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Uchitec (7100) is a listed industrial stock in Malaysia, known for its original design manufacturer (ODM) business for coffee machine components. Uchitec has a track record of delivering dividend yield of 5-6% to its shareholders consistently over the years. Let’s look into this company.

(Last update: 27th Feb 2022 based on quarterly report issued on 23rd Feb 2022. Updates are made in red. For readers that would like to read superseded version, please free to contact by email)

Background of Uchitec

Uchitec is actually name of the stock. Full name of this company is Uchi Technologies Berhad. Uchitec was initially found in Taiwan. Its first manufacturing plant in Penang was started in 1981. The Taiwanese founder Ted Kao is still executive director of the company at the time of writing.

The main product of Uchitec is electronic control system. By its application, it can be categorized into

1. For household art-of-living products, mainly fully-automated coffee machines
2. For biotechnology laboratory or industrial instruments, such as weighing scales, centrifuges and deep freezers.

Among the two categories above, art-of-living products is the product category that contributes the most. Roughly 85 % of revenue comes from art-of-living products, while the remaining 15% comes from biotech.

Uchitec holds three 100%-owned subsidiaries, two in Malaysia and one in China. Its subsidiary Uchi Optoelectronic (M) in Malaysia, or called “UOM”, is the main operating unit performing R&D activities and manufacturing of electronic control modules, while the other two subsidiaries are assembly arms of UOM. It is also worth to take note, according to responses from management during annual general meeting (AGM) 2020, due to trade war between US and China, company is adjusting production volume in China factory and in Penang factory.

Business model of Uchitec

ODM business

Uchitec is original design manufacturer (ODM) of electronic control system. Their products are not finished products, but partial products that need to be further assembled and completed by customers.

More than 90% of their products are exported to Europe. More precisely, exported to Switzerland, Portugal and Germany. The breakdown percentage of revenue contribution from these three countries has not been changed much, at least since 2017 when this information started to disclose in annual report. Biggest customer of Uchitec is Swiss coffee maker Jura, and management mentioned in AGM 2021 that company is sole supplier to art-of-living customer (which I believe that means Jura).

High profit margin

Uchitec is known for its capability in maintaining a very high operating profit margin. From disclosure in annual reports. operating profit margin has been at a level of above 40% since 2000. Note that this operating margin is calculated after taking account of raw material cost, employee expense, depreciation and R&D expense, so it is indeed very impressive.

Research & development as competitive strength

In my opinion, consistent research and development (R&D) is one of the main reasons why Uchitec can have a such a high margin for many years. Company has been budgeting 7% of revenue into R&D every year to ensure that demand from pipelined projects, prospects and new plans are fully covered.

From reading of multiple resources, it is obvious that company want to built its competitive advantage around R&D rather than putting too much resources to expand production. Management confirmed again in AGM 2021 that there is no plan for expansion, and if required local EMS support will be engaged for certain production processes in the event of surge in demand.

Tax incentive

Tax incentive is a big thing for Uchitec. Its subsidiary Uchi Optoelectronic (M) in Malaysia, or called “UOM”, is granted pioneer status of MITI Malaysia for design, development and manufacture of certain products. Under this incentive scheme, 100% of statutory income derived from these products are exempted from income tax for a period of five years starting from January 2018.

Note that this is not the first time Uchitec managed to qualified for tax incentive. Before 2018, UOM was already under tax incentive scheme commencing from 2013 until 2017. After that, UOM managed to obtained an extension on its pioneer status from MITI, with new expiry of Dec 2022. Tax incentive contributes to more than 20% of net profit, so it is a very big thing for Uchitec.

To know more about tax incentive for pioneer status, you may refer to resource in MITI (Ministry of international trade and industry) official website here and MIDA (Malaysian Investment Development Authority) website here.

Financial

Net cash company

Uchitec has zero borrowing, and RM182million of cash as of Dec 2021. This is equivalent to 40 cent of net cash per share. Financially, Uchitec has a strong fundamental and there is nothing that worry me.

Back in 2017, Uchitec had even more cash, standing at RM243 million. In 2018, management thought it was not necessary to hold so much of cash, therefore about RM90 million was paid back to shareholders as capital repayment (i.e. reduction of share capital). Note that this capital repayment was made on top of dividend distribution.

Dividend payout and policy

Dividend policy of Uchitec is to allocate at least 70% of profit after tax as dividend. In fact, over the past few years, Uchitec has distributed close to or more than 90% of profit as dividend to shareholders.

In my another article about divided investing, I wrote that high dividend payout could mean limited or comprised growth potential, and Uchitec is a perfect example.

However a good thing about Uchitec is, the company consistently budgets 7% of revenue into R&D. I think that is a key point for company to maintain its pricing power and keep other players at bay. Therefore while growth was limited by high dividend payout, company still managed to maintain mild level of growth over past few years.

Credit & business concentration risk

Uchitec heavily rely on one customer. In financial year 2019, “customer A” alone contributed 73.5% of revenue. To recap, although it is not directly disclosed in financial report, it is believed that customer “A” is Swiss coffee maker Jura.

Currency risk

More than 90% of their products are exported to Europe. Therefore almost 100% of revenue is denominated in USD. Uchitec does import raw materials in USD also, this provides certain extent of natural hedge (about 30%). The residual currency risk (about 70%) is managed via financial tools (forward foreign exchange contracts).

As a result, performance of Uchitec is sensitive to fluctuation of USD/MYR exchange rate. A good thing is, management normally discloses how much revenue grows in USD term vs MYR term in annual report, so shareholders can better know how the business is growing excluding variation due to exchange rate.

Interest rate

Because Uchitec is net cash company with zero borrowing, low interest rate does not benefit them but will reduce their interest income instead. But in overall, this is not something that is concerning.

Financial highlights (Quarterly Report of 2021 Q4)

• On quarterly basis, revenue and net profit are 21% and 24% lower than previous year. On full year basis, both revenue and net profit are approximately 8% better than 2020, in line with the forecast given by management. It is worth highlighting that both revenue and net profit recorded in 2021 are record highs.

• With regards to prospect of year 2022, management conveyed the following message to shareholders in the latest Q4 quarterly report.

Barring any unforeseeable impacts, mainly those caused by the COVID-19 pandemic and/or geopolitical conflicts, the revenue in USD terms is expected to grow by a low-teens percentage year over year in FY2022, supported by growing demand of our products and services.

From Uchitec’s interim report for quarter ending Dec 2021

End

With share price of Uchitec at the time of writing at around RM3.1. With this price, the expected dividend yield is considered not bad at 5 to 6%, which is pretty decent. It is a very stable company with mild but consistent growth.

I expect profit before tax in year 2022 to be close to or slightly exceed RM100 million, so introduction of prosperity tax should have minimal impact.

In overall, management of Uchitec is reliable and trustworthy from shareholder’s perspective. The information disclosed in financial reports is always clear and transparent. It is also not common for company to provide revenue forecast in advance to shareholders. So it is not type of company that I would expect any kind of bad surprise from them.

The two major points that I would watch out, are single customer risk and tax incentive status (expires in Dec 2022). Any change of either of these points, could be significant to the company. Uchitec mentioned new application for tax incentive status would be submitted in second half of 2021, so I assume the result could be available in first half of 2022.

In case you want to know more about dividend investing, feel free to check out my article about ultimate guideline for dividend investing here.

Disclaimer: This article is purely my notes from studying this company. This is not a BUY or SELL call. I am not a registered investment advisor nor an investment guru, please be reminded to do your own homework and invest at your own risk.