With a new CEO in place, the tech company hopes to further galvanise its operations. By Ridwan Abbas

Motorola’s slowdown became apparent in early 2007 when it posted first quarter sales of US$9.4 billion ($13.5 billion) - well off its initial target of between US$10.4 to US$10.6 billion. The company’s revenue receded a further seven per cent in the second quarter, with the decline attributed to its sagging mobile phone business. Jurtech’s performance on the stock market has naturally reflected investors’ concerns about the knock-on effect on the company – its share price dropping 62 per cent from the start of 2007 to close at 41 cents on December 17.

Road to recovery

Jurtech is not necessarily waiting for its customers to kick-start its recovery. In a bid to diversify, the group has successfully ventured into the ODM (Original Design Manufacturer) business, producing ULC (Ultra Low Cost) mobile phones for export in the emerging markets of Latin America.

To date, the company has shipped close to a million ULC cell phones to eight markets in Latin America, while plans are afoot to export the phones to Eastern Europe as well. Aside from manufacturing bases in Malaysia and China, Jurtech recently set-up a facility in Brazil - a move which has borne initial fruit already.

“We are focusing on the emerging market where the most growth is. We built a hub in Brazil because there is little competition there and we grew to $100 million within a year from nothing,” explained Mr Cheang.

In the non-handset product business, the company is also seeing growth in shipment volume for computer motherboards as a customer in Brazil continues to churn out new models. Mr Cheang said the company expects business in Brazil “to grow by nearly three times” in 2008.

ODM Strategy

Prior to 2007, Jurtech ran mainly an EMS (Engineering, Manufacturing and Services) business which manufactures high quality, low-cost electronic assemblies for major OEMs (Original Equipment Manufacturers), the biggest being Motorola.

OEMs including the likes of IBM, Philips and HP have long favoured outsourcing their manufacturing to EMS companies, as it allows them to free up capital for investment into new product development. But in recent times, ODMs (Original Design Manufacturers) have appeared on the scene to provide not only manufacturing services but also completely designed products.

Commenting on Jurtech’s ODM business, Mr Cheang said, “It used to be that we took others’ recipe and made products around it. Now we can actually design our own recipe, so all you need to do is put your brand onto it and you can start selling it as your product. And that is exactly what we’re doing for our mobile phone business.”

To bolster its ODM capabilities, Jurtech made four acquisitions this year. One of the most significant is that of i-Sirius Pte Ltd, a company founded by Mr Cheang himself in 2006, which designs complete handsets based on its proprietary ULC GSM modules.

The GSM modules, which are slightly bigger than the size of a SIM card, contain all the essential technology needed for a mobile phone to function. “This reduces our cost of R&D to a level where we can actually churn out many new models, all based on the same engine,” according to Mr Cheang.

Aside from mobile phones, the company also produces LCD TV sets as part of its ODM strategy as “these are the two fastest growing consumer electronics business,” said Mr Cheang. Its flat screen televisions, branded under the name Sirius, are available at major electronics retailer Harvey Norman.

Jurtech’s revamped set-up represents a more vertically-integrated model where the company has also added capabilities such as metal stamping and plastic moulding to its manufacturing repertoire.

Addressing a weak balance sheet

But while Jurtech embarks on its expansion strategy, the aggressive growth has also contributed to the company’s high gearing of 1.26 times as at end-September. Its debt/equity ratio of 1.76 compares much higher to industry competitors and points to the high debt it has incurred while on the expansion trail.

A 15.2 per cent year-on-year (yoy) slide in revenue coupled with higher interest expense contributed to a 28 per cent yoy contraction in third quarter earnings. The jury is still out as to whether interest charges will greatly pin down Jurtech’s future earnings.

In the near term, the company plans to fund its expansion through more equity and has announced a 3-for-10 rights issue at 37 cents each to raise a gross proceed of $51.8 million.

In his recent report, CIMB-GK research analyst Jonathan Ng predicts that Jurtech’s gearing would fall to below 0.8 times after its rights offering, but believes it is still high. Further, Mr Ng estimates that “the exercise will dilute EPS by about 23 per cent.”

Part of the problem for the high gearing is also attributed to the increase in receivable days, as credit terms for Motorola have been extended from 45 to 75 days. This has led to a negative cash flow of $33.5 million in the third quarter. However, Jurtech expects its ODM business to contribute a more positive cash flow since the company is able to negotiate its own payment terms by virtue of being original manufacturers.

Going forward, Mr Cheang posits that its ODM business will also manage gearing and infuse the company with more working capital. “You need your core EMS business to grow and you need to grow your ODM business as well, then you’ll bring down your gearing. It’ll take another few years for the ODM business, which just started, to catch up with the EMS business but the signs are positive,” he said.

Jurtech’s diversification effort is taking shape with the ULC mobile and wireless loop phones making up about 10 per cent of third quarter revenue. Its plastics components business, which only started in the second quarter, has also contributed 8.5 per cent to the group’s overall revenue. But while it seeks to increase its options and diversify from its one major customer, Jurtech is not about to throw the baby out with the bath water.

“It’s not every part of Motorola’s business that’s not doing well; it’s only the handset business. So we’ve successfully moved a big chunk of the business into their accessories business which is doing well, so that diversification works,” said Mr Cheang. For the third quarter of 2007, wireless accessories production formed 47 per cent of Jurtech’s turnover.

Looking ahead

Due to festive demand, the fourth quarter has traditionally been the strongest period for the electronics manufacturers. The management thus expects higher quarter-on-quarter (qoq) margins led by its handset business. Rising order momentum for motherboards in Brazil would also lead to a better fourth quarter on both the revenue and earnings front.

Evidently, a recovery in Motorola’s volume would further aid Jurtech’s cause but while the mobile phone maker is likely to see positive growth, its qoq expansion is not expected to be as strong as it was in previous years. BNP Paribas notes in its analyst report that it is “unconvinced of a massive improvement at Motorola given the seemingly weak product pipeline” and expects only a 10 per cent growth instead of the 15 to 20 per cent range seen in the past.

Looking at 2008, Mr Cheang expects Jurtech’s ULC handsets to be the major growth driver as it remains the fastest growing segment of the business. “Right now, we have a portfolio of products in the low-end and I think by next year, we’d be able to go into the midtier as well,” he said. While Jurtech may have seen better days, its CEO believes that the company has managed to turn the corner and reengineer its operations to become less reliant on a single customer.

“When I came in, I was lucky as we were starting to see some initial trend to change the direction. Now it needs energy and drive to make sure the trend remains in this direction and that’s what I need to do going forward. The strategy is there and we’re executing it and seeing some positive results,” said Mr Cheang. Though Jurtech looks to have weathered the storm, the challenge lies in proving that it can sustain its margins as it shifts greater toward the ODM business in the next few quarters.

While a substantial market exists in the ultra-low-cost (ULC) business, Jurtech has entered a domain ripe with stiff competition in product pricing. Hence, it needs to ensure consistent high volume in order to make good margins. Considering that it is still early days, investors seem content to adopt a wait and see attitude. SI

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