JF Tech: Passing the growth test

TO investors, it may seem that JF Technology Bhd’s (JF Tech) glory days are a thing of the past.

When it rode the semiconductor upcycle a few years ago, the group posted stellar earnings that pushed its share price to historical highs.

The Selangor-based firm, which makes highly-customised test contacting solutions for the global semiconductor market, became one of the most highly valued stocks on Bursa Malaysia, trading at a historical price-to-earnings multiple of more than 100 times for the last few years.

The stock reached a peak market capitalisation of RM1.3bil in 2021.

One of the highlights for JF Tech came in 2020, when it embarked on a joint venture with Huawei’s investment arm, Hubble Technology Investment Co Ltd, to build a plant in Kunshan, China, targeting new test contacting technology for 5G and 6G networks.

When news of the Huawei tie-up first broke, JF Tech’s shares had already tripled that year.

Huawei would ultimately hold a 1.91% stake in JF Tech, which is still reflected in the company’s latest annual report.

However, the past few years have seen JF Tech’s earnings take a hit, partly from high capital expenditure (capex) to expand its manufacturing footprint in China.

The group invested in its Kunshan facility in anticipation of its growing business there, but the US-China trade tensions disrupted some of its growth plans.

While JF Tech’s market capitalisation of RM674mil today is less than half of its glory days, a revival seems to be under way.

It has quietly evolved from merely a test socket provider for semiconductor manufacturers into what it now positions as a globally recognised test solutions provider.

JF Tech’s net profit has nearly tripled over the last four quarters. Annualising the last two quarters’ earnings suggests a prospective price-to-earnings multiple of about 41 times.

“We are transforming ourselves into a one-stop test solution company. The level of service is still the same, but we are now offering more through our expanded product line, generating greater sales from the same customers,” says chief executive officer Andy Goh Joo Hwa.

The broader portfolio now includes test interface and engineering solutions as well as components that connect chips to testing equipment, like probe cards and load boards.

Goh says this adds another layer of stickiness with customers being increasingly more dependent on JF Tech’s solutions.

This is especially relevant as semiconductor product cycles shorten, with companies launching new products every six to 12 months instead of taking several years.

“Customers do not want to manage multiple supply chains. They want to work with a company that is more experienced and specialised,” he says.

Goh adds that JF Tech’s customer stickiness begins even before production, as the group engages clients at the integrated circuit (IC) design and engineering stages, seeking to have its test solutions specified into their processes before products move into high-volume manufacturing.

Once that happens, switching test solutions becomes cumbersome and technically challenging.

Given the stringent and complex testing requirements, engineers also have limited time to evaluate alternatives, Goh explains.

Another deterrent is the switching cost, which is borne by the customer rather than the supplier.

“This stickiness is also supported by our intellectual property, which makes it difficult for competitors to come in and replace us,” he says.

JF Tech has filed 108 patents globally, particularly in 5G and automotive testing technologies.

Capitalising on AI and data centres

The scaling of AI data centres (DC), which drives demand for more computing devices, entails higher testing volumes.

As semiconductor architectures become increasingly complex, a single chip now incorporates functions that were previously spread across multiple chips.

This, in turn, makes chip testing more complex, with each new generation “requiring more test content than the one it replaces”, Goh says.

At the same time, the expansion of AI DC infrastructure through additional server racks is increasing testing volumes, while more demanding requirements are raising the value of test solutions, he adds.

“This creates a multi-year opportunity for us to capture not only volume growth, but also rising complexity and value in semiconductor testing,” Goh says.

To build its test solutions platform, JF Tech undertook four acquisitions in under two years – HFC Tech Sdn Bhd (thermal management), Q3 Probe Pte Ltd (probe cards), ATS Technology (test-cell solutions) and Transcend Technologies (S) Pte Ltd (precision parts) – gaining access to capabilities and markets that would otherwise be difficult to develop organically.

The broader product line is also opening the door to more partnerships, with companies looking to add their products to the group’s portfolio and tap its customer reach.

The group operates in Malaysia, China, Singapore, the Philippines and the United States.

China accounted for 32% of revenue in its latest filing, making it the largest market, followed by Malaysia at 30%.

Other Asian markets contributed 23%, while the United States accounted for 13% and Europe and the United Kingdom 2%.

Following earlier disruptions to its business in China, Goh says the country’s semiconductor industry is now “firing on all fronts”, supported by technological advances and efforts to build out domestic supply chains, particularly as China continues to invest in AI DCs.

This is driving a renewed demand for chip testing.

“We may not need another large round of capex in China if we have partners that can support expansion.

“Sales could increase without significant additional capex, given the technological advances Chinese companies are making.

“Many companies in China want to internationalise their business. But where is the platform for them to do so?

“Expanding beyond China takes years, while geopolitical tensions create another barrier of entry for Chinese players.

“In this sense, JF Tech is a good platform because we have so many customers and can act as a bridge between China and the rest of the world,” he says.

There are concerns that JF Tech’s China ties could put the group in a difficult position with US customers.

Goh, however, does not think this will be a problem, arguing that the group’s products are not highly sensitive.

“If you are involved in more advanced technologies like ASML, then you could have an issue with supply.

“For us, it is not a threat. Moreover, this is not a business that American companies want to get into,” he says.

A bigger question is whether Chinese customers could eventually replicate JF Tech’s capabilities and bypass the group.

Goh does not see this as a major risk, saying partners continue to value its access to technology and expertise outside of China.

“We are effectively keeping track of the global IC development roadmap and bringing that knowledge to Malaysia and China.

“As such, our partnerships are sustainable because they need us, as they have conveyed to us time and time again,” he says.