Baotek (5340 TT) -- Taiwan's Nittobo?

In a previous article, I extensively discussed Japan's Nittobo (Nittobo (3110 JP) -- The King of Electronic Fiber Glass). Today, I will introduce a similar entity in Taiwan -- Baotek, known officially as Jianrong Industrial.

Originally, Baotek was just an ordinary fiberglass cloth manufacturer in Taiwan, producing low-grade electronic fiberglass cloth (E-Glass). The turning point came in 2018 when Nittobo announced a public acquisition of Baotek shares, subsequently making Baotek a subsidiary of Nittobo. After the Taiwanese founder of Baotek retired in 2021, a Japanese leadership took over, leading to Nittobo's full control over Baotek's operations. Thus, referring to Baotek as Taiwan's Nittobo is quite fitting.

As mentioned in previous articles, Nittobo's strength lies in its high-end fiberglass yarn products, which all electronic fiberglass cloth companies globally must purchase from it. However, Nittobo’s fiberglass yarn factory in Japan was at full capacity, prompting the construction of a new fiberglass yarn factory in Taiwan starting in 2021 to meet the growing demand from Taiwanese customers (such as TUC, EMC). Production of corresponding fiberglass cloth was handed over to Nittobo's Taiwanese subsidiary, Baotek.

Nittobo originally planned for Baotek to produce Ultrathin E Glass (another high-end fiberglass cloth product used in iPhone SoCs) and T Glass (used in ABF substrates) in Taiwan. However, plans changed due to the semiconductor down cycle in 2022-2023, which saw sluggish demand for mobile phones and ABF. Instead, the second half of 2023 saw a sudden surge in demand for NE Glass due to the strength of AI servers, prompting a strategic pivot. Nittobo’s newly built fiberglass yarn factory in Taiwan now fully supports Baotek in producing high-end NE Glass fiberglass cloth.

From supply chain research, I understand that Baotek currently has a capacity of 500 furnaces for electronic-grade fiberglass cloth. Baotek’s NE Glass fiberglass cloth products successfully passed major customer certifications in 4Q23 and began formal contract production and delivery in January of this year. Currently, about 45% of the company's 500 furnaces are planned to produce NE Glass fiberglass cloth, with the remaining 55% continuing to produce regular E Glass fiberglass cloth (limited by the supply of NE Glass fiberglass yarn from Nittobo’s new Taiwanese factory in its first year). There are plans to add 200 new furnaces in the medium term. As previously mentioned (Nittobo (3110 JP) -- The King of Electronic Fiber Glass), the unit price of NE Glass is six times that of regular-grade E Glass, so it’s straightforward to calculate that Baotek’s revenue scale could triple once full production is achieved (45% x 6 + 55% x 1). Currently, the company’s monthly revenue is about 130 million, projected to increase to about 200 million by the second half of this year, and potentially reaching about 300 million per month in the medium term.

Another concern for investors is related-party transactions, as Baotek’s raw materials for fiberglass cloth come from its parent company. I confirmed with Nittobo's management that profits from fiberglass cloth sales are recorded under the fiberglass cloth segment (Baotek), with all fixed costs allocated to the fiberglass yarn segment (Nittobo). This accounting approach is evident from Nittobo's historical financial statements, where the Glass fiber yarn segment consistently shows losses (due to costs allocated at the raw material end), while the Glass fiber cloth segment consistently shows healthy profits. It is expected that the same accounting method will apply to the sales of fiberglass cloth in Taiwan.