January 10, 2018

We expect VMS’ FY17E revenue to grow 39% YoY. Importantly, our analysis of its revenue and customers suggests it likely won significant allocations from a few existing customers. Our shortlist of probable customers includes Broadcom, Thermo Fisher and Honeywell. All have hefty margins and either large sales or materially higher sales since 2015. For example, consensus FY17E COGS for an enlarged Broadcom-Avago is USD9.1b, 3x Avago’s pre-merger USD3.3b in FY15. Broadcom was not a customer prior to the merger. Broadcom opened a global warehouse in Batu Kawan, Penang, in 2017 to facilitate the export of export USD16b of products, nearly 80% of FY18E revenue. It plans to invest USD1b over 10 years on its local supply chain. VMS’ manufacturing facilities are largely based in Malaysia and bought 30.6 acres of land in Batu Kawan in 2016.

We believe VMS has also ramped up products with high R&D content. There was a pick-up in its R&D expenses in FY15 that preceded its FY17E revenue growth. Recently, VMS has been beefing up its capabilities in radio frequency (RF), optics, biology etc. Its recent upgrade of netmargin guidance to 6-10% from 6-8% signals that its business mix is tilting towards higher-margin products with more design / R&D content.

Channel checks suggest VMS may have won contracts for smokeless cigarette devices from a tobacco giant, and smart toothbrushes from a prominent high-end consumer-appliance company. If true, we estimate each to contribute 2-3ppt of FY18E revenue growth each. We initiate coverage of VMS with a BUY and TP of SGD27.50 by Maybank Kim Eng. Share price closed at S$22.480