Solution Engineering Holdings Bhd (SEHB) is one of the top 30 stockpick by the Malaysia infamous investor, Mr. Fong Siling AKA Coldeye. This has drawn our attention to find out more about the company. While searching online about the company, we noticed that most of the write-ups about SEHB did not explain much about the business. Today, we will cover as much as we can on the group’s main business, and its services/products.
Let us start with some brief introduction. The SEHB was incorporated in 2004 and was public listed in Bursa Ace Market (formerly known as MESDAQ market) on the same year. Initially, SEHB was mainly designing and developing hardware and software for engineering education and research for high education institutions. Over the years, they have been focusing on the R&D, which eventually results with wide range of products and simulation modules. They have also expanded their education and research products into biotechnology and pharmaceutical field. Today, the group is involved in several business areas:
1) Educational engineering equipment
2) Production and distribution of lubricants
3) Provision of industrial biotechnology
4) Automation solution provider.
The educational engineering equipment business has been the group’s core business. The engineering equipment division has contributed 80% of the overall revenue in 2014. The operations of Solution Engineering Sdn Bhd involved design and develop equipment for engineering education and research as well Technical Vocational Education and Training (TVET). Currently, the company has 3 major products: SOLTEQ, SOLDAS and SOLCAL.
SOLTEQ involves wide range of engineering education equipment, which can be categorised into:
– Process Control
– Heat Transfer & Thermodynamics
– Fluid Mechanics
– Environmental Engineering
– Chemical & Bioprocess Engineering Pilot Plants
– Basic Process & Reaction Engineering
Air Conditioning Laboratory Unit (Model AC 01)
Boiler Heating Batching Control Trainer (Model SE 107)
Each education equipment is specifically designed to represent real life engineering system in lab scale, which allows engineering students or researchers to experiment through simulations. Education equipment are supplied along with process control instruments such as switches, gauges, transmitters, control valves, process controllers, and alarms. The client is given an option to include data acquisition system (SOLDAS) and computer aided learning software (SOLCAL) in their purchase.
GUI of SOLDAS Data Acquisition System
SOLDAS data acquisition system includes the following in its package:
– A PC with latest Pentium Processor
– An electronic signal conditioning system
– Standalone data acquisition modules
– Window based data acquisition software for data logging, signal analysis, process control, real-time display, tabulated results, plotting graphs.
SOLCAL Computer Aided Learning Software
On the other hand, SOLCAL Computer Aided Learning Software comes with the following items:
– Interactive multimedia features
– Graphical simulation
– Experimental results samples
– Full experimental manuals
Judging from the functions of the two optional products, it is logic to think that the two “optional” products are somewhat necessary and very likely to be purchased with the experimental-based-equipment, which is good sales strategy. As we can see from its product catalogue, wide range of engineering education equipment are mostly supplied as a complete engineering system, we opine that the equipment components, SOLDAS and SOLCAL are the main inventories, while the SOLEQ equipment are likely to be manufactured or assembled upon purchase order/contract and also the major sales contributor. Hence, we assume the education equipment sales are mostly on contract basis.
The main products of SBSB are bioreactor and fermentor for modelling various microbial (bacteria, yeast, fungi) culture processes. The Group’s biotechnology segment is operated under its subsidiary, Solution Bioforce Sdn Bhd (SBSB), which specialises in Biotechnology and Pharmaceutical, provides engineering solutions, design / development of biopharma equipment. Incorporated in 2011.
The available product series are:
– BLF series: Basic series for small scale production, education and research, available in 1 – 10 L capacity.
– CLF series: Compact series for small scale production, education and research, available in 1 – 14 L capacity.
– PLF series: Modular, predesign and configured turnkey system for research to small scale production, available in 10 – 5,000L capacity.
– BTU series: Teaching unit series for education.
All bioreactor series, except for BTU series are supplied as a package inclusive of other components such as bioreactor system, heating system, process vessels, software, measurements and control system. Pumps, SIP (sterilised) and CIP (cleaning) systems are only included in the PLF supply package for its pilot plant scale.
The lubricant business operates under Solution Biogen Sdn Bhd contributes 5% of the group’s revenue in FY14. This subsidiary is acquired by Solution Engineering Holdings Sdn Bhd in 2013. The company mainly produces local Malaysia brand lubricants, which are biodegradable and made of esters and other palm oil products. Their lubricant products are categorised into 4 major types: automotive engine oils, heavy duty diesel engine oils, marine oils, and motorcycle engine oils. In 2012, the company is also started to supply Viscosity Index Improvers (VII), which commonly used in multigrade engine oils, gear oils, automatic transmission fluids, power steering fluids, greases and hydraulic fluids.
SCADA & Automation System
This business area is operated under Solution A&C Technology Sdn Bhd in which the Group owned 70% of shareholding. This subsidiary specialised in SCADA (Supervisory Control and Data Acquisition) & Automation system. The company has participated in River of Life (RoL) project as automation system provider. The project aims to transform the polluted Klang River to high economic value environment by river cleaning and beautification.
One of the reasons that it caught our attention to study further is its high gross profit margin of ~50% and net profit margin of ~20%. Considering the core business, educational equipment division, it is hard to imagine supplying engineering equipment to education institution could yield such impressive margin. From the previous explanation of the group’s equipment business, we noticed that using “equipment” to describe the products could be misleading, we would prefer to describe the products as “system”. Here is the reason, many would think that the educational equipment is sold as a single item in which common equipment business does. In the case of SEHB, their product is the assembly of many components such as vessels, control instruments, switches, gauges, transmitters, control valves, PID controllers, alarms, SOLDAS, and SOLCAL based on their process design blueprint. The process design blueprints are the results of the invested R&D, which brings values to its equipment. Hence, this explains why the educational equipment business yields high profit margin.
Apart from that, automation solution provider is a service business, which requires certain human expertise to “assemble” various automation instruments to create values to the customers. Hence, it could be one of the contributors to the high profit margin of the group.
However, looking at the revenue segment of the Group, 99% of the revenue in 2015 is contributed by contracts and the remaining is from sales of goods, this could mean most of the group’s income is non-recurring. For instance, it is not likely for the education institution to purchase the similar education equipment every year, unless for uncommon reasons such as expansion, but it is likely that certain components of the equipment will be purchased for maintenance purpose. Hence, this explains why sales of goods has little contribution to the revenue, compare to the contract sales.
As mentioned previously, the core business of the group comes from engineering educational equipment business. In 2016Q3 (TTM), we estimated that the top line contribution from overseas has declined from RM 5.2 mil in 2014 to the latest RM 2.4 mil, which is 7% of the overall revenue. Hence, the group’s revenue is mainly on domestic education market. In 2015, Malaysia has 410 private higher education institutions nationwide. The government is aiming to create 1.5 mil jobs in the year 2020 under 11th Malaysia Plan (RMK11), where 60% of the jobs will require Technical Vocational Education and Training (TVET) skills. The initiative is of good purpose to shift working society from labour intensive to knowledge and innovative based jobs. To make this happens, the TVET sector has to increase its annual intake from 164,000 in 2013 to 225,000 in 2020. As mentioned by the management, their educational equipment business will be one of the beneficiaries of this government initiative. Apart from that, the management has the intention to invest in R&D to improve their products to adopt the green and renewable technologies.
To conclude this, readers from non-engineering background might find it difficult to understand the products and services of Solution Engineering Holdings. We would like to say it is absolutely normal, as the business model is based on engineering knowledge. Hence, investors are expected to require some engineering and technical experience to understand the business. We always believed that investing in business within the Cycle of Competence is important in investing. We believe that margin of safety does not merely come from valuation alone, it also comes from the qualitative aspect of a business.