UMS Holdings

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I would not totally rule out the possibilities of quality/reliability issue and "outdated" inventory - as we are at multiple inflections (technology) stage ; and as feature size or process technology node gets smaller, unprecedented precision engineering will be needed.

2013: Facing unprecedented precision engineering challenges
01/02/2013
By Randhir Thakur, Vice President and General Manager, Silicon Systems Group, Applied Materials

Mobility is the biggest influence shaping the semiconductor industry and is the main driver of chip development. Smartphone sales are expected to surpass 700 million units growing at a 50% growth rate year over year and demand for tablets is set to exceed 110 million units growing at an 85% rate year over year. The race to manufacture chips for the surging mobile markets is driving the industry to explore new materials and technologies to enable essential breakthroughs for higher, more power-efficient performance. For the PC market, we will see the advent of Ultrabooks and the new Windows 8 operating system – both of which can spur a technology upgrade cycle and drive growth.

Multiple inflections will figure prominently in 2013. Among these, we see the Foundry transition to 20-nanometer process technology node as a significant milestone. 20-nanometer is all about building advanced transistors that can deliver low leakage, low power and high performance in a smaller footprint. To achieve this combination of performance and energy efficiency, chip makers must adopt high k metal gate transistors which could deliver a 20 percent savings in power consumption while offering a 15% increase in speed. Further leakage and speed performance improvements at 20nm and below will be gained from FinFET transistors. Beyond advances to the transistor, we expect major inflections in lower resistance interconnects, advanced patterning, packaging, and 3D NAND flash technology.

We’ve never seen in this level of change in the industry or this pace of manufacturing process development. Innovations in new semiconductor materials, manufacturing processes and other technologies will be needed to support these inflections that each pose critical challenges. Unprecedented precision engineering will be needed to manufacture chips features measured in nanometers. At these dimensions every atom counts and controlling variability is vital to meet performance and productivity targets. Also pivotal in enabling future chips will be new classes of materials with superior properties that can be used in a broad range of process applications.

With demand for new forms of consumer electronics and new methods of computing driving the pace of innovations, we’re going to see more changes in the next five years than we’ve seen in last 15. These innovations will require major research and development efforts and very early and close collaboration across the industry.

http://www.electroiq.com/articles/sst/20...enges.html

Interesting article but I do not agree with the author that the semiconductor capital equipment is a fairly stable industry - it is cyclical.

I do agree that the industry is becoming oligopolistic with a few big players but please note that ASML and Tokyo Electrion and Nikon are dominating in the lithographic equipment segment whereas Applied Materials, KLAC (KLAC), Lam Research (LAM), are dominating the remaining segments of the semiconductor equipment market with AM being the leader.

Fewer players means more pricing power potentially for Applied Materials. - Not a good time and gesture to have margin squeeze on its strategic partner - if it is the case - haha !

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Applied Materials: Oligopoly Play At Cyclical Trough

Applied Materials (AMAT) is the world's largest semiconductor capital equipment company both in terms of value and sales. Semiconductor fabs are multibillion dollar factories where silicon chips that go into tablets and smartphones are made. These fabs house very specialized and complex equipment which are made by a handful of suppliers. Most of these companies are Japanese and US (ASML is an exception). Unlike other industries, the semiconductor capital equipment is a fairly stable industry with a massive moat. The Korean and Chinese companies have never managed to make inroads into the semiconductor capital equipment industry due to the high IP barriers. The growth in this industry has not been great, but it is safe from the competitive pressures unlike other sectors such as smartphones, tablets or PCs. KLAC (KLAC), Lam Research (LAM), AMAT and Tokyo Electron are the biggest players in the sector. They have a comfortable oligopoly with high margins. The industry has also been consolidating around the main players with Applied Materials buying Varian Semiconductor and Lam buying Novellus Systems.

We are positively biased towards Applied Materials because of its leading position in the "semicap" sector. The expenditure on the semi equipment is set to grow with the industry transitioning to smaller design nodes and shifting towards 450 mm wafers from 300 mm. Intel is already building out the first 10x nm node and plans to spend $2 billion on 450 mm wafers. Other companies such as Samsung and TSMC (TSM) will have to match Intel or get left behind. Intel (INTC) has already bought a big stake in one of the major semicap players ASML Holdings (ASML) to accelerate the technology advancement process.

Why we like AMAT

Technology Advantage - Applied Materials has a tremendous technology advantage in a number of areas such as implant, PVD, CVD, etc. While the company competes with KLAC and LAM in a number of these fields, we do not think the company is in any big danger of losing significant market share. The company is perfectly capable of making equipment for smaller design nodes which would require increasing complexity. The company spends almost 15-20% of its revenues on R&D every year to keep its technological lead.

Cyclical Trough - We think that Applied Materials is at the cyclical trough and its prospects should improve with increase in semi equipment spending. Management believes that the worst of the trough has passed and I believe them. The company's solar equipment revenues have fallen off a cliff (down 80%) and the only way to go is up. Display revenues should also go up in the 2nd half of 2013 as the industry recovers.

Industry Consolidation - Competitive dynamics in the semiconductor industry are improving with the Tier 2 players like Varian and Novellus being gobbled up by the Tier 1 players. This will help the top 5 companies to maintain prices and improve margins. We do not see any new entrant coming into the semicap market anytime soon because of the high industry barriers.

Decent Dividends - Applied Materials has kept on increasing dividends as the industry has matured. While the recent stock rally has decreased the yield from ~3% to 2.65% now, it is still a decent yield for a technology company. AMAT also operates in a less competitive space than other companies so it makes their yield much safer. Dividends have grown by 500% from 6 cents in 2005 to 34 cents in 2012.

Strong free cash flows - Applied Materials manages to earn an average of ~$1.5 billion in free cash flows every year as the capex requirements of the business are quite low. Though earnings in the last year were affected due to big restructuring charges, FCF was still quite strong.

Applied Material Risks

Solar Market Problems - The whole solar energy market has been hurt hard by the overcapacity in solar panels. Applied Materials has become the No.1 supplier of equipment to solar companies, through acquisitions. However, all has not been rosy for AMAT, which was forced to abandon its amorphous silicon thin film equipment line in 2009. The company has also sharply reduced spending on crystalline solar panel equipment after the whole market crashed. Pure play solar equipment companies like GTAT and Meyer Burgher are trying to survive this tough period.

Declining PC market - The PC market is showing declining revenues and volumes, as tablets cannibalize the laptop market. However, the growth of smartphones and tablets has managed to offset some of that growth decline. AMAT has been hurt from a decline in the memory segment revenues apart from slowing of the logic revenues.

Slow growth - Applied Material's revenue in 2012 was only 10% up from its 2004 level, despite the company having made major inroads into the Display and Solar equipment markets. However, the thing to remember is that the company plays in a cyclical industry which is going through a trough right now. Its revenues in 2011 were $10.5 billion. The company expects WFE equipment spending to range between -10% - 0% growth in 2013. Given Intel's capex announcement, I think that it will be on the higher end. However, there are global economic slowdown risks which also have to be taken into account.

http://seekingalpha.com/article/1204661-...e_readmore
Research, research and research - Please do your own due diligence (DYODD) before you invest - Any reliance on my analysis is SOLELY at your own risk.
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UMS 4Q2012 gross material margin declined to 41% from 54% in 4Q2011. This decline in margin was mainly due to inventory adjustment made during the quarter as well as UMS extending price discount on some products lines. The price discount was made in return for a 5 year contract extension of the Semicon Integrated System business with a key customer”.

On closer examination, I do agree that the decline in 4Q GROSS margin was due to:
a) Price discount
b) “Inventory adjustment”

Many suspected this “Inventory adjustment” to be some kind of “hidden inventory impairment” that had contributed to profitability decline in 4Q. But, was it?

No doubt, “inventory impairment” was one of the factors that had contributed to the profitability decline in 4Q, however, it had been SEPERATELY accounted for and charged as expenses under “other charges/credit” in the Income Statement – See page 3 of the 4Q/FY2012 result statement: Provision for impairment of inventories (net) was SGD 0.661 million (4Q2012) and SGD 2.159 million (FY2012); inventory written off = SGD 0.279 million (FY2012)

Also, on page 15, under profitability, this impairment was referred to - as “provision for slow moving and obsolete inventory

“Other charges/credits recorded a loss of S$0.6 million in 4Q2012 as compared to a gain of S$1.0 million in 4Q2011. The gain of S$1.0 million in 4Q2011 was mainly attributed to a foreign exchange gain and reversal of provision for impairment of inventory. In contrast, the loss of S$0.6 million in 4Q2012 was mainly due to a net provision for slow moving and obsolete inventory of S$0.7 million after taking into consideration of the write back of inventory previously provided.”

The fact is: “slow moving and obsolete inventory” do exist at UMS - and its “impairment” had been OPENLY accounted for.

So, what exactly was this - Gross Margin Declined related “Inventory adjustment” meant or implied?

I am not an accountant, but IMO, it was simply a year-end accounting reconciliation exercise which had resulted in the increase in the value of COGS in 4Q.

In another words, it implied COGS previously reported should had been “HIGHER” ; or profitability previously reported should had been “LOWER”

Having said that, the following questions remain:

1) How much of the gross margin reduction was due to “price discount” and how much was due to “inventory adjustment”?
2) How much was the discount?
3) Was it a one-off or permanent discount?

It would be hard to assess the impacts without any further details being given on the “price discount”. Despite of the discount (be it one-off or permanent), the fact that the management had declared a final dividend of SGD 2 cents, showed their confidence toward future profitability of the company.

Useful Reference:

http://www.accountingcoach.com/online-ac...Xpg01.html

http://www.ehow.com/info_7735510_account...ments.html

http://www.accountingtools.com/questions...-down.html

(Vested)
Research, research and research - Please do your own due diligence (DYODD) before you invest - Any reliance on my analysis is SOLELY at your own risk.
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Andy Luong, CEO of UMS, has re-started his share selling again - sold 0.948 million shares on Friday and 0.931 million shares on Monday. Recall, the last time, the CEO + Quest World sold shares, the price took a huge beating.

(Vested)
Disclaimer: Please feel free to correct any error in my post. I am not liable for anything. Do your own research and analysis. I do NOT give buy or sell calls and stock tips. Buy and sell at your risk. I am not a qualified financial adviser so I do not give any advice. The postings reflects my own personal thoughts which may or may not be accurate.
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(05-03-2013, 06:29 PM)Nick Wrote: Andy Luong, CEO of UMS, has re-started his share selling again - sold 0.948 million shares on Friday and 0.931 million shares on Monday. Recall, the last time, the CEO + Quest World sold shares, the price took a huge beating.

(Vested)

Wow ! Bad news! Wondering what was the purpose of his "Invest Asean 2013" road shows ?

(Vested)
Research, research and research - Please do your own due diligence (DYODD) before you invest - Any reliance on my analysis is SOLELY at your own risk.
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Rationale given by the management following his previous shares sale last year:

1) These shares sale is purely a personal investment decision of Mr. Andy Luong and is not influenced by any business fundamentals of UMS

2. These shares sale is not an act of cashing out as Mr. Andy Luong has no intention to relinquish his current role in UMS and he has envisioned that he will continue to drive UMS’ business in the foreseeable future

3. These shares sale have no impact on the way the company will be run in the foreseeable future

4. The outlook and the business of UMS remain largely unchanged and are within the expectation of the Board.

http://info.sgx.com/webcoranncatth.nsf/V...80035D7C0/$file/Announcement_UMS_Clarification.pdf?openelement

I don't expect another similar clarification to be issued this time - clarification on the "price discount" would be more helpful

(Vested)
Research, research and research - Please do your own due diligence (DYODD) before you invest - Any reliance on my analysis is SOLELY at your own risk.
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Sigh. after being quite a long-term shareholder... i'm really quite disappointed in him.

Then again, i strongly suspect he used his shares in UMS as leverage at Bank of Singapore (which explains the Bank of Singapore Nominees). Due to the recent market sell-off, possibly in China, he might have gotten some margin calls.
Just a guess.

i'm just wondering who else are major shareholders beside Andy with 28% shares and Applied Materials with 6%.
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UMS COO (Andy Luong wife) resigns from the Board and as COO. Will stay on as consultant. I wonder is something going on ???

http://info.sgx.com/webcoranncatth.nsf/V...6003AE072/$file/UMS_Resignation.pdf?openelement

(Vested)
Disclaimer: Please feel free to correct any error in my post. I am not liable for anything. Do your own research and analysis. I do NOT give buy or sell calls and stock tips. Buy and sell at your risk. I am not a qualified financial adviser so I do not give any advice. The postings reflects my own personal thoughts which may or may not be accurate.
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(06-03-2013, 06:58 PM)Nick Wrote: UMS COO (Andy Luong wife) resigns from the Board and as COO. Will stay on as consultant. I wonder is something going on ???

http://info.sgx.com/webcoranncatth.nsf/V...6003AE072/$file/UMS_Resignation.pdf?openelement

(Vested)

Hi Nick,

Not every company has a COO anyway, and I guess her relinquished responsibilities could be assigned to others.

Previous Responsibility as COO”

- Responsible for the daily operations of the Group and managing the Group's marketing and business development efforts.

http://info.sgx.com/webcorannc.nsf/Annou...endocument

New Role:

- re-designated as Consultant in line with her intention to take on a less demanding role and focus her efforts on key account management

http://info.sgx.com/webcoranncatth.nsf/V...6003AE072/$file/UMS_Resignation.pdf?openelement

The key point is she is going to “focus her efforts on key account management”

According to qfinance.com,

Key Account Management is the management of the customer relationships that are most important to a company. Key accounts are those held by customers who produce most profit for a company or have the potential to do so, or those who are of strategic importance. Development of these customer relations and customer retention is important to business success. Particular emphasis is placed on analyzing which accounts are key to a company at any one time, determining the needs of these particular customers, and implementing procedures to ensure that they receive premium customer service and to increase customer satisfaction

http://www.qfinance.com/dictionary/key-a...management

http://en.wikipedia.org/wiki/Account_manager

In another words, she is now concentrating on looking after existing key customer – called “farming” and leave out creation of new accounts to others - called “hunting” – ( interesting terms used by Wikipedia).

This change in responsibilities could also be viewed as a new initiative by UMS to strengthen its strategic partnership with Applied Materials in order to retain and gain more business from this key customer down the road – hopefully without having to give price discount – haha ! .

Looking at it from this perspective, it is a positive step, IMO.

(Vested)
Research, research and research - Please do your own due diligence (DYODD) before you invest - Any reliance on my analysis is SOLELY at your own risk.
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Good analysis Boon - but if she is still playing such a crucial role with Applied Materials, is it necessary to resign from the BOD considering that close to 90% of the revenue is derived from that customer ?

(Vested)
Disclaimer: Please feel free to correct any error in my post. I am not liable for anything. Do your own research and analysis. I do NOT give buy or sell calls and stock tips. Buy and sell at your risk. I am not a qualified financial adviser so I do not give any advice. The postings reflects my own personal thoughts which may or may not be accurate.
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The management is selling his shares. Do not sound good.

I wonder if the quarterly dividend of $0.01 will continue.
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