideas over a 12-to-18-month period. Many start-ups with good ideas may not have last-mile engineering capabilities, Chong explains. ST Engineering, however, has sufficient experience on this front. Currently, eight of its employees are already working on their ideas at Innosparks.

The VC unit, meanwhile, will invest in promising technology start-ups and early-stage companies and offer them access to the group’s business network and distribution channels. These start-ups could include teams from Innosparks that have reached or entered the commercial scaling stage.

Positive views Will these new initiatives be enough to eventually lift the stock out of its current slump? Analysts are largely positive. Bloomberg data shows 11 “buy”, four “hold” and just one “sell” call for the stock.

In a note dated Nov 8, Deutsche Bank analyst Joshua Lee says ST Engineering’s q-o-q earnings momentum is improving. Lee expects earnings in 4QFY2017 to be better and sees FY2017 earnings beating consensus estimates. He is forecasting earnings growth of 11.3% to $540 million. Lee is expecting order wins in the marine and electronics businesses to lift ST Engineering’s return on equity by 2019, and has a “buy” rating for the stock, with a price target of $4.

CIMB Research analyst Lim Siew Khee is also forecasting a positive swing in 4QFY2017 on the back of a pickup in work at the aerospace and marine divisions. Lim is forecasting earnings of $517.7 million for FY2017, and has an “add” call with a price target of $3.85. “This is a safe index proxy,” she says of the stock.

Meanwhile, UOB Kay Hian analyst K Ajith thinks ST Engineering’s new investments will provide a long-term growth platform. “While near-term earnings visibility is poor, we believe that STE is taking the right steps to enable growth,” Ajith says in a Nov 9 report. He has a “buy” call and a price target of $3.80. While the stock is unlikely to produce quick returns, Ajith recommends shareholders to “stay invested”.

However, DBS Group Research is more cautious. The research house has a “hold” call and a price target of $3.70. “While we do like the direction the company is taking — that is, smart-city products, robotics, new growth -areas (for example, aircraft leasing), we think most of these initiatives have yet to gain traction to significantly drive revenues in the near term,” DBS says in a Nov 9 report. It has cut its earnings estimates for FY2017 by 1% and now expects ST Engineering to report earnings of $489 million.

New growth engines Chong, 48, graduated with a first class honours in mechanical engineering from the National University of Singapore. His first job was as an HR analyst at Exxon Mobil, tasked to hire and train staff for petrol stations. At the time, he says, it was a policy at Exxonmobil to put new hires through a variety of positions. Over 20 years at the company, he occupied roles in refinery process engineering, product marketing, industrial and retail operations, and strategic planning.

After two decades of working around the world, however, Chong wanted to come home to contribute to the nation. When a position became available at ST Engineering, he jumped at the chance. In December that year, Chong was appointed to the role of deputy CEO in charge of corporate development.

He was appointed president and CEO designate in October 2015 as part of a succession plan, after then-CEO Tan Pheng Hock suffered a mild stroke. Tan retired last year, after 32 years of service — 14 of them as CEO. Over his tenure at the helm, shares of ST Engineering returned a compounded 7.6% per annum.

Now, Chong is making his own mark on the company. In  the past year, he has streamlined certain operations. For instance, each business unit within ST Engineering — ST Aerospace, ST Electronics, ST Kinetics and ST Marine — previously had its own legal, HR, finance, procurement, IT, estate and facilities management, and corporate communications teams. Those teams have since been combined and Chong says other functions will also go through the same process over time. He adds that combined procurement processes have saved ST Engineering more than $10 million already.

Chong says ST Engineering will continue to grow and strengthen its four core businesses. He is, however, also looking at new growth engines. “We are going through planning and putting the resources together,” he says. He declines to give any hints about the other industries ST Engineering is considering, saying only that those selected will play to the company’s strengths in engineering and technology.

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