When Aztech Group was listed on the Singapore Exchange, it expanded from its original electronics business manufacturing PCs and electronic products, into various segments such as the marine logistics business and building materials.
Showing an entrepreneurial trait to go into new business areas where he thought he could make money, Aztech Group founder, CEO and executive chairman Michael Mun also famously paid $4 million in 2014 to buy over the Kay Lee Roast Meat Joint, and announced ambitious plans to expand the brand.
Before Aztech Group shareholders could savour the returns from these ventures, Mun launched a privatisation offer for the company at 42 cents per share, valuing it at about $21.42 million. It said back then that Aztech had no present need for access to Singapore’s capital markets and was unlikely to tap these markets to finance its operations in the foreseeable future.
Now, just four years later, Mun is back to tap public investors’ funds again. On March 4, Aztech Global’s IPO was launched. Based on its offer price of $1.28 per share, the company will have on listing a market value of $990.4 million. At this price, the shares are being sold at 16.7 times FY2019 earnings of 7.62 cents per share.
The new entity to be listed, Aztech Global, is different from the Aztech Group that was privatised. For one, the non-electronics businesses have been divested and the focus over the past few years was to grow the electronics portion. “We don’t have it [roast duck] anymore,” Mun tells The Edge Singapore in an interview.
Rather, Aztech Global provides various manufacturing services, including original equipment manufacturer (OEM) and contract manufacturing services to brand owners under the labels of the respective customers.
Beyond that, the company also distributes Internet of Things (IoT) devices and datacommunication products, such as smart plugs and mesh routers sold under its proprietary Aztech and Kyla brands through channel partners and e-commerce platforms.
Aztech also manufactures LED lighting products used in residential, commercial and industrial applications; and specialises in the design and development of smart lighting systems.
Finally, it manufactures and sells two categories of electrical products, namely, kitchen appliances and other home and living products, including vacuum cleaners, air-fryers and standing fans.
Expansion and M&A
For the IPO, which was jointly arranged by United Overseas Bank and Maybank Kim Eng Securities, a total of 68.12 million shares are offered. Out of these, 64.62 million are placement shares, while 3.5 million shares are for retail investors. Aztech Global aims to raise around $297 million, and the estimated net proceeds will be approximately $283.7 million, of which approximately $188.6 million will be due to the company.
On March 11, the newly listed company revealed that its placement offer was 16.4 times subscribed (excluding the over-allotment option), while its public offer was 18.4 times subscribed. The total IPO — placement and private offers included — was 16.5 times subscribed, excluding the over-allotment option.
The IPO also managed to attract 18 cornerstone investors, including AIA Investment Management, HSBC Global Asset Management (Hong Kong), JPMorgan Asset Management (Singapore), and Lion Global Investors.
Mun explains that the “time is ripe to ask the market for funding” as he needs the additional capital to fund expansion plans. He notes that post privatisation, Aztech has done “very well”, and he is confident that the company will be able to grow further.
“With the expected growth of our electronics business in the coming years ... it is imperative for our group to grow to a good size and develop economies of scale in order to remain competitive and improve our ability to maintain and attract new customers in the technology sector,” according to the prospectus.
Aztech seeks the expansion of its original design manufacturer (ODM) and joint development manufacturer (JDM) businesses “to capitalise on opportunities in the growing IoT market”, as well as to build an ecosystem of inter-connected smart devices for home and office appliances to capture market share and opportunities in the growing IoT market.
Furthermore, it wants to establish a sales network in countries with a high penetration rate of IoT and smart connectivity devices, as well as LED penetration of markets such as the US, Europe, China and Japan.
Mun explains that he plans to use the proceeds from the IPO for two main purposes: expanding the company’s manufacturing capabilities and acquiring mergers and acquisitions (M&A) targets.
Aztech intends to ride on the rapidly growing demand with plans to expand and enhance its manufacturing facilities to the tune of $50 million, so as to increase production capacity. The company currently has two manufacturing plants — in Dongguan, China, and Johor, Malaysia — and plans to construct a third plant that will double its existing manufacturing capacity.
In light of the trade tensions between the US and China, the Johor plant was built so as to ensure supply chain resiliency, and the company’s third plant will also be outside China. “About four to five years ago, we already had the design. We had the plan to have the second plant in China but we shelved it due to the trade war,” says Mun, adding that the location of the third plant has not yet been decided but the shortlist includes Thailand, Indonesia and Vietnam.
As for M&A, Mun says Aztech is prepared to spend another $50 million. The company is a very “vertically integrated” company, doing plastics and electronics, but in the manufacturing arena, the company is lacking the capability in precision engineering. This, therefore, will be one of Aztech’s first targets. In terms of R&D, Mun says the company is looking at good software companies in certain areas like AI and app development for IoT.
The main thing that Mun looks for in an M&A target is also whether it has the “right management team with the right talent and technology”, because “you cannot buy the hardware and the machine, then the whole team disappears”, he says. “You have to keep these soft skills.”
Three key customers
For FY2017 to FY2019, Aztech Global reported a CAGR of 6.6% for its revenue, which grew from $377.2 million in FY2017 to $428.8 million in FY2019. In the same period of time, Ebitda more than tripled from $19.7 million to $64.3 million.
For its 9MFY2020 ended Sept 30, 2020, Aztech reported a slightly lower y-o-y revenue of 4262.2 million, compared to the 9MFY2019 figure of $326.6 million. According to the company, most of the sales are typically booked in the second half of the year.
The rise in revenue can be attributed to mainly the increased demand from customers for IoT devices and data-communication products, which grew at a CAGR of 56.8%, from $118.9 million in FY2017 to $292.5 million in FY2019. This accounted for about 83% of its turnover in the first nine months of 2020.
The market for these IoT products is also expected to grow. A Frost and Sullivan 2021 study says that the market for IoT devices is growing at a CAGR of 22% from 2015 to 2019, and is expected to grow at a CAGR of 20.8% from 2019 to 2023.
Jeremy Mun, Aztech’s executive director and COO, explains that these IoT and datacommunication products are higher-margin products, which generate better margins for the company. He gives the example of a LED tube sold by Aztech to a customer. Ten years ago, the price was US$75. The price has since collapsed to less than US$10 ($13.50).
As at Feb 15, Aztech has over 290 customers worldwide, with its products sold in over 40 countries. However, according to Aztech’s prospectus, three of these customers accounted for nearly 90% of its revenue between FY2017 and FY2019. As year-to-year trends go, the revenue generated from these customers can vary significantly. For example, the one it sold LED lighting products to has gone from contributing 64.3% of its revenue in FY2017 to just 28.43% in FY2019, whereas the share of the revenue from the customer to which it sold smart security cameras went up to 49.03% in FY2019 from 5.73% in FY2017.
The customers are not named in the prospectus. However, as described in the prospectus, Customer A, which buys the security cameras from Aztech, was acquired by a major US e-commerce retailer in 2017 and the products have since been more actively marketed, thereby leading to the spurt in popularity.
According to a Reuters report on Feb 12, 2018, a home security camera maker, Blink, was acquired by Amazon in late 2017 for US$90 million.
On its part, Aztech has flagged the concentration risks in its prospectus: “Although we have entered into master manufacturing agreements with certain customers which set out a broad framework of the business relationship and arrangements with these customers, these agreements do not always oblige these customers to place certain minimum orders with us, nor are they necessarily exclusive.”
As at Feb 15, 2021, Aztech’s outstanding order book was approximately $307.9 million, comprising approximately $292.4 million for the IoT and data-communication products segment and approximately $15.5 million for the LED lighting products segment. All the outstanding order book as at Feb 15, 2021, are expected to be delivered or completed within FY2021.
For FY2019 and FY2020, Aztech paid total dividends of $67.3 million ahead of the IPO. Mun, who has a deemed interest of 100% in the company now, will see his stake trimmed down to 70% following the IPO, or 68.3% if the over-allotment option is fully exercised. To entice potential new investors, Aztech plans to pay out 30% of its earnings to shareholders for FY2021 and FY2022.
When asked if he was prepared to again deal with minority shareholders as being part of a listed company, Mun is quite positive. “Everybody wants to make money, so if you are running properly, if you’re transparent, you treat them nicely, I don’t think I would be worried,” he asserts.
