ValueBuddies.com : Value Investing Forum - Singapore, Hong Kong, U.S.

I re-read some "older" reports from analysts to refresh my understanding of UMS...would like to share some key points for those that are not so familiar with UMS biz...

UMS has a five-year supply contract with AMAT to machine and manufacture components, sub-modules and whole systems for the latter’s Endura vapour deposition equipment from 2012 to 2017. As a result, as much as 80% of UMS’s revenue comes from AMAT such that a comparison of the two companies’ sales trends would look like they are the same company! Some investors may not like this single-customer, single-product dependency.
However, AMAT gives UMS a fixed percentage allocation (~80%) of its annual requirements at a fixed margin. In addition, this contract is renewable for another five years after 2017.

We can think of two reasons why the two companies have such a strong relationship.
• First, their factories in Singapore are just five minutes apart. Competitors may be able to offer better pricing but they will never beat UMS in terms of speed to respond. According to management, AMAT practically treats UMS as its extension factory. This makes it difficult for a competitor to break into the business.
• Second, UMS also offers a comprehensive suite of more than 70 metal finishing processes in-house that its competitors cannot, such as chemical cleaning, anodizing and plating.

In addition, UMS is in the process of moving more of its Singapore production to a larger plant in Penang to take advantage of the island’s tax-free status and easier access to labour. The possibility of lower cost should further cement its relationship with AMAT.

I find the last paragraph re-assuring. UMS has the ability to lower its costs and still provides a value proposition to AMAT if ever AMAT starts asking for cost reduction. UMS bottomline may not be too much affected even if that day comes.

mslee888 Wrote:I re-read some "older" reports from analysts to refresh my understanding of UMS...would like to share some key points for those that are not so familiar with UMS biz... UMS has a five-year supply contract with AMAT to machine and manufacture components, sub-modules and whole systems for the latter’s Endura vapour deposition equipment from 2012 to 2017. As a result, as much as 80% of UMS’s revenue comes from AMAT such that a comparison of the two companies’ sales trends would look like they are the same company! Some investors may not like this single-customer, single-product dependency. However, AMAT gives UMS a fixed percentage allocation (~80%) of its annual requirements at a fixed margin. In addition, this contract is renewable for another five years after 2017. We can think of two reasons why the two companies have such a strong relationship.

• First, their factories in Singapore are just five minutes apart. Competitors may be able to offer better pricing but they will never beat UMS in terms of speed to respond. According to management, AMAT practically treats UMS as its extension factory. This makes it difficult for a competitor to break into the business.

• Second, UMS also offers a comprehensive suite of more than 70 metal finishing processes in-house that its competitors cannot, such as chemical cleaning, anodizing and plating.

In addition, UMS is in the process of moving more of its Singapore production to a larger plant in Penang to take advantage of the island’s tax-free status and easier access to labour. The possibility of lower cost should further cement its relationship with AMAT. I find the last paragraph re-assuring. UMS has the ability to lower its costs and still provides a value proposition to AMAT if ever AMAT starts asking for cost reduction. UMS bottomline may not be too much affected even if that day comes.

The point on moving to Penang contradicts 'next-door' or extension of AMAT. That means point 1 will be invalid = open to competitors

Can someone verify this:-

Does more to Penang mean the Singapore office will close?
Penang could be the manufacturing base while Singapore the warehousing?


Being in the semicon parts business, my view is that as long as the supply chain is well planned there should be nothing to worry about

There are plans to shift IMT Group operations to Penang as well to tap on the tax-free status and lower operating costs. Penang is one reason why UMS is able to reap significantly higher margins than its competitors despite charging similar prices.

(Vested)

Other than a lower tax environment, the facility in Penang, Malaysia also enjoys reduced overheads such as lower labor costs and lower electricity tariffs, thereby helping to improve the profitability of the Group. UMS has been transiting its Singapore precision machining operations to Penang, Malaysia while retaining its higher value added systems integration activity in Singapore. The management believes that Penang, Malaysia will account for approximately 80 per cent of its machining operations after the exercise is completed within the next 24 months.

From page 6 of AR2011, I think the transiting has yet to be completed.

(vested)

(13-06-2014, 04:25 PM)passiveincome Wrote: [ -> ]Can someone verify this:-

Does more to Penang mean the Singapore office will close?
Penang could be the manufacturing base while Singapore the warehousing?


Being in the semicon parts business, my view is that as long as the supply chain is well planned there should be nothing to worry about

Hi,
Regarding the question of Singapore office close, I don't think this is likely.
This question was raised during the recent AGM, and the answer given is that some functions still need to be in Singapore for the product UMS deliver to AMAT to carry "made in Singapore" tag. I think the figure mentioned was about 60-70% (sorry, can't remember the exact % replied ) must be made/ assembled in Singapore. I'm not an expert in manufacturing procedures and policies, maybe some expert help to verify this.

But Andy did mentioned that IMT operations will shift to Malaysia, as mentioned by some fellow buddies earlier.

So I gathered Singapore office will stay. Warehousing is possible, though, if assembly included.

Hope this helps...

This maybe a really stupid hypothesis and I apologise in advance if it is. But knowing that I do not know, I thought that I should nonetheless post this. Worse outcome would be that I learn from someone smarter how dumb I really am.

Enough has been said about how Andy’s stake sale is a non-issue and I will not add to it. The major cause of concern is the AMAT stake sale and whether it signals the deterioration of the “strategic partnership”.

I have taken a different tack from most of the previous postings by trying to ascertain if there is any other reason for the stake sale by AMAT. One possibility readily comes to mind i.e. the proposed merger with TEL. This is a very complicated and complex merger since one of its aims is “inversion” (something I only read about recently) i.e. reincorporating in Netherlands rather than US or Japan (see http://dealbook.nytimes.com/2013/10/08/t...blogs&_r=0).

The Structure of the Business Combination can be found as Attachment 1 on page 11 of http://www.tel.com/news/pdf/20140215/203...nglish.pdf. Under this merger of equals, each issued and outstanding share of Applied Materials will be converted into the right to receive one ordinary share of HoldCo.

My limited accounting background suggests that this might trigger issues relating to investments carried at cost, deferred tax liability coming due and / or (to quote from the document below) “HoldCo’s ability to utilize AMAT’s U.S. tax attributes to offset their U.S. taxable income resulting from certain taxable transactions post merger”. I therefore hypothesize that any realized capital gains from the sale of their UMS equity stake MAY be subject to a different tax treatment post merger.

This hypothesis is very difficult to analyse and confirm because the (new) “HoldCo will be subject to taxation in the Netherlands, the United States, Japan and various other countries. Significant judgment is required to determine and estimate worldwide tax liabilities. HoldCo’s future annual and quarterly tax rates could be affected by numerous factors, including changes in the (1) applicable tax laws, (2) amount and composition of pre-tax income in countries with differing tax rates, (3) plans of HoldCo to permanently reinvest certain funds held outside of the U.S. or (4) valuation of HoldCo’s deferred tax assets and liabilities.”

I have tried my best to understand the Tax Consequences of the Business Combination found at http://www.sec.gov/Archives/edgar/data/1...c658761_91. But after spending the better part of a day trying to look for the reason in a haystack, I have decided that:

a. There is sufficient complexity in the merger for me to postulate that it is the root cause of AMAT’s UMS stake sale.
b. I am not knowledgeable enough to be absolutely sure of (a).
c. I should therefore throw this into the valuebuddies ring for someone smarter than me to analyze over the weekend.
d. With a plausible alternative reason for the stake sale identified, UMS shares should stage a rebound and all vested can make some money and, more importantly, the angst some of us feel can be lifted.

Cheers!

(Disclaimer: Vested in UMS and have just added a little bit more today before this posting).

(13-06-2014, 11:34 AM)Boon Wrote: [ -> ]

(11-06-2014, 11:22 PM)Nick Wrote: [ -> ]Many great points have been raised by fellow buddies in this thread especially recently with discussions on its business model, customer's intentions, macro outlook etc. Personally, I didn't find Andy's sale to be perplexing since I have seen him sell in great volume in the past while the business carried on steadily. But AMAT sale is different since it is unprecedented. I initially purchased UMS with the knowledge that with AMAT as a SSH, it implies that it has confidence in its subcontractor ability to deliver and the partnership is unlikely to be disrupted. With the stake sale, this premise no longer holds true - I am not saying that AMAT definitely has no more confidence in UMS but rather I cannot say that it definitely does. The fundamentals is no longer the same (to me) - there is an element of uncertainty as Specuvestor wisely wrote about. I did reduce my stake yesterday after contemplating about this. I am penning this now to avoid any hindsight bias but I do wonder will I regret parring down my stake when the dust settles (foresight bias ?) haha ! I hope the Board will issue a similar clarification like in 2012 to reduce this element of uncertainty.

(Vested)

At the infancy stage of the AMAT-UMS strategic partnership, a stake in UMS by AMAT would probably mean a great deal – it symbolized AMAT’s commitment and support to the new partnership.

The paring down of AMAT’s stake in UMS could symbolize the deterioration of the relationship – AMAT has lost confidence in UMS.

Or it could mean the relationship has now reached a mature, stable and robust stage.

Hence, the “strategic stake” in UMS is deemed to have served its initial purpose – it is now redundant as far as AMAT is concern.

From the perspective of capital allocation, it may no longer justifiable for AMAT to continue parking the money here which it should deploy elsewhere in compliance with its overall capital allocation objective - hence, the sell down.

I would tend to believe in the later - Of course, the possibilities are many – as always, one would have to draw his/her own conclusion.

Who is right and who is wrong – only time will tell.

(vested)

From page 10 of
2008 CITIZENSHIP REPORT
Supply Chain
As the leading equipment supplier to the global semiconductor, LCD flat panel display markets and solar photovoltaic (PV) industries, Applied has an extensive supply chain. To produce our semiconductor, flat panel, and solar products, we purchase subsystems, parts, materials and services from more than 800 suppliers worldwide, with 75 prime strategic suppliers representing 80 percent of our annual procurement spend.

http://www.appliedmaterials.com/sites/de...08_csr.pdf

The latest reports do not contain number of suppliers AMAT has.

Using 2008 figure of 75 prime strategic suppliers - if AMAT has to “commit” in each strategic supplier, an average “strategic stake” of USD 10 million - that work out to be USD 750 million – a lot of “capital” being tied down.

To achieve optimal use of capital, there is every reason for AMAT to pare down its stake in UMS, I reckon.

(vested)

More non-top-3-lower-ranked players join the "race"
________________________________________________________________________________________________________________

UMC to enter trial production of 14nm FinFET process in 1H15

Josephine Lien, Taipei; Steve Shen, DIGITIMES [Thursday 12 June 2014]

United Microelectronics Corporation (UMC) will continue to develop advanced processes with plans to enter trial production of 14nm FinFET products in the first half of 2015, according to the company.

While Globalfoundries and Samsung Electronics have tied together for the development of 14nm process, UMC will continue to cooperate with IBM for its advancement into the 14nm FinFET technology, UMC said.

The company currently has more than 20 tape-out clients for its 28nm processes, with about 10 clients likely to begin volume production in 2014, said UMC, adding that 28nm products are expected to account for 5% of total revenues by the year-end.

UMC is currently operating at 90% of its total production capacity with its 8-inch fabs running almost at full capacity, the Chinese-language Economic Daily News (EDN) quoted company chairman Stan Hung as saying.

UMC has plans to ramp up the output of 8-inch wafers from Hejian Technology, a subsidiary in Shanghai, to 48,000-50,000 units from the current 44,000 units, said the paper.

http://www.digitimes.com/news/a20140612PD209.html

________________________________________________________________________________________________________________

UMC to expand foundry capacity to fend off competition from SMIC, say sources

Josephine Lien, Taipei; Steve Shen, DIGITIMES [Friday 13 June 2014]

United Microelectronics Corporation (UMC) will ramp up its capacity for 40nm processes in order to fend off increasing competition from China-based Semiconductor Manufacturing International (SMIC), according to industry sources.

UMC's 40nm production capacity has been squeezed recently by an upsurge in 28nm orders, mainly from MediaTek and Qualcomm, thanks to an improvement in yield rates of its 28nm process, the sources noted.

However, SMIC has spared no time to expand its share in the 40nm segment optimizing its unique strategic position in the China market, indicated the sources.

To face increasing competition from SMIC, UMC plans to ramp up 40nm capacity at its subsidiary in Singapore, said the sources, adding that the increased capacity will be up to 10,000-15,000 12-inch wafers a month initially.

UMC also plans to strengthen its competitiveness in China by ramping up the production of 8-inch wafers at its China-based subsidiary, Hejian Technology, from the current 44,000 units a month to 48,000-50,000 units.

Additionally, UMC is also evaluating the possibility of acquiring Malaysia-based 8-inch foundry house Silterra to further expand its capacity.

UMC is strengthening its capability as SMIC will also begin to compete with the Taiwan-based foundry house for 28nm orders by year-end 2014, explained the sources

http://www.digitimes.com/news/a20140613PD201.html

(13-06-2014, 07:14 PM)nsengkia Wrote: [ -> ]I have taken a different tack from most of the previous postings by trying to ascertain if there is any other reason for the stake sale by AMAT. One possibility readily comes to mind i.e. the proposed merger with TEL. This is a very complicated and complex merger since one of its aims is “inversion” (something I only read about recently) i.e. reincorporating in Netherlands rather than US or Japan (see http://dealbook.nytimes.com/2013/10/08/t...blogs&_r=0).

The Structure of the Business Combination can be found as Attachment 1 on page 11 of http://www.tel.com/news/pdf/20140215/203...nglish.pdf. Under this merger of equals, each issued and outstanding share of Applied Materials will be converted into the right to receive one ordinary share of HoldCo.

My limited accounting background suggests that this might trigger issues relating to investments carried at cost, deferred tax liability coming due and / or (to quote from the document below) “HoldCo’s ability to utilize AMAT’s U.S. tax attributes to offset their U.S. taxable income resulting from certain taxable transactions post merger”. I therefore hypothesize that any realized capital gains from the sale of their UMS equity stake MAY be subject to a different tax treatment post merger.

This hypothesis is very difficult to analyse and confirm because the (new) “HoldCo will be subject to taxation in the Netherlands, the United States, Japan and various other countries. Significant judgment is required to determine and estimate worldwide tax liabilities. HoldCo’s future annual and quarterly tax rates could be affected by numerous factors, including changes in the (1) applicable tax laws, (2) amount and composition of pre-tax income in countries with differing tax rates, (3) plans of HoldCo to permanently reinvest certain funds held outside of the U.S. or (4) valuation of HoldCo’s deferred tax assets and liabilities.”

I have tried my best to understand the Tax Consequences of the Business Combination found at http://www.sec.gov/Archives/edgar/data/1...c658761_91. But after spending the better part of a day trying to look for the reason in a haystack, I have decided that:

Nice view-point from another angle. The wisdom of crowds work because of many sources of information and knowledge aggregating, rejecting group-think in the process.

AMAT's entire 5% stake is worth ~15mil SGD. Assuming a 1-2 bagger gain, the recognized gains would have ~10mil SGD. AMAT generated close to 9 billion revenue and close to a billion in net profit recently. So, the 'recognized gains' in question constitute ~1% of its annual profitability. Would this be significant towards tax efficiency savings?

I tend to agree that the timing still smells a rat and coincidentally too close to AMAT-TEL merger. But i suspect the real reason is qualitative, rather than quantitative in nature, if all of us here are not fooled by randomness.

Whether is it optimizing capital structure or tax or any other reasons which suggest that AMAT sales are not a overly big concern, i do think that one needs to try to prove the hypothesis by reviewing what is AMAT doing with the stakes in their other suppliers (if any), ie. any treatment of UMS should be similar for other vendors/suppliers as well, if one believe it is still 'comparatively business as usual'