SINGAPORE (Feb 21): The semiconductor industry has enjoyed a rebound on the back of the easing of US-China trade tensions, but is yet again threatened with a potential disruption as the ongoing Covid-19 virus outbreak intensifies.
Micro-Mechanics Holdings, a designer and manufacturer of precision tools, assemblies and consumable products for the semiconductor industry, has endured the cyclical nature of the economy, and CEO Chris Borch is betting that the industry’s turnaround – when it happens following the virus scare – will be significant.
“I think everyone is hugely focused on the virus, there’s a great deal of concern. But in the semiconductor industry, I don’t think we’re going to see demand disruption. I think what we’ll see is a push-out of some of the equipment orders on a short-term basis. But when this subsides, the kick-up will be even stronger,” says Borch in an interview with The Edge Singapore.
Micro-Mechanics was listed on the Singapore Exchange (SGX) back in 2005. Year to date, its share price has fallen 7.7% to close at $1.80 on Feb 19, valuing the company at 20.6 times historical earnings and giving it a market value of $250.26 million.
As at Dec 31, its net asset value was 40.6 cents per share, down from 41.98 cents as at June 30. The company is debt-free as well – even as other companies have borrowed to fund growth in this lowinterest environment.
“We had just kind of made the decision years ago that we were going to build a very profitable business that didn’t rely on debt,” says Borch.
While many semiconductor companies prefer to husband their cash for capital expenditure, Micro-Mechanics has been giving out dividends. For the most recent 2QFY2020 ended December, it plans to pay five cents per share, up from four cents a year ago.
On the distribution of dividends, Borch says: “At the end of the day, the results are what matter. If you’re growing and earning, you’ll give out dividends.”
With the latest interim dividend, MicroMechanics would have distributed total dividends of 78.9 cents per share since 2003, which translates into a return of some 430% for shareholders who bought its shares during its IPO.
While other companies welcome SGX’s decision this month to do away with mandatory quarterly reporting for most companies, which some companies have regarded as cumbersome, Micro-Mechanics has decided to continue with quarterly reports. Borch says that the decision at the board’s most recent meeting was a “unanimous” one.
“Transparency and governance is sort of an X-factor for us. If you look at companies that get into trouble, it’s mostly because of a lapse in governance. So if we keep working on that and value our good governance, it will not only build the company, but also safeguard its value,” he says.
Virus disruptions
The Covid-19 outbreak has hit the company’s operations in China, which is its single largest market. For 2QFY2020, business in China generated revenue of $4.7 million, or 28% of the company’s total. The company’s Suzhou plant, like most other businesses, was told to either stay shut or shorten trading hours.
The annual trade conference in China for the global chip industry, which the company was supposed to take part in, was postponed until further notice.
Although Micro-Mechanics had expected the plant to resume operations on Feb 10, Borch says that operations are likely to be delayed for at least one more week, as the team rushes to get approval from the Chinese authorities through a re-application process in which the plant has to display good business continuity and contingency-type planning procedures.
“It’s fairly realistic – we’re not going to set a record in China for the month of February, but I think it will be pretty good if we can get back running and be back in the game by the end of the month. I think that’s what will happen in a lot of places – people will pick up pace again once things quieten down,” he adds. “The Chinese market is a significant contributor to our revenue, but I’m glad it’s not 50% or 100%.”
Even with this disruption, Borch will be staying put in China. He is confident that the Chinese government will make it a priority to get things going soon. Furthermore, Micro-Mechanics needs to be where it has business to do. “We have to go where our customers go. We supply to the semiconductor players and I think for a long time, China is going to be a strong player in the semiconductor industry. But they won’t be the only player,” he explains.
Borch would not let the virus crisis disrupt the company’s long-term growth plans. “These things appear suddenly and they’ll disappear kind of quickly too. What we want to do is not let these short-term things, even though they are important concerns, divert our attention from the long-term plans that are necessary,” he says.
“[But the virus] is going to change behaviour for the long term, as companies realise that they need to rebalance their supply chains and can’t be so dependent on any one geography,” he adds.
While the plant in China has stalled, MicroMechanics’ plants in the US, Malaysia, Singapore and the Philippines will help to pick up the slack. “Even though our plant in China is generally geared towards supporting Chinese customers, any of the factories in Asia can help out if need be, so that’s a bit of contingency work in place,” says Borch.
Micro-Mechanics is also banking on its markets outside of China to help tide it over the difficult period. For instance, the group is turning more attention to the US, which is its second largest market after China, contributing some 21% to revenue in 2QFY2020. “We are seeing really nice improvement in the market for wafer fab equipment companies, and most of our customers are optimistic about plans for 2020. That could be a nice growth opportunity for us,” says Borch.
Competitive advantage
While the broader positive industry trends will benefit everybody, if Micro-Mechanics is to stand out, it simply has to be more efficient than the competition. “Automation is really important. There’s some great technology available today that wasn’t available five years ago. We are beginning to embrace some of the smart factory initiatives – using smart factory data, digital processes to eliminate things and tasks that humans had to do. That’s a really important part of strategy moving forward,” says Borch.
In 2QFY2020, Micro-Mechanics’ gross margin was 53.9%, an improvement from 52.4% in the year earlier. This helped the company report a 14.4% y-o-y increase in earnings to $3.6 million, from $3.1 million. Borch hopes to further improve on efficiency by using more automation, boosting utilisation rates. For example, some of the company’s plants are now running round-the-clock. “Consumers want more, for either less or the same price. The industry is always going to have to try to do things better for either the same price or less,” he says.
Although the virus has thrown a temporary dampener on global business sentiment, MicroMechanics is choosing to remain focused on the industry’s long-term trends without being preoccupied with the short-term uncertainty. Borch describes the Covid-19 disruption as akin to the US-China trade tensions, in the way they are both creating anxiety and lack of clarity. Companies just have to keep calm and carry on with meeting the growing demand for semiconductors, he says.
“While industries like hospitality and tourism have seen disruptions, if you were planning to upgrade your computer system or get a 5G phone, you would go ahead with it anyway. This virus is sort of like a temporary surprise, it’s going to clear up, but we just don’t know when,” says Borch.
