TUESDAY, 03 NOVEMBER 2015

Cirtek Holdings Philippines Corporation

Evolving with the times

Proceeds from follow-on offering to fund expansion. TECHs follow-on offering involves 80Mil
primary common shares with an oversubscription option of 40Mil secondary shares. The new issue will
represent 19.1% of the total outstanding shares after the offering. With the offer price set at Php20/sh,
the amount raised will be Php1.6Bil and possibly Php2.4Bil if the oversubscription option is exercised.
This will be used to fund strategic acquisitions, capital expenditures, payment of financial obligations,
and working capital requirements.
To take advantage of millimeter wave products attractive growth outlook. TECHs acquisition of
CATS back in July 2014 has positioned it to take advantage of the strong growth outlook for millimeter
wave products. The advantages of these products (which sit at the 20Ghz to 300GHz range) compared
to lower spectrum waves (e.g. the 0GHz to 6GHz range where 2G, 3G, and 4G reside) include larger
bandwidth and faster data rates. In particular, the market for the 60Ghz to 80GHz millimeter wave
systems is projected to increase by a 45% CAGR from less than US$1Bil in 2012 to US$11Bil by 2020.
Acquisition of CATS to drive next wave of earnings growth. TECH has a strong earnings track
record, with its net income increasing by a 48.1% CAGR from 2009 to 2013 and net margin consistent
at around 10.5%. Its acquisition of CATS could not have come at a more opportune time, given that
its legacy business under CEC declined in 2014. We estimate that CECs revenues declined 49.7%
in 2014 to US$20.2Mil while profits declined 42.5% y/y to US$2.7Mil. However, with the acquisition of
CATS by 2H14, the consolidation of its books enabled TECH to record a 17.8% growth in revenues to
US$51.8Mil and profits 41.1% higher to US$6.5Mil by the end of 2014.
Going forward, management expects CATS to be the driver of its growth, which is projected to account
for 50% of revenues in 2016 (from 29% in 2014). It recently bagged contracts from two new customers
and is undergoing qualification test for three others. Assuming that it passes the qualification tests, it
could start working on new projects as early as 4Q16. TECH remains optimistic and expects revenues
from CATS to grow at a 20% clip next year. Management also sees total revenues hitting US$100Mil
and profits growing by 130% in 2016.

Premium valuation justified by attractive growth prospects of CATS. At its current price of Php22.05/
sh, TECH is trading at 25.8X 2015E P/E, higher than the global peer medians 14.0X. Although TECH is
trading at a premium relative to its peers, the premium is justified assuming that profits indeed grow by
130% to US$15.1Mil in 2016. With the said level of profits, TECH would be trading at 13.2X P/E which
is below the industry median. Growth going forward should also exceed the industry average given its
ability to produce millimeter wave products which is still not commonplace currently.
FORECAST SUMMARY
in US$ '000
Revenues
%change y/y
Gross profit
%change y/y
Gross margin (%)
Operating income
%change y/y
Operating margin (%)
Net income
%change y/y
Net margin (%)
EPS (Php)
%change y/y

RELATIVE VALUE
P/E (X)
P/BV (X)
ROE (%)
Dividend yield (%)
source: TECH

2011
37,111
6,037
16.3
3,880
10.5
3,972
10.7
0.51
-

2012
40,631
9.5
6,840
13.3
16.8
4,462
15.0
11.0
4,407
11.0
10.8
0.55
8.2

2013
43,984
8.3
8,508
24.4
19.3
6,075
36.2
13.8
4,637
5.2
10.5
0.58
5.8

2014
51,792
17.8
7,541
-11.4
14.6
4,212
-30.7
8.1
6,542
41.1
12.6
0.86
47.5

46.1
7.6
17.2
0.2

42.6
6.8
17.1
1.9

40.3
6.1
16.0
0.9

27.3
5.0
19.8
1.0

SHARE DATA

N/A

Rating
Ticker
Fair Value (Php)
Current Price
Upside (%)

TECH
N/A
23.90
N/A

SHARE PRICE MOVEMENT

110

100

90

80

70
3-Aug-15

3-Sep-15
TECH

3-Oct-15

3-Nov-15

PSEi

ABSOLUTE PERFORMANCE
TECH
PSEi

1M
-7.54
5.26

3M
-8.08
-4.79

YTD
38.37
-0.27

MARKET DATA
Market Cap
Outstanding Shares
52 Wk Range
3Mo Ave Daily T/O

8,103.61Mil
339.06Mil
11.09 - 32.73
11.58Mil

Angelo Lecaros
angelo.lecaros@colfinancial.com

PHILIPPINE EQUITY RESEARCH

Company Background
Cirtek Holdings Philippines Corporation (TECH) began operating in 1984 as an outsourced
semiconductor assembly and testing company, owned by the Liu family through Camerton, Inc.
From having only three customers when it started, the company has grown significantly, with 70
major and regular customers across Europe, the US, and Asia. It has also evolved into a technology
manufacturing company after it acquired REMEC Broadband Wireless International, Inc. in July 2014
which it later renamed into Cirtek Advanced Technologies Solutions, Inc. (CATS).
At present, TECH has two major subsidiaries namely Cirtek Electronics Corporation (CEC) and
Cirtek Advanced Technologies Solutions, Inc. (CATS).
CEC manufactures standard integrated circuits, discrete, hybrid, and potential new packages,
as well as turnkey solutions that include wafer probing, assembly and packaging, and testing of
semiconductor devices, among others.
Meanwhile, CATS provides manufacturing solutions for radio frequency, microwave, and millimeter
wave products that are used in the wireless industry. Its uses include wireless point of sales devices
as well as radios for communication systems, among others. The products that CATS manufactures
are also crucial in building the infrastructure for 4G/LTE as well as the eventual rollout of 5G.
As of 1H15, 71% (or US$20.2Mil) of TECHs revenues (US$28.3Mil) came from CEC while the
remaining 29% (or US$8.1Mil) came from CATS.
TECH was listed in the Philippine Stock Exchange on November 2011 at an offer price of Php3.35/
sh (adjusted for stock dividends).

Proceeds from follow-on offering to fund expansion

TECHs follow-on offering involves 80Mil primary common shares with an oversubscription option of
40Mil secondary shares. The new issue will represent 19.1% of the total outstanding shares after
the offering. With the offer price set at Php20/sh, the amount raised will be Php1.6Bil and possibly
Php2.4Bil if the oversubscription option is exercised. This will be used to fund strategic acquisitions,
capital expenditures, payment of financial obligations, and working capital requirements.
Exhibit 1: Use of proceeds
Use of proceeds
Amount (Php Mil) % of total
Fund strategic acquisitions
631
34.0
Capital expenditures
632
34.1
Payment of financial obligations
278
15.0
Working capital requirements
314
16.9
Total
1,855
100.0

Estimated timing
2015
2015-2016
2015-2016
2015-2016

source: TECH

TUESDAY, 03 NOVEMBER 2015

TECH

FIELD NOTES

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PHILIPPINE EQUITY RESEARCH

To take advantage of millimeter wave products attractive growth outlook

TECHs acquisition of CATS back in July 2014 has positioned it to take advantage of the strong
growth outlook for millimeter wave products.
The millimeter wave is a high frequency band belonging to the upper end of the radio frequency
spectrum, which range from 20 gigahertz (GHz) to 300GHz. This is higher than the spectrum where
more commonly known radio scanners reside, such as MRI scanners and the RFID, as well as the
cellular networks 2G, 3G, and 4G (0GHz to 6GHz).
Millimeter wave is superior compared to the lower spectrum waves that are currently being used.
Advantages include larger bandwidth and faster data rates (40 to 100 times faster than todays
wireless LAN technologies). Aside from data volumes and speed, the said technology is easier to
deploy compared to fiber optic networks. In fact, the ability to tap millimeter wave is expected to
support the adoption of the Internet of Things (IoT). Ericsson estimates that the number of internetconnected devices such as tablets and smartphones are expected to reach 49.8Bil by 2020 from
12.7Bil in 2014. In addition, the IoT market which includes industries such as manufacturing,
healthcare, construction, and automotive are also expected to grow, from US$3.5Bil in 2014 to
US$8.9Bil by 2020.
Because of the millimeter waves numerous advantages, growth prospects are very attractive. For
example, the market for the 60Ghz to 80GHz millimeter wave systems is projected to increase by a
45% CAGR, from less than US$1Bil in 2012 to US$11Bil by 2020. Growth is much faster than the
projected 5.2% CAGR of the semiconductor industry in general from 2014 to 2019.
Exhibit 2: Millimeter wave technology

source: TECH

Earnings growth to continue in 2016 despite recent dip

TECH has a strong track record prior to the acquisition of CATS. From less than US$1.0 Mil in 2009,
TECHs net income has increased by a CAGR of 48.1% to US$4.6Mil in 2013. Its net margin has
also been consistent at around 10.5%. TECHs strong earnings performance is also responsible for
the significant increase in the companys share price since its IPO in 2011 (up 600% over ~4 years).

TUESDAY, 03 NOVEMBER 2015

TECH

FIELD NOTES

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PHILIPPINE EQUITY RESEARCH

TECHs success is attributable to its focus on niche products. It doesnt go after large sized contracts
where economies of scale are crucial and where margins are very thin. Rather, it is focused on
highly specialized products that are tailored to customer needs which allow it to earn more attractive
margins. Management mentioned that 65% of the products it makes are customized for client-specific
needs. Aside from numerous certifications that it has garnered, TECH mentioned that its top clients
have been very loyal, buying products from the company for an average of 15 years.
However, TECHs performance showed a slight dip in 2014 and 1H15. Separating the operating
performance of CEC and CATS, we estimate that the profit of TECHs semiconductor business
declined 42.5% y/y to US$2.7Mil in 2014 while the consolidated performance of CATS to TECH
(August to December 2014) reached US$1.3Mil. Though management admitted that demand for
semiconductors have been soft in 2014 and is expected to remain flat this year, it expects 8% to
10% revenue growth for CEC in 2016. TECH confirmed that it recently bagged two semiconductor
customers, with revenues expected to come in by 2Q or 3Q16. Moreover, TECH is undergoing
qualifications for three other customers and production may start in 4Q16 or by 2017 should it be
certified.
Exhibit 3: Earnings performance
US$ '000
2009
2010
Revenues
23,948
34,370
CEC
23,948
34,370
CATS
%change y/y
43.5
Net income
964
3,600
CEC*
964
3,600
CATS**
%change y/y
273.5

2011
37,111
37,111
8.0
3,972
3,972
10.3

2012
40,631
40,631
9.5
4,407
4,407
11.0

2013
43,984
43,984
8.3
4,637
4,637
5.2

2014
51,792
40,062
11,730
17.8
6,542
2,665
1,296
41.1

1H15
28,311
20,168
8,143
24.1
3,254

50.3

* estimated core income based on 2014 annual report

** reflects performance from August to December
source: TECH

Exhibit 4: Margin performance (%)

2010
2011
Gross margin
14.8
16.3
Operating margin
10.1
10.5
Net margin
10.5
10.7

2012
16.8
11.0
10.8

2013
19.3
13.8
10.5

2014
14.6
8.1
12.6

1H15
18.6
12.2
11.5

source: TECH

Meanwhile, the expected growth in demand for millimeter wave products will drive revenues for
CATS. Management sees a 20% growth in revenues for this business in 2016, where it recently
won two contracts to produce millimeter wave products. Because of this, TECH sees the revenue
contribution of CATS to rise from 30% of total revenues (as of 1H15) to 50% next year.
Given the brighter prospects of its businesses, management sees revenues of US$100Mil as well as
a very ambitious earnings growth of 130% in 2016.

TUESDAY, 03 NOVEMBER 2015

TECH

FIELD NOTES

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PHILIPPINE EQUITY RESEARCH

Unused capacity available for ramp up in production

TECH is ready to boost its production under CATS, with capacity currently running at only 30% to
40%. Its facilities produce about 400 to 500 radios/week at present and management expects that
with its new contracts in 2016, production will increase to about 1,000 to 1,500 radios/week. In
addition, TECH is also augmenting its capacity for both CATS and CEC with the construction of a
third facility, set to be completed by the end of 2015.

Premium valuation justified

At its current price of Php22.05/sh, TECH is trading at 25.8X 2015E P/E. This is based on our
estimated 2015 EPS of Php0.86, obtained from an annualized 1H15 income and weighted average
EPS inclusive of the 80Mil follow-on offering shares. This is higher than the global peer medians
14.0X.
Although TECH is trading at a premium relative to its peers, we believe this is justified given the
consistent growth it has shown in the past. Management is also confident in growing profits by 130%
to US$15.1Mil in 2016. With the said level of profits, TECH would be trading at 13.2X P/E which is
below the industry median. Growth going forward should also exceed the industry average given its
ability to produce millimeter wave products.
Exhibit 5: Relative Valuation
Company
Hana Microelectronics PCL
Siliconware Precision Industries Co Ltd
Advanced Semiconductor Engineering Inc.
Diodes Incorporated
Unisem (M) Berhad
Amkor Technology, Inc.
Benchmark Electronics, Inc.
Integrated Micro-Electronics
Cirtek Holdings Philippines Corporation
Median (ex-TECH)

Ticker
HANA TB
2325 TT
2311 TT
DIOD US
UNI MK
AMKR US
BHE US
IMI PM
TECH PM

2015E P/E
12.5
12.1
15.3
18.9
15.6
19.3
12.6
7.7
25.8
14.0

source: COL estimates, Bloomberg

Risks to investing in TECH

TECH is exposed to economic risk, where a decline in global demand may hamper its ability to
generate revenues. In addition, the weakening of currencies in other countries may result to increased
competition with its peers as other manufacturers products become more affordable. However, its
focus on niche products makes it less sensitive to cycles and cost pressures.
TECH is also subject to operational risk, where it may face disruptions in operations due to key
personnel leaving or other unforeseen events. Its ability to adapt to innovations in technology will also
affect the types of products it can manufacture. To mitigate the said risk, TECH actively works with its
customers in meeting the required standards for its products as well as in understanding the evolving
demands to keep its technology up to date.
Investing in TECH also has risks in terms of liquidity. The value turnover for the stock has averaged
Php10Mil in the last six months compared to the Php189.1Mil six-month average of the PSEi index
members. This makes TECH a riskier investment than other larger and more stable firms.
TUESDAY, 03 NOVEMBER 2015

TECH

FIELD NOTES

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PHILIPPINE EQUITY RESEARCH

Investment Rating Definitions

BUY

HOLD

SELL

Stocks that have a BUY rating have attractive

fundamentals and valuations, based on
our analysis. We expect the share price
to outperform the market in the next six to
twelve months.

Stocks that have a HOLD rating have either

1.) attractive fundamentals but expensive
valuations; 2.) attractive valuations but
near term earnings outlook might be poor
or vulnerable to numerous risks. Given the
said factors, the share price of the stock may
perform merely inline or underperform the
market in the next six to twelve months.

We dislike both the valuations and

fundamentals of stocks with a SELL rating.
We expect the share price to underperform in
the next six to twelve months.

Important Disclaimers
Securities recommended, offered or sold by COL Financial Group, Inc.are subject to investment risks, including the possible loss of the principal amount
invested. Although information has been obtained from and is based upon sources we believe to be reliable, we do not guarantee its accuracy and it may
be incomplete or condensed. All opinions and estimates constitute the judgment of COLs Equity Research Department as of the date of the report and are
subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a
security. COL Financial ans/or its employees not involved in the preparation of this report may have investments in securities or derivatives of securities of
securities of the companies mentioned in this report, and may trade them in ways different from those discussed in this report.

2401-B East Tower, Philippine Stock Exchange Centre, Exchange Road, Ortigas Center, Pasig City, 1605 Philippines
Tel: +632 636-5411

TUESDAY, 03 NOVEMBER 2015

TECH

Fax: +632 635-4632

FIELD NOTES

Website: http://www.colfinancial.com

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