NRA Capital Pte Ltd

Written by: jinshu

Sunday 17 Jan 2016

Eindec Corporation Limited - IPO note

Industrial clean air equipment provider aims to enter China air purifier market

Leveraging on its historical expertise and product knowledge, Eindec aims to use its IPO proceeds to fund the expansion of its air purifiers business in China. Riding on Chinese consumers' concerns over air quality, Eindec looks to capitalize on its existing pool of knowledge to tap into rising demand for clean air solutions.

 

Background. Eindec Corporation Limited (Eindec) commenced trading on the SGX Catalist on 15 January 2016. The company raised a total of S$7.5m via the placement of 35.8m shares or 33.2% of its enlarged share capital at S$0.21 each. Eindec is primarily engaged in the

  1. Design, manufacture and distribution of clean room equipment,
  2. Design, manufacture and distribution of heating, ventilation and air-conditioning equipment,
  3. Distribution and installation of cooling towers

Clean room equipment includes fan filter units, air showers and clean furniture used to create the clean room environment used in the electronics, pharmaceutical and food processing industries. At present, most of Eindec’s end users in this segment are from the electronics industry.

Heating, ventilation and air-conditioning (HVAC) equipment refers to air diffusers, deflection grilles and other fixtures installed to channel and regulate airflow into a building. These items are mainly sold to contractors that undertake mechanical and electrical engineering design and installation services for commercial, residential and industrial buildings and factories.

The distribution and installation of cooling towers is complementary to the company’s HVAC business in Singapore, as cooling towers are typically used alongside HVAC equipment as part of a building’s overall air-conditioning system. Cooling towers are used to dissipate heat via cooling water. Water is pumped to the top of a tower, sprayed out and cooled by evaporation as it falls through air blowing through it.

The company’s key facilities are located in Singapore and Malaysia, with Singapore serving as the corporate headquarters and R&D centre. 

 

Figure 1: Revenue mix, by product segment and by geographical segments

Source: Company, NRA Capital

 

Established and stable core business. At first glance, the clean room/HVAC equipment business is interesting for its niche and technical nature. Clean room facilities, be it for electronics, pharmaceutical and food processing purposes, typically have to adhere to minimum air quality standards, as measured by the amount of particulate matter in the clean room environment. Equipment failures will lead to defective production and hence losses. Therefore, suppliers with positive track records will generally be preferred over new entrants or unfamiliar bidders. Eindec’s direct customers are typically the M&E engineering contractors who install their products in the facilities of end users like IBM, Seagate, Texas Instrument, GlaxoSmithKline, and other major manufacturers. Eindec’s strength in this business is demonstrated by its high gross margin of more than 30% during the last three years.

Product niche in fan filter units. Within the clean room segment, Eindec designs and manufactures fan filter units (FFUs), as one of its key products, and has more than ten years of experience in manufacturing all sizes, materials and types of FFUs. It also offers computer software to control FFUs – claiming that it is among the first in Asia to develop a FFU network control system capable of controlling thousands of FFUs, which can also be integrated with fire alarm systems.

The project fabrication and installation process starts with a detailed discussion with the customer on product requirements, followed by construction drawings and approval. Thereafter, Eindec’s engineers will fabricate, assemble and test the products. Depending on the customers’ requirements, the equipment will be either be delivered or installed on-site. The fabrication process shows that there is a high level of customization in Eindec’s products – they are not standard units manufactured from a production line, and therefore justify a higher gross margin.

Licensing agreement with major US market leader. The company has a technology assembly agreement and trademark licensing agreement with Ruskin Company to non-exclusively assemble Ruskin products in Singapore and Malaysia. It also has the license to sell, use and install the Ruskin products which it assembles and to extend to its customers the right to use such products. In conjunction with this licence, the company can also use the Ruskin trademarks in connection with advertising the Ruskin products. The agreements are effective for five years from 1 July 2015 and can be extended via mutual agreement. Ruskin Company can be construed as a major air control solutions company with 29 production and office locations worldwide.

Other agreements, include a distribution agreement to distribute Liang Chi cooling tower products and related equipment in Singapore expiring in July 2018. In addition, Eindec has a service agreement with Underwriters Laboratories, Inc. for the manufacture of fire dampers for buildings in Singapore. 

 

Figure 2: Range of Products

Source: Company

New consumer business to drive growth. We are more excited about Eindec's new consumer business in air purifiers. Leveraging on Eindec’s technological expertise in clean room and HVAC equipment, Eindec has ventured into the consumer air purifier market with its own brand of smart air purifiers. In 2014, Eindec completed the design and prototype of its own brand of air purifiers and has launched them in the PRC. According to Eindec’s materials, its air purifiers are small in size, energy saving, comes with automated temperature control system, and can be controlled using smartphones.

More importantly, Eindec claims that its air purifiers can provide both fresh air intake ventilation and air purification through filters, thus overcoming the weaknesses of traditional products. According to tests, its products can filter PM2.5 pollutants, formaldehyde and benzene. According to the prospectus, demand for air purifiers in the PRC is expected to grow at a CAGR of 30.2% from 2014 to 2017. Eindec has established an office in Shenzhen, PRC with 14 staff to commercialize and market its air purifier products.

Order book shows decent sales for air purifier products. The core clean room and HVAC equipment business does not maintain an order book. However, the company has secured purchase orders worth S$1.41m as of 30 November 2015, to be fulfilled in 2015. On an annualized basis, the purchase orders translates to revenue of around S$16m for the industrial business. For the air purifiers business (environmental and technological solutions products business), Eindec Shenzhen has entered into various contracts, including a sale and purchase contract for a total value of RMB25.0m, of which RMB10.0m has been received as a deposit. Following the setup of a sales and marketing team, Eindec intends to establish manufacturing capabilities in the PRC to manufacture its air purifier products. Of the total proceeds of S$7.5m, S$3.3m or 43.9% will be used to establish the new environmental and technological solutions products business in the PRC.

Conclusion. Our above overview of Eindec suggests that the company offers a balanced value proposition for investors, with a stable industrial business and a budding consumer business of high upside potential. With an operational history tracing back to August 1984, Eindec has had its equipment installed in clean rooms, commercial and industrial buildings, and offshore oil and gas installations. The expansion into consumer air purification products leverages on the proven technical expertise that Eindec possesses. This attribute will be a key selling point to consumers who may be concerned about track record and reliability of a new brand, thus facilitating market entry.

At the same time, air quality is a concern among consumers in PRC, whose growth offers space for new entrants such as Eindec to establish themselves. The key challenge for Eindec now is to firmly establish itself within the various distribution channels in the PRC to boost sales. Overall, Eindec offers an interesting value proposition that is worthy of a closer look. 

Additional Company Specfic ReportsDate
Eindec Corporation Limited - IPO note
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17 January 2016


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