Strategic Partnership For Manufacturing Operations In Chengdu, China

5 July 2013: Rakon Limited (NZX:RAK) and ZheJiang East Crystal Electronic Co. Ltd. (ECEC), a specialized electronic components manufacturer listed on the Shenzhen Stock Exchange, are to establish a strategic partnership targeting the smart wireless device (SWD) market.

ECEC will acquire from Rakon 80% of the shares in Rakon Crystal (Chengdu) Co. Limited (RCC), the owner of the manufacturing facility in Chengdu, China for US$18.8 million. The acquisition will result in a new joint venture of RCC with Rakon holding 5% and existing joint venture partners continuing to own 15%.

A Cooperation Framework Agreement signed by the two companies will see Rakon and ECEC working together in the areas of technology, capital, management and markets for SWD by sharing resources and capabilities.

“The Chengdu plant enables our joint venture to be at the centre of manufacturing for consumer electronics, supplying components to the world’s leading manufacturers and suppliers to the smart-phone market. It’s a purpose-built plant with considerable capacity to be expanded from its current 20% utilisation. ECEC will further fund the expansion of the Chengdu plant and will enable the joint venture to achieve greater scale. We will provide R&D, technology and marketing capability to the partnership. We have a joint venture in India with Centum that works well and can see similar benefits being achieved through a partnership with ECEC.” said Brent Robinson, Rakon’s Managing Director.

Our view is that competition in this segment will remain very strong and it is likely that industry consolidation will occur over the next two to three years. We are contributing to that consolidation with the introduction of ECEC to RCC. Bringing ECEC into the joint venture will enable us to benefit from having low cost high volume manufacturing expertise and access to Chinese capital markets. The partnership will allow the new joint venture to grow the supply of our leading edge SWD products to manufacturers who are significant household names, both in China and worldwide.”

“This change will enable Rakon to enhance its focus on the high margin markets where we currently see growth and profit opportunities that can be driven by our significant technical strengths and differentiation” said Mr Robinson.
Rakon’s core business is in the design, manufacturing and supply of crystal and oscillator components to other more profitable market segments:

• Network infrastructure supporting voice and data in the telecommunications industry;
• High reliability and precision products used in the avionics, space and military industries; and
• Specialised location-based devices sold by global navigation and mapping manufacturers.

“Rakon has an established and highly regarded reputation with the customers it supplies to in these industries. This plan aligns our resources and our balance sheet into areas where we have high market share and higher margins while benefitting from a small investment in a partnership led by an established manufacturer to the consumer electronics industry.”

In the 12 months to 31 March 2013 Rakon’s core business (which excludes SWD) accounted for 70% of the company’s $176.3 million sales revenue.

Rakon estimates to make a $32m million impairment of assets associated with the partial sale of the Chengdu facility. The final result will be based on results of RCC up to settlement that will be reflected in the accounts for the six months to September 2013.
The reduction of working capital and proceeds from the sale of the shares in RCC will be used to retire debt. Directors had previously announced plans to reduce debt to less than $15 million by the end of the 2014 financial year. Upon settlement of this agreement, debt can be reduced both earlier and below the target of plans previously announced. A full update will be provided with the interim result which will be announced in mid-November.

Upon signing the Cooperation Framework Agreement with Rakon, ECEC has expressed an intention to purchase a stake of up to 5% of Rakon’s shares on-market.

Both parties will move forward from the Cooperation Framework Agreement to establish a final Sale & Purchase Agreement by 10 September 2013. Settlement is expected to take place on 30 September 2013 following the granting of any required regulatory approvals.

For further information:
Brent Robinson
Managing Director
Rakon Limited
(09) 571 9323

About Rakon:
Rakon is a global high technology company that designs and manufactures world leading frequency control solutions. Rakon's products enable fast and reliable connectivity in the transfer of data. Customers are manufacturers in the avionics, space, military and telecommunications industries.

About ECEC:
ZHEJIANG EAST CRYSTAL ELECTRONIC CO., LTD. is primarily engaged in the research, development, design, manufacture and distribution of electronic components. The Company primarily provides surface mount device (SMD) quartz crystal resonators, oscillators and ceramic tubular capacitors, among others. The Company's products are mainly used in communication field, information field, home appliance field, automobile electronic product field and other fields. The Company distributes its products in domestic and overseas markets.