Smartphones Nearly Killed This Stock, But Tesla Brought It Back

(Bloomberg) -- The rise of the smartphone almost broke Tze-Mon Chuang's company -- Elon Musk provided its salvation.

Singapore-based Memtech International Ltd. has more than doubled its market value in the past year thanks to tie-ups with the likes of Tesla Inc. The manufacturer is a key supplier to Musk's pioneering auto company, making plastic components for its battery packs.

It's a far cry from just five years ago, when the seismic shift in the phone industry wrought by the advent of touch-screen devices saw Memtech suffer two straight years of losses. Started by Chuang's father in 2000, the company had been making millions churning out the plastic keyboards used in mobile handsets produced by Nokia, Motorola and Ericsson.

“That put the company immediately into a crisis and there was no way back,” the 42-year-old executive director of the company said in a recent interview. "The easiest way out was to use the money to invest in a totally different business but the existing equipment would become obsolete."

Reinventing Itself

Chuang knew he had to reinvent Memtech. Giving himself two years, he looked for ways to use his existing production lines. It was during a conference held by a German customer when he realized that he could easily re-purpose his facilities to make automotive parts.

“We did some research and we found there was a trend of putting more plastic in the car to replace the metal parts, to make the car lighter, more fuel efficient and protect the environment,” Chuang said. “We identified a whole list of potential customers.”

The executive opened offices in Germany and Michigan, close to potential clients, and started building prototypes and giving out free samples. Today, Tesla accounts for about 3 percent of Memtech's revenues, according to CLSA.

So far, investors like what they see. The stock is near its highest since 2006, reached in January this year, having surged 128 percent in the past 12 months. The company now has a market capitalization of about $156 million, almost four times the $41 million in 2012.

“We like the company on strong returns on capital and cash flows,” Kenneth Tang at Nikko Asset Management Asia Ltd. said by phone. “This company has been able to move into new arenas to generate strong cash flows.”

Automotive parts account for about 47 percent of its sales, compared with almost none just five years ago. Sales from the auto industry will expand 20 percent annually in the next two years, Chuang said.

Memtech's shares rose 5.5 percent to S$1.54 in Singapore on Tuesday, while the benchmark gauge gained 1.6 percent.

"There is potential upside from riding on Tesla's growth potential, and this working relationship has also opened other doors for Memtech," Ngoh Yi Sin, an analyst at CGS-CIMB Securities in Singapore, wrote in an emailed response to questions. The company's contract with Beats has also helped secure new customers such as Bose and JBL, said Ngoh, who holds an add rating on the stock. 

Even with the rosy outlook for auto parts, Memtech hasn't turned its back on consumer electronics, which still accounts for about 34 percent of sales. From June, Memtech -- which is also a supplier to Apple's Beats Electronics -- is expected to start multiple contracts with a major U.S. electronics firm, Chuang said, declining to name the company.

These contracts could potentially help double Memtech's consumer electronics sales in less than two years, Chuang said.

“We were fortunate enough to get into the supply chain of this U.S. company,” he said. “The numbers they gave us for quotation are huge.”

To contact the reporter on this story: Abhishek Vishnoi in Singapore at avishnoi4@bloomberg.net.

To contact the editors responsible for this story: Divya Balji at dbalji1@bloomberg.net, Teo Chian Wei

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