Management Discussion
& Analysis

MANAGEMENT DISCUSSION AND ANALYSIS


Overview Of Business Operation

JF Technology Berhad (“JF Tech” or “the Company”), one (1) of the world’s pre-eminent manufacturers of test contacting solutions in test sockets and contact pins for the Integrated Circuits (“IC”) testing industry reported a 512% increase in earnings per share and profit after taxation to 5.06 sen and RM6.38 million respectively in Financial Year Ended 30 June 2017 (“FYE 2017”). Revenue was up 30% to RM24.67 million in FYE 2017 primarily on exports to the United States, Southeast Asia and increasingly North Asia as its market share gains abroad begins to gain traction. Earnings before interest, tax, depreciation and amortisation (“EBITDA”) rose 214% to RM8.42 million as EBITDA margin is now 34% on improving capacity utilisation and lower per unit cost.

The financial performance for the FYE 2017 was the best achievement for the Company and its subsidiaries (“the Group”) since its debut on Bursa Malaysia Securities Berhad in 2008.

Market share gains abroad particularly to the United States, Thailand and Philippines and increasingly to China,Taiwan and Japan is gaining traction which led to exports now accounting for 65% of the Group revenue.

For the automotive segment, test sockets’ revenue particularly ALPHA and GAMMA test contacting solutions grew 33% year-to-year, contributed 45% to the Group revenue. For the mobile devices and internet of things (“IoT”) segments, demand for ZIGMA and ETA product lines continued to be encouraging, contributed 18% to the Group revenue. Sales of contact pins and elastomers for both automotive and IoT, which are recurring consumables are a “compounding” sales to the Group revenue. Sales of original equipment manufacturer (“OEM”) products grew at 13% year-to-year and contributed 19% to the Group revenue, mainly to domestic customers including leading test handler manufacturers, SRM Integration Sdn. Bhd., outsourced semiconductor assembly and test providers (OSATs) and major multinational companies semiconductor manufacturers in Malaysia.

Excluding legal fees, operating profit as measured by EBITDA was up 57% year-to-year to RM10.02 million from increasing exports of high-performance test sockets particularly to the automotive IC devices segment and rising contribution of contact pins. EBITDA margin has now risen to 41% thanks to the increased capacity utilisation. The full-scale effects of this rapidly improving economies-of-scale and operating leverage will be felt across the Group operations in the years ahead. Our 100%-owned subsidiary, JF Microtechnology Sdn. Bhd. (“JFM”) has been granted a pioneer status by the Malaysian Investment Development Authority (MIDA) which resulted in a lower provision of taxation.

JFM has also won the prestigious Enterprise 50 Award by SME Corporation,for the third (3rd) time recognising its achievement in overall business performance particularly in generating intellectual property, commercialising research and development (“R&D”) products, improving quality standards, increasing exportation and maintaining excellent profitability track records.

Both subsidiaries of the Company, J Foong Technologies Sdn. Bhd. (“J Foong”) and JFM had upgraded to the latest ISO Quality System ISO9001:2015 which includes risk managements in the Quality Management System

Financial Review

Statements of Comprehensive Income


JF Tech had set new revenue and profit records for the FYE 2017 despite the lawsuit which has been on-going for more than thirty-six (36) months. Revenue recorded at RM24.67 million for the FYE 2017 which was a double-digit growth of 30% as compared to the preceding year corresponding period. Profit before taxation stood at RM6.96 million, representing a 494% growth throughout the FYE 2017. During the FYE 2017, the Company has incurred approximately RM1.55 million on legal fees for the on-going lawsuit.

As a result of the increased in profit after taxation in the FYE 2017, the basic earnings per share rose from 0.83 sen in the financial year ended 30 June 2016 (""“FYE 2016”) to 5.06 sen in FYE 2017.

The main factors that contributed to the increase of revenue and net profit were as follows:

  1. Increase in export sales.
  2. Increase in the product lines namely, ALPHA and GAMMA which supplied validated IC devices to automotive segment.
  3. Lower legal fees incurred for the FYE 2017 of RM1.55 million as compared to RM3.75 million for the FYE 2016.
  4. Being a manufacturer of an export driven business, the performance of the Group was also enhanced to a certain extent, by the strength of the US Dollar against the Malaysian Ringgit.

Statements of Financial Positions


On the balance sheet front, the financial position of the Group remained strong. The Group continued to maintain a robust position with working capital of RM15.81 million as at 30 June 2017. Cash and cash equivalents increased from RM7.19 million as at 30 June 2016 to RM10.80 million as at 30 June 2017.

The Group has negligible borrowings which places it in a strong position to obtain financing to fund future capital expenditures and additional working capital requirements for any expansion of its businesses and investment in new ventures should there be any opportunity arises.

Operational and Financial Risks

Operational Risks

(a) Competition Risk

The semiconductor industry is highly competitive, subject to rapid technological changes and new product developments. Many of the Group’s customers are multinational companies in Malaysia and overseas where the selection of the test contacting solutions for their manufacturing processes are based on stringent criteria such as high quality patent protected, good after sales service support and also dependability of the products.

The Group is actively and continuously pursuing new product and technology innovations to address the increasing sophisticated needs of its customers. The Group’s regular participation in overseas exhibitions provide the opportunities for the Group to understand the latest market requirements and keep abreast of the current technological changes.

Emphasis is also placed on continuous quality checking to ensure that the products meet customers’ requirements and are of high quality. As the Group’s products are highly customised manufacture, after sales service is critical to ensure smooth running of customers’ operations.

The Group will continue to strengthen its market position and expand the customer base.

(b) Intellectual Property Risk

As a technology company, the Group is continuously focusing on R&D of new products and enhancing of its existing products. The Group depends heavily on the use of its own intellectual property and technological know-how. In order to mitigate the risk, the Group continues to submit the applications for patent for new products which are capable of being patented. To-date, the Group has been granted eight (8) patents in various countries whilst thirty one (31) pending for approval.

All the employees are required to sign a non-disclosure agreement (NDA) to protect the Company’s interest.

(c) Dependence on Experienced Personnel and Shortage of Skilled Manpower Risk

The Group's continuous success depends to a certain extent upon the abilities and continued efforts of its existingDirectors, key management and technical personnel.

The Group has participated in various career fairs conducted by leading universities in the country. The Group will continue to provide industrial training to students from these technical fields with the aim of developing their potential prior to them being officially recruited.

Financial Risks

The Group’s financial risk is set out in Note 33 under the Notes to the financial statements.

Dividend

The Group does not have an explicit dividend policy.

In view of the Group’s financial performance and position of the FYE 2017, the Board proposed a final single-tier dividend of 2 sen per ordinary share for the FYE 2017, subject to the approval of the shareholders at the forthcoming Annual General Meeting.

Outlook Going Forward

The Group started in 1999 with J Foong as an OEM for one (1) of the world’s top Turret Handler Machine Maker, SRM Integration Sdn. Bhd. and three (3) years after its debut on Bursa Malaysia Securities Berhad in year 2011, the Group began its evolution to an Original Design Manufacturer (“ODM”) with the set-up of another 100%-owned subsidiary, JFM. To-date, the Group is a proud owner of eight (8) patents granted with approval and thirty-three (33) patents pending for approval which made JF Tech as one (1) of the most aggressive intellectual property owner in the global semiconductor test socket industry.

In spite of the pending lawsuit in the United States which had caused the Company RM6.85 million in legal fees from June 2014 to 30 June 2017, the Group grew its revenue in FYE 2017 by almost 30% year-to-year and net profit by 512%. The Group is now accelerating export growth opportunities in numerous markets simultaneously while at the same time, continues its innovation on its products line-ups and stay consistently ahead of competition.

Management envisions further growth in the coming years as the Group is aligned with the market’s high growth applications in the automotive, IoTs, smartphones and medical segments. The Group will continue to focus on long term earnings sustainability by diversification of products and market expansion activities.

Message From Board and Management

Premised on the above, the Board and Management are optimistic to meet the challenges for the coming years and would deliver results to the shareholders and investors.

CORPORATE SOCIAL RESPONSIBILITY (“CSR”)

WORKPLACE

During the financial period, the Company has carried out its CSR through various activities. These include offering technical and industrial training to interns from local vocational institutions and universities.

The Company is committed to the betterment of its employees. With regards to human capital, our development strategy focuses on building individual skills, accountability, competency and management leadership programmes.

The Company is an equal opportunity employer and all appointments and employment are based strictly on merits and experience.

COMMUNITY

The Company also contributed financially to the orphanage homes by way of donations.

ENVIRONMENT

The Company is continuously looking for new ways to incorporate sustainability practices into all its processes and continues to operate in a responsible manner by optimising the Company’s resources and reducing the generation of waste.

Appreciation

My sincere appreciation to our valued customers, suppliers, business associates, bankers, authorities and most importantly our esteemed shareholders for their unwavering support and confidence to the Group.

Last, but not least, I wish to thank my fellow colleagues on the Board for their counsel, support and commitment this far as well as our staff for their invaluable commitment to the Group.


Dato' Foong Wei Kuong
Executive Chairman/ Group Managing Director