UMS Holdings

Yup. I also do think that it's once off but reading the announcement again places some doubt in my head.. Not sure if it means that the discount is extended for 5 years or once off!!

But at least it's on for "some product lines" and not across the board...

I do not think that the low margins were solely due to the discounts... My guess is that there was prob some inventory issues which were written off... I do not really like their way of presenting the profit and loss statement as it seems to hide ineffective inventory management practices...

It is clear that the Market did not like the margin depression with a sell-off yesterday with decent volume.

Quote:UMS 4Q2012 gross material margin declined to 41% from 54% in 4Q2011. This decline in margin was mainly due to inventory adjustment made during the quarter as well as UMS extending price discount on some products lines. The price discount was made in return for a 5 year contract extension of the Semicon Integrated System business with a key customer.

I don't think it was a pure price discount scenario which occurred in 4Q. As Boon has calculated - it would imply revenue in excess of $27 million which wouldn't square well with 3Q result and the lower semiconductor equipment booking in 4Q should imply similar or lower revenue with 3Q of approx $21 million. Hence, the decline in gross margins could be due substantially to a one-off inventory adjustment or write off. Again, it is difficult to judge since the Management failed to give a satisfactory reply on what happened. Moreover, no details were given on the trade discount to Applied Materials - one off or recurring. If it applies indefinitely, it changes the game completely since UMS needs to generate 1/3 more revenue to earn the same amount as pre 4Q.

My point of view is that semiconductor equipment do become outdated rather quickly looking at the rate of advances seen throughout all the consumer electronics devices we have. Therefore, i would not be surprised that the discount has been given to older manufacturing machines such as those required for the 28-nanometer processors, which should be at the mature towards decline section of the production life cycle. These machines could also have been piling up due to weak demand in Q4 2012.
The machines for the 28 Nm should be towards the end of their production cycle and UMS would be moving on to building the machines for those newer 20-nanometer processors where it is at the introduction -> growth stage of the life cycle.
Therefore I am still optimistic about the opportunities for the year ahead for UMS and will continue to accumulate.

This is my hypothesis: Inventories are written off due to quality and reliability issues found in some of their equipment. If this is the case, hopefully UMS has found the root cause and stem the problem. Nonetheless, the confidence with the major customer may have been shaken.

(03-03-2013, 09:51 PM)mrEngineer Wrote: This is my hypothesis: Inventories are written off due to quality and reliability issues found in some of their equipment. If this is the case, hopefully UMS has found the root cause and stem the problem. Nonetheless, the confidence with the major customer may have been shaken.

That could be possible - but why would Applied Materials tie themselves up for another 5 years and risk more poor quality products ? I think a margin squeeze is more probable since 4Q was a terrible quarter for the industry. Alternatively, it is provision for older and obsolete equipment produced earlier this year and its demand fell dramatically in 2H ? Both are not reassuring either haha.

On another note, UMS conducted a presentation yesterday in the Invest ASEAN 2013 conference in Malaysia titled: Leveraging on the boom in smartphones and mobile devices
Speaker: Andy Luong, Chief Executive Officer.

Any one managed to find the presentation slides ???

(03-03-2013, 09:58 PM)Nick Wrote: That could be possible - but why would Applied Materials tie themselves up for another 5 years and risk more poor quality products ?

In the semicon industry, it is difficult to search for multiple suppliers as for your equipment parts or some processes have been commissioned with certain equipments and certification, it will be difficult for AMAT to change supplier easily. At the same time, UMS also offered discount to entice AMAT to hook up for another 5 years. Also, I do not mean all inventories are impaired that will result in a massive withdrawal from AMAT off UMS but probably certain product lines are affected only.

This is only a hypothesis based on how things work in the industry. There are definitely other possiblities.

(03-03-2013, 10:21 PM)mrEngineer Wrote:

(03-03-2013, 09:58 PM)Nick Wrote: That could be possible - but why would Applied Materials tie themselves up for another 5 years and risk more poor quality products ?

In the semicon industry, it is difficult to search for multiple suppliers as for your equipment parts or some processes have been commissioned with certain equipments and certification, it will be difficult for AMAT to change supplier easily. At the same time, UMS also offered discount to entice AMAT to hook up for another 5 years. Also, I do not mean all inventories are impaired that will result in a massive withdrawal from AMAT off UMS but probably certain product lines are affected only.

This is only a hypothesis based on how things work in the industry. There are definitely other possiblities.

Ahh Ok...I got it. Thanks for the explanation.

For part suppliers with excess inventories that are outdated, they will need to clear asap before they become obsolete.
For system manufacturers, they need to keep excess parts to service their old equipments. (You can literally chop carrots when some 90nm, 65nm or 45nm semi conductor plant owner comes and ask you for parts to service their machines)

The likely scenario is that one party wants to clear inventory while the other party wants to keep excess parts for servicing.
In this case, UMS probably lelongs their parts to AM.

(03-03-2013, 09:58 PM)Nick Wrote:

(03-03-2013, 09:51 PM)mrEngineer Wrote: This is my hypothesis: Inventories are written off due to quality and reliability issues found in some of their equipment. If this is the case, hopefully UMS has found the root cause and stem the problem. Nonetheless, the confidence with the major customer may have been shaken.

That could be possible - but why would Applied Materials tie themselves up for another 5 years and risk more poor quality products ? I think a margin squeeze is more probable since 4Q was a terrible quarter for the industry. Alternatively, it is provision for older and obsolete equipment produced earlier this year and its demand fell dramatically in 2H ? Both are not reassuring either haha.

On another note, UMS conducted a presentation yesterday in the Invest ASEAN 2013 conference in Malaysia titled: Leveraging on the boom in smartphones and mobile devices
Speaker: Andy Luong, Chief Executive Officer.

Any one managed to find the presentation slides ???

The slides can be found here: http://www.set.or.th/th/asean_exchanges/..._ASEAN.pdf

As you can imagine, the tone is positive both on UMS business and prospects.

(03-03-2013, 10:57 PM)FatBoi Wrote:

(03-03-2013, 09:58 PM)Nick Wrote:

(03-03-2013, 09:51 PM)mrEngineer Wrote: This is my hypothesis: Inventories are written off due to quality and reliability issues found in some of their equipment. If this is the case, hopefully UMS has found the root cause and stem the problem. Nonetheless, the confidence with the major customer may have been shaken.

That could be possible - but why would Applied Materials tie themselves up for another 5 years and risk more poor quality products ? I think a margin squeeze is more probable since 4Q was a terrible quarter for the industry. Alternatively, it is provision for older and obsolete equipment produced earlier this year and its demand fell dramatically in 2H ? Both are not reassuring either haha.

On another note, UMS conducted a presentation yesterday in the Invest ASEAN 2013 conference in Malaysia titled: Leveraging on the boom in smartphones and mobile devices
Speaker: Andy Luong, Chief Executive Officer.

Any one managed to find the presentation slides ???

The slides can be found here: http://www.set.or.th/th/asean_exchanges/..._ASEAN.pdf

As you can imagine, the tone is positive both on UMS business and prospects.

Thanks for the reply.

I believe this is the Jan 2013 conference in Thailand. Just wondering whether they created new set of slides for yesterday conference taking into account FY 2012 results.