Is JFTech an investment opportunity?
Value Investing Case Study 84-1: Is JF Technology Bhd growth story losing steam? This article unveils the hidden risks behind its high market valuation.
JF Technology Berhad (JFTech or the Group) is a global player in developing and manufacturing test probes and test sockets for the semiconductor sector. While the company boasts a solid reputation, recent financial results indicate certain challenges.
This article provides an in-depth evaluation of JFTech's investment case. I examined its financial performance, growth prospects, valuation metrics, and efficiencies. Additionally, I explored industry dynamics and broader market conditions influencing the company's performance.
My analysis shows some concerns about its business performance. This seems to contrast with the press statement issued by the Group in Dec 2024 which painted an upbeat picture.
“The Group’s 6 growth engines have been gaining healthy traction and this positive momentum is expected to continue going forward.”
Can we reconcile this? At the same time, my valuation shows that there is no margin of safety. Join me as I show why I prefer to sit out on this one.
Should you still go and buy it? Well, read my Disclaimer.
Contents
- Background
- Operating performance
- Financial position
- Valuation
- Conclusion
|
Background
JFTech was listed on the MESDAQ Market (now known as the ACE Market) of Bursa Malaysia in 2008 and transferred to the Main Board in 2022.
The Group started in 1999 manufacturing and trading electronic products and components. It then moved up the value chain from being an Original Equipment Manufacturer to an Original Design Manufacturer with its own intellectual property, brand, and distribution channel.
The Group's core business today is in the design, development, and manufacturing of test probes and test sockets for the semiconductor sector. These are essential tools used during the testing phase of semiconductor devices, like microchips.
- Test probes are tiny, needle-like devices that make contact with the semiconductor chip's pads or pins. They are used during the manufacturing process to ensure that each chip works correctly before it is packaged and sent to customers.
- Test sockets are specialized connectors that hold the semiconductor chip securely in place during testing. They are particularly useful for testing multiple chips and can be designed for different testing purposes, such as high-speed testing or high-temperature conditions.
According to the Group, “it is the world’s top 3 leader in the high-performance test socket industry. It has more than 20 years of industry experience with in-depth technical expertise and has more than 200 customers worldwide.” Bursa Digital Research 2021
In Nov 2023, the Group partnered with Huawei to design, develop, manufacture, and supply high-performance test contactors in China. However, this facility in Kunshan, China is accounted for as an associate.
While the Group has solutions for automotive and radio frequency applications, it did not provide any segment information in its Annual Reports. Rather it only broke down its revenue by locations.
As can be seen from Chart 1, Malaysia accounted for about 27% of the 2024 revenue. The bulk of the revenue growth over the past decade came from China.
Note that the Group has Jun as its financial year-end. As such unless specified otherwise, the year in this article refers to the financial year.
![]() |
Chart 1: Revenue by Geographies |
Market demand
The market for test probes and test sockets is expected to experience a single-digit growth rate in the coming years.
“Semiconductor Test Socket Market was estimated to be worth USD 1,296 Million in 2023 and is forecast to a readjusted size of USD 1,833.8 Million by 2030 with a CAGR of 7.0% during the forecast period 2024-2030.” Yahoo Finance quoting Valuates Reports
“Semiconductor Test Socket Market was valued at USD 1.3 Billion in 2023 and is projected to reach USD 1.9 Billion by 2030, growing at a CAGR of 7.1% during the forecasted period 2024 to 2030.” Verified Market Research
Based on the above market data, JFTech only has less than 1% of the total market. But this is not a sunset sector. The demand for test probes and test sockets is driven by several factors:
- Growth of the semiconductor Industry.
- Technological advancements. As chips become more complex, with higher pin counts and smaller sizes, the need for advanced test probes and sockets that can accommodate these changes increases.
- Emerging markets. Growth in emerging markets, particularly in Asia-Pacific, is contributing to the increasing production of semiconductor devices, which in turn raises the need for testing tools.
- The rise of Internet of Things (IoT) devices and artificial intelligence (AI) applications requires extensive testing to ensure reliability and performance, fuelling demand for test probes and sockets.
Furthermore, test probes and test sockets are integral components within the broader test board market. This encompasses various technologies and tools used for testing semiconductor devices. The test board market is much larger and points to a potential growth path for the Group.
“Semiconductor Test Board Market size was valued at USD 3,544.94 Million in 2023 and is projected to reach USD 4,744.82 Million by 2031, growing at a CAGR of 4.25% during the forecast period 2024-2031.” Verified Market Research
“The Semiconductor Test Equipment Market size is estimated at USD 14.23 billion in 2024, and is expected to reach USD 19.22 billion by 2029, growing at a CAGR of 6.20% during the forecast period (2024-2029).” Mordor Intelligence
Operating performance
Over the past 12 years, JFTech achieved a 16% CAGR in revenue. Refer to the left part of Chart 2. You can see that the majority of the growth came post-2020. The company attributed this to its expansion into China as well as moving up the value chain.
“Our efforts to diversify and expand our global presence continued to bear fruit… export sales grew 24%... In particular, export sales to China.” 2020 Annual Report
“In the previous financial year, we expanded our business to include test engineering solutions as part of our plans to continuously move up the semiconductor value chain…started contributing to the Group in FY2022.” 2022 Annual Report
However, the troubling sign is that revenue growth seems to have levelled off in 2023 with a decline in 2024. The company attributed this to the slowdown in the global semiconductor sector.
“It was a difficult year for the global semiconductor industry as 2023 sales decreased 8.2%...according to Semiconductor Industry Association” 2024 Annual Report.
JFTech operates in a sector with short product life cycles. I am not able to tell how much of the declining revenue is due to the soft market and how much is due to product obsolescence. Furthermore, there is not enough information from the Annual Reports to assess whether the decline is mainly due to declining volume or declining selling prices.
At this stage, I am concerned about the 3 years of zero topline growth compared to the following growth picture. Note that I obtained this picture from ChatGPT (sourcing from Statista and Semiconductors). They refer to the calendar years.
- 2020: The industry saw steady growth, with monthly sales increasing from approximately USD 34 billion in January to around USD 40 billion by December.
- 2021: Sales continued to rise, reaching about USD 50 billion per month by the end of the year.
- 2022: The market achieved a record high, with annual sales totalling USD 574.1 billion.
- 2023: The industry faced a downturn, with annual sales decreasing by 8.2% to USD 526.8 billion.
- 2024: The market rebounded strongly. By October, monthly sales reached a record USD 56.9 billion, a 22.1% increase compared to October 2023. Annual sales for 2024 are projected to increase by 19.0%, reaching approximately USD 626.9 billion.
![]() |
Chart 2: Performance Index and Returns |
More troubling was the large drop in profits from 2022 to 2024. This in turn led to a drop in the returns. You can see from the right part of Chart 2 that while volatile, there was an uptrend in the ROIC and ROE from 2013 to 2020/21.
But thereafter, there were declining trends. The result was that from 2013 to 2024, we had an average:
- ROIC of 17 % compared to the current WACC of 9.3 %.
- ROE of 8.9 % compared to the current cost of equity of 9.3 %.
Despite the conflicting picture, I would conclude that the Group managed to create shareholders’ value over the past 12 years.
You will notice that the ROE is only about half of the ROIC. The main reason for this is because, over the years, the Group has been building up its cash.
- Cash was RM 6 million in 2013 (about 21% of the total assets) compared to RM 63 million in 2024 (about 43 % of the total assets).
- In computing the ROIC, I excluded the cash. But cash was part of the equity for the computation of the ROE. Cash does not generate much returns and the table below illustrates this impact on the returns.
![]() |
Table 1: Comparative returns 2013 to 2024 Notes a) Earnings = Operating income. Capital = Equity + Debt - Cash. b) Earnings = PAT. Capital = Equity. |
Cost structure
Part of the reason for the drastic drop in profits from 2021 to 2024 was because of its cost structure. The left part of Chart 3 shows a breakdown of the operating profit into fixed and variable components. You can see that fixed costs on average accounted for about ¾ of the total costs. With such a cost structure, a decline in revenue would have a significant impact on the profits.
Furthermore, a decrease in revenue directly affects the profit margin since fixed costs remain unchanged. You can see this in the right part of Chart 3.
At the same time, the Group was not able to reduce the Selling, General, and Administration (SGA) costs so there was an uptrend in the SGA margin post-2021. Refer to the right part of Chart 2.
The other characteristic of the Group was the low effective tax rate of about 7.5% over the past 12 years. This was because the Group benefited from the pioneer status tax status from 2006. This has been extended to 2026.
Efficiency
Given the cost structure, efficiency improvement would be an important factor in driving profits. In this context, the Group experienced declining capital efficiency as measured by the gross profitability. Refer to the left part of Chart 2.
This was despite all the focus on efficiency.
“…our JF 4.0 transformation has been pivotal, integrating digitalization and automation into our operations to enhance efficiency and innovation.” 2024 Annual Report
“A comprehensive quality management system has been established to assure customers…as well as to improve our work efficiency.” 2022 Annual Report
“…providing a ‘one-stop shop’ for test interface products and engineering services will not only enable us to capture a new market segment…by increasing efficiency…” 2020 Annual Report.
This disconnect between intention and the numbers is exemplified by the trends in the various operating and capital efficiency metrics as shown in Chart 4.
- From 2013 to 2024 both operating and capital efficiency indices indicate periods of improvement followed by declines or stagnation. Sustained improvements are absent, suggesting areas for further optimization.
- Post-2020 both operating and capital efficiency metrics suggest a weakening performance. This is particularly true in profitability, inventory turnover, and free cash flow. Asset turnover and reinvestment margins showed slight improvements but were insufficient to offset broader inefficiencies.
![]() |
Chart 4: Efficiency trends |
Reinvestment
Growth needs to be funded and one way to assess this is the Reinvestment rate defined as Reinvestment/NOPAT.
Reinvestment = CAPEX & Acquisitions – Depreciation & Amortization + net increase in Net Working Capital.
Over the past 12 years, the Group had a 75% Reinvestment rate. This is not a good sign as there is not much NOPAT left for the shareholders.
The Reinvestment rate is link to growth by the following equation
Growth = Return X Reinvestment rate.
With 16% revenue growth and 17% historical average ROIC, we have a Reinvestment rate of 0.16/0.17 = 94%.
Given this picture, you should not be surprised to see the high historical Reinvestment rate. The only way for this to come down is when the Group reaches maturity with growth at the long-term GDP growth rate.
If we assumed that the Group will grow at 4% over the long run with the historical 17 % average ROIC, then the Reinvestment rate should be 0.04/.17 = 24 %.
Peer comparison
As JFTech claimed to be among the world’s top 3 leaders in the sector, I compared its performance with global players in the sector. However, many of the global players have much larger revenue. As such I selected 4 peers with the lowest 2023 revenue as shown in Table 2.
You can see that while JFTech is a very small player in the global market, it had the best revenue growth among the panel.
![]() |
Table 2: Peer revenue Note: Data from Beijing Huafeng was only available from 2016. |
I looked at the trends of 4 metrics to get a sense of how well JFTech performed compared to its peers. Refer to Charts 5 and 6.
JFTech displayed periods of outperformance in return on capital, EBIT margin, and EPS, particularly around 2020-2021. However, its performance has been highly volatile and inconsistent compared to peers like TER and COHU, which exhibited steadier trends.
This suggests that while JFTech demonstrated strong short-term growth, it struggled to sustain performance over time.
- Return on capital. JFTech showed a highly volatile trend in return on capital, peaking above most peers around 2021 but experiencing a sharp decline afterward.
- JFTech initially had a growing but volatile EBIT margin that declined after 2021.
- JFTech’s erratic cash flow margins indicate poor predictability, while peers demonstrated better stability.
- Its peers had better EPS growth.
![]() |
Chart 5: Bursa Peer Return on Capital and EBIT Margin |
![]() |
Chart 6: Bursa Peer Levered Free Cash Flow Margin and EPS |
Financial position
I would rate JFTech as sound financially based on the following:
- As of Sep 2024, it had RM 63 million cash. This is equal to 43 % of its total assets.
- As of Sep 2024, it had a debt-capital ratio of 4 %. This has come down from its 2013 high of 22 %.
- Over the past 12 years, it generated positive cash flow from operations every year.
- From 2013 to 2024, it generated RM 77 million cash flow from operations compared to the total PAT of RM 70 million. This is a good cash flow conversion ratio.
- It had a reasonable capital allocation plan. Refer to Table 3. The cash flow from operations was sufficient to fund its CAPEX with excess used to reduce debt and for dividends.
![]() |
Table 3: Sources and Uses of Funds 2016 to 2025 |
My main concern was the historically high Reinvestment rate of 75%. If this is not reduced, it would impact the valuation.
The Group is in the midst of a 10 % private placement of shares at the end of Dec 2024. This would result in an issuance of 92.7 million additional new shares. The placement price will be at a discount of not more than 10% to the 5D-VWAMP of JF shares immediately preceding the price-fixing date(s) for each tranche.
The placement is projected to raise about RM 46 million. I must admit I don’t understand the rationale as the Group has about RM 63 million cash as of Sep 2024. Why undertake an exercise to increase the number of shares? Is it about securing a strategic ally?
Valuation
I adopted the following picture in valuing JFTech.
I assumed that it would continue with its high historical growth rate of 16 % next year. But this would be reduced proportionately to the 4% perpetual growth rate in Year 6.
I assumed that there was no improvement in the operating and capital efficiencies. As such I considered the 2021 to 2025 (post the testing expansion) average contribution margin and capital turnover to be the base values.
At the same time, the Reinvestment rate would reduce proportionately from the historical average rate in Year 1 to one given by the fundamental growth equation in Year 6.
I also assumed that the Group would no longer enjoy the tax incentives and have a 24% nominal tax rate.
On such a basis, I obtained an intrinsic value of RM 0.28 per share compared to its market price was RM 0.82 per share (31 Dec 2024). There is no margin of safety.
Valuation model
I valued SDS based on a multi-stage valuation model as shown in Table 4.
The basic equations used in the model are:
FCFF = EBIT(1 – t) – Reinvestment.
EBIT = Revenue X Contribution margin – Fixed cost. The earning was based on the business model shown in the left part of Chart 3.
Reinvestment was derived from the Reinvestment margin.
![]() |
Table 4: Sample calculation Notes a) Straight-line reduction. b) Pegged to growth rate. c) Assumed no improvement. d) Assumed growth at a terminal rate. e) Revenue X Margin and after accounting for Fixed costs. f) Assumed proportionate improvement to reach the rate given by the fundamental growth equation. g) b X f h) FCFF for each year = e - g j) Assumed constant D/E ratio. Refer to the WACC table. k) NPV for each year = (h X j) l) Terminal for the year discounted at terminal growth rate. n) Inclusive of any excess TCE. Non-operating assets, MI and Debt. o) Based on the number of shares. |
The cost of funds was based on the first page results of a Google search for “JFTech WACC”. Refer to Table 5.
![]() |
Table 5: Estimating the cost of funds |
Risks and limitations
I have assumed a very optimistic picture in valuing the Group as can be seen from Chart 7.
- I have assumed that the Year 1 revenue would grow at 16%. This is very optimistic. This is because there does not seem to be any revenue growth in 2025 based on the LTM calendar year Sep 2024 LTM revenue.
- I have assumed that the Group would be able to reduce its Reinvestment rate to one given by the fundamental growth equation. This is no record of the Group focussing on this.
- You can see from the right part of Chart 7 that the projected Free Cash Flow has a much steeper growth trajectory than the historical one
Despite the optimistic picture, there is no margin of safety. I suspect that part of the reason for the poor valuation is that 43% of the total assets are tied up in cash.
![]() |
Chart 7: Projections |
To give you a sense of whether JFTech is overvalued, I compared its valuation with those of its peers as shown in Table 6. You can see JFTech multiples was among the highest.
![]() |
Table 6: Peer Valuation as of 31 Dec 2024 |
Conclusion
JFTech has evolved from a local manufacturer of electronic components into a global player specializing in test probes and test sockets. Its ability to move up the value chain and expand geographically, particularly into China, has been a key driver of growth.
However, recent performance highlights challenges in sustaining profitability and efficiency. But the Group is financially sound as evidenced by its strong cash position and low debt levels. Nonetheless, its high reinvestment rate raises concerns about whether returns can justify continued expansion without affecting shareholder value.
JFTech claimed to be one of the top three players in the high-performance test socket industry. But the comparative revenue shows that it is a small player in the broader market. While the partnership with Huawei could provide avenues for growth, this is considered a non-operating asset in my valuation.
My analysis may at first seem to be at odds with its Dec 2024 press statements that its 6 growth engines are gaining traction. I take it to mean that management is confident of building back the topline growth. I have accounted for this by having a 16% revenue growth in the first year of my valuation model.
But as I have shown, the challenge is more than topline growth. Can it improve its operating and capital efficiencies? Can it reduce its fixed costs and SGA margin as it grows? If these are not addressed, there will be profitability challenges.
My valuation suggests that JFTech’s current market price does not offer a margin of safety.
Investment thesis
JFTech has experienced declining topline growth since 2021. Given its high fixed cost structure, this declining revenue had translated to a large decline in returns. The Group attributed the declining revenue to a soft semiconductor market. However, market data seems to suggest that the market was not soft for all the years.
This seems to suggest that there may be more than just a soft market issue. But even assuming that the Group could achieve double-digit growth for the next few years, my valuation showed that there is no margin of safety. As such, I would sit this one out.
|
END
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
How to be an Authoritative Source, Share This Post
If the above article was useful, you can find more insights on how to make money in my e-book. The e-book is now available from Amazon, Kobo and Google Play.
PS: If you are in Malaysia or Singapore, the e-book can only be download from Kobo and Google Play.
|
Disclaimer & DisclosureI am not an investment adviser, security analyst, or stockbroker. The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies. Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them.
The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such.
I may have equity interests in some of the companies featured.
This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you.
Disclaimer & Disclosure
I am not an investment adviser, security analyst, or stockbroker. The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies. Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them.
The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such.
I may have equity interests in some of the companies featured.
This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you.
Comments
Post a Comment