KUALA LUMPUR: Once set to be one of the most promising sectors this year, the electronic manufacturing services (EMS) industry’s prospects for the near term are looking bleak, as the “black swan” Covid-19 pandemic forced many parts of the world into a lockdown, disrupting economic activities.

Yesterday, VS Industry Bhd, the largest EMS player locally by market capitalisation and with the highest annual turnover, sounded an alarm over its performance for the year ending July 31, 2020 as its second-quarter earnings declined 12% amid lower sales.

A slow order flow from customers is expected in the coming months, the group said, given Covid-19’s extent and reach. Discussions with prospective customers have also been held back, in view of ongoing travel cautions and restrictions.

“The global supply chains may experience minor delays in shipment, as suppliers in China are now catching up on production since resuming operations in mid-February 2020. For the demand side, the outlook for the next few months appears uncertain for now,” its managing director Datuk SY Gan said in a statement.

In addition, VS Industry said the Malaysian government’s 14-day movement control order (MCO), extended until April 14, is expected to cause further impact on its operations. “Against the aforementioned backdrop, the group’s performance for the current year is expected to be lower than the previous year,” Gan said.

Widely known to be labour intensive and heavily reliant on global supply chains, the MCO’s impact on the EMS player is not unexpected.

Since the MCO started, EMS players have halted production and sought clarification and approval from the ministry of international trade and industry to resume operations, according to Affin Hwang Capital Research.

The research house, having placed the sector on “overweight” in October 2019, has since downgraded its call to “underweight” given the sector’s grim outlook.

“A full 28-day factory closure is likely to negatively impact EMS players’ earnings as they would continue to incur fixed costs such as rental and staff despite a temporary production halt.

“Even if they are allowed to resume production, they are required to operate at a minimal workforce [capped at 50%],” according to the National Security Council. “This would result in lower production and adversely impact their earnings,” the research house said in a note to clients yesterday.

In view of that and accelerating Covid-19 infections, it has cut EMS players’ earnings forecast by 9% to 22% for financial year 2020 (FY20) to FY22, while reiterating its “sell” call on VS Industry and ATA IMS Bhd.

In particular, it noted weak consumer sentiments and the global slowdown are likely to dampen discretionary spending, meaning EMS players are unlikely spared as they manufacture mainly consumer products such as household appliances, coffee machines and pool cleaners.

Meanwhile, according to Datuk Seri Wong Siew Hai, chairman of the Malaysian American Electronics Industry Committee at the American Malaysian Chamber Of Commerce, many EMS companies in Malaysia rely on suppliers in China for their parts.

Since China’s production has been running at sub-optimal levels, EMS players have been facing shortages. The impact is greater on those lacking inventory.

“Even if one component does not arrive, you cannot complete the product unless you can find a replacement. But it is not as simple as that. To find a replacement, you need [a] product qualification, which will take [some] time. It is too risky. By the time you get the qualification, the supply chain would probably have returned to normal,” he told The Edge Financial Daily when contacted.

Nevertheless, Gan assured that the group, operating for over 30 years, has the experience and capabilities to weather the current challenges. “In all, we remain positive about the group’s long-term prospects.”

The company’s net profit for the second quarter ended on Jan 31, 2020 retreated to RM33.2 million from RM37.94 million a year ago amid lower sales. Its revenue fell 16% to RM820.33 million from RM978.99 million.

For the first half of FY20 (1HFY20), VS Industry’s net profit was RM81.27 million, up 5% from RM77.75 million for 1HFY19, though revenue dropped 10% to RM1.85 billion from RM2.05 billion.

The improved cumulative earnings were mainly due to smaller losses incurred at its China operations, after adopting an asset-light lower-cost model.

VS Industry shares closed 2.5 sen or 3.3% lower at 72.5 sen yesterday, with a market capitalisation of RM1.34 billion. ATA IMS’ share price rose three sen or 3.9% to 79.5 sen, with a market capitalisation of RM957.48 million.

VS Industry’s share price has fallen close to 46% since the start of this year, while ATA IMS’ slumped 54%.

Other EMS players such as SKP Resources Bhd and Notion Vtec Bhd also saw similar declines. SKP is now down 45% year to date to 74 sen, valuing it at RM924.92 million. Notion Vtec lost 38% to 59 sen, with a market capitalisation of RM197.35 million.