Micro-Mechanics (Holdings)

[chialc88]

Q3 Result out on 27 April 2019.
(Link to SGX page)

[chialc88]

20190427 Q3 Result for Micro-Mechanics (Holdings)
(Link to Q3 Result)

All the numbers dropped.
GM% dropped below 50% too.

Bright spots continued to be in USA.

[Contrarian]

Caught in midst of a storm... how bad the cycle we wont know. I find the current valuation still steep

[chialc88]

(link to FY19 result)

---

Good morning valuebuddies,
The same chirping birds, the same cooling wind - what a beautiful morning.
Was it mist or haze outside the window?

Many people complaint that MM valuation is not cheap.
I think so too.
I thought so when I initiated my position in MM back in 2012.
At that time, MM GPM is still under 50% and it's NTA is not much different from now (ok lar,now is 30% higher).

The fact is it's not consider cheap by myself.

I started to buy because I read about WB(AR 1992):
Most analysts feel they must choose between two approaches customarily thought to be in opposite:
"value and "growth."  Indeed, many investment professionals see any mixing of the two terms as a form of intellectual cross-dressing.

We view that as fuzzy thining (in which, it must be confessed, I myself engaged some years ago).
In our opinion, the two approaches are joined  the hip: 
Growth is always a component in the calculation of value, 
constituting a variable whose importance can range from negligible to enormous and whose impact can be negative as well positive.

For those valuebuddies who prefers to read from the source:
(link to BRK AR 1992)

The moral of the story for me is simple.
At that time, I saw MM is a growth stocks.
It's PE and PB did not give any comfort of MOS.
e.g. It's NTA is about 30+ cents, and it's selling at 40+ cents.


Dividend of 3 cents  at that time with price 40+ gives about 6% yield (similar to now.)

Not a cheap stock (similar to now).

After reading BRK AR 1992, everything make sense to me and hence load up until my maximum amount.

Today, it's a 4 baggers (at it's peaked last year, it was a 6 baggers).

Will MM continue to grow?

---

I'm relieved by Q4FY19 result as I was a bit concern about Q3FY19 result (because all numbers had gone down.)

Again, for those valuebuddies who like to read from the source, this was released yesterday:
(link to FY19 Presentation slides)

Pg 5 & 6 - projected FY20 turn around of Chips sales (global and US)
Pg 12 - 1 cents special dividend - I thought this might be cut as Q3FY19 all numbers drop. MM maintain the special dividend not because it could pay but rather it's recognition of shareholder needs for dividend.  Mind you, the payout is 107% this year and critic will says it's not sustainable. right?
Pg 14 - Revenue from US continue to grow (but China and Malaysia dropped)
Pg 15 - Q4 GPM go up above 50% (business KPI)
Pg 17 - planned capex at 6-7m means MM is expanding (where and for what, you think?)
Pg 18 - perfect!!! For MM, none of the ppt slides is more important than this particular slide.  The 2 business matrices that we need to pay attention is bad debt and inventory write-off.  So far, so good. Relax

Thank you valuebuddies.
Do continue to share all the great stuffs and I really appreciate and benefited tremendously from your posts.

Thank you.

[karlmarx]

Many people complaint that MM valuation is not cheap.
I think so too.
I thought so when I initiated my position in MM back in 2012.

Many people have bought stocks at a fair-value price (i.e. not cheap), with the belief/rationale that the underlying business is good/growing, and hence today's fair-value price will be cheap in the future.

Of course, this 'growth' strategy -- identifying businesses that will be earning more in the future -- has not turned out as well as most would expect; things went bad and so did the share price. 

For the purpose of learning, it will be great if you can share with us what you saw in Micro Mechanics that made you very confident that this is a growth stock.

[chialc88]

@K,
First, let me thank you for sharing many of your sincere posts and I personally gained from your contributions tremendously: 
(link to Karlmarx post - Penguin is still in growth mode"
You might not believed me, Penguin is nearly a 2 baggers now.
Thank you very much for your analysis.

Unfortunately, I'm not able to add too much value but let me try.

If you have a chance to read MM from beginning, you'll realised that MM was having a tough time roughly 2012.
It's a penny stocks (less than 40 cents), low liquidity, high capex in a cyclical industry.

What ever bad news you can anticipate, you got it.

However, if you look carefully at kazukirai (repeated) posts, you will sense something is not correct.

In the first place, kazukirai mentioned that he is vested in MM which is already very strange to me.

If you look carefully and why MM is not doing well (eg. see cash), you'll realised that $$$ is spend to expand business oversea.
kazukirai know exactly where is investment:
1. outfitting a larger factory building in Suzhou (Yes, you could almost guess, where all the high tech semicon is build).
2. CMA - AMP3 LLC (Yes, you got it right too. MM brought AMP3 LLC for 3 purposes:
    a) knowledge transfer 24x7 automation  system to it's existing factories in KL, Suzhou etc
    b) expand it's revenue streams beyond it's current product mix
    c) expand into different market segment (which again you know is proven to be a failure)

Ok, so, by now you know that I like to read what other people think.

So, if you read carefully the first few posts of this MM thread,
what do you think?

I think that MM is in a growth mode (as it's spending lots of $$$ to expand into different product, different market, different segments)
during the period of cyclical down turn of semicon industry (so that it could get all the raw deal cheaply).

No brainier for me to derive such a conclusion.

The question is not whether we know or we do not know MM is a growth company.
The question is what are you going to do after you had made your conclusion.

Do you wait for the share price to fall further?
Like most season value buddies did?

Or, you have the confident in Micro-Mechanics management and took some action?

---

I must says again that I benefited a lot from all your postings.
I am deeply touched by your deep analysis capabilities.
I will never be able to perform these analysis myself and your posts make me decide to vest or not vest in a particular company.

Thank you and have a nice weekend.

Enjoy - I've never been to me by Teresa Teng 邓丽君

[karlmarx]

So, if you read carefully the first few posts of this MM thread,
what do you think?

I did read the entire thread. But because my knowledge of this industry is so lacking, so if there was something special about MM -- market leader, highly-demand proprietary technology, extraordinary pricing power against supplier/client, etc -- that was highlighted in this thread, I wouldn't have noticed it.

The reasons supporting most investments -- as observed in VB and elsewhere -- are arguably largely based on financial results. The point I'm making is that doing has turned out to be unprofitable, most of the time, at least in the past 5 years or so. I thought it is perhaps more important to identify the drivers of earnings, and then speculate on its prospects. 

Hence my question to you; I had no idea what would drive MM's earnings, and what you saw in it.

What was clear to me was that MM increased its dividend payout ratio over the years -- which is perhaps the main driver of its share price -- and is now at 107%. I don't know whether such a policy is sustainable, since I do not understand the business. But business fundamentals aside, I think the dividend policy decided by any management has a very big impact on a share's price performance.

[chialc88]

@K,
I'm not sure whether you read this thread before or after I had removed most of my posting.

Anyway, I just wanted to say that I am in no position to teach you as I perceived that you're 10x a better analyst than me.

I don't mind sharing my thinking process and hope you don't mind.

I actually thought that what you said about MM is true (to me).
I just don't know whether you're sarcastic or can't see or what.

This is what you wrote (and I agreed):
1. market leader
2. highly-demand proprietary technology
3. extraordinary pricing power against supplier/client
4. increased dividend payout ratio 

Before I share my think process, would it be too stretch for you to read thru MM's FAQ?
(link to Micro-Mechanics FAQs)

After reading thru MM's FAQ, would you mind share with me what do you feel?

For your information, I had massage MM's FAQ into separate categories:
1. Impact of currency and interest rate
2. Impact to dividend
3. Market cycle, customer and competition
4. Profit and operation numbers
5. Strategy
6. Financial general


I don't think you should use the same categories as me.
You should read each of the question, digest it into your own category and then post it there.

I did this exercise because it's like a internalisation process.


After you did the exercise, can let me know how you feel and then I'll share my thinking process with you?

Meanwhile, behappyalways:

[holymage]

Without a doubt there are long-term tail winds for the semiconductor industry, it is nonetheless a very cyclical industry. It is also easy to mistaken a cyclical up-cycle with growth. With Micro Mechanics serving only the semiconductor industry (having exit other industries at MMUS in 2018), I don't see a reason why Micro Mechanics would be an exception.

From my observation, the downcycle for semiconductors have already begun in 2019. Yeo Seng Chong of Yeoman Capital could have possibly observed this as well. Or maybe the semiconductor "slowdown" is due to front-running of electronic products, owning to Huawei and the trade war. Who knows? But, if a recession hits, semiconductors will be hit particularly hard. While, I am no expert in predicting the economy, my money is on a recession in 2020.

[karlmarx]

I actually thought that what you said about MM is true (to me).
I just don't know whether you're sarcastic or can't see or what.

This is what you wrote (and I agreed):
1. market leader
2. highly-demand proprietary technology
3. extraordinary pricing power against supplier/client
4. increased dividend payout ratio 

I think I have not been clear. The qualities which I mentioned, and you have quoted above, points 1 to 3, were questions and not statements.

In other words, I was asking whether you "load up until your maximum amount" because of MM's

1. market leadership?
2. highly-demand proprietary technology?
3. extraordinary pricing power against supplier/client?
4. or other reasons, etc

As I have mentioned, I have poor knowledge of the semiconductor industry, and the technical details are far too difficult for me to understand. Which is why I asked for you to share, if you wish to, what you saw in MM. You have stated your reasons, and my curiosity is more than satisfied.

I have read the FAQ you posted, but because of my poor knowledge, I do not understand the context to make sense of it. And so it is also not possible for me to give you a useful analysis of MM.