- Dongguan factory investment was for capacity expansion
- Investments in UCHItecture was for capability upgrade
- How would the investments in UCHItecture be paid back? How much would be its return on investment?
- These are key questions to be answered before one could quantitatively assess the value of Uchi Technologies stocks
Jura, a premium Swiss brand of fully automated coffee machine, shows sign of recovery in both volume and sales in 2016 (refer to my last post about Uchi Technologies). This surge in demand of fully automated coffee machine in Europe eventually showed up in the supplier of electronic control systems – Uchi Technologies. See the positive tone from the management in its FY2017 Q2 results discussion.
Many are tempted to project a growth trend in UCHITEC future sales. However, without examining the scale and the intention of capital investment in UCHItecture, we may miss some key insights to assess Uchi Technologies’ future prospects. So, let’s have a look at the development of the book value of buildings, and plant and machinery (P&M) on its balance sheet in the past 17 years. Very clearly there are two leap-forward capital investments in FY2009 and FY2012 respectively as shown in the chart; the first one was Dongguan factory and the second was UCHItecture. In terms of RM, the later was bigger than the former. More importantly, what are the purposes of these investments?
Capacity Expansion in Dongguan Site
We get some hints from the management discussion in the annual reports. In FY2005, the objectives of Dongguan site were clearly stated that it was for capacity expansion. This new site has UCHITEC’s second mechatronic development division (MDD) and a manufacturing plant. Unfortunately, the timing was really bad; by the time this new site started to operate, it was at the peak of financial crisis. Nevertheless, we do not see over capacity problem because the management did not really add much new machinery. In fact, the amount of plant and machinery (P&M) declined from RM 3.9m in FY2008 to RM 3.3m in FY2009.
Capability Upgrade in UCHItecture
If investments in UCHItecture were for capacity expansion and if the demand for fully automated coffee machine exceeded its production capacity, then it would be very useful to apply a capacity-led growth model to predict future sales of UCHITEC (refer to my post in May about the growth model of SCGM). However, from the management discussion in FY2010, the purpose of UCHItecture is primarily to elevate their R&D capabilities and secondly to enhance operational efficiency, which in turn help the company to climb up value-added chain. These investments mainly consist of:
- New factory building worth almost RM 20m according to valuation in December 2012
- New plant and machinery (sum of addition is roughly RM 27m from FY2011 to FY2014, see chart below)
- new Fast Prototyping Laboratory
- QA Reliability Test Room
- Clean Room
- enhanced logistics circulations
- assembly areas automation
The total investments in UCHItecture are estimated to be RM 47m, roughly equal to the average annual operating profits from FY2011 to FY2016. This is a considerable amount of capital investment.
How would the investments in UCHItecture be paid back? How much would be its return on investment? These are key questions to be answered before one could quantitatively assess the value of Uchi Technologies stock. As the management said:
“With this enhancement, we believe that we shall continue to climb up the value-added-chain in serving and delighting our customers”
Therefore, I think it would be very useful to understand the positions of Uchi Technologies in the value-added chain, both in the past and at present.
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