PP 7767/09/2011(028730)

RHB
12 Research
October 2010
Corporate Highlights

Malaysia
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

V is it Note
12 October 2010
MARKET DATELINE

Globetronics Share Price

Fair Value
:
:
RM1.04
RM1.29
Joining The LED Lighting Revolution Not Rated

Table 1. Investment Statistics (GTRONIC; Code: 7022) Bloomberg: GTB MK

Net EPS
FYE Revenue Profit EPS Growth PER C. EPS * P/NTA P/CF ROE Gearing GDY
Dec (RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (%) (x) (%)
2009 217.5 15.9 6.1 (26.9) 17.1 - 2.0 5.1 11.4 net cash 5.0
2010f 260.6 25.7 9.8 61.2 10.6 - 1.6 4.1 14.8 net cash 6.6
2011f 308.8 33.8 12.9 31.9 8.1 - 1.5 3.5 18.4 net cash 8.7
2012f 379.3 48.7 18.6 43.8 5.6 - 1.4 2.9 25.3 net cash 12.5
Main Market Listing / Syariah-Approved Stock By The SC

♦ Brief history. Globetronics Technology (Globetronics) is principally involved in Issued Capital (m shares) 262.1
the manufacture and assembly of integrated circuits (IC), chip carrier crystal Market Cap(RMm) 272.5
products and optoelectronics products i.e. Light Emitting Diodes (LED). Daily Trading Vol (m shs) 0.1
52wk Price Range (RM) 0.695-1.73
♦ General lighting to drive the LED revolution. According to management, Major Shareholders: (%)
the mass conversion from conventional lighting to LED is imminent. According Wiserite Sdn Bhd 21.9
to IMS Research, the general lighting market outlook will continue to be highly EPF 11.5

positive, with a forecast 5-year CAGR of 45%. The demand for LED will see LTH 8.5

robust growth mainly due to: 1) increasing awareness amongst consumers of FYE Dec FY10 FY11 FY12
the benefits of LED e.g. energy efficiency; 2) rising penetration of LED in EPS chg (%) - - -
various applications e.g. architectural lighting; and 3) Government incentives Var to C.EPS (%) - - -
and regulations. Also, the general lighting market has an estimated US$100bn
PE Band Chart
value, providing huge growth potential for LEDs.

♦ Focusing on high-growth segment. Going forward, Globetronics will focus PER

PER
=
=
20x
15x
on two high-growth segments, mainly: 1) LED for general lighting; and 2) PER = 10x
PER = 5x
timing devices used in smartphones, notebooks, etc. The company is poised to
leverage on the growth of these segments and is spending RM80m in 2010 to
ramp-up capacity.

♦ Earnings forecasts. We are positive on Globetronic’s shift of focus to the LED

as well as the timing device market which we believe is poised for exponential
growth in the longer term. While 40% of revenue in FY09-10 is mainly Relative Performance To FBM KLCI
contributed by its IC and plating segment, we forecast FY10-FY11 earnings
growth of 61.2% and 31.9% p.a. respectively mainly driven by: 1) strong LED
growth from the general lighting segment; 2) higher-than-expected demand for Globetronics
its timing devices stemming from robust demand from the electronic devices as
well as automotive sectors; and 3) resilient earnings from its IC and plating
services. However, we highlight that there could be potential upside to our FY11-
12 earnings as we have not forecast any contribution from new products currently FBM KLCI
in development.

♦ Risks. The risks include: 1) strengthening of RM against US$; 2) intense

competition; and 3) rising raw material costs.

♦ Valuations. Although Globetronics is positioned for high growth, we remain

conservative and have derived a target PE of 10x, which is a 1x discount to our
FY11 target PE for the semiconductor stocks. Accordingly, we derive an
indicative fair value of RM1.29 based on 10x FY11 EPS. This still implies a Yap Huey Chiang
(603) 92802166
24.2% upside to our fair value. Including the estimated 8.7% dividend yield for
yap.huey.chiang@rhb.com.my
FY11, we estimate 32.9% total return for the stock.

Please read important disclosures at the end of this report.

Page 1 of 7

A comprehensive range of market research reports by award-winning economists and analysts are exclusively
available for download from www.rhbinvest.com
 12 October 2010

Key Takeaways

♦ Background. Globetronics Technology (Globetronics) is principally involved in the manufacture and assembly of
integrated circuits (IC), chip carrier crystal products and optoelectronics products i.e. Light Emitting Diodes
(LED). The company was established in 1991 as an IC burn-in service and has since diversified into several key
main segments. Globetronics was listed in the Second Board in 1997 and transferred to the Main Board in 2001.

Table 2. Globetronics Divisions

Divisions Owners Remarks

hip (%)

Globetronics 100 Assembly and testing of integrated circuits, optoelectronic products, and technical
plating services
ISO Technology 100 IC assembly and technical plating services
Globetronics Industries 100 Technical ceramic substrates and antistatic products manufacturing
Globetronics 100 Computer integrated manufacturing and systems’ solutions provider
Globetronics (KL) 100 Manufacturing, assembly and test of chip carrier quartz crystal products
SMCi Globetronics Technology 49 Advance ceramic piece-parts manufacturing
Source: Company

♦ Green initiatives. Countries around the world are investing heavily in green technology in an effort to address
longer-term concerns of an energy crisis and environmental degradation. One of these efforts is the conversion of
conventional lights (incandescent and fluorescent) to LED, widely acknowledge as the fourth generation light
source. Already, regulations covering energy efficiency in Australia, the EU, U.S. and Japan are banning
incandescent bulbs due to poor efficiency and at the same time making the use of LED in general lighting
compulsory i.e. street lights, traffic lights, and electronic signages.

Table 3. LED vs. Traditional Lighting

LED Traditional Lighting*

Life span 50,000 hours (60 watts) <1,000 hours (60 watts)
Efficiency 80% of electricity is converted to light energy Only 20% of electricity is converted to light energy
(the rest is lost as heat)
Resistance Solid state, difficult to damage Contain filament and glass
Toxicity No mercury, lead or heavy metals Contains mercury

*Traditional lighting includes incandescent and fluorescent bulbs for simple comparison
Source: Company, Various

Chart 1. LED Market Size (2005-2013)

25

20

15

10

0
2005 2006 2007 2008 2009 2010 2011 2012 2013

UHB -LED HB -LED Regular LED market

High Bright (HB), used in camera phones, screen backlighting

Ultra High Bright lights (UHB), used in automotive and general lighting
Source: Research In China

Page 2 of 7

A comprehensive range of market research reports by award-winning economists and analysts are exclusively
available for download from www.rhbinvest.com
 12 October 2010

♦ Most LEDs are in consumer electronics market. Initially, demand for LED was mainly driven by backlights for
notebooks, TVs and monitors (penetration rate of 52% in 2009 vs. 12% in 2008) pioneered by TV manufacturers
such as Samsung. However, we believe major car producers will adopt the use of LEDs in automotive lighting in a
major way going forward. We note that Audi’s R8 was the first car to fully adopt LED lights and the auto
manufacturer will continue to do the same for future car production.

♦ General lighting to drive the LED revolution. However, the next stage of growth will come from general
lighting. Longer term, the lighting market outlook will continue to be highly positive, with a forecast 5-year CAGR
of 45%, according to IMS Research. While LED costs currently are still high (40-50% higher than incandescent
and fluorescent lights), demand for LED is soaring mainly due to: 1) increasing awareness amongst consumers of
the benefits of LED e.g. energy efficiency (the initial high cost of purchase offsets the electricity savings); 2)
rising penetration of LED in other applications; and 3) Government incentives and regulations. Note that contrary
to popular belief, general lighting requires higher technological capabilities vs. LED backlighting – see Chart 2.
Also, the general lighting market has an estimated value of US$100bn, providing huge growth potential for LEDs.

Chart 2. Lumens Required On Various Applications

1600
General lighting
1400
Car headlamp
1200 TV

1000 LCD backlight

800

600

400
Display
Car rear lamp
200
Handpho ne
0
2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: IMS Research

Chart 3. Forecast Shipments of LEDs (2010-2015)

160

140

120

100

80

60

40

20

0
2010 2011 2012 2013 2014 2015

Backlight ing Lighting Other

Source: IMS Research

♦ LED investments to maintain its momentum in 2011. While the semiconductor industry is expected to have
a stellar year with 30% revenue growth, the LED market is expected to grow faster. Spending for LED equipment
is expected to grow 3x to US$1.3bn in 2010, which is the highest in the industry. We believe the spending
momentum reflects the rapid growth of LED technology. Already, Samsung has plans to invest about US$20.6bn
over the next decade to invest in green technology i.e. solar cells and LEDs for lighting, of which the largest
planned investment of US$7.6bn is expected to be for LEDs for backlit displays and lighting applications.

Page 3 of 7

A comprehensive range of market research reports by award-winning economists and analysts are exclusively
available for download from www.rhbinvest.com
 12 October 2010

♦ Banking on Osram’s growth. Osram Opto Semiconductors (Osram) officially started its new LED chip plant in
Penang in early 2010, the first ever in Asia. Osram stated that it is responding quickly to the fast-growing LED
market. The plant is expected to produce LED chips on 4 inch wafers for its blue, green and white LEDs which we
believe will benefit Globetronics’ wafer processing business. Note that Osram is the world’s top three lighting
makers in the world, and 60% of its revenue is derived from energy-saving products.

♦ Focusing on high-growth segments. While currently, IC and plating remains the main revenue contributor of
around 40%, management expects the LED segment and the timing devices segment to drive the revenue growth
going forward. The company will focus on two key segments mainly:

o LED general lighting. Given the green initiatives in key developed nations and to a smaller extent,
developing country, Globetronics believes the LED revolution is imminent (converting from incandescent
and fluorescent to LED lighting). Therefore, the company expects to ride on these developments and is
bullish on the prospects of the LED market.

o Timing devices (crystal devices). Similarly, the company will also focus on its crystal devices given its
promising prospects. Also known as a crystal oscillator, it is a circuit that uses a vibrating crystal to
create an electrical signal with frequency, mainly used as a “timing device”. These devices are used in a
vast range of applications mainly in smartphones, notebooks and automotive. Demand for these devices
is expected to continue given the increasing demand for smartphones and electronic mobile devices. For
example, a typical smartphone would require at least six crystal devices while an automotive vehicle
would require up to 60 crystal devices.

♦ Capex plans. Management expects to spend RM80m and around RM60m in FY10-11 respectively to ramp up
capacity for:

o LED assembly. Management expects to double the capacity for assembly for its high-medium power
LED segment to 4m/month from 2m/month by 4QFY10. Note that assembly capacity for its LED (low
powered) stands at 10m/month.

o Wafer processing. Similarly, management expects to ramp up capacity for wafer processing to
500m/month from 300m/month. We also note that its sawing process for its one of the new customers is
expected to increase from 180m/month to 230m/month by Nov 2011.

o Crystal device. Separately, management expects to go into higher volume loading for its timing devices
to 95m/month vs. 70m/month by Nov 2011. Note that Globetronics’ 150 sq ft plant in KL is up and
running and is fully focused on this segment.

♦ One of the NKEA initiatives. We note that under the Economic Transformation Programme (ETP), the LED has
been identified as one of the key project areas. Already, 18 projects worth RM6.9bn to produce LED products
have been approved. While the details on this are still not made public, we believe this will create new business
and opportunities for Globetronics.

♦ Competition in China will not likely effect Globetronics. We note that there may be concerns of intense
competition from China. However, we believe most LED manufacturers in China have lower-technological
capabilities. These low-level technologies are mainly green/yellow LEDs (mainly for outdoor landscape lighting)
that are not suitable for general lightings. Hence, we believe this would not likely create any significant
competition for Globetronics.

♦ LED capacity overheating? Similarly, we also note that there are concerns of an oversupply in the LED market.
We note that Formosa Epitaxy (Taiwan-based LED chipmaker) has guided its 4QCY10 revenues to continue to
drop mainly due to low TV backlighting demand and tight component supply. However, we point out that
Globetronics has minimal exposure to the backlight and is mainly in the general lighting segment. Therefore, the
likelihood of a capacity glut will be mainly seen in the TV and monitor segment, in our view.

♦ Dividend policy. Despite the capacity expansion, management will stick to its 60-70% dividend payout. This
implies an attractive gross dividend yield of 6.6-12.5% p.a. in FY10-12.

Financial Analysis

Page 4 of 7

A comprehensive range of market research reports by award-winning economists and analysts are exclusively
available for download from www.rhbinvest.com
 12 October 2010

♦ Healthy balance sheet. Historically, for the past five years, the company has maintained a net cash position. As
at Jun 2010, the company has net cash position of RM91.9m, an improvement from RM85.4m in 2009. According
to management, FY10 capex would be fully funded internally. However, the company is likely to use bank
borrowings to finance part of its capex in FY11 which may cause its net cash position to be slightly affected.
Nevertheless, the company would still be able to maintain its dividend payout based on our estimated operating
cash flow of RM66.5-94.5m for FY10-FY12.

Table 4. Globetronics Quarterly Results

FYE Dec 2Q09 1Q10 2Q10 % qoq % yoy 6M09 6M10 % yoy
Revenue 52.6 60.2 69.1 15 31 90.7 129.3 43

EBIT 4.8 6.7 8.3 24 74 6.2 14.9 74

Margin (%) 9.0 11.1 12.0 6.8 11.6

Net finance costs 0.1 0.3 0.3 (18) 160 0.4 0.6 38
Associate 0.9 0.0 0.1 138 (93) 0.9 0.1 (91)

Pre-tax profits 5.8 7.0 8.6 23 49 7.5 15.6 107

Taxation (1.3) (0.9) (1.0) 14 (25) (2.2) (1.8) (15)
Effective tax rate
22.6 12.2 11.3 28.6 11.7
(%)

Net profit 4.5 6.2 7.6 24 71 5.4 13.8 >100

Source: Company

Risks And Mitigating Factors

♦ Risks. The risks include: 1) strengthening of RM against US$; 2) intense competition as lower-end producers
move up the value chain; and 3) rising raw material costs i.e. gold wire, substrates and mould compound.

♦ Some mitigating factors. In our view, strengthening of RM against the US$ remains the main risk for the
company given that revenue is mainly derived in US$. However, several mitigating factors include: 1) putting in
hedging policies i.e. one-third of its receivables are hedged to reduce forex volatility; 2) raw materials are mainly
purchased in US$, therefore acts as a natural hedge; and 3) the company is able to pass forex changes and
higher costs of main components to its main customers subject to a cap.

Forecasts And Valuations

♦ We estimate 2009-2012 net profit CAGR of 41.5%. We are positive on Globetronic’s shift of focus to the LED
as well as the timing device market which we believe is poised for exponential growth in the longer term. While
revenue in FY09-10 is expected to be mainly contributed by the IC and plating segment, we expect the LED and
timing device to achieve higher revenue growth going forward, given its higher volume loading as well as its position
in a high growth market. We forecast FY10-FY11 earnings growth of 61.2% and 31.9% p.a. respectively mainly
driven by: 1) strong demand for LED from the general lighting segment; 2) higher-than-expected demand for its
timing devices stemming from robust demand from the electronic devices as well as automotive sectors; and 3)
resilient earnings from its IC and plating services. In addition, we expect EBITDA margins to remain at around
26.8% p.a. supported by: 1) strong contribution from its higher-margin LED processing and assembly; and 2) stable
average selling prices (ASPs) for its timing devices. Note that we assume gross margins for its IC and plating
segment to drop 1% p.a. mainly due to the potential increasing competition as well as overcapacity that may cause
a drop in ASPs and result in margin squeeze. Nevertheless, we believe that the drop in ASP for this segment will be
offset by its higher-margin segments. Longer term, we highlight that there could be potential upside to our FY11-12
earnings as we have not forecast any contribution from new products currently under development.

♦ Fair value calculation. Although Globetronics is well positioned in a high-growth market, we remain
conservative and have derived our target PE of 10x, which is a 1x discount to our target FY11 PE for

Page 5 of 7

A comprehensive range of market research reports by award-winning economists and analysts are exclusively
available for download from www.rhbinvest.com
 12 October 2010

semiconductor stocks. Accordingly, we derive an indicative fair value of RM1.29 based on 10x FY11 EPS. This still
implies 24.2% upside. We estimate a total return of 32.9% including the estimated dividend yield of 8.7% for
FY11. On the other hand, we highlight the potential earnings risk in our forecast assumptions. Our forecast is
deemed to be the best-case scenario which assumes the company is able to commence volume loading without
any difficulty or other external effects in our assumptions. Note that the industry is highly cyclical in nature which
may suggest potential volatility in earnings going forward. In addition, given that the growth in the LED and
timing device market is expected to remain robust, this would potentially attract other players which would
intensify competition.

Table 5. Earnings Forecasts Table 6. Forecast Assumptions

FYE Dec (RMm) FY09 FY10F FY11F FY12F FYE Dec FY10F FY11F FY12F
IC and plating 87.0 95.7 100.5 105.5 Revenue Growth (%)
LED Processing 30.4 38.1 47.6 61.9 IC and plating 10.0 5.0 5.0
LED Assembly 34.8 45.2 58.8 79.4 LED Processing 25.0 25.0 30.0
Timing device 65.2 81.6 102.0 132.5 LED Assembly 30.0 30.0 35.0
Revenue 217.5 260.6 308.8 379.3 Timing device 25.0 25.0 30.0
Growth (%) (21.0) 19.8 18.5 22.8
GPM assumptions (%)
EBITDA 57.2 69.8 82.4 101.8 IC and plating 19.0 18.0 17.0
EBITDA margin (%) 26.3 26.8 26.7 26.8 LED Processing 35.0 35.0 35.0
LED Assembly 25.0 25.0 25.0
Depreciation and
Timing devices 25.0 25.0 25.0
amortisation (38.1) (40.5) (43.3) (45.6)

EBIT 19.1 29.3 39.1 56.2 RM:US$ exchange rate 3.15 3.10 3.10
EBIT margin (%) 8.8 11.3 12.7 14.8
Source: RHBRI estimates
Finance costs (0.0) 0.0 (0.4) (0.4)
Associate 0.2 0.2 0.2 0.2

Pretax profit 19.2 29.5 38.9 55.9

Pretax margin (%) 8.8 11.3 12.6 14.7

Tax expense (3.3) (3.8) (5.1) (7.3)

Net profit 15.9 25.7 33.8 48.7

Net profit growth (26.9) 61.2 31.9 43.8

Source: Company data, RHBRI estimates

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad
(previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law. The
opinions and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or be
contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be
construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any
manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons may
from time to time have an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of
persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate
particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy
will depend on an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts any liability for
any loss or damage arising out of the use of all or any part of this report.

RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities as well as providing
investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB Group
may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity securities or loans
of any company that may be involved in this transaction.

“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors,
officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other services
from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports.

This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect
information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based upon
various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

The recommendation framework for stocks and sectors are as follows : -

Page 6 of 7

A comprehensive range of market research reports by award-winning economists and analysts are exclusively
available for download from www.rhbinvest.com
 12 October 2010

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on higher
risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

RHBRI is a participant of the CMDF-Bursa Research Scheme and will receive compensation for the participation. Additional information on recommended securities,
subject to the duties of confidentiality, will be made available upon request.

This report may not be reproduced or redistributed, in whole or in part, without the written permission of RHBRI and RHBRI accepts no liability whatsoever for the
actions of third parties in this respect.

Page 7 of 7

A comprehensive range of market research reports by award-winning economists and analysts are exclusively
available for download from www.rhbinvest.com