In the 1980s, Malaysia, Taiwan and Korea started industrialisation phase at about the same time. Started as low-end original equipment manufacturers (OEM), Taiwan succeeded to move up the value chain, became the world’s best original design manufacturers (ODM) for western brands, and advanced to original brand manufacturer (OBM) in 2000s. And for Korea, needless to say, the Samsung smartphone alone explains their position in manufacturing level.
Malaysia, however, still taking her sweet time for being just an OEM. The issue has concerned a lot of economists and policymakers in Malaysia for some time. Being an OEM, there will be very little technology transfer to the country and more importantly, there will be little value created. The competitiveness of an OEM mainly based on its cost, particularly labor costs. As a result, the one with lowest cost wins the contracts. In such circumstance, the margin made by OEM will be limited, and with the low labor cost as one of its characteristics, Malaysia is facing the difficulty to realize its aspirations and enjoy the living standards of an high-income nation.
Ok, we might have digressed from the original point of the post. But as you can see the damages of being heavily focus in OEM done to the country , the same things apply to individual companies. Because of this reason, IQGROUP stands out to us as one of the very few listed E&E companies in Malaysia that has already moved up the value chain.
Illustration of different manufacturing levels, i.e. OEM, ODM & OBM
IQGROUP is an established global leader in the design & manufacture of lighting, security and convenience products, working with some of the world’s major retail and professional brands. Established in 1989, IQGROUP has the experience and reputation of more than 25 years in what it does. Don’t worry, in our business analysis post, one of our main objectives to let our readers understand the business operations behind the company being covered. Thus, we will definitely do more than just copy & paste what is available in annual reports and the company website.
Listed on the Main Board of KLSE in Oct 2005, the Group’s portfolio of products remain the same throughout the 11 years, with only one additional product added (LED Lighting) since FY09, as the Group established a joint venture with SemiLEDs Optoelectronics Co. Ltd to form SILQ (Malaysia) Sdn Bhd, to tap into the growing market trend towards LED lighting. Our findings give us certain comfortability as we always appreciate companies that continue to focus in their own expertise as they grow.
From IQGROUP official company website, it is interesting to see IQGROUP displaying their “technology”, instead of their “products” as most of the manufacturers would do. As we can relate, IQGROUP is more of a technology company, rather than a pure manufacturer. Therefore, to better understand the business of IQGROUP, it is better to understand its technology, rather than its products.
Extraction from IQGROUP company website
PIR Motion / Presence Sensor
PIR (Passive Infra Red) is where the main technology lies in IQGROUP, and it is the bread and butter for the Group. PIR sensors operate by monitoring the background ‘temperature’ within their coverage and by responding to sudden changes, such as the approach or movement of a person or vehicle. When movement is detected, the sensor might switch on lighting, activate an alarm, open a door or anything the system is designed for.
Motion Controlled Traditional Lighting
By applying the PIR motion sensor to traditional light source (typically tungsten halogen or incandescent GLS), these products provide automatic lighting for security & courtesy purposes and have been a mainstay of the global outdoor domestic lighting market for in excess of 20 years.
Motion Controlled LED Lighting
By applying the PIR motion sensor to ultra-efficient LED luminaire (instead of traditional light source), smart lighting can be achieved as LED beat traditional lighting in almost every perspectives, including lower energy usage, less environmental impact, longer lifetimes, lower cost, better illumination, more responsive, etc.
Wirefree Door Entry & Chimes
A technology platform to manufacture wirefree link door entry products, from a simple door chime to a sophisticated video door entry system. The wirefree platform ensures ease of installation, alongside flexibility in use and access to an array of added-value features. Its clients in this area includes Friedland and Byron.
After the presentation of the 4 main technology as above, we can conclude that IQGROUP is mainly in the business of smart lighting and security system by utilizing its PIR motion technology. Now, perhaps the company catch phrase”We provide the technologies that detect, illuminate & announce your arrival” finally makes sense to you. Now let’s look how IQGROUP operates with its technology.
Illustration of smart lighting in warehouse
IQGROUP started as an OEM of motion sensor light controllers and security lighting in 1989, has already moved up the value chain, being a player in OEM, ODM and OBM. Because of this, IQGROUP offers the flexibility to work with its clients in whichever way that suits them. We see this as one of the advantages to IQGROUP as they are able to tap into different markets and cross sell their services. Going forward, OBM will be the growth driver of IQGROUP’s revenue. According to an article published in The Star Online on 1 Sept 2016, the Group first smart lighting solution under own brand, Lumiqs, which was launched in early 2015, is expected to contribute 10% to the group’s revenue by 2018, and 30% by 2020. The Group CEO Daniel Beasley is confident that the goal was achievable because Lumiqs brand had started to receive orders form South-East Asian countries, Japan, Australia, and Switzerland. At the same time the Group is also developing and designing a new sensor lighting for small commercial premises and residential households which to be released under a new business model by 2018. Both Lumiqs and the new product will help drive the group’s growth over the next five years, especially with its higher margin.
Illustration of IQGROUP operations in OEM, ODM & OBM.
When studying IQGROUP recent annual reports, we couldn’t help noticing the executive chairman Kent Chen’s sense of optimism for IQGROUP in current industry revolution. Let us examine the smart lighting industry.
With ever-larger population and limited resources, demand for energy keeps growing worldwide, and the use of it must become more sustainable. That is where smart energy comes in. There was a time when “going green” had to come with higher costs in lighting industry, but now it is not the case anymore. LED lighting revolution for example, is giving traditional lighting manufacturers a run for their money because LED’s are significantly more efficient than older lighting technologies, they have longer lifetimes, reducing the overall cost of ownership and minimizing maintenance requirements. The growth of LED Lightning was backed by more countries jumping on the bandwagon to ban incandescent light bulb as an effort to save energy and achieve global environmental target. IQGROUP’s venture into LED lighting in FY09 has contributed to the growth of the Group for past few financial years.
However, we would like to remind our readers that smart lighting means more than just LED. That’s why we regard IQGROUP as a smart lighting solution provider, instead of a LED manufacturer, and it makes a whole lot of difference. If you are in the lighting industry yourself, you would know that although the market needs of LED lighting are still rising largely and replacing traditional lighting in a large number of applications in 2015 & 2016, the average price per unit decline of 30% to 40% due to oversupply and competition, driving many manufacturers out of the market. This situation didn’t affect IQGROUP much as a smart lighting solution provider. Smart lighting solution integrate LED luminaire with PIR motion sensor to automate the lighting in certain area, therefore adding value to the ecosystem and able to maintain reasonable margin. For example, the Group own brand product, Lumiqs lighting solutions enable industrial users to save up to 90% of energy as the whole system can be programmed to grow dimmer or brighter according to the movement of people in an area.
What is more exciting to the industry is the evolution of IoT (Internet of Things), also known as Industry Revolution 4.0, in which everyday objects have network connectivity, allowing them to send and receive data. Today, most of the smart lighting solutions are being implemented in industrial areas and warehouses due to the heavy usage of electric, but very few in small commercial and residential areas due to the lower consumption of electric makes it not cost feasible to do so. Now imagine this, when there are more things can be connected to the internet, the only step required is to add wireless component into the system, eliminating the hardware which is often expensive and required skilled professionals and technicians, smart lighting in residential households can be generalized in the coming future.
How long will it take before every residential household can afford to install a smart lighting system? As mentioned earlier, IQGROUP is working on the development of a product for home and small commercial lighting. This seems to be in line with the direction the industry is heading. According to a report from MarketsandMarkets, smart lighting market will worth 19.47 Billion USD by 2022.
Currently, IQGROUP customers are mainly from developed markets including Europe, Japan and United States. 99% of its revenue is derived through export business. Therefore, the Group has exposure to foreign exchange risk and it has been their practice to enter into derivative financial to manage their exposure to such risk. Having said that, the Group is still exposed to USD fluctuation due to their practice to long USD forward contract (therefore favourable to USD strengthening, vice versa) to hedge their purchase of raw materials in USD. We see plenty opportunities for the Group going forward as awareness of environmental awareness is on a rise and hardly a choice anymore. The Group operations are strategically distributed across continents to maximize efficiency with lower costs.
Strategic locations of IQGROUP global presence
Research & Development (R&D)
Just like every technology company, R&D is the backbone of IQGROUP. The Group executive chairman Kent Chen said that it is their significant emphasis on R&D that drives the product development with related results. As mentioned earlier, the main technology of IQGROUP lies in its PIR motion sensor, enable them become a smart lighting solution provider and security system provider, rather than just a manufacturer.
IQGROUP has been at the forefront of PIR sensor technology for over 25 years. According to the company website, IQGROUP today is rightly regarded as a global leader in this field. Having said that, the research in PIR motion sensor still has to be carried on to play a vital role in IoT. The technology in PIR motion sensor varies greatly, and at this point of time there is still room for improvement, like minimising false activation, expanding detection area, maximizing performance & energy saving, alongside more general breakthroughs in overall quality and reliability. PIR motion sensor mainly serves two purposes: i) Occupancy detection ii) Intrusion detection. Occupancy-related sensors identify a person’s or object’s presence by detecting body motions and then automate energy-consuming devices that are able to react to the sensor. Intrusion detection sensor wants to know if there’s an intruder inside their home, but no one wants the pet dog to trigger the sensors every time he goes to his food bowl. This means intrusion detection sensors must be architected to ignore minor motion like pet movements and non-moving objects of changing temperature. According to an industry report, many PIR motion sensors have not been optimized to meet both purposes. And, most that are specialized to meet the needs of one area often don’t meet the needs of the other.
Unfortunately, the management of IQGROUP did not shed much light on their R&D. The reason we are presenting this section is to let our readers understand the variety of PIR motion sensors technology. Although we can’t tell which technology level IQGROUP has achieved or trying to achieve, we believe their technology is at the advance side as it involves in both occupancy detection and intrusion detection. Besides that, for a company that is continuously investing in R&D, it provides certain barrier to entry to the industry. At the same time, it is important to know if the R&D of the Group is bearing any fruit, as failing of which might cause the Group to die out in competition in the future. In next post, we will conduct quantitative analysis to check Return on Research Capital, as this is the only way to measure the return of R&D conducted without sufficient information.
At time of writing, MYR is trading at RM 4.4714/USD, resulting in listed exporters experiencing another wave of hot trading in KLSE (IQGROUP being one of them). This makes certain sense but in real economy, 1 +1 is not necessarily equal to 2. For example, you run a company that derived 100% of its revenue in USD, a 10% up in USD will not result in 10% up in revenue (let alone net profit), as the the client from US will definitely negotiate for a better price in view of your higher margin now.
We seriously don’t know which way is MYR heading (and we doubt if someone out there know for sure), so this is definitely not a weak RM play (despite the fact it will benefit from weakening RM). Back to basics, we like IQGROUP due to its ability to evolve from OEM to OBM, and its exciting position in where the lighting industry is heading.
In this post, we have conducted a business analysis of IQGROUP to study its operations and the industry. In next post, we go into IQGROUP financial analysis, which is the boring part but then again, the figures always reveal more than you can imagine.