Micro-Mechanics (Holdings)

karlmarx · 03-09-2019, 07:32 AM

(02-09-2019, 11:01 PM)holymage Wrote: While, I am no expert in predicting the economy, my money is on a recession in 2020.

I guess most observers feel the same way.

Businesses will likely suffer in Q3 and Q4 2019, with weak demand continuing into Q1 2020.

While the markets have come down somewhat, my opinion is that the worst is yet to happen.

chialc88 · 03-09-2019, 07:28 PM

@K,
Apologies.

Let me start/try again.

It's clear that MM had and will continue to have exceptional GPM and NPM.
- this you can trace and make your own conclusion.

It's also clear that MM is able to translate it's profits into cash (FCF)
- essentially MM is building a rock solid cash generation machine/business.

Last but not least, MM's OPMI friendly dividend (yield)
- continuous dividend dished out every year Tongue

Back to it's GPM, NPM, FCF, dividend (yield) and net cash,
it's no brainer that MM is a market leader in it's industry.
It' must have something proprietary that maintain it's pricing power all these years.

Let me remind you on what Kazukirai says: "Tortoise and the Hare".

MM is not the Hare but the Tortoise.

We are not expecting MM to shoot up in short term
but we are very sure that MM will definitely be a GEM in a long run.

Of course, there are a lot of reasons (business decision actually),
why MM can command such a high GPM, NPM, FCF and dividend without dig into debt.

It takes time to understand.

Meanwhile, enjoy:

money · 03-09-2019, 10:17 PM

>>

Last but not least, MM's OPMI friendly dividend (yield)
- continuous dividend dished out every year

Back to it's GPM, NPM, FCF, dividend (yield) and net cash,
it's no brainer that MM is a market leader in it's industry.
It' must have something proprietary that maintain it's pricing power all these years.

===================

Judging from the dividend given out over the years, i would more or less agree with a management that has been treating minority shareholders quite fairly and generously.

As for having a decent GPM, NPM, etc, i have no idea if it is safe to conclude that MM is a market leader just based on that. What i do know is that before the demise of Nokia and Blackberry, they also have very very fat margins

holymage · 04-09-2019, 09:46 AM

I don't think Micro Mechanics have pricing power. I don't think Micro Mechanics is able to raise prices without affecting underlying demand. In fact, I think most if not all semiconductor companies have no pricing power (to varying degrees). That would explain why prices for electronics has been constantly decreasing. This is just different from See's Candies/Altria/Microsoft, which have pricing power.

MM's outstanding margins should be due to operational efficiencies, cost control and business strategies.

Quotes from MM's 2Q2018 quarterly report:
"While growing the Group’s top line and the value we create for our customers remains a key priority, we have also been working tirelessly to enhance our manufacturing processes, productivity and cost structure by focusing on various strategies, such as 24/7Machining, IT automation and department integration. Hence, in spite of ongoing selling price and cost pressures, our GP margin in 2Q18 improved slightly to 56.1% from 55.4% in 2Q17."

"We believe the semiconductor industry’s robust growth during 2017 may indicate a prolonged period of stronger industry growth as chips become increasingly used in nearly every aspect of modern life. While this would be a welcome change from the sluggish industry conditions witnessed during 2016, the semiconductor industry is being increasingly driven by price-sensitive consumer applications. As such, we expect to see continued price and cycle-time pressures from our customers. Together with rising costs and a shortage of skilled workers, the operating environment for the Group is expected to remain challenging."

chialc88 · 05-09-2019, 08:04 AM

Pai seh.

Thank you valuebuddies for sharing your view and again, I can understand a bit more how you see MM.

I always think that MM is a penny stock.
It's supplying small little commodity product to high tech precision engineering companies operating in Asia (China, Malaysia) and USA.

It's outstanding profit margin is a testimony of its success especially China.
No amount of cost saving could produce an GPM > 50% operating in China.
So, naturally I infer that's MM ought be a leader in it's industry (especially China) with few competitors.
And hence, it's ability to command such a high profit margin.

Moving forward, I will pay more attention on it's pricing power
which means increasing product cost.

I always thought that MM is in a cyclical industry aka subjected to the boom-burst cycle of RAM etc

My feeling is the impact of the boom-burst cycle on MM is not in pricing of its products but on the volume aka number of goods sold,
reason:
1. During slow down of economy, it's very common for the bosses to asked for 30% cut in budget.
2. This in term, translate to a demand for supplier to cut 30% cost eg. a equipment of $1m, now will negotiate to pay $700k.
3. Idealy, all supplier should cut their cost by 30% but we know the rules of 80/20 (which is even more important when economy slow down).
4. Usually, we just shotlist top 10 or top 30% suppliers and negotiate with them on the prices.
5. I am quite sure that MM will not be impacted by this cost cutting exercise aka it got to keep it's goods at the same price.
6. Reason being it will not meet the #4 shortlisting criteria.
7. MM is a very small company and it's goods form a very small part of the manufacturing cost which most likely will be negligible and not meaningful to negotiate a price cut.

I always thought that MM has strong pricing power (which you could dis-agree and says something else).
Today, I know that my interpretation might not be very accurate but the meaning is there.

Look at it's bad debt.
Look at it's bad debt throughout history especially during electronic down cycle.

Zero bad debt (aiyo, that's not exactly what I mean. I meant to say MM bad debt is very small aka in-significant - for those valuebuddies with very high expectation of MM).

You know what's the most challenging part of a business?
No, not it's ability to grow.
A company can always grow very easily.

As a OM told me once.
What so difficult to close a deal?
Just continue to lower the selling price to meet customer buying price.
So easy.

It's true.
Everyday, we are getting orders from customers to deliver goods.
The selling part is easy.

Wait until you try to collect back the $$$.

Especially during economy downturn/crisis.
So, to grow is very easy, to have zero bad debt is virtually unheard of (unless youpre operating a mamak shop).

With this, and the birds chirping happily outside,
enjoy your work, my friend:

tips: turn on CC

pencilin · 05-09-2019, 08:09 AM

chiac

Mind to explain what exactly are MM products?
How those products function in a phone?
Who are the competitors?
Why they are better than their competitors?

setan · 05-09-2019, 02:28 PM

(05-09-2019, 08:04 AM)chialc88 Wrote: Pai seh.

Thank you valuebuddies for sharing your view and again, I can understand a bit more how you see MM.

I always think that MM is a penny stock.
It's supplying small little commodity product to high tech precision engineering companies operating in Asia (China, Malaysia) and USA.

It's outstanding profit margin is a testimony of its success especially China.
No amount of cost saving could produce an GPM > 50% operating in China.
So, naturally I infer that's MM ought be a leader in it's industry (especially China) with few competitors.
And hence, it's ability to command such a high profit margin.

Moving forward, I will pay more attention on it's pricing power
which means increasing product cost.

I always thought that MM is in a cyclical industry aka subjected to the boom-burst cycle of RAM etc

My feeling is the impact of the boom-burst cycle on MM is not in pricing of its products but on the volume aka number of goods sold,
reason:
1. During slow down of economy, it's very common for the bosses to asked for 30% cut in budget.
2. This in term, translate to a demand for supplier to cut 30% cost eg. a equipment of $1m, now will negotiate to pay $700k.
3. Idealy, all supplier should cut their cost by 30% but we know the rules of 80/20 (which is even more important when economy slow down).
4. Usually, we just shotlist top 10 or top 30% suppliers and negotiate with them on the prices.
5. I am quite sure that MM will not be impacted by this cost cutting exercise aka it got to keep it's goods at the same price.
6. Reason being it will not meet the #4 shortlisting criteria.
7. MM is a very small company and it's goods form a very small part of the manufacturing cost which most likely will be negligible and not meaningful to negotiate a price cut.

I always thought that MM has strong pricing power (which you could dis-agree and says something else).
Today, I know that my interpretation might not be very accurate but the meaning is there.

Look at it's bad debt.
Look at it's bad debt throughout history especially during electronic down cycle.

Zero bad debt (aiyo, that's not exactly what I mean. I meant to say MM bad debt is very small aka in-significant - for those valuebuddies with very high expectation of MM).

You know what's the most challenging part of a business?
No, not it's ability to grow.
A company can always grow very easily.

As a OM told me once.
What so difficult to close a deal?
Just continue to lower the selling price to meet customer buying price.
So easy.

It's true.
Everyday, we are getting orders from customers to deliver goods.
The selling part is easy.

Wait until you try to collect back the $$$.

Especially during economy downturn/crisis.
So, to grow is very easy, to have zero bad debt is virtually unheard of (unless youpre operating a mamak shop).

With this, and the birds chirping happily outside,
enjoy your work, my friend:

tips: turn on CC

Hi chialc88,

From what I had learnt, the differentiation of it's tools lies in the material of the tools. I would think that the tools can be make by anyone by buying the essential machines. It make make sense with me from the information I received as I do not know they had any specialised machine to produce the tools. Do you have any information on this?

Besides, do MM disclose the selling price of their tools? If not, it will be very difficult for us to determine whether tMM possess the pricing power of selling their tools.

Appreciate you can share on the pricing power, if you have any. Thanks.

setan

chialc88 · 05-09-2019, 09:34 PM

cheap raw materials - rubber and aluminium

Not sure how to start but just take this as me sharing my thought process.

By definition of pricing power implies ability to increase price on the same manufactured product year after year c.f. see's candies.
I don't think MM has the pricing power at all.
(any one can gives me some stock tips, please?)

Ok. I had to agree that MM do not have this type of pricing power.
I'm wrong.

Let's see my thinking process.

We all agrees that MM has outstanding profit margin (year after year).
I'm quite sure that MM is facing continuous price pressure from customers.
This is a fact. (again, any one can gives me some stock tips - any counter that don't face price pressure from customer, please?)

The tricky thing to observe is despite continuous price pressure from customers,
we see that money (cash) keep pouring in (increasing dividend, increase cash on hand, 100% zero debt),
we see that profit margin (both GPM & NPM) are decent (some say outstanding),
and 100% of the customer pay up their purchase aka 100% zero bad debt.

Interesting, isn't it?
On one hand, we read that MM is facing price pressure,
on the other hand, we benefited from a cash generation machine with 50% GPM operating in China (notorious for cut-throat price).

What is happening?
(I leave it as a exercise for you to think.)

Let me answer the 4 questions posted by OP:
1. MM provides tools for high tech - high precision manufacturing company where "small is beauty." I long had suggested MM to change it's name to nano-mechanics. Any valuebuddies care to propose in next AGM in NLB?

2. Sorry, I watch a few times but not able to find any MM product function inside a phone.

3. Sorry again, MM has no competitor in it's area of ops. 100% of its customers continue to use MM after initiate hooked.

4. NA aka Not applicable.

Regarding materials and tools.
My thought it's not so important (yet).
The raw materials is only a very small part of MM's cost.
Do you know what's the main raw materials for MM's product?
Yup, you guess correctly, aluminium and rubber.

The recent purchase of specialist tools is very expensive indeed.
However, I doubt the tools itself is the key differentiator.
I believed the SI System integration of the various tools to make a 24x7x365 machine will be the key.
Have you read the pain that Chris describe in creating such a system?
Let me know and I could point you to the extremely technical article on MM SI success story.

Inventory.

Ok, I can't talk about MM inventory today, it's going to take a long time.

Let me start with something easier.
When you read (which I think you should already) the business overview of MM,
it always starts with blar blar blar DESIGN blar blar blar.

This word "design" means a lot to the success of MM and the word "design" goes beyond what other normal company do.

Ai... before I elaborate on the "design", I need to highlight one of the business strategy of MM (which looks just like what other normal company do but means a lot to the success of MM, too).

JIT Just in time technology
means manufacturer (MM customer in this case) do not need to stock up inventory in it's warehouse.
MM will automatically provide all the parts that's needed for the particular batch of production run.
In order to do that, MM need to integrate it's supply change into the project/production plan of it's customer.
Using SAP - of course, what were you thinking.

When there is a change in production projection, MM got notified and the parts will be on the way.
JIT.

This means that MM will also need to be near it's customer factory.
Just use google map to see the distance between MM Inc is to intel factories in Silicon valley.

What is amazing is, when MM's customer wanted to set up a new production line.
Who did they call as part of planning process?

When MM's customer wanted to set up a new factory, who are they calling?

A new design says 14nm to 12nm, who are they calling to joint develop the production line?

chialc88 · 07-09-2019, 09:35 AM

It's holiday and wish all valuebuddies a nice trip.
For those not travelling, a relax and meaningful holiday.
Feel like reading more on MM?
(link to a fool - Sudhan post on MM published 30 Aug 2019)

Why would a customer contact MM when they start a new production line, new factory or new product (sub 10nm wafer)?

There are many reasons and let me try:
1. I think that most global semi con company who need to use MM product is already MM client. If they don't call MM then they will need to perform the job internally (aka without getting the parts from MM).

2. I think that these company unlikely will call another supplier to provide the parts that they had been getting from MM because there is a long qualification/certification stage (at least 1 year) before the part can be use in the factory. A new supplier might unnecessarily lengthen the burn-in process.

3. I think that there is some synergy in different companies (in the same industry) to use the same parts provided by MM. The specification, the price and the process would be very similar and would be efficient and effective. Of course, MM parts is needed by all of them, it's a common denominator.

4. I feel like MM is pricing it's goods cheap. This gives it's customer the feeling that there is no need to look for alternatives. Trust MM and involve them in the setup as early as possible. Safer to work with MM than others.

Just my thought. As I witness the result of a high profit, high cashflow and zero bad debt highly repeatable business operating in China.

MM vision allow it to keep minimum inventory.

Recall JIT.
MM customers do not need to stock up large inventory in their warehouse.
MM will provide them with the right parts at the right time (factory location, SCM integration, etc).

It is also very common for suppliers to build a large pool of inventory, ahead of customers order.
This is so that whenever customer order, there are ready products (kept as inventory in the supplier warehouse) to be delivery to customer factory.
This common practise of stocking up inventory (for projection of customer order) is easy to understand and do.
However, the downside is when the anticipated order did not come in, these inventory will need to be write-down/off.

MM choose not to do this.
Instead, MM choose to tightly integrate with customer with minimum stock up.
It's inventory is actually not stock ready for customer order.
It has minimum stocks.
It's inventory is actually spare parts for it's machine (in MM's factory).
The machine will breakdown.
Instead of waiting for parts to change, MM kept the spare parts as inventory.

So what?
(again, I leave it as a thinking exercise for you)

MM also have a very different supplier payment policy.
Strange in first glance as it violated all industrial best practice.

However, on second thought, it just been prudent.

Building a rock solid, value generation machine.

Enjoy: "The laptop of tomorrow" - also do not have any MM parts inside too.

chialc88 · 15-09-2019, 02:08 PM

Good afternoon, value buddies.
Hope that you had a enjoyable and energetic holiday.

The different now vs last week is the haze, isn't it?

I might be wrong.
My sensing is MM and PIL is turning up strongly.

I might be wrong but for those vested value buddies, congratulation as I do think that both MM and PIL has something unique that allow it to continue survive for many many years ahead.

Micro-Mechanics has an extraordinary payment policy
When we studied fundamental of a/any business, 'cer definitely touch on the payment terms for supplier.
COD is seldom practise unless it's a mamak store.
A credit term of 30days or more will be desired.

In fact, 'cer will mentioned that if you're a strong company aka with strong credit rating,
you could demand a longer payment terms.

Vice versa, if suppliers granted a longer payment terms, it could means that the business has a strong credit standing.

Which means that a potential indicator for identifying a outstanding company is to look for a business with long payment terms.

These is bulls***, or at least not what MM practise.

MM opts to pay it's supplier faster and without stretching for longer credit.

The rationale is very simple.
Especially during (logistics) crisis, given mulitple orders from different companies (one, of course is MM),
the suppliers will deliver the orders to MM faster than others companies
.... even other companies wanted to pay a higher price for the goods, the supplier will still deliver to MM first.
....... because MM will pay them faster than anyone else (during peace time as well as crisis time).

It's payment policy is rather extraordinary, agree?

No debt policy is another extraordinary point to me too.

Again, 'cer will says that a company normally set up to take advantage of borrowing $$$ (from bank especially).
Again, a company bother to list itself and pay for stock exchange fee is to gain access to more borrowing (stakeholder and especially bank too).

Why did Micro-Mechanics choose not to be in debt?
Why it pared down all it's bank borrowing?
Why it choose to own the factory instead of leasing the land?
Zero debt?

Does it make any sense at all, valuebuddies?

Enjoy:

Disclaimer: None of MM's parts is inside.

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