One investment research report from Asia argues Wistron’s EMS-lite model, comprised of a diversified product mix with focused vertical integration, deserves a better valuation and more attention than other pure notebook ODM players.
The report also speaks to Wistron’s foray into services historically affiliated with more traditional EMS providers as a strategic move that will lessen Wistron’s cost structure compared to other players in industry, while also providing other benefits.
Management details
The same research firm estimates Wistron’s notebook ODM work will account for 61% of revenue in 2011, down from 66% in fiscal year 2010 with LCD TV revenue growth of 103% YoY and handheld up 84% YoY, the latter based partly in fact that Wistron’s RIM BlackBerry mobile business turned profitable in June, which has also helped handheld margins.
Below is representation of Wistron notebook revenues, and other end-markets, when compared to Pegatron.
Wistron and Pegatron’s revenue breakdown, 2011F
Meanwhile, Wistron is said to be working on improving gross margins and getting better at controlling costs.
Wistron management also guided in its conference call for notebook shipments of 28 million to 29 million units for 2010, with LCD TV and handheld both at 5 million units for 2010.
Looking at 2011, Wistron management said it believes ASP to increase slightly for desktop PCs and LCD TVs, with the former due to Wistron doing more value-add and not just barebones work. The latter based on industry trends for more expensive LED TVs to reach 30% of Wistron shipments in 2011 vs. significantly less volumes for LED TVs in 2010.
Wistron RIM business based on gaining handheld market share
In the report, it is believed Wistron’s handheld business for RIM is solid, supported by industry research which indicated Wistron is gaining share from other EMS providers such as Elcoteq and Jabil Circuit, which is easier than competing with Hon Hai on its pricing with Apple for Hon Hai’s iPhone busines. In short, Wistron’s handheld growth is based on gaining market share.
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Wistron, a genuine EMS provider?
As mentioned above, Wistron’s notebook business will account for 61% of revenues in 2011, down from 2010 numbers. The report estimates notebooks will no longer be as important to Wistron moving forward.
In comparison, ODM Quanta currently derives 79% of revenues from its notebook business and ODM Compal’s notebook business accounts for 86% of revenues.
Wistron’s move into a more diversified mix of markets served plus its focus on vertical integration to support its EMS-lite model could prove formidable for other ODMs, and some EMS providers, to compete against what many believe will be Wistron’s higher EPS than ODMs like Compal and Quanta.
Looking closer at Wistron’s vertical integration to support its EMS-lite model, Wistron is focusing on enclosures / casings and LCM (TFT-LCD), which is in early-stage of production. Wistron management says it is targeting a 40% to 50% in-house : outsourced supply ratio for 2011.
Casing is also Quanta’s and Compal’s key vertical leverage, although through joint ventures.
However, while Quanta and Compal have both invested in LCM (even though Quanta does not make LCD TVs), the report indicates Compal seems to be behind schedule in ramping up volume for new customers.
Meanwhile, it is believed Wistron’s LCM business has the potential to see favorable cost synergies on the back of its fast-growing LCD TV shipments for Sony.
The report goes on to argue Wistron does not need many other components to qualify as a genuine EMS provider. The reasoning being many components such as generic printed circuit boards (PCB), cables and connectors are easily sourced with plenty of supply available and therefore not necessarily required for Wistron to have capabilities in house.
Furthermore, it is believed Wistron’s strategically focused vertical integration could actually simplify its operations, and make Wistron less of a threat to suppliers. This makes a lot of sense.
Wistron v Hon Hai
Anyone familiar with the EMS sector knows Hon Hai is the largest, and in many instances, the most powerfully financial EMS provider. A few quick reasons why the report favors Wistron over Hon Hai follow, each based on what are believed to be Wistron strengths follow below.
Targeted EMS-lite
Wistron has strategically targeted its EMS-lite model, resulting in a less complicated operation than Hon Hai and Pegatron. The idea being, this means less need to keep utilization rates at high levels for factory assets, which are considerable investments for Hon Hai and Pegatron.
Management bench strength
Unlike Hon Hai, Wistron has long been well-managed, and may not face the pending management succession issues Hon Hai does. It is believed Wistron does need a dominant, charismatic force to hold together a complex conglomerate of operations.
Supplier friendly
Wistron is considered by many a ‘supplier friendly’ company, in that since Wistron does not have many assets Wistron is not perceived as a threat to component suppliers.
Growth phase
Wistron is at an earlier stage of growth than Hon Hai, with what many believe is more room to target and take market share.
China labor impact
Unlike Hon Hai and Pegatron, Wistron faces a slower threat and lower impact from labor wage increases in China (i.e. less risks to earnings) which may or may not be an issue given the generally small percentage cost of labor when compared to MCOGs for EMS providers with operations in low-cost locations.
Wistron China labor contribution
Below is information on the potential impact on 2011 fiscal year operating profits vs. gross profit generated per Chinese labor at select companies. Note highlights for Wistron, Hon Hai and Pegatron.
Notes for above chart: X axis represents gross profit per China laborer (US$). Y axis represents impact on 2011F operating profit based on Yuanta Research worst-case sensitivity test. Yuanta assumes 70% of laborers’ base wages are raised by 30%, and 30% of laborers’ base wages are raised to RMB2,000 in 2011.
Yuanta Research, VentureOutsource.com, October 2010
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