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5 Things to Know About IQ Group Before You Invest

Value Investing College (VIC) site visit to IQ-Group: Mr Daniel Beasley, CEO (6th from left), Ms Helen Lau, PA of CEO (7th from left) & Ms Chee Ting Ting, Group Financial Controller (8th from left).

IQ-group’s business model is in designing and manufacturing of lighting, security and convenience products, working with some of the world’s major retail and professional brands. Their expertise is in infrared sensors, providing the technologies that detect, illuminate & announce upon your arrival.

In this article, we will be sharing the company’s overview, segmental review as well as some of the key insights shared during our site visit. Here are 5 things you need to know about IQ Group before you invest.

1. IQ-Group’s main business segment

The company is specialised in manufacture specific designs for its collaborating partners like Theben, Osram, and Philips. About 90% of its revenue derives from this ODM segment whereas about 5% of its revenue derives from their Lumiqs brand under Original Brand Manufacturer (OBM) segment.

2. IQ-Group’s Revenue according to the Geographical Segment

Although IQ-Group is listed in Malaysia, its main revenue is contributed by European countries. United Kingdom as well as Japan do contribute significantly to the company’s revenue.

3. IQ-Group’s Revenue and Net Profit After Tax have declined for the current financial year

According to IQ Group’s past few years financial report, its Revenue and NPAT have been growing steadily over years until the financial year 2018. In the year 2018, its Revenue has declined 22% from RM199mil to RM154.6mil whereas its NPAT has also declined from RM34mil profit to a -RM6mil loss. The decline in revenue and profit is mainly due to the delay in its new product launching for its existing ODM ( Original Design Manufacturer) customers.

4. Focusing on Lumiqs under its Original Brand Manufacturer (OBM) segment

The reason why the management started with their own brand Lumiqs is due to their long-term approach in terms of scalability and control. They realise if they only rely on their ODM business, they can’t go far. There are only a same number of customers and once they go past that, they will start competing with their customers. Eventually, at a certain point, they will achieve customer saturation. To scale the business and to achieve more, the company needs to have its own brand and distribution. With that, they are also looking after their existing ODM business. The CEO, Mr Daniel mentioned that they still have a great relationship and very close friendship with their ODM customers. However, for the long term, sustainability, viability and growth of IQ Group, they need to be more strategic by venturing out through Lumiqs.

5. Effect on the new foreign levy policy

According to the CEO, IQ-Group will not be affected by the foreign levy policy as they have decided to move their manufacturing site to China. Previously, 50% of the manufacturing was done in Malaysia and 50% in China. Now, the management wants to have about 95% of the manufacturing to be in China and the remaining 5% in Malaysia. The management will focus on the China facility by consolidation as well as reducing duplication cost. They expect the savings will fall to the bottom line in the next financial year. Hence, the company will not be affected by the new foreign levy policy.

Questions and Answers with the CEO, Mr Daniel during our site visit

Q: Do you service the lighting or just sell the lights only, do you all have a recurring income?

A: That is my goal, at the moment we sell products, but eventually we want to get into non-product in the revenue streams as quickly as we can. Because one of our customers was asking for cameras integration. Because we are at the perfect position, covering endless square footage of the warehouse space. Of course, there’s a security issue whereby the employees might take advantage of the situation. When we got cameras in the situation, we will need to have the peer to peer type of communication, cloud service, so we can access and record the data of the video footage. It is practical going forward for us to venture into this space to provide the product and take into some sort of service agreement.

Q: How to you all compare yourself to other competitors in China?

A: There’s always competition. We have a time advantage, because the people China in this space tend to be more following and copying, they are not leading the way. What IQ-group need to do is to keep going, by being ahead, potentially more efficient, more stories, more marketing stories, integration of newer technologies. Now we are moving to the new generation. The first generation, is you install it and you use it. The second generation is you can get your tablet to see the map of the products installed, you can group them with your finger, coordinate them into groups, you can choose the settings for each group. So, it is about staying ahead and developing fast enough, and we are maintaining a leading position.

Q: How about moving forward on automation, will it be less reliable on foreign labours?

A: Automation is directly related to volume. In China facility, there is a lot of smaller scale localised automation processes, where we just eliminated manual processes and automate into a certain extend. There is still manual intervention, not fully automated. But we are also maintained a focus on that. If and when scale or volume of a product becomes sufficient, then we will ramp up the automation.

Q: Who is the closest competitor to Lumiqs?

A: I think Digital Lumens. It was an American company but purchased by Osram during the last 18 months. They are probably the biggest. But they have a slightly different target. They are really a Rolls-Royce, high-end features, options and software that goes with it. We are quite comfortable with them in the market because only some want to go for that level of capital investment. But from our experience most don't, they want to get their energy safe, they don't want to pay that sort of price. We seem to sit comfortable side by side, not so much head to head, but occasionally head to head. The last time I heard the cost of their product is about twice as compared to ours. But the energy saving on our product and their product is the same. So, it is more about the return of investment.

Q: What have Philips and Osram done without IQ Group?

A: Philips is really brilliant on the lighting side. Their lighting competence is incredible. For Osram, it is unusual for them to go to the market with product that we have not been involved in the sensor control lighting area, in this area Osram will look to us, we are the ones who bring in innovation and breakthrough.

Key Takeaway with Management

When it comes to mistakes and challenges, Mr Daniel admitted that they did made mistake in trusting the wrong partner during their first venture into China many of years back which nearly brought the company to its knees. This sharing was unexpected as the question posted was about how IQ Group sailed through 2 financial crises in his 22 years of experience in the company. Mr Daniel as the CEO shared that he is aware of the cruel reality in their current business model, being an ODM does have long term challenges if they do not move up the value chain as OBM. Eventually, the ODM market will become saturated and margins will suffer.

We feel that the management is very sincere and candid. The management really values our time, they are there to share, not just giving a rosy presentation.

Disclaimer: All facts and opinions presented are for educational purposes only. This is not a recommendation to buy or to sell. The author involved in the writing of this message has no vested interest in the companies. Please consult a professional for expert financial or other assistance or legal advice.