Micro-Mechanics @ 3.12
Good morning valuebuddies,
Another brilliant day started and hope that everyone had a great day ahead.
During the short time when MM rush up to $4, I couldn't help but sold some of my MM stocks.
The rationale was rather simple, the stocks go up too fast in too short timeframe.
As the price gradually settled down to low $3, I thought it might be good time to start buying again.
*** Not an advice to buy, it's just a mental notes for myself ***
Since I intend to buy again, I thought just do some revision and get some clarity on the investment merit for Micro-Mechanics.
I started by reading it's latest FAQ published during last year AGM.
As I read the elaborated FAQ, it's deja-vu.
For valuebuddies worth their salt, our first question was MM does not have competitors. Well that's what MM always says and our valuebuddies kept asking MM management, are you sure?
And, it seems that despite so many years, MM management answer to this question never change.
So, as a revision, let's take a closer look and internalise the model answer.
As this is the top FAQ, I can almost guaranteed that despite the same answer, this question about MM's competitors will pop up again, every year.
Who are your major competitors?
Micro-Mechanics operates in the global semiconductor industry which is keenly competitive and constantly evolving as a result of disruptive technologies and shifts in the business environment.
Our semiconductor tooling business is primarily centred in Asia and serves a world-wide base of customers. While we are not aware of a similar company that is directly comparable to MicroMechanics in terms of product range, scale and geographical coverage, we do face a variety of competitors ranging from small local machine shops to a few larger multi-national companies.
In the “nano” world of the semiconductor industry, it has become increasingly challenging to manufacture tools and parts to support the demanding needs of customers for greater precision, flawless quality, reliability and cleanliness. In the future, we think there may only be a handful of suppliers capable of meeting these stringent requirements and our goal is to continually enhance our capabilities to become a leading Next Generation Supplier in this specialized market for high precision, process-critical tools in the semiconductor supply chain.
The Group’s business in the manufacture of process-critical parts for wafer-fabrication equipment makers faces different competitive challenges. While this space offers a much larger addressable market size, there are also entrenched suppliers including some of the world’s biggest contract manufacturers in addition to small machine shops. As a result, we are working to become an elite supplier of critical parts used in semiconductor wafer-fabrication, with competitive advantages so far not seen by others in terms of quality, repeatability and efficiency.
[b]Can you describe your competitive edge over other competitors?
What is your economic moat?[/b]
In essence, Micro-Mechanics’ key competitive advantages include our proprietary design capabilities and manufacturing know-how; our sound financial position which enables the Group to invest in automation and advanced equipment; as well as our ability to provide fast, effective and local support to our global customers. At Micro-Mechanics, we have a consistent focus on our gross profit margin which we believe is a key measure of our competitive strength, our focus on customers and the value that we bring to them.
Well, the reason why valuebuddies keep asking about MM's claim that it does not have a competitor is like so ah beng.
In any case, we don't really mind asking this question year after year because it sounds like music to the ear.
The next question is also a favourite among valuebuddies.
I can guarantee that this will come out every year too.
I can't really recall, it could be a financial analyst or a financial bloggers who commented that MM has more than 10% of it's sales coming from major customers and hence the questions implied that this is high concentration risk arriving from these major customers.
Frankly speaking, when I first saw the question and I immediately noticed where this question came from.
It's not referring to MM.
If you're valuebuddies worth your salt, then I suppose you're aware of the Precision manufacturing companies in Singapore.
Now, this would be a real major customer concentration risk.
For the younger valuebuddies, not too late to read the other Precision manufacturing companies in Singapore. I am sure there are gems to be found too.
So, this question actually refers to those manufacturing companies but not MM.
Then, again, why this concern about high customer concentration risk is raised?
It's clearly not applicable to MM, so why it was raised again, again and again?
I suspect it's a school teacher questions referring to the general observation of Singapore precision manufacturing company and the students take it that it also apply to MM.
Or, I suspect, the person has a pre-conceived idea that Precision manufacturing co in Singapore typically has high customer concentration and that would implied to MM too.
In any case, I did the sum and I know that relative to other co in the same industry, this is not a (major) risk to MM and of course, I had to agree, that high concentration risk is a generally true to Singapore Precision manufacturing co in Singapore.
(dear valuebuddies is encourage to exercise your level 2 thinking on the implication of this observation)
Let's see what' the model answer:
10 major customers provided 32% of FY2020 revenue. Does the company see a customer concentration risk here?
The Group has a large base of over 600 active customers. It does not have concentrated exposure to any single customer as none accounted for more than 10% of Group revenue in the last five financial years up to FY2020.
Again, if you compare this to Singapore precision manufacturer, you will have a sense of why MM is the outstanding one that I prefer to invest my hard-earn $$$.
So, what would/should be the risks that we are concern?
I think #1 is MM's ability to continue to innovate.
What I meant is MM kept talking about the difficulties of going beyond sub 10nm technology.
Granted MM had some breakthru in material science (likely with the help of ASTAR) but in my heart, when I read this statement, it implies that they had not over come the difficulties of going beyond sub 10nm challenge.
You know what I mean?
If they had cleared the hurdle, why would they says break thru in material science (only).
This for me would be the major risk of owning MM for long term.
Shorter term, the risk would be the fluctuation of the revenue.
Two factors reported by MM management which to me were real risks.
1. Short term un-sustainable ramp up of inventory by it's customers (everywhere) due to anticipated supply chain (logistic) disruption.
It's a homework for you and I won't elaborate more.
2. Closure of factories due to impact of C19 aka workers kana C19 and factories forced to close down.
The impact is unknown and hence posted a great uncertainty on the impact of the biz.
Thanks for reading.
Gratitude!
Have a nice weekend.
Enjoy Alan:
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