UMS Holdings

[Boon]

2000:
UMS secured AMAT as Major Customer

2002:
AMAT was first granted option to take a stake in UMS

2007:
AMAT exercised option and subscribed for 20,639,400 shares in UMS.

2008:
Applied Materials Breaks Ground for Asia Operations Center in Singapore

http://www.appliedmaterials.com/company/...-singapore

2010:
Applied Materials Opens Global Hub in Singapore for Manufacturing Semiconductor Equipment

The 32,000m2 Center, located in the Changi North Industrial Park, will serve as a hub for Applied’s semiconductor equipment manufacturing around the world, as well as support its worldwide supply chain operations and other corporate functions.

http://www.appliedmaterials.com/newsroom...-equipment

2010

From UMS Corporate Presentation Material :

http://umsgroup.listedcompany.com/misc/U...1_11am.pdf

Investment Highlights
- Leveraged competence in components to work with major customer during financial crisis to develop higher-value integrated systems, expanding product portfolio
- Efforts began paying off significantly from 2H2010; major reason for profit increase

Strategy Updates:
- Major customer is relocating more value added manufacturing to Asia
- Two years of process development with customer, reaping fruits only in 2H2010

2013 :

Announcement of merger of AMAT + TEL
Hinting to move more manufacturing jobs to Singapore

AMAT was at Credit Suisse Technology Conference held on December 3, 2013 and during the Q&A session, the statement by Bob Halliday:

Question: John Pitzer – Credit Suisse

Well, Bob, when you think about the Tokyo Electron transaction the cake is truly the fundamental synergies on the product side. I would argue the icing is some of the financial advantages you will get.

Can you walk a little bit through those advantages and, just in general, your view of cash flow and uses of cash and return of cash to shareholders?

Answer : Bob Halliday (AMAT)

Yes, there's a couple of leverage points there. One is generating more income and the second one, which is really fundamental, is generating better cash flow for investors. I think we have a real opportunity for both.

Because the combined companies in the strong wafer fab equipment yield like 37, we said we could do 18 billion. But even in a lesser year, we think we can do significantly better operating margins and that is really my focus for Applied and the combined companies to generate significantly improved operating margins even regardless of the volume. Okay, the wafer fab equipment volume.

So if you can generate 20%, 25% operating margins – and that is very viable even in a low year. Because you look at 50% drop through pretty strong IPs, strong product positions, good service business, we model 25% operating margin. I think that is very doable even in an off year. I don't know why we can't get to 20% or so. So then, what gets to investors? Cash, right?

So if you look at the semi cap industry it is an industry that inherently can generate significant cash returns as long as you don't get too much fixed cost. Because the industry tends to cycle up and down.

So if you look at the history of the industry, you have one boom year, one year you are ascending, its chaos growing, one year you make a lot of money and one year you write off everything. And that is a fundamental issue of putting too much fixed cost into the structures, too much time, it takes too long.

So, if you take these costs and time out you can make 20%, 25% operating margins pretty much year in and year out. And it is cash margins if you do it right. Because we don't have to invest a lot in fixed assets. Its receivables and inventory we cycle up and down and so the cash-operating margin can be 20%, 25%.

And what this merger unleashed for us was almost a unique opportunity structurally to merge the companies. One of the Japanese operating companies was an American operating company and put the parent company structure in Holland and also put a lot of the manufacturing and intellectual property value added through Singapore, which we have already sampled out of that.

So what you get is a much greater flexibility of moving cash around the Company, and returning dividends and higher share buybacks to investors. So, I think it is almost uniquely positioned as a company that can generate high cash returns to investors. And if we are successful in growing the Company, it's a big tech, potentially strong growth. Very high cash-generating business.

http://seekingalpha.com/article/1875061-...art=single

2014:

Research Report from KimEng_Maybank

http://research.maybank-ib.com/pdf/docum...4_5643.pdf

Lucrative OEM contract with Applied Materials
UMS has a five-year supply contract with AMAT to machine and manufacture components, sub-modules and whole systems for the latter’s Endura vapour deposition equipment from 2012 to 2017. As a result, as much as 80% of UMS’s revenue comes from AMAT such that a comparison of the two companies’ sales trends would look like they are the same company! Some investors may not like this single-customer, single-product dependency.
However, AMAT gives UMS a fixed percentage allocation (~80%) of its annual requirements at a fixed margin. In addition, this contract is renewable for another five years after 2017. In our view, UMS’s OEM business with AMAT appears to be sustainable.
We can think of two reasons why the two companies have such a strong relationship.
• First, their factories in Singapore are just five minutes apart. Competitors may be able to offer better pricing but they will never beat UMS in terms of speed to respond. According to management, AMAT practically treats UMS as its extension factory. This makes it difficult for a competitor to break into the business.
• Second, UMS also offers a comprehensive suite of more than 70 metal finishing processes in-house that its competitors cannot, such as chemical cleaning, anodizing and plating.

________________________________________________________________________________________________________________

Comments:
1) So, it appeared that UMS did leverage its competence in components and worked with AMAT during the financial crisis to co-develop higher-value integrated systems and expand product portfolio of AMAT - Efforts began paying off significantly from 2H2010.
2) I did mention this before – any process or product co-developed between UMS and AMAT, would implied sharing of intellectual property right- I don’t know how the R&D costs had been shared between them but the profit sharing seemed to be as reported by KimEngMaybank – AMAT gives UMS a fixed percentage of its annual requirements at a fixed margin.
3) Hence, as long as this shared intellectual property right – be it a process or an end product – still has its value – the strategic partnership between AMAT and UMS would be intact - unless AMAT is willing to buy it off completely from UMS.
4) It does not seem like the Endura system is going to be outdated soon – on the contrary, more PVD process steps are required in 3D chips including FinFET – otherwise AMAT would not have expanded on this platform with new products
5) If this is the case – and it appears to me that it is - it doesn’t really matters if AMAT sells off all its shares in UMS. .
6) It also would not matter much if UMS does not get more job from AMAT + TEL，if they could merge successfully- even if is in their game plans to move more manufacturing job to Singapore - but it would be an added bonus if it happens.
7) Without the co-sharing of intellectual property right - there is no other ways to explain the high margin that UMS has been able to enjoy since 2010.

(vested)