Singapore – InnoTek Limited, trading at $0.43, has been navigating a transformative journey since selling its core disk-drive components business over 15 years ago. The precision components manufacturer pivoted to grow its small stamping business and has since diversified into promising sectors such as electric vehicles (EVs) and graphics processing unit (GPU) servers, which are riding the artificial intelligence (AI) wave. These efforts are now bearing fruit, with revenue for the first half of 2024 rising 30.9% year-on-year to S$121.6 million.
From Disk Drives to AI-Powered Growth
Once a key supplier of disk-drive components under its former identity as Magnecomp, InnoTek pivoted away from the sector, selling its core business to a major client at an advantageous price. The company then focused on scaling its small stamping business and gradually diversified into fast-growing sectors.
Chairman Neal Chandaria highlighted that the company needed to enter industries with rapid growth potential to attract investors. With that in mind, InnoTek added AI-related GPU server components and gaming machines to its portfolio in 2022. Since then, the AI business has expanded rapidly and now accounts for 27% of revenue, up from 14% a year earlier.
“These are future sectors,” Chandaria remarked. “Compared to more traditional industries, these areas have both stronger and faster growth potential.”
Automotive, AI, and Diversified Revenue Streams
InnoTek’s largest revenue contributor remains its automotive division, driven primarily by the booming EV sector in China, accounting for 33% of total revenue. Office automation and TV/display components also remain key revenue streams, contributing 23% and 15%, respectively.
The company has further entrenched itself in the EV supply chain by securing contracts to manufacture battery components and parts for EV charging stations. Even as traditional internal combustion engine (ICE) vehicles face disruption, InnoTek continues to produce essential safety components needed in both ICE and EV models.
However, profitability has taken a hit, with net profit for H1 2024 slipping 8.3% to S$3.2 million. This was attributed to extraordinary costs linked to shifting business strategies and geopolitical tensions driving the “China+1” manufacturing strategy. InnoTek has been strategically expanding its footprint in ASEAN countries, with facilities in Thailand and Vietnam, and plans to further invest in Malaysia due to its favorable infrastructure and skilled workforce.
“The EV market is growing, but it’s also cutthroat,” Chandaria cautioned. “A lot of companies are shutting down. It’s a challenging space.”
Profitability Dips Amid Expansion and “China+1” Strategy
Despite strong revenue growth, InnoTek’s net profit for H1 2024 declined 8.3% to S$3.2 million, weighed down by extraordinary costs linked to shifting business strategies and geopolitical tensions. The company has been actively executing a “China+1” strategy, expanding its manufacturing footprint in Southeast Asia to mitigate risks associated with over-reliance on China.
InnoTek first expanded to Thailand in 2017, followed by Vietnam in 2021, and further strengthened its presence there with a 70% stake acquisition in a local facility in 2023. Now, the company is eyeing Malaysia as its next strategic hub, drawn by its strong infrastructure, cost efficiencies, and skilled workforce.
“Many of our customers are comfortable operating in Malaysia,” Chandaria said. “They have suggested we explore setting up operations there, and it’s something we’re considering.”
Higher Value-Added Offerings to Enhance Margins
Beyond geographical expansion, InnoTek is also enhancing its product offerings to move up the value chain. In its office automation division, for example, it has expanded into assembly operations to provide a more comprehensive service for its customers.
Similarly, in the AI space, InnoTek has ventured into liquid cooling solutions for data centers, a technology critical for high-performance computing and energy efficiency. The company partnered with a Chinese high-speed rail cooling solutions provider to adapt the technology for GPU servers.
Strong Balance Sheet and Investor Appeal
Despite recent profit declines, InnoTek remains on solid financial footing, with a net cash position of S$56 million and a market capitalization of S$100 million. The company continues to reward shareholders with a stable dividend payout of 2 cents per share, offering a 4.6% yield. With a market capitalization of $100 million, InnoTek trades at 0.6x its book value of 76 cents.
Analysts recommend an “Accumulate on Weakness” strategy, citing the company’s strong positioning for long-term growth and increasing demand for AI and EV components.
Looking Ahead: Stability Expected by 2026
While 2025 is expected to remain challenging, Chandaria remains optimistic about the company’s trajectory. “We should reach our earlier profitability levels within the next couple of years and grow beyond that,” he affirmed.
With a diversified revenue base, a strategic expansion plan, and growing foothold in high-tech industries, InnoTek is poised to capitalize on the next wave of industrial transformation.
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