Micro-Mechanics (Holdings)

[Wildreamz]

High dividend payout ratio of ~100% is usually not a good sign for me, especially if the company is dependent on R&D to grow.

Not sure about Micro-mechanics' specific situation.

Just my 2c.

[ghchua]

High dividend payout ratio of ~100% is usually not a good sign for me, especially if the company is dependent on R&D to grow.

Not sure about Micro-mechanics' specific situation.

Just my 2c.

Hi Wildreamz,

The company do not need to do high end R&D, as they are supplying high precision replacement parts and tools, and not inventing whole equipment or new parts itself. And normally, when companies replaces those parts, it is due to wear and tear. The parts design geometries (sorry if I might use design jargon, as I am an Engineer by training) are already out there in the market. They might need some changes in the parts materials and design geometries, but that is all about it. 

What is critical for Micro-mechanics is the manufacturing process of those parts. They must be:

1. Scalable
2. Repeatable
3. Cost effective

Why are the above 3 points important? Because for customers, the reliability and availability of the parts is critical. Your manufacturing process must have scale to produce parts in large volume as and when customers need them. The process must also be repeatable so that those parts are consistent in reliability. And finally, it must be cost effective for Micro-mechanics to earn a decent margin on them.

So as you can see, the investment capex for Micro-mechanics is mostly cater towards the manufacturing process of those parts, and the plant and equipment used to manufacture them.

[dreamybear]

I do think Micro-mechanics(MM) is a well-run company, though not vested.

I think the basic due diligence as with other companies are analysing the financials and trends(e.g. margin, profitability, balance sheets), among other things. However, how does one project the earnings growth of MM or other B2B manufacturing companies ? Are future earnings estimated by using the market industry trends, in this case the precision parts market forecasted growth rates and/or the company's income statement trends for the past few years ?

For consumer discretionary/staple businesses(e.g. Apple, Sheng Siong, Challenger, Hour Glass), we can more easily find information on these and they are also something we can see in our daily lives, for e.g. we can track the release of new Apple products, new luxury watch models, new supermarkets opened, expansion into new geographical areas, etc.

But I find that it is not as "transparent" when it comes to the manufacturing companies dealing in B2B.

I think the research process is further complicated if there is no direct competitor nor market share information, or a key customer as in the case of AEM.

Wld appreciate if fellow buddies can enlighten me.

[Wildreamz]

Yes, I find small companies in an industry I'm not familiar with (e.g. high precision manufacturing), hard to predict. Although recent growth rates may be good, there is not much certainty that it will extend well into the future (5, 10, 15 years), to me. Especially the size of Micro-Mechanics, they maybe under the mercy of both industry trends and large concentrated customers (see how Apple decimated their suppliers in the past: https://www.nasdaq.com/articles/apple-in...2017-04-12; I don't know much about MM to comment here).

Special qualitative insights on the industry is needed IMO. For example, we all know ASML is the only provider of EUV, and TSMC is the largest semi fab (whose technology and unit economics greatly benefits from economies of scale), there is little to no alternatives for either; and this is an open secret to people just vaguely familiar with the semiconductor industry.

Looking forward for experienced MM investor's comments on this too.

[Kaimin]

Yes, I find small companies in an industry I'm not familiar with (e.g. high precision manufacturing), hard to predict. Although recent growth rates may be good, there is not much certainty that it will extend well into the future (5, 10, 15 years), to me. Especially the size of Micro-Mechanics, they maybe under the mercy of both industry trends and large concentrated customers (see how Apple decimated their suppliers in the past: https://www.nasdaq.com/articles/apple-in...2017-04-12; I don't know much about MM to comment here).

Special qualitative insights on the industry is needed IMO. For example, we all know ASML is the only provider of EUV, and TSMC is the largest semi fab (whose technology and unit economics greatly benefits from economies of scale), there is little to no alternatives for either; and this is an open secret to people just vaguely familiar with the semiconductor industry.

Looking forward for experienced MM investor's comments on this too.

I agree with Wildreamz here. We have very little visibility in such a niche industry. Same for ISDN. Results have been spectacular but the business is very poorly understood and money has been made more by luck than my due diligence. How long do precision manufacturing equipment last? Is there a moat maybe in terms of switching costs? Why do some companies do better but not others? If this is factory equipment, does it mean customers only buy when they need to expand or replace? If so, how do we know when customers are going to stop buying more equipment?

[ghchua]

Dear all,

Some questions here and I try to attempt to answer them as much as I can.

First, MM is not in the business of precision manufacturing equipment. They are in the business of providing high precision replacement parts and tools. Tools and parts do wear and tear after usage and they need to be replaced regularly.

Second, MM business is not dependent on a single or a few large customers. In fact, their customer base is pretty diversified. This is because replacement parts are needed for semi conductor manufacturing process. Those parts are mostly standard ones and not designed with a specific customer in mind. Which is why I said MM do not need a lot of high end R&D earlier. If you supply to only Apple, most likely those parts are only used by them and not quite standard ones. MM is not in those kind of business.

Third, though semiconductor industry do experience boom and bust, as long as you run a fab, you need to keep some machines running. When they run, they wear out their parts and needs to be replaced. Therefore, though MM business will be affected by downturn in the industry, overall they are less affected than others in the forefront of it like TSMC, which runs fabs and churn out chips.

Hope that the above helps to clarify some queries here.

[donmihaihai]

I invested in MM for close to 20 years(18 years maybe). My initial purchase was luck(lucky) and bought at too high a valuation(unlucky or stupid) but I believe my subsequent purchases(reasonable valuation and cheap) and holding it till selling almost all of them recently because the market offered some crazy valuation is not luck.

Precision manufacturing is board and huge. ghchua comment touch right on MM core business which provide high precision consumable parts and tools use in semiconductor industry. These are just small little critical parts(now reach nano) and very profitable, selling to lot and lot of customers. I don’t know what machine/robot/process or suppliers semiconductor use 20 years back but MM is still supplying the same stuffs now. Does the name of these suppliers matter? No.

Talk about competitive advantage, what kind of competitive advantage does MM has that enable it to sell the same stuffs in an ever changing industry? It is simple, the segment that MM is focusing on is very small), and MM is the only shark in this ever changing small pond. If there is another shark in the same pond, both sharks will die out of hungry. MM revenue is just over 60M, split that over 2 companies with same set up(capex), how much can each earn? If MM is not earning, it will not able to evolve along with semicon.

There is a FAQ on competitive advantage in MM website written in 2018. The reply is exactly what I got and understand 10 years earlier. Micro-Mechanics (Holdings) Ltd - Investor Relations: FAQs (listedcompany.com)

The future will likely be the same, and it is commented by MM on latest results announcement.

As the semiconductor industry develops new equipment and processes for manufacturing chips with device geometries below 10 nano-meters, our customers will increasingly require parts and tools manufactured using improved materials and processes that eliminate defects and variability. In the future, we think there may only be a handful of suppliers capable of meeting these stringent requirements and our goal is to become a leading Next Generation Supplier.

MM is not a fast grower and revenue grow at single digit since listed. Those who are looking at 20 or 30 or 50% shouldn’t be looking at MM because MM can be considered as the whole industry so how fast can MM grow.

WB said many times, if the company is not within your circle of competence, just pass.

[Wildreamz]

So from my understanding, the competitive advantage is that, it's a small fish in a small pond. Hence, does not attract competition yet.

As increasingly smaller node size is required, increasingly lower tolerance (higher precision) parts are required.

Hence, as more and more semi customers use MM products to reach that low tolerance level, revenue grows; if revenue grows too big, it may start to attract competition? (at least based on financial theory)

[dreamybear]

Thanks for all the replies from buddies. I particularly like the shark anecdote, it is much easier for a layman like me to understand.

I think if MM is the only shark, it shd be in a gd position to eat up the other small fishes(though not all as it may lead to some anti-competitive issues)unless the small fishes are not desirable(e.g. in terms of returns/quality) or squeeze out the small fishes from the pond(unless small fishes are needed to serve order sizes too small for MM).

If I am not wrong, MM's payout ratio is quite high. Under than the US operations, does this signify MM is not keen to utilize its cash to expand its bizness more aggressively - whether thru' M&A or expanding into new geographical areas or even a new line of related business ?

@Kaimin - I feel the same with regards to ISDN though I think ISDN is more of a service provider than a manufacturing company. However, I believe NT is able to and also eager to help to drive ISDN's bizness fwd, so at least there is some catalyst and a likely chance for a multi-bagger(based on improved revenue/earnings).

[ghchua]

Hi dreamybear,

Just to address some of your comments.

I think if MM is the only shark, it shd be in a gd position to eat up the other small fishes(though not all as it may lead to some anti-competitive issues)unless the small fishes are not desirable(e.g. in terms of returns/quality) or squeeze out the small fishes from the pond(unless small fishes are needed to serve order sizes too small for MM).

There is no reason for MM to acquire all those companies as these are small players in a fragmented market, with no large competitor. It won't move the needle. What MM is doing is to focus on their own gross profit margin by being more efficient and focus on their manufacturing process. Those small players, if they are not being efficient enough to deliver parts that are using improved materials and processes that eliminate defects and variability will eventually die off and exit automatically in this business.

If I am not wrong, MM's payout ratio is quite high. Under than the US operations, does this signify MM is not keen to utilize its cash to expand its bizness more aggressively - whether thru' M&A or expanding into new geographical areas or even a new line of related business ?

The problem is that there is only so much you can grow in this business, unless you want to expand into other businesses, which MM might not be familiar with. Most M&A deals have failed. How many times you have read a listed company on SGX going into a new business to get shareholders' approval, only to fail big time after that?

I prefer MM to focus on their current niche, continue to execute well and reward shareholders if they have excess cash. Payout ratio high is not an issue, since they have no bank borrowings and do not need to pay the banks.