UMS Holdings

[Boon]

Thanks Nick,

I managed to find the net profit margin for 2010 ( 22.3% ) and 2011 ( 24.2% ) on page 8 of AR2011. These figures look impressive compared to that of its competitors.

2010 net profit margin of its competitors: AEM (2.8%), Avi-Tech (3.1%), MIT (6.9%), Micro-Mechanics (15.1%), and Rokko (10%). May be UMS has some kind of competitive advantage over them.

[shanrui_91]

Thanks Nick,

I managed to find the net profit margin for 2010 ( 22.3% ) and 2011 ( 24.2% ) on page 8 of AR2011. These figures look impressive compared to that of its competitors.

2010 net profit margin of its competitors: AEM (2.8%), Avi-Tech (3.1%), MIT (6.9%), Micro-Mechanics (15.1%), and Rokko (10%). May be UMS has some kind of competitive advantage over them.

ums provides multiple value-added services for its customer and they are being billed as a whole instead of individual service. I think Micro-mechanics is worth looking into as well given that they have remained profitable even in 2009. If not for their acquisition of AMP3 LLC in 2008 which contributed to a $3m losses in 2009 (they were close to breakeven then the GFC struck), their profit will have been $3.5m. They have a strong balance sheet as well with no debt and with sufficient cash to pay for all the payables.

http://micromechanics.listedcompany.com/summary.html

[Nick]

Applied Materials cuts outlook as chipmakers curtail orders

http://finance.yahoo.com/news/applied-ma...24397.html [Article]

Applied Materials have reduced its revenue guidance for the next quarter due to lower demand for pc and chips. AM is a major customer for UMS (> 85% of the revenue) and this will impact its profitability in 2H 12 if there is no rebound in demand for chips.

UMS closed at 39.5 cents after its 1Q 2012 1.0 cent dividend XD'ed.

(Vested)

[Musicwhiz]

Applied Materials have reduced its revenue guidance for the next quarter due to lower demand for pc and chips. AM is a major customer for UMS (> 85% of the revenue) and this will impact its profitability in 2H 12 if there is no rebound in demand for chips.

Do you think this will be a cyclical thing or that demand would be permanently affected by advancements in chip technology?

For UMS, do they have any competitive edge over others or do they compete mainly on price?

Thanks!

[Drizzt]

tech at this level usually there is no competitive edge. they should be efficient operators and lowest cost producers. even the best operators will be affected when their major customers demand falls

[Nick]

Applied Materials is being affected by the major chip makers and foundries delaying their capex spending due to the drop in demand for chips. This is seasonal and will eventually rebound as people continue to desire new smartphones, tablets and pc assuming no major recession.

UMS niche is its close relationship with Applied Materials in system integration (solidified in 2008). Like Adampak, I don't think major manufacturers will turn to a brand new supplier with little track record to cut some cost but face the risk of a major disruption in their supply chain. This partnership has allowed UMS to report gross margins exceeding 50% and generate positive FCF annually since 2005.

With that being said, UMS fortunes is tied with Applied Materials - it did report a loss in 2009 when Applied Materials suffered. This is a company dealing in a cyclical semiconductor industry with little diversification hence its operating outlook will be volatile. There is a possibility of dividends being cut if operating profit suffers in 2H 2012.

(vested)

[Boon]

I thinks its competitive advantage lies with IMT-S and IMT-USA

According to SIAS research dated 05 March 2012, see page 4, it is stated that

"More importantly, the lack of qualified vacuum welding and tube bending Applied contractors in the region provide the company with a marginal discriminitory pricing advantage........"

[investmentjourney]

Hi Nick,


I am a newbie here.
May i know how did you find out that UMS' revenue is more than 85% from Applied Material? I did look through the Annual Report 2011 but it does not mention about this.

Many thanks in advance.

[Boon]

Both IMT-S and IMT-USA have been accredited by Applied Material to perform orbital welding (vacuum welding and tube bending), i.e. they are on Applied Material’s “Approved Vendor Lists”. This is the Competitive Advantage UMS has that enable it to achieve a net profit margin in excess of 20%.

Please refer to page 8 and 9 of the following Circular to Shareholders dated 12 January 2012

http://info.sgx.com/listprosp.nsf/5ec09b...ing%29.pdf

(a) Provision of vacuum welding and tube bending services by IMT-S and IMT-USA

Both IMT-S and IMT-USA provide vacuum welding and tube bending services to the Group. Although vacuum welding and tube bending services are necessary to the Group’s business, the Group is not qualified to supply such services to its major customer, Applied Materials, Inc., based on its major customer’s certification processes. The Group’s major customer has accredited IMT-S and IMT-USA for what it calls “orbital welding” and what the Company refers to as vacuum welding and tube bending. Only vendors who are accredited to perform orbital welding can supply such services in the manufacturing of products that the major customer buys. Each of IMT-S and IMT-USA possess the necessary accreditation to supply such services to the Group’s major customer and are on a short list of companies which the major customer considers qualified to perform such services. As such, the Group has been entering into various transactions with IMT-S and IMT-USA in connection with the provision of vacuum welding and tube bending services, and the size of transactions with IMT-S and IMTUSA
has increased in proportion to the Group’s integrated systems business.

(b) Provision of semi-conductor equipment components by the Group

The Group sells semi-conductor equipment components to IMT-S and IMT-USA who in turn integrate such components into their end products and sell these end products to the Group’s major customer. The Group is unable to directly supply final manufactured gaslines and weldments to its major customer because it is not a qualified supplier according to the major customer’s accreditation process. The major customer’s accreditation process is a complex process involving multiple stages. As a
very brief summary, those stages include, amongst other things, (i) providing company details, financial risk assessments and advanced technical specifications, (ii) auditing and monitoring the manufacturing/servicing process and (iii) testing the finished product in order to ensure it meets the major customer’s quality standards. Only successful candidates who have satisfied the above stringent approval process are added to the major customer’s “Approved Vendor List”.
Although IMT-S and IMT-USA are qualified suppliers, each of them do not have the Group’s machining capabilities. As such, the Group machines the components, while IMT-S and IMT-USA conduct the final welding and sell the end product to the Group’s major customer.

[Nick]

Hi Nick,


I am a newbie here.
May i know how did you find out that UMS' revenue is more than 85% from Applied Material? I did look through the Annual Report 2011 but it does not mention about this.

Many thanks in advance.

Hi Investmentjourney,

At the bottom of pg 78 of AR 2011, it mentions:

Information about major customers

Included in revenues arising from semiconductor segments of S$107.2 million (2010: S$119.2 million) are revenues of approximately S$99.6 million (2010: S$105.6 million) which arose from sales to the Group’s largest customer.

Since the total revenue for FY 2011 was $114.4 million, the contribution from the major customer ie Applied Materials amounts to 87% of the Group's revenue.

Applied Materials also owns a 6.0% stake in UMS Holdings.