Micro-Mechanics (Holdings)

[¯|_(ツ)_/¯]

Good morning valuebuddies.
What a fantastic weather.
Although weather forecast says that it's 24 degree, it sure felt like 18 degree for the past few days.
I feel like in Switzerland.

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Let's do a quick recap on MM.

It operate in Semi Conductor industry which is a notoriously cyclical industry to be in.
It does not produce parts that become part of electronic gadgets that we buy and use.
It's products is actually a consumable which is needed at the end-stage of the high-tech, precision-engineering manufacturing process.
Being a consumable, it's customer had no choice but to continue to purchase it's parts despite industry downturn.
It's business is kind of protected/shielded and hence a smoother revenue generation machine in a stormy sea.

Because of it's strong customer relationship, there is no much competitors.
And because of this reason, Micro-Mechanics is enjoying more than 50% gross profits every year.

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A question was raised regarding customer concentration risks of Micro-Mechanics.
Based on Annual Report, its clear that all the Major Customers contributed a whopping 35% of it's revenue ( $21M out of $60M) in FY19.
FY17 $15M out of $57M (27.04%)
FY18 $19M out of $65M (29.23%)
FY19 $21M out of $60M (34.90%)

In my previous post, I had made a wrong assumption.
My previous-post calculation had wrongly derived that Micro-Mechanics largest major customer contributed less than 5% of it's total revenue.

Let me re-do with additional two worst-case assumptions on THE major customer:
1. It's presence in all 5 reporting segments
2. It's the largest possible revenue contributor for each segment aka the rest of the major customers just make the 10% qualification criteria to be marked as major customer for that segment

After redo, the largest possible customer for Micro-Mechanics from FY17 - 19 will be:
1. FY17  22.68%
2. FY18 24.35%
3. FY19 25.82%

Questions:
1. Is this consider high customer concentration risk?
2. Is there a concern that revenue is skew towards major customers?
aka take special note that FY19, despite total revenue dropped from $65M to $60M, revenue from Major customer go up from $19M to $21M.
3. Looking back carefully at the revenue from it's major customer, since FY12 (top customers contributed $10M) until FY19 (top customer contributed $21M), is the growing trend looks favorable? aka smaller customers dropped off and larger customer purchased more consumable.


Enjoy:


It's holiday season again. Wish all valuebuddies have a good time ahead.

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感恩 
Thanks all valuebuddies for helping me in my investment journey.
I learn a lot from you.

[¯|_(ツ)_/¯]

Micro-Mechanics customer concentration risk

With 35% of revenue coming from major customers, there is definitely a sign of customer concentration risk.
Is this risk acceptable?
Is this a common phenomenon for companies supporting high tech semi-conductor industry?

I roughly have an idea but unfortunately not enough time to investigate.

Valuebuddies who is keen on semi-con industry should take a look at UMS, AEM holdings major customers as a comparison.

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DBS published 4Q19 CIO insight.

There is a diagram on Semicon trends which needs to pay attention.
Figure 13: Waiting for a turnaround in global semiconductor demand
Based on the data point of Seminconductor shipment, there seems to be sign of recovery.

Looking at ifast article, especially Figure 3: Global Semiconductor sales (Quarterly), 
it also projected a recovery.
(click to read ifast article)

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Christmas is coming.
Enjoy Leonardo's last supper:

If you're going Milan (Milano) for holiday, remember to book early as there is a restriction of 25 visitors every 15mins.

=========== Signature ===========

感恩 
Thanks all valuebuddies for helping me in my investment journey.
I learn a lot from you.

[¯|_(ツ)_/¯]

MM: Unsustainable Dividend yield of 5.41%
- this will be the topics for next post

Meanwhile, we just take a quick look at the AR for AEM, UMS and MM:

A) AEM in 2018, out of total revenue of $262m, $246m was contributed by a single major customer. This translate into 93.78%.
    Flip to 2017, out of total revenue of $221m, a wopping $212m aka 95.77% was from a single customer.


B) UMS did not publish the revenue for major customer except a statement declaring that one customer accounted for more than 50% of it's total revenue.

C) MM single largest possible customer revenue derived for its segment report 
(click to verify)
FY19 is $15m out of $60m (25.82%)
FY18 is $15m out of $65m (24.35%)
FY17 is $13m out of $57m (22.68%)

Looking at the customer profile of AEM, UMS and MM, a few things we could derive:
1. Semicon industry had gone thru a lots of consolidations and it is dominated by large players who prefers to spend time and $$$ with their favorite suppliers.
2. Customer concentration risk is deem as very high because Semicon industry is notorious for the extremely fast changing technology. If THE major customer changes its requirement then it's supplier must change accordingly.  Otherwise, all it's revenue from the major customer will disappear and become zero sooner or later.
3. If we read #1 and #2 together, then it's very clear that a supplier to a leader of semicon industry, should expects a recurring income from it's major customer. That's the nature of the business. Customer loyalty is strong. In additional, the major customer will likely work with its current favourite supplier to redesign for the future generation products (lines).  If the supplier is not able to deliver the new specification, then there should be ample lead time to develop a plan B (exit plan).

Hence, customer concentration risk in Semicon industry seems un-avoidable.
And for the case of MM, we need to be careful to see whether MM is able to transform it's technology to handle demands for below 10nm.
If it can't, then we should have ample time to execute plan B.
If it could, then we had hit another jackpot.

Dear valuebuddies, pick up your camera, ready for your holiday?


(click for winter in Lake Como)

=========== Signature ===========

感恩 
Thanks all valuebuddies for helping me in my investment journey.
I learn a lot from you.

[Ray168]

Hi, I think we can't compare MM with AEM and UMS even though they are in the semiconductor sector.

MM is in tooling consumer business, whereas AEM and UMS are in equipment/machinery.

Tooling consumer business is fast moving item, large customers base.

Equipment/Machinery business is more concentrated with few customers. Capex business is cyclical and project base, and needs lot of R&D in order to maintain their competitive advantages and meet or even exceed the industry expectation.

[¯|_(ツ)_/¯]

Consumable - comparing AEM, UMS and MM

Thank you Ray for your quick tips.

I love MM and I had been spend quite a lot of time understanding MM's investment merits and risks.

My falling in love with MM was actually more like love at first sight and as time go by, I become more and more rationale (I hope).


At this moment, MM occupied more than 30% of my portfolio and I did not buy so much of MM.
I mean, I brought some at the beginning (few years ago) and it just balloon to more than 30% of my portfolio.
To me, it's a 4 baggers.

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Back to comparison:
Like MM, AEM and UMS also provide consumables to it's key customer too.
In fact, if you study both companies a bit in details, both are focusing their growth strategies in this segment of their business.

Let's take a closer look at the consumable related business for AEM and UMS:
1. AEM - about 50% of $262m in FY19 (click and scroll to page 16 Financial Performance)
2. UMS - about 20% (click here and scroll to page 12 Strong recurring income base)

Anyway, take a look at the map of Italy Lake District:

Take a closer look at the right hand side - Lake Como.
Bellagio is famous for it's million dollar view ... arriving from the ferry.
(of course, the LV's Bellagio is a copy of this town aka not the other way).
Como (town) is usually the starting place for the ferry.
There are multiple stops which you could hop down and take some nice pictures.

=========== Signature ===========

感恩 
Thanks all valuebuddies for helping me in my investment journey.
I learn a lot from you.

[¯|_(ツ)_/¯]

Dear Valuebuddies,
Wish everyone a blessed 2020 for another decade.

$$$ aside, it's good to know that everyone is still having a good time in VB.com, just like me.


There are a lot of concerns raised on Micro-Mechanics:
1. Increasingly dependency on major customers aka rose to 35% in FY19
2. Increasingly un-sustainable dividend payout ratio aka rose to more than 100% in FY19
3. Increasingly confusion on it's business model aka what type of business exactly is Micro-Mechanics having that gives it more than 50% profits especially operating in highly competitive country like China.

The list of doubts and risks increased sharply as more and more valuebuddies trying to understand this small cap counter.

For me, I think that there could be some valid reasons for us to dig more into Micro-Mechanics in 2020.

The number 1 reason I still feel ok because Micro-Mechanics is quite transparent with it's KPI.
It's actually rather easy and useful to monitor MM's KPI for potential dropped in it's competitiveness (and of course, business),
instead of worrying about something that Micro-Mechanics management is handling as part of their daily routines.

I mean, why do we need to be so stressed about something that the experts already dealing with it on a daily basis?
What value could we add?


亲爱的我多么幸运 人海中能够遇见你
亲爱的我多么盼望 就从这一刻起和你分享所有感觉
亲爱的我多么幸运 人海中能够遇见你
亲爱的我多么盼望 就从这一刻起和你分享真心的感觉

你的爱没有保留 你的心献给了我 只要你在我就有更多理想
与你同在就好像拥抱天堂


=========== Signature ===========

感恩 
Thanks all valuebuddies for helping me in my investment journey.
I learn a lot from you.

[¯|_(ツ)_/¯]

KPI to watch out for selling?



It's clear today that more buyers is bagging Micro-Mechanics into their portfolio.
Rather aggressive, given that most of the time Micro-Mechanics volume is very low.

A few financial bloggers was waiting for the price drop to something reasonable.
A valuation that make more sense.

Instead of waiting for the price to drop, may be it make sense to just pick up a little bit first.
Don't need to be a lot, just a bit first.
After that, spend some time in understanding a fantastic company that build to last.

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To me, Micro-Mechanics is a piece of Gem.
The entire company is build to meet customer business objectives.
It exist just to solve it's customer problem.
Full stop.

What concern me is whether they are capable, I mean whether Micro-Mechanics is able to catch-up with the ever increasing demand of high tech precision engineer?

I fear that one day, Micro-Mechanics does not have the R&D capability to address the demand for sub 10nm aka material, process, technology.

However, my eyes are not looking at these as these area should be left to Micro-Mechanics management to strategise and tackle them one by one.
QED.

My eyes are zeroing on their KPI.
(click to understand MM's business model)

=========== Signature ===========

感恩 
Thanks all valuebuddies for helping me in my investment journey.
I learn a lot from you.

[¯|_(ツ)_/¯]

9 Jan 2020 SGX announced that it's adopting risk-based approach to quarterly reporting, mandates more robust disclosures for SGX listed company on matters of high impact such as:

• It has received a disclaimer of opinion, adverse opinion or qualified opinion from its auditors on its latest financial statements;
  

• Its auditors have expressed a material uncertainty relating to going concern on its latest financial statements; or
  
• SGX RegCo has regulatory concerns with the company, for example if it has had material disclosure breaches or where it faces issues that have material financial impact.
  

(click to read SGX annoucement)

Out of 800+ SGX listed company, currently 600+ are required to provide quarterly reports.
When the new ruling kick in on 7th Feb 2020, only 100+ need to provide quarterly reports.
Saving lots of $$$ especially small company such as Micro-Mechanics.

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What it means to me?
For one, I am tracking MM's KPI closely for sell signal.
I'm not concern about the Quarterly report because these KPI does not appears on the Quarterly reports.
It's the additional disclosure by MM that I valued the most.

As per what CFO Chow says, MM will continue to provides these information to investors.
Extracted:
主板上市公司微机械（Micro-Mechanics）的董事会还没做出决定，但很可能继续发布季度财报。公司财务总监周锦荣受访时说：“公司希望跟投资者有更多接触。
(click to read news)

So, let's just relax and do something more productive.


Milano, anyone?

=========== Signature ===========

感恩 
Thanks all valuebuddies for helping me in my investment journey.
I learn a lot from you.

[¯|_(ツ)_/¯]

Last Wednesday 29 Jan 2020, MM announced that its' China factory will be closed for CNY as per China Gov directive.
(click to read details)

Another announcement was on coming MM 2Q20 results to be release on 8th Feb 2020.
(click to read details)

Lets hope that everyone is safe and sound.




=========== Signature ===========

感恩 
Thanks all valuebuddies for helping me in my investment journey.
I learn a lot from you.

[¯|_(ツ)_/¯]

5 cents dividend; record date:19 Feb 2020

8th Feb 2020
As expected, today, MM released it's 2Q20 results.
(click for summary - for lazy investor)

(click for you and me)
pg  9 - revenue table - note that revenue is steadily increasing
pg 10 - revenue breakdown 4 Japan and Taiwan. Taiwan seems to be growing strong. China and US still #1 & #2
      - utilisation back to 61%
pg 11 - interim dividend of 5 cents vs 4 cents (jump of 25%)
pg 12 - 14 No excuse. If you're a learner and wanted to learn about what's a good company, read these 4 pages word-by-word and digest everything.
pg 15 - confirmation to continue quarterly reporting

CEO of Micro-Mechanics, Mr Chris Borch said, “The Group’s results in 2Q20 marked the first year-on-year

growth in our quarterly revenue since 4Q18. We believe this reflects the improving stability of the global
semiconductor industry from the cyclical downturn that began during the second half of calendar year 2018.
The higher revenue, coupled with our continuous efforts to enhance manufacturing processes, productivity
and cost structure, drove the improvement in the Group’s profitability during 2Q20.” 

Based on the Group’s steady performance during 1H20, strong financial position,
modest capital requirements for the remaining months of FY2020 and encouraging long-term business outlook,
the Board of Directors has approved an interim dividend of 5 cents per ordinary share (one-tier tax exempt)
payable on 28 February 2020 to the shareholders on record as at 19 February 2020. This represents a 25%
increase over the interim dividend paid by the Group for 1H19. 

Because it can be difficult to accurately assess the economic impact of this situation, or any other sudden 
or unexpected event, we prefer to focus as much as possible on the industry’s long term trends and try 
not to get preoccupied by short-term variations. We continue to believe the semiconductor industry is poised 
for a prolonged period of solid growth as chips are becoming increasingly embedded in nearly every aspect of 
modern life from today’s smart phones to tomorrow’s driverless cars.

Enjoy:



=========== Signature ===========

感恩 
Thanks all valuebuddies for helping me in my investment journey.
I learn a lot from you.