
Overview
Formosa Prosonic Industries Berhad (9172) is a high-quality sound system manufacturer with a team of audio experts each of whom has over 30 years experience in the design, manufacturing and marketing of sound system products to worldwide multinational companies.
Formally established in 1989, Formosa Prosonic Industries Berhad (FPI) was listed in the Main Market of Bursa Malaysia on 17th June 1994. FPI is headquartered in Malaysia with manufacturing facilities strategically located in Malaysia’s Port Klang, Selangor and Sungai Petani, Kedah. FPI has also established a design and engineering centre in Taiwan.
Business Model
FPI specialises in Original Equipment Manufacturing (OEM) services including woodworking, plastic injection, driver units, PCB assembly and finished-products assembly as well as Original Design Manufacturing (ODM) services. These services are supported by proven engineering expertise, experience as well as reliable testing capabilities.
A wholly-owned subsidiary, Acoustic Energy Limited which is based in Cirencester, United Kingdom, hosts their in-house brand name Acoustic Energy (AE). Acoustic Energy has been producing a wide range of award-winning speaker system.
FPI is proud of its track record in product quality and services. It does this by working together with customers to provide support for product excellence, prompt feedback and strong service support. FPI values long-lasting relationships with its customers and has been in business with multinational and mid-sized companies in the home entertainment, audio, and musical instruments industries. Their customer list of renowned brands include Panasonic, Onkyo, Sharp, Sony, JVC and Kenwood to name a few brands names reflects FPI’s quality and reliability.
Financial Review

For FY2019, FPI has paid a final single-tier dividend of 11sen per ordinary share amounting to RM27,209,409 (dividend payout ratio of 65.2%) with a dividend yield of 6.47%. The total dividend paid in FY2019 is the highest over past 3 years supported by strong sales growth of 36.7% year-on-year for the full FY2019. (refer to Prospects & Challenges and Insight at the end of this article)

FPI has achieved growth in its Quality of Earnings over the past 3 years (1.801 times) in FY2019 compared to 1.764 times in FY2018 and 0.871 times in FY2017 indicating that the operating cash flow generated from the business is more than the net income suggesting that the business has strong cash flow and is financially sound.

Based on the computation of liquidity ratio, FPI has a lower current ratio of 2.201 times in FY2019 compared to FY2018 and FY2017, although a slight decrease over the past 3 years indicating that the company has used some of its cash to fund the operation expenses. Still, the company has a healthy margin of current assets due to extremely low debt and a substantial amount of RM203.6 million in cash holding and bank balances.

FPI did face some challenges over the years due to geopolitical trade tension and disruption in supply chain affecting the gross profit margin. The company reported 9.7% gross profit margin in FY2019 which is lower than past 2 years.
However, FPI managed to offset the setback by achieving higher revenue in FY2019, an increase of revenue CAGR 30.62% over past 3 years. Without incurring a substantial increase in operating cost, FPI managed to improve net earnings for the company with growth in net earning CAGR 45.54% year-on-year.

FPI’s Return on Equity (ROE) has improved marginally to 13.47% in FY2019 from 12.50% in FY2018 but lower than the 14.92% in FY2017. The company was able to maintain the ROE at double-digit indicating that the net income generated relative to the value of its equity in FY2019 was better as compared to FY2018.
FPI started borrowing in 2019 to improve its cash reserve but with low net debt to equity of 0.016 times, the company has more than enough cash to settle the debt if needed.
Cash Flow Statement
FPI continued to display a strong balance sheet for FY2019. Financial position remained solid with net cash of RM203.6 million, an increase of 21.4% from RM167.7 million FY2018 mainly attributable to strong operating cash flow and lower capital expenditure. Total shareholders’ funds amounted to RM310.0 million, an increase of 5.7% as compared to FY2018. Book value per share was higher at RM1.25 as compared to RM1.19 at FY2018, an increase of 5%.
The trade receivables turnover improved to 49 days from 61 days attributable to vigorous credit vetting and monitoring which was consistent with the terms granted. FPI is comfortable with the quality of the receivables and will continue to exercise due care in managing credit exposure. Inventory level remained largely unchanged despite significantly higher sales value.
This has resulted in reduced inventory turnover to 23 days from 31 days thus driving down inventory holding cost and reducing possible slow-moving and obsolete inventory. These were achieved on the back of strong Just-In-Time (JIT) manufacturing including streamlining and synchronising the receiving store and incoming quality control (IQC) so that the incoming materials received are inspected in a JIT manner. IQC operations were reconfigured so that material specifications and inspection samples are supplied directly to the inspection stations thereby reducing handling activities by inspectors.
Prospect and Challenges
FPI anticipates 2020 to be a very tough and challenging year in view of the economic downturn due to COVID-19 and turmoil in the global market which have resulted in lower sales and higher operating costs, and barring unforeseen circumstances, FPI expects its performance for the financial year 2020 to be impacted.
Group Managing Director Shih Chao Yuan in the FY2019 annual report Director’s statement mentioned that in order to strive and continue to survive so as to be able to compete in the market, FPI will have the following strategies:- to maintain focus on current customers by providing strong engineering back-up and improving professional labour to increase productivity; to pay extra attention to supply chain and work closely with suppliers’ engineering to lower part cost; to maximize productivity and increase speed through enhanced product and process design capabilities; to further enhance and strengthen the quality control measures to further reduce costs and last but not least to continue to provide training for all engineers, business team and employees.
Rating System

Return on Equity (ROE) | Average |
Revenue (3 Years CAGR) | Excellent |
Net Earnings (3 Years CAGR) | Excellent |
Dividend Yield | Good |
Interest Coverage | Excellent |
Quality of Earnings | Excellent |
Formosa Prosonic Industries Berhad Share Price Over 3 Years

My Insight
Based on the calculation of the Discounted Earnings Model, FPI has an intrinsic value of RM1.78. The current share price of FPI is RM1.40 which makes it an undervalued stock (as at 18 June 2020). FPI has a beta of 1.217 (500 days) indicating that the share price is more volatile than in longer-term overall market movement. Based on the computation of the Capital Asset Pricing Model (CAPM) on 10 years period, FPI has an expected market return of 1.58%.
FPI’s with its strong management team will be expecting to drive the group into the next level in future. With most countries having to turn towards digitalisation which requires home-based learning and work from home (WFH), hence consumers will have to adopt technology and spend more time at home to appreciate the finer things in life. The resurgence in demand for high-end consumer audio-visual products is expected to benefit FPI with its core business in audio products.
However, with the global economy taking a hit due to COVID-19 pandemic, many analysts foresee that it will take more than 10 years for a full recovery to pre-pandemic era. FPI’s business as with many other businesses will not be spared. Investors need to consider the uncertainties ahead and take into account the new normal which still unknown.
Disclaimers
The research, information and financial opinions expressed in this article are purely for information and educational purpose only. We do not make any recommendation for the intention of trading purposes nor is it an advice to trade. Although best efforts are made to ensure that all information is accurate and up to date, occasionally errors and misprints may occur which are unintentional. It would help if you did not rely upon the material and information in this article. We will not be liable for any false, inaccurate, incomplete information and losses or damages suffered from your action. It would be best if you did your own research to make your personal investment decisions wisely or consult your investment advisor.