Background

HE Group is an electrical engineering service provider, focusing on the provision of power distribution systems for end-user premises such as industrial plants and commercial substations. Its operating segments comprise of (i) Power Distribution System, (ii) Other Building Systems and Works, (iii) Electrical Hook-up and Retrofitting, and (iv) Trading of Electrical Products.

HE Group has been a certified Class A electrical contractor with the Energy Commission since 2007 and a Grade 7 M&E contractor with CIDB since 2008. As a Class A and a G7 M&E contractor, it is qualified to bid for and undertake projects with no limitations in size or value.

Figure 1: HE Group focuses on end-user premises (diagram not shown)
Source: Company

The history of the Group can be traced back to 1995, when its subsidiary, Hexatech Engineering, was incorporated and commenced operations to undertake the supply and installation of electrical and electronic control components, mainly the low voltage switchboards. Hexatech Engineering was originally incorporated under the name Hexatech Electric (M) SB in 1995 before adopting its present name in 2000.

Since acquiring an equity interest in 2006, the Managing Director, Haw Chee Seng and Executive Director, Eng Choon Leong, have been the main driving forces behind the business growth, development and strategic direction of the Group. Haw Chee Seng holds an engineering diploma from the Midas Institute of Technology Malaysia and has been with the Group since 1997, commencing his career as a wiring technician. Eng Choon Leong holds an engineering diploma from the Federal Institute of Technology Malaysia as well as a Full Technological Certificate in Electrical Engineering from the City and Guilds of London Institute, UK. He has been with the Group since 1995, beginning his career as a junior site supervisor. Both of them have since progressed to the role of director, with appointments in 2007 and 2006, respectively.

Business Overview

Through its subsidiary, Hexatech Engineering SB (Hexatech), HE Group is one of Malaysia’s leading electrical engineering service providers. The Group specialises in designing, supplying, installing, testing, and commissioning of high voltage (HV), medium (MV), low voltage (LV) and extra-low voltage (ELV) power distribution systems. Its services also include equipment hookup and retrofitting, encompassing machinery installation, as well as electrical equipment upgrades and modifications.

As a complementary segment, the Group also provides other building systems and works including mechanical systems, control and instrumentation systems, plus civil, structural and architectural works. These services are outsourced to third parties under the Group’s supervision and project management. The Group is also engaged in trading of electrical products.

• Power distribution systems. The Group provides power distribution systems tailored to end-user requirements. These systems encompass a comprehensive network of electrical infrastructure, equipment, and components designed to efficiently distribute and control electricity from the primary substation source to various loads within a facility. The systems convert high-voltage power into safer, lower voltages suitable for machinery and devices, ensuring operational efficiency across diverse applications. Additionally, this incorporates integrated safety features to protect personnel and property while delivering consistent, high-quality power. This ensures reliable and precise power distribution, meeting clients’ needs with dependability.
• Other building systems and works. The Group also provides complementary works to support its power distribution systems for end-user premises. These include (i) Mechanical Systems, (ii) Control and Instrumentation Solutions, and (iii) Civil, Structural and Architectural Works. Its Architectural Works focus on functional designs that prioritise usability, optimise space utilisation, efficient floor plans and enhance aesthetic value. This ensures a comprehensive, tailored approach to meeting clients’ project requirements.
• Electrical hook-up and retrofitting. This segment focuses on connecting plant machinery, electrical equipment, and related components to a power source, establishing a fully functional and integrated system. Complementing the Power Distribution Systems segment, this service ensures reliable power delivery for safe and efficient operation, seamlessly integration with other machinery and equipment, and upgrades and modifications to enhance system performance and adaptability. By aligning with evolving client needs, this segment strengthens the synergy across the Group’s core offerings.
• Trading of electrical products. The Group also trades in electrical products, including power cables, metering panels, copper busbars and power conditioning systems upon request.

Distribution channels and customer base. HE Group utilises both direct and indirect Distribution Channels as its primary sales and marketing approach. For Indirect distribution channels, the Group secures projects through intermediaries who work directly with project owners. Its customers primarily consist of engineering firms, M&E companies, and building construction firms. These entities are responsible for delivering complete facilities or building system to end owner. In this arrangement, the Group operates as a subcontractor to its customers.

Meanwhile, direct distribution channel refers to projects that are secured directly from customers who are owners of the manufacturing plant or property development projects. This strategy involves conducting sales and marketing activities directly with the ultimate decision-makers, allowing the Group to work closely with its customers to meet their technical specifications, requirements, and business objectives.

Figure 2: Indirect and Direct Distribution Channels (diagram not shown)
Source: Company

HE Group’s clients are predominantly in the semiconductor industry which accounted for over 93.7% of FY24. Revenue from this industry is primarily generated by the power distribution system segment. While the Group seeks to expand into the new DC and RE segments, the semiconductor industry is likely to remain its largest revenue contributor in the future.

Figure 3: Revenue Breakdown from End-User Industries (diagram not shown)
Source: Company

Investment Merits

Strong track record backed by various MNC clients. The Group’s clients are MNCs in the semiconductor, medical devices, and electronics industries. The Group’s current orderbook stands at RM68.7m, of which 85.2% is contributed by the semiconductor industry, followed by 14.7% and 0.1% from medical devices industry and electronic industry, respectively. For FY25F, management is targeting RM50m of orderbook replenishment while its tender book amounts to RM675m.

Tapping into DC and RE sectors. HE Group is actively pursuing DC projects, leveraging its expertise in substation development and power distribution. The growing DC industry in Malaysia is expected to drive increased demand for advanced semiconductor chips, creating a synergistic link between the two sectors. HE Group aims to capitalise on this favourable landscape by delivering solutions to both the DC and semiconductor industries. We understand that the bulk of its tender book is predominantly in the DC space.

RE sector also presents an emerging opportunity for HE Group, as supportive government policies accelerate renewable energy adoption, particularly driving interest in BESS. BESS is a grouped batteries that stores excess energy produced from renewable sources (solar cells) during off-peak hour, and releases it into power grid during peak demand. HE Group is able to leverage its expertise in power distribution system for BESS as its strong fundamental knowledge in energy delivery closely aligns with the technical demands for BESS projects.

Industry Outlook

The electrical and electronics (E&E) sector, including the semiconductor industry, is benefitting from several positive industry trends. These include the rapid adoption of technologies such as the Internet of Things (IoT) and artificial intelligence (AI). Notably, the recent tariff hikes imposed by the United States on Chinese-made semiconductors and related components are expected to accelerate the diversification of global supply chains. This shift is likely to benefit Southeast Asia, particularly Malaysia, as multinational semiconductor companies seek to establish or expand manufacturing operations outside of China to mitigate geopolitical risks and tariff exposure.

Meanwhile, the renewable energy sector continues to gain momentum in line with Malaysia’s transition towards a low-carbon economy. BESS are becoming increasingly essential to address the intermittency challenges associated with renewable energy sources.

With government initiatives expected to actively support the deployment of BESS solutions in the near future, HE Group is also exploring large-scale BESS projects to further diversify its portfolio and strengthen its presence in the clean energy space.

Financial Highlights

Healthy earnings growth. HE Group’s topline has grown at a CAGR of 60.2% from FY20 to FY24, driven by its ability to secure and deliver new projects. Power distribution system segment and electrical equipment hook-up and retrofitting segment are the main earnings growth contributors, serving clients from various end-user industries such as semiconductor, medical devices and electronics industries. Meanwhile, the Group’s bottomline rose at a robust CAGR of 177.1% over the same period, driven by rising revenue and further supported by the expansion in other income, primarily contributed by interest income. The net profit margin remained steady hovering between 5-7% during the years.

Forecasting 3-year net profit CAGR of 6%. We expect HE Group to achieve a satisfactory net profit CAGR of 6% from FY24-FY27F, despite flat revenue, supported by margin expansion due to a more favourable project mix. This improvement is driven by higher contribution from high-margin electrical equipment hook-up and retrofitting projects, fueled by the accelerated adoption of advanced technologies by its customers in the semiconductor industry. However, global trade tensions and cyclical downturns in certain end-user industries may restrict the Group’s ability to sustain profitability over the next 1-2 years.

Copper price. HE Group’s cost of sales is primarily driven by raw materials, with a significant portion attributable to power cables and wires. The prices of these components generally move in tandem with copper prices, which are expected to increase due to a growing demand for electricity and slower supply growth of mined copper. Nevertheless, we believe HE Group is well-positioned to mitigate this risk through its effective contract negotiation strategies and cost pass-through mechanism.

Figure 4: Revenue vs Gross, Pre-Tax and Net Margins (chart not shown)
Source: Company, PublicInvest Research

Figure 5: Revenue Breakdown by Business Segments (chart not shown)
Source: Company, PublicInvest Research

Investment Risks

Project pipeline disruption. HE Group’s financial performance is intrinsically linked to the successful acquisition and execution of project-based contracts. The Group’s revenue stream relies on a continuous pipeline of new projects, along with the effective management of ongoing operations. While each project is preceded by meticulous planning, unforeseen scope adjustments may arise during execution, potentially impacting project timelines and financial outcomes.

Cost fluctuations. Project contracts typically involve fixed pricing, which presents a financial risk in the event of unexpected cost escalations. This risk stem from the inherent time lag between the initial cost estimation during the tender or quotation and final project completion, during which market conditions may change. In addition, the Group’s operational costs are exposed to various external factors, including commodity price volatility, inflationary pressures, material shortages, supply chain disruptions, and unforeseen project delays. If these increased costs cannot be passed on to clients, HE Group may have to absorb the financial impact.

Cyclical risk attributes to end-user industries. As an electrical engineering service provider focusing on providing power distribution systems for end-user premises, particularly the semiconductor industry, the Group is reliant on the demand and performance of the operators in this sector. Since the Group has no control over the market prospects or success of these operators, its financial performance may be negatively affected if they experience an economic downturn or reduced demand for their products, which may in turn influence their capital investment decisions.

Valuations

We like HE Group for its strong track record in the semiconductor industry which can be replicated in the DC industry. However, as the Group has yet to demonstrate its success in penetrating the DC industry with new job awards while the semiconductor industry is affected by the on-going trade war, we initiate coverage on HE Group with a Neutral rating, and a TP of RM0.37, based on 12x of FY26F EPS. This reflects a c.25%-discount to the average PER of industry peers and KLCON Index, due to the Group’s smaller market capitalisation.