Micro-Mechanics (Holdings)

[Contrarian]

Price is cheaper now. I wonder how much earnings will drop from last year.

[weijian]

Price is cheaper now.  I wonder how much earnings will drop from last year.

I do not have an intimate understanding on the economics on MMH business. But I thought the LTM (Last 12 months) historical earnings change for TSMC as showed by this blogger might be indicative of how long this current downturn may be.

https://www.fabricatedknowledge.com/p/ar...pletons-of
P.S. look for TSMC’s "monthly revenue"

From deceleration to negative growth, historically in the last 10 years, we are looking at ~6months (the last brief downturn in 2018) to ~18months (GFC2008).

[BlackCat]

Given these few points, my thinking is MMH had not been breaking thru in sub-10nm space aka non of the sub-10nm chips are using MMH's products.

Similar thoughts.  I just started looking at the semicon space, and am trying to figure out what this company does.  

What I can gather is that it is involved in 2 ways of packaging chips: wire-bonding (very old) and die-attach (probably flip-chip - currently used for older chips).  Are they  involved in 2.5D or 3D packaging used for newer chips?  (A good description of 2.5D and 3D packaging is at https://www.fabricatedknowledge.com/p/se...ng-history).

So I get the impression they only handle low level chips (eg: household appliances) or mid-level chips (eg: automobiles), but not the high-end chips used for servers or iphones.  Is this true?  Their 2019 revenue breakdown: 63% of revenue was from countries that don't produce high end chips (China/M'sia/Sg/Philippines).

This might not be a bad thing, as there could be a long-term shortage of lower-end chips due to EVs and IOT (see 'Old chips cost More' https://www.fabricatedknowledge.com/p/th...iconductor).

[weijian]

Hi BlackCat,

MMH is a precision part manufacturer, whose customers are OSAT (Outsourced semiconductor assembly and test) or IDM (Integrated Device Manufacturers). OSAT are contractors who specifically assemble/test semiconductor chips for their customers. IDMs (Integrated Device Manufacturer) are like Intel or Samsung who manufacture their own chips and assemble/test of semiconductor chips as well.

Compared to chip manufacturing (also called "frontend"), the assembly/test part of the supply chain (also called "backend") is much less sexy. There is less need to keep up to Moore's Law - hence less R&D, less CAPEX. As a result, most of the OSAT (or IDM have their backend operations) are situated in "lower cost countries" like China/Msia/Philippines or just simply found in chip manufacturing hubs (eg. Taiwan/Spore) to reduce supply chain complexity.

Many of the core technologies for backend assembly haven't changed for a long time (and that is a good thing for investors to hear actually). Of course, as frontend chip technology evolves, it will require new form factors (just a fancy word for smaller sizes demanding larger expectations), so backend has to evolve too, just much slower than frontend.

The other portion of the business (mainly US and still loss making) is also providing precision parts to an equipment manufacturer. The only difference is that their customer is a supplier for the frontend, while the OSAT are suppliers for the backend.

So in a way, MMH is pretty far removed from all the exciting evolutions in the semiconductor space. However since investors are often better off looking to invest in things that don't change, this is not a bad thing in my opinion. And MMH have sticky products - once their small part/s is qualified in the entire machinery, they rarely change because:

(1) In the semiconductor space, most equipment doing the same function, are frequently very similar to enjoy economies of scale (eg. less downtime with servicing due familiarity). Therefore, any requalification is large scale, hence expensive and complex. Decision makers seldom take such risks unless forced to.
(2) Any cost reduction efforts by its customers will probably only target the biggest 1-2 consumable item, not those small parts since the ROI is too small for the latter due to the requalification effort as explained in (1).

[¯|_(ツ)_/¯]

MMH@178 - yes, it's SGD1.78 now. what are you going to do?

Just wanted to add on to WJ post above.

Many of the core technologies for backend assembly haven't changed for a long time
This is good news for MMH because SemiCon industry is notorious for being Capital intensive due to frequent obsolescent of its equipment.  MMH core products (miniature consumerable tools) fall nicely into this and avoided the heavy capex.

My thinking is this trend will continue but we need to look out for a possibility of MMH invest in opening up a new factory (says in USA). 


Sticky products - once their small part/s is qualified in the entire machinery, they rarely change
This is a double edged sword. By now, all valuebuddies concern would be whether MMH managed to punch thru it's technology limitation of sub-10nm tools.  MMH had make it clear that only way for them to continue being a market leader is a break thru into serving customer in this niche segment. 

My thinking is MMH should be able to cross the Chasm but we need to look out for a possibility that it couldn't or by the time MMH managed to R&D sub-10nm tools, it's (existing & potential) customer already found another supplier.

If this is the case, then it would be extremely difficult for MMH to sell it's sub-10nm tools due to the long qualification process (if customer do wanted to take a risk and give a chance to qualify MMH's sub-10nm tools)

Last but not least, COO and CFO retired at the same time
The timing is just coincident?
What if there are something brewing that caused their retirement.
To err on the safe side, I would think that both of their retirement will have negative impact to MMH's operation and financial performance.  

Of course, the latest Qtr result is out and nobody like the number. 
Question is what would be the operational impact that is not obvious at this point in time?

Building a factory in USA - to me is a likely scenario.  
What are you going to do?

Gratitude. 

[weii]

Sticky products - once their small part/s is qualified in the entire machinery, they rarely change
This is a double edged sword. By now, all valuebuddies concern would be whether MMH managed to punch thru it's technology limitation of sub-10nm tools.  MMH had make it clear that only way for them to continue being a market leader is a break thru into serving customer in this niche segment. 

My thinking is MMH should be able to cross the Chasm but we need to look out for a possibility that it couldn't or by the time MMH managed to R&D sub-10nm tools, it's (existing & potential) customer already found another supplier.

If this is the case, then it would be extremely difficult for MMH to sell it's sub-10nm tools due to the long qualification process (if customer do wanted to take a risk and give a chance to qualify MMH's sub-10nm tools)

May I know which supplier is venturing into making sub-10 nm tools?

"As the semiconductor industry develops new equipment and processes for manufacturing chips with device geometries below 10 nanometres, our customers will increasingly require parts and tools manufactured using improved materials and processes that eliminate defects and variability. At the same time, our customers need suppliers that are responsive, cost-effective and resilent." - from Micro-Mechanics announcements

Micro-Mechanics approach to meet customers needs as chips geometry goes below 10 nm:
Improved materials: We are continually developing proprietary materials, such as an elastomer that disipates static electricity which, if left unchecked, could lead to damaged chips.
Processes that eliminate defects and variability: Developing methods to clean our parts and tools and reduce the possibility of introducing organic or
ionic contaminants which are especially detrimental to the chip-manufacturing process.
Suppliers that are responsive, cost-effective and resilent: To this end, our
strategies include automating our operations and implementing Smart Factory technologies such as RFIDenabled cutting tools, embedded equipment sensors and specialized software.

There is no mention that there is a need for sub- 10 nm tools.

The very fact that Micro-Mechanics can command a high gross margin of around 50% during normal times could be an indicator that there are few strong alternative suppliers available besides Micro-Mechanics. The market size for the types of parts and tools that Micro-Mechanics manufactures is actually rather small and does not attract many competitors.

[¯|_(ツ)_/¯]

MMH@180

MMH business does not really changed much for the past 20 years and likewise, both it's financial and operational KPI does not change much too.

With the departure of COO and CFO, GPM (which is a major KPI for MM's management) dropped to 45.2% in 2Q23.  

This is definitely a red flag that valuebuddies need to keep a closer eyes.  

Next, MMH is notorious of it's payout ratio.  From 2019, MMH had been paying out closed to 100% of it's earning. Recently at more than 100% payout ratio.  Given the dropped in GPM to 45.2%, MMH continued to pay out 6 cents dividend and the pay out ratio (against earning) is wopping 136%.

This is definitely a red flag that valudbuddies need to keep a closer eyes too.

Granted, MMH does not have any competitors and this was true in the past 20 years too.  Moving forward, I wish this is true too.

Question is at SGD1.80, what are you going to do?

Gratitude.

[¯|_(ツ)_/¯]

MMH@190

FY2023 Result is out:

#1 Dividend dropped to 3cents (and at a record payout ratio of 128%)
#2 GPM dropped below KPI of 50% due to lower revenue (but fixed cost)
#3 FY2024 need to preserved cash due to uncertain economic conditions and $4m capex
#4 MMUS 
a) Loss $1.5m
b) Restructured and further narrowed to focus on 4 area
c) Expecting cost saving of $2m in FY2024

Enjoy: MMUS - this initiatives supposed to expand into a new market segment aka increase MM's TAM.  With the restructuring of MMUS, we need to watch the top line.... otherwise... ai ya....



Gratitude.

[weijian]

MMH announced 1H24 results recently and things do not look good.

- Despite chip sales finally showing a YOY increase in Nov2023, 2Q (Oct-Dec2023) saw the lowest quarterly revenue in the last 5 years. MMH is loaded towards the backend of the semiconductor value chain and so the time lag should not be further than a few months. Has anything material happened to its "sticky consumables" business?

- A 2nd restructuring has occurred for MMUS. I used to think that MMUS, specializing in frontend equipment is a wild-card for MMH. It wasn't making money all these time and with these restructuring and reduction of capabilities, will it get worst? US may not be competitive after all, wrt to outsourcing Asian sites.

GENERAL ANNOUNCEMENT:RESENTATION MATERIALS FOR 1HY2024 RESULTS BRIEFING ON 31 JANUARY 2024
https://links.sgx.com/1.0.0/corporate-an...fc8662ed80