KESM rides on auto growth
BY AFIQ ISA
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Lim: ‘We have more than three decades of burn-in and test experience with a very broad spectrum of semiconductor devices. Additionally, we focus on high growth markets such as the automotive, industrial and data storage markets.’
Lim: ‘We have more than three decades of burn-in and test experience with a very broad spectrum of semiconductor devices. Additionally, we focus on high growth markets such as the automotive, industrial and data storage markets.’
Company lifted by booming automotive semiconductor market
KESM Industries Bhd, the world’s largest independent burn-in and test service provider, has set its sights on consolidating its foothold in the booming automotive semiconductor market following stellar earnings growth over the past three years.
After years of flying under the radar, investors have by now certainly noticed KESM’s tripling in net profit during that period. Since the second half of last year, its stock price has rallied at a staggering rate from RM4.03 to RM10.98 as at March 16, or an increase of 172%.
In a reply to StarBizWeek, the group attributed its earnings performance growth on steadily improving manufacturing efficiency.
This in turn provides a ‘time to market’ advantage for the group’s customers, which essentially means that the semiconductors are ready for use in the fastest time possible after undergoing stringent tests.
Burn-in is the practice of stress testing electronic components to detect failures or defects in a product. This may involve electrical or thermal tests to measure the durability of such components.
“We have more than three decades of burn-in and test experience with very broad spectrum of semiconductor devices.
“Additionally, we focus on high growth markets such as the automotive, industrial and data storage markets,” says the group’s executive chairman and chief executive officer Samuel Lim.
Pinpointing the automotice integrated circuits (IC) market as a major growth catalyst, he adds that worldwide demand for devices in this segment remains strong and is forecasted to grow by 7.2% year-on-year to US$23bil this year.
This is in line with various industry estimates.
The global automotive semiconductor market is expected to reach an estimated US$45.9bil in sales by 2022 and is forecast to grow by a compound rate of 6.4% per annum over the next five years, according to a recent report by global market research firm Lucintel.
The semiconductor content per vehicle is also expected to rise considerably as demand grows for more advanced safety systems as well as stricter regulations over carbon dioxide emissions.
The advent of autonomous vehicles is another game-changer for the industry, although this angle may be for the much longer term.
For example, the group has extensive experience in testing components for advanced driver assistance systems (ADAS), which provide the integrated functions of a front camera, park assist, surround view and sensor fusion in a single chip.
According to Lim, the growing demand is reflected in KESM’s current operations. The group counts the world’s leading automakers as its customers, meaning that there is little room for error when it comes to delivering chips with zero defects.
“We shipped over one billion devices to our customers in 2016. Presently, we are running at the optimum capacity,” he says.
According to one analyst, the automotive segment contributes close to 80% of KESM’s total revenue base and has seen robust growth.
Its capex requirements are estimated at around RM70mil to RM80mil per annum over the next few years, which is easily realized due to KESM’s low gearing and stable cash pile of more than RM100mil as at Jan 31 this year.
KESM also holds frontrunner status in the automotive semiconductor market among its peers.
According to Kenanga Research in a recent note, Unisem (M) Bhd derives 17% of its revenue from the market while Malaysian Pacific Industries Bhd’s share is 24% based on the latest quarter results.
While its revenue base grew from RM247.6mil in FY14 to RM285.7mil in FY16, its net profits and margins have increased tremendously.
KESM’s reported RM10.9mil in net profit for FY14 suddenly grew to RM30.7mil by FY16, signifying that the group is enjoying cost savings due to greater economies of scale.
At present, KESM’s earnings growth trajectory looks set to continue.
For the first half of its financial year ending July 31, 2017 (H1FY17), the group reported RM19.9mil in net profit from RM163.22mil in revenue, or a net profit margin of 12%.
Lim, who holds three US patents for inventions in various solutions in the burn-in and test segment, says that KESM intends to further capitalise on its frontrunner status in the industry.
“Our broad portfolio of engineering and management experience places us well in leading the group’s value delivery for stakeholders.
“We do not provide growth projections, but based on the current industry forecast and the first half results, the group is on track towards achieving its objectives,” he says. On the other hand, the group’s chief concern going forward is on the risk of sudden shocks in global trade which in turn influences semiconductor demand.
Additionally, lower economic growth also has a direct impact on demand for vehicles.
“The macroeconomics, whilst projecting a positive growth year, is being challenged by immigration and protectionism movements globally. This may in turn affect worldwide GDP growth which has a knock-on effect on the semiconductor industry,” Lim says.
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