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China's leading domestic manufacturer of camera module
Q&A for the participation in Possible Private Placement of NEWMAX
1.What is the rationale behind acquiring a lens manufacturer? Why pick Newmax
(3630.TWO) among those players in the market?
In view of the overall strategic development of the Group, we believe the potential transaction may help to create values to shareholders due to the following three reasons:
I. To coincide with the business strategy of the Group:
The Group is dedicated to providing machine vision and human vision to mobile terminals by means of continuously building up capabilities of optics, computing vision and deep learning. Participating in the Possible Private Placement coincides with the Group’s business strategy, especially to enhance its capabilities on optical designs, as Newmax has been engaging in the design, research and manufacture of optical lens for years and has acquired sufficient know-hows and developed various patented technologies in respect of optical lens. Newmax is also one of the few manufacturers having the ability on the mass production of lens used for 13M module.
II. To help the Group to earn international branded customers:
The Group’s existing customer portfolio consists primarily of Chinese brands. As Newmax maintains years of working relationships with several international branded customers, participating in the Possible Private Placement can help the Group promote its business to these international branded customers.
III. To expand the Group ’ s product offerings to new market segments
The Group’s current product portfolio consists primarily of camera modules and fingerprint recognition modules used for mobile phones, and the Group is actively expanding its product offerings to new market segments, such as augmented reality (AR), virtual reality (VR) and automobile. As Newmax has been collaborating with a number of brands on lens that are used for motion sensing games, and has developed the relevant knowledge and technologies on lens that are used for automobile for years, participating in the Possible Private Placement can help the Group expand its product offerings.
Please be reminded that it’s a conditional private placement and the Company will be restricted from disposing of the placing shares within three years upon the completion of the possible private placement. Upon the expiry of the lock-up period, several requirements should be satisfied so as to seek the approval of Taiwan Exchange for public trading. Therefore, the terms reflected that the potential move is a long term strategic investment rather than a short term speculating financial investment behavior.
2.What’s the background of Newmax? What’s their product mix and customer mix? Do they own any core technologies?
Newmax was a Taiwan company found in August 1999, shares were issued by 3 June 2008 and publicly trading on Taiwan Exchange since 26 April 2010. Stock code is 3630.TWO. The company is mainly engaged in the manufacturing of optical instrument, electronics components and other mechanical and electronic machinery equipment. Chicony electronics, an electronics products manufacturer listed on Taiwan Exchange, hold 21% of the stake of Newmax via three different subsidiaries and being the controlling shareholder of Newmax.
Currently, Newmax is mainly producing lens used in the modules of handset, PC, Notebook and game console. Customer bases included Chicony and Flextronics, and indirectly serving a handful of international branded customers through these channels.
3.Newmax remained a loss-making company in the past two years. Would the acquisition of a loss-making company impose negative impacts on the financial performance of Qtech?
Based on our preliminary analysis, the reason of the recorded loss of Newmax in the past two years were mainly due to the deployment of resource to facilitate the shift and upgrade of product mix, and also the persistent low utilization rate of its capacity. Although the consolidation may negatively impact the financial performance of Qtech in near term, we are more interested in the contributions of Newmax in helping Qtech to achieve long term strategic goals. We will work closely with the management team of Newmax to strive for a sustainable long
4.How’s the financial condition of Newmax? What is its Debt-to-Asset ratio? Will
the repayment schedule of debt put pressure on the Company’s financials? Are there any short-term refinancing needs?
According to the latest financial statement of Q3 2016, the Debt-to-Asset ratio was around 45%. Most liabilities on the book was current liabilities such as bank loans and account receivable, and we didn’t see any signs that the debtors would like to change the clauses of relevant loans. If the possible private placement materialized, the transaction could bring in new cash flow of RMB 300 million and provide extra investing and working capital to the company.
5.What’s the long-term plan of Qtech, after the completion of possible private placement, to turnaround Newmax?
If the placement successfully gone through, Qtech is confidence to help Newmax directly in terms of expanding their markets outreach to handset applications by introducing our existing broad client base. We believe this can also help increase the utilization rate of Nexmax’s capacity and improve their production efficiency. Most importantly, the cooperation can facilitate the R&D of new solutions to customers and achieve a win-win outcome.
6.Will the original management team stay after the potential transaction? Does Qtech plan to assign a new management team to Newmax?
As the potential transaction is still in the stage of signing the “Letter of Intent”, the management team of both sides haven’t start the discussion about the formation of new management team. However, the initial thoughts of the Group’s management is to maintain the stability of the existing operating team of Newmax, and at the same time supplement with the positive inputs from the R&D, Sales, HR, Finance team of Qtech to achieve long term goals.
7.If Qtech successfully acquired controlling stake of Newmax, will Qtech got the majority seats of the board as well? Does the original controlling shareholder
Similar to above, as the potential transaction is still in the stage of signing the “Letter of Intent”, it’s too early to discuss the composition of board at the moment. However, reference to general business norms, it’s common to get a significant influence of board if Qtech successfully controlled Newmax.
By far, we didn’t aware that the original controlling shareholder Chicony has a plan to dispose all its stake in Newmax. On the contrary, we believe that Chicony appreciate that Qtech’s investment is positive to the long-term development of Newmax. Going forward, we will strengthen the communication with Chicony and prepare for the smooth joint operation of the company.
8.Why does the controlling shareholder Chicony decide to sell the controlling stake of Newmax? Is it based on a negative view about the future of the industry, and not willing to further invest in production facilities? Is the financials of controlling shareholder healthy?
The existing controlling shareholder of Newmax, Chicony Electronics, is a Taiwan company listed on Taiwan Exchange mainly engaged in the manufacturing of electronics components for PC, Notebook and Keypad. According to his publicly disclosed financial statement, financials is solid and healthy. We understand that his rationale of giving up the position of controlling shareholder is mainly due to the consideration of long term development of Newmax, and the trust of Qtech in running the company at high standard.
The Company would like to reiterate that the proposed transaction is a private placement instead of shares transfer from existing controlling shareholders, which we believe representing the confidence of them in the industry. Based on our understanding, Chicony would like to see the synergies of Qtech and Newmax in terms of the incremental business contribution in handset and tablet camera modules, and achieving long-term goals together.
9.Are Newmax and Qtech plan to sign any procurement agreement after the transaction? How much is the plan of total procurement of lens of Qtech come from Newmax ultimately?
As the potential transaction is still in the stage of signing the “Letter of Intent”, it’s yet to confirm any details of collaboration in future. In short, we believe vertical integration of upstream supplier and downstream module makers is a global trend.
10.When did the conversation between Newmax and Qtech started? Why do you think it is the best timing to do so?
Newmax is one of the supplier of lens of Qtech camera module in recent years. Therefore, we got a basic understanding about Newmax and maintain constant business contacts. The idea of private placement is based on the ground of mutual benefits in terms of the strategic goals to be achieved given the influence of both in camera module and lens industries.
11.Will the outstanding of placement balance settled by Cash? If so, will it impose pressure on Qtech’s cash flow? Does the company got any plan to raise capital to finance the deal? Why the company didn’t consider settling by issuing new shares?
The nature of the transaction in concern is a private placement to raise capital instead of shares exchange. Therefore, we will use cash instead of shares of Qtech to settle the balance.
Base on the current information, the total consideration will be around RMB 300 million and wouldn’t impose a material impact on company’s cash flow. At the moment, the company doesn’t have any plan to raise capital in equity
market to finance this investment. The sources of fund to settle the transaction including operating cash flow, bank borrowing or factoring of account receivable, etc., and it’s yet to confirm.
12.Does the transaction need to seek approval of shareholders in AGM? What’s the expecting earliest completion date?
At the moment, Qtech and Newmax have only signed a “Letter of Intent” of which does not constitute any legal binding commitment in respect of the possible private placement. There are uncertainties before completion, for e.g. Taiwan Exchange set out stringent reviewing procedures of private placement including the approval of investment commission, MOEA. In addition, the transaction is still subject to the due diligence work to be done by the company. We are currently in talk with Newmax regarding the timeline of transaction.
13.Does Qtech got any plan to increase the stake of Newmax in near future? Will Qtech consider to acquire 100% stake of Newmax ultimately?
If the transaction completed, the Company will hold 36% of the total issued shares of Newmax, and there is still uncertainties about the transaction. At the moment, the Company doesn’t have any plan to further increase the stake of Newmax, and doesn’t aware that Chicony electronics would like dispose their shares.
14.Which entity will Qtech use to invest the stake of Newmax?
Tentatively, the Company plan to hold Newmax through the HK listed Company directly.
15.When the transaction completed, does the Company need to consolidate the accounts of Newmax? Or record by Equity method?
If the transaction successfully completed, the Company will be the biggest controlling shareholder of Newmax, and possibly got controlling numbers of board seats. Therefore, according to the account standard of HK listed companies, the Company got the “Control” of Newmax, so it may need to consolidate the accounts.
16.How does the Company compare the capability of Newmax to other lens manufacturers in the market? What are the major differences?
At the moment, there is still a gap between Newmax and other tier-1 lens manufacturers in market in terms of the R&D capabilities and sales channels of high-end lens product in handset and tablets, product capacity, etc. However, Newmax also got its uniqueness. For example, Newmax has accumulated certain technologies know-how and experience in developing lens used in motion sensing devices such as game console and laptops. The motion sensing technologies got certain similarities with 3D sensing technologies used in AR/VR and automotive industry which may lead the Company to a new market segment.
17.Will the ownership of a lens company affect the existing relationship of Qtech with other lens suppliers?
Vertical integration of camera module supply chain is a global trend. The Company also learnt that other competitors in the market run their own lens business and maintain a good relationship with their lens suppliers at the same time. Therefore, the Company believe that the competitive landscape of lens industry is not zero-sum game, but rather a co-existing relationship of competition and cooperation.
On the other hand, one of the main reason for participating in the private place is about synergies in future development of AR/VR and automotive products. This part of the business plan will not create conflict with the existing lens suppliers.
18.Qtech was quite active in capital markets recently. Does it imply there will be more corporate capital market activities coming? Does the Company plan to inject other connected companies such as the imaging software company, VCM company or FPCB company into Qtech anytime soon ?
The Group provides machine vision and human vision to mobile terminals by means of continuously building up capabilities of optics, computing vision and deep learning. Before Qtech was listed on HKEX, founder of the Company Mr. Roy He has set out the overall strategical plan of the group. The connected companies mentioned above are all running well at the moment and the
Company doesn’t have a conclusion and timeline about consolidate it into the listed entity or not . Also, the Company doesn’t have any disclosable proposal of capital markets operation at the moment.