MICRO-MECHANICS (HOLDINGS) LTD (SGX:5DD)
Micro-Mechanics - Semiconductor Consumables Specialist A Proxy To 5G Digital Revolution
- The irreversible trend of digitalisation will drive increasing demand for semiconductor chips. Although hampered by the COVID-19 outbreak in the near term, key industry consumables supplier Micro-Mechanics will benefit as the digital revolution approaches the phase of steep growth on the S-curve, with the widespread adoption of 5G in the near term.
- We initiate coverage on Micro-Mechanics with a HOLD call.
- Target Price: S$1.82. Entry price: S$1.55.
Micro-Mechanics Company Background
PRINCIPAL BUSINESSES OF MICRO-MECHANICS
- Just as sewing machines require needles, and printers require ink cartridges, Micro-Mechanics (SGX:5DD) designs and manufactures high precision consumable tools and parts used by the tens of thousands of machines worldwide that assemble and test semiconductor chips.
- Currently, the group produces consumables for three of the 10 major assembly and test processes, namely die-attach, wire-bonding and encapsulation.
- For instance, the die-attach process, sometimes referred to as pick-and-place, involves attaching a die to a printed circuit board with precise accuracy. Repetitive use would result in the wear of the tools and parts used in the process, thereby reducing accuracy. Hence, these tools and parts are termed consumables, as they need to be replaced regularly, and are the type of products that Micro-Mechanics specialises in.
- Products manufactured by Micro-Mechanics under the die-attach segment include rubber tips and high temperature plastic pick-up tools for the pick-up process, dispense nozzle adaptors and epoxy stamping tools for the dispensing process, as well as ejector needles and pepper pots for the die ejection process.
- There is a misconception whereby these products manufactured are of low value and/or easily substituted by competition that faces low barriers to entry. On the flip side, these specific tools and parts are vital to the production of semiconductor chips and not easily replaceable, evidenced by the sizeable gross margin sustained by Micro-Mechanics since 2002.
- These consumables are indirect materials used as part of the production for semiconductor components, in both the front-end and back-end manufacturing processes. Micro-Mechanics serves the entire application spectrum in the semiconductor industry, from computers and consumer electronics to automotive.
- Additionally, Micro-Mechanics engages in contract manufacturing of parts and tools for process-critical applications for wafer-fabrication in the aerospace, semiconductor, laser and medical industries.
LARGE DIVERSE CLIENTELE
- Listed on the SGX in 2003, Micro-Mechanics currently serves a worldwide base of more than 600 active customers that includes nearly all of the American, European, Japanese and Asian semiconductor makers.
- It has 5 manufacturing facilities located in Singapore, Malaysia, China, the Philippines and the US, as well as a direct sales presence in Taiwan and Europe. In FY19, the group's top 11 customers contributed 35% of overall sales.
- Geographically, the top three contributors to FY19 revenue stemmed from China (29%), the US (21%) and Malaysia (19%), while others included the Philippines (10%), Taiwan (7%) and Singapore (5%), Europe (4%), Japan (2%), Thailand (2%) and others (1%).
NO DIRECT GLOBAL COMPETITORS
- The long and reputable track record of Micro-Mechanics has helped the company extend its product range, production scale and geographical coverage. Its improved capabilities enhance customer stickiness, even during the recent consolidation of upstream semiconductor manufacturers, and are reflected in its steady revenue CAGR of 7% over FY14-19.
- Furthermore, Micro-Mechanics’s pricing power and ability to pass on costs resulted in a stable gross profitability range between 46% and 63% since listing (excluding FY09 GFC of 39%).
Mass adoption of 5G to spearhead next growth leg for Micro-Mechanics.
- The last 40 years saw the build-up of the massive infrastructure of the Digital Revolution, via successful penetration by computers, servers and mobile phones, which we rely on in the digital world today. The disruption has led to an upscaling of efficiency in our lives and we believe the upcoming adoption of 5G en masse over 2020-22 will be the next growth leg in the era.
COVID-19 disruption to delay ramp-up.
- While industry heavyweights raised capex budgets in mid-Oct 19 on a previously anticipated demand boost arising from the 5G evolution, the pandemic has delivered a second blow to the semiconductor supply chain. The COVID-19 situation is still fluid as the extent of the global recession would have consumers spending less, but the longer-term upward trajectory towards 5G technology remains.
- We anticipate supply chain normalisation to return in Oct 20 in the base case.
Positioned as key industry downstream supplier.
- Management’s astute positioning for Micro-Mechanics as the leading parts and consumables supplier for the broad spectrum of the semiconductor industry has proven effective, as reflected in a solid long term revenue CAGR of 8.8% and net profit of 15.6% since FY02. The extensive product range, production scale and geographical coverage have put Micro-Mechanics in a superior position among downstream peers, providing customer stickiness.
- Furthermore, the group’s stable gross profitability range between 46% and 63% since listing (excluding 2009 GFC of 39%) is strong testament to its competitive edge and management’s ability to retain pricing power in the cyclical sector.
Initiate coverage with HOLD and target price of S$1.82.
- We value Micro-Mechanics at 8.8x FY21F EV/EBITDA, a 20% discount to global peers’ average due to the low liquidity. We believe investors should keep Micro-Mechanics on their radar given its:
- diverse clientele,
- experienced industry-veteran management, and
- superior industry positioning.
- See Micro Mechanics Share Price; Micro Mechanics Target Price; Micro Mechanics Analyst Reports; Micro Mechanics Dividend History; Micro Mechanics Announcements; Micro Mechanics Latest News.
- Positive developments on the COVID-19 situation and a normalisation of orders in the semiconductor value chain should drive outperformance of Micro-Mechanics relative to SGX-listed peers, given its superior ROE and profitability.
- Entry price: S$1.55.
- See attached 15-page initiation coverage report for complete analysis on Micro-Mechanics.
Clement Ho
UOB Kay Hian Research
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https://research.uobkayhian.com/
2020-04-28
SGX Stock
Analyst Report
1.82
SAME
1.82
