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Industry rides upcycle as global demand returns, Singapore semicon plays rise on earnings recovery

Uma Devi
Uma Devi12/20/2019 07:00 AM GMT+08  • 6 min read
Industry rides upcycle as global demand returns, Singapore semicon plays rise on earnings recovery
SINGAPORE (Dec 20): In 2019, Singapore’s worsening manufacturing sector was a cause for concern as the country’s economy slowed to a decade-low growth rate of 0.1% in the second quarter. In July, the outlook for the second half of the year did not app
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SINGAPORE (Dec 20): In 2019, Singapore’s worsening manufacturing sector was a cause for concern as the country’s economy slowed to a decade-low growth rate of 0.1% in the second quarter. In July, the outlook for the second half of the year did not appear positive as most manufacturing and services firms turned less upbeat about business prospects.

However, September marked a turning point, with manufacturing output recording a modest 0.1% growth. The most recent set of data released by the Economic Development Board (EDB) shows a 4.0% increase in October, the largest y-o-y growth since November 2018, when factory output grew 6.8%.

Notably, although semiconductor output declined 0.9% in October, it was much smaller than the double-digit falls recorded in the previous months.

According to the World Semiconductor Trade Statistics organisation, the global semiconductor market is expected to return to growth in 2020, as demand recovers and inventory runs low. A separate study by the EDB in October notes that the semiconductor and pharmaceutical sectors are set to be leaders in the adoption of Industry 4.0 technologies, signalling a bright outlook for the semiconductor industry.

“Overall, the overstocking situation in 1H2019 is improving as demand has been picking up in 2H2019. The industry demand-supply environment is projected to be much healthier in 2020,” says DBS Group Research analyst Ling Lee Keng.

Undertaking expansion

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Growth in the semiconductor industry is driven by an increasing demand for new-generation semiconductor chips, which are needed to support new applications such as 5G mobile networks, artificial intelligence computing capabilities, as well as internet of things systems, where devices and machinery are all connected.

Apart from these technologies, the industry could benefit from the introduction of products such as speech recognition devices, wearables and 3D printing, as well as product enhancements for mobile phones and technology nodes.

According to Ling, these trends are likely to have a positive and “profound impact” across the whole semiconductor industry.

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“Prices for both DRAM memory, used in desktop computers and servers, and NAND, used in smartphones, have fallen sharply in the past 18 months,” he notes. “These trends look like reversing, aided by major new growth drivers emerging from new technologies and 5G. The uptick in this industry should lead to an improvement in demand for other segments down the technology value chain.”

On a global level, semiconductor heavyweights have taken to expanding their facilities in keeping with the positive outlook. For instance, Micron Technology launched a wafer fabrication facility in Singapore in August to produce advanced 3D NAND flash memory chips used in smartphones, tablets and computers. According to CEO Sanjay Mehrotra, this was part of a multi-billion-dollar investment in the country by Micron, making it the single-largest source of foreign direct investment in Singapore.

Intel, the industry leader, has raised capex guidance by US$0.5 billion ($0.68 billion) to US$16 billion as a result of increased 10-nanometer and 7-nanometer investments.

Besides the semiconductor companies themselves, the various supporting segments are actively expanding as well. JTC Corp, which develops and manages industrial space in Singapore, is building a new semiconductor facility in Tampines, with the first phase set to be completed by 2021.

“Naturally, companies that align themselves with key technology trends such as 5G and high-performance computing will also be well placed to take advantage of the market upturn,” says Cheam Tong Liang, vice-president of corporate strategy at Kulicke & Soffa.

Acquisitions and diversification

Some companies in the sector are not content with just riding out the cycles and enjoying the recovery. UMS Holdings, for example, has diversified its business. It acquired a controlling stake in JEP Holdings, which serves the aerospace industry, in October. By doing so, UMS is not just buying into a new business; it is also staking a claim in another growing market.

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UMS now holds 38.81% of JEP, from an initial stake of 7.48%. “UMS has always been in only one sector: semiconductors. As a company, we were wholly focused on one sector, which can be dangerous to some extent,” says UMS CEO Andy Luong.

Since then, JEP’s earnings have improved significantly. It booked earnings of $3.3 million for 1HFY2019, compared with losses of $0.2 million in 1HFY2018.

Year to date, shares in UMS have surged 74% to close at 99 cents on Dec 16. This gives the company a valuation of 15.7 times historical earnings, and a market capitalisation of $531.1 million.

AEM Holdings, another Singapore-listed semiconductor play, has long been valued by investors for its close relationship with Intel, which accounts for 90% of its revenue.

Even so, AEM has diversified its customer base, signing up new customers such as Huawei Technologies to supply cable testing solutions for its 5G rollout. AEM is also working with a major German sensor supplier in the automotive and consumer industries for a wafer level test handler for environmental sensors.

For 3QFY2019 ended September, AEM reported earnings of $13.7 million, 20.4% higher than that of $11.4 million a year ago. Its share price, too, has more than doubled over the course of the year to close at $1.92 on Dec 16, valuing the company at $524.8 million or 13 times historical earnings.

Growth prospects for listed stocks

As technological advancements proliferate, market watchers envision that the semiconductor industry will be buoyed by a wave of growth. “As adoption of these new advanced technologies become more commonplace, growth is likely to accelerate further beyond 2020,” says DBS’s Ling.

The share prices of several semiconductor stocks listed on SGX have seen increases of 50% over the second half of FY2019. Yet, there appears to be more to come in terms of growth.

Analysts say the uptick in global semiconductor shipments, positive guidance from global players such as Micron and Intel, as well as positive forecasts on industry trends are among factors that could contribute to further upside for these stocks.

Things look especially positive for companies with a stable cash flow and strong financials.

For instance, Micro-Mechanics Holdings, a manufacturer of consumable parts and tools used in the fabricating, chip testing and assembling of semiconductors, is what market watchers term “a major beneficiary of the bottoming semiconductor industry”. With no borrowings to its name, the group has been able to generate a strong cash flow thus far. This has in turn enabled it to fully fund capital expenditure during a slowdown, so as to boost production quickly in the event of an industry rebound.

Similarly, Frencken Group has been taking significant “belt-tightening” measures, such as its strategic divestment of loss-making, wholly-owned subsidiary Precico Group, which enabled it to unlock the value of this business unit at a profit. An optimisation exercise was also undertaken, which resulted in some subsidiaries being wound up so that the group could achieve a leaner structure.

As a result, Frencken saw its earnings for 3QFY2019 double y-o-y to $11.4 million, while revenue inched up 3.8% to $170.2 million on the back of an increase in contributions from the mechatronics segment.

Year to date, the group’s share price has surged some 121% to close at 93 cents on Dec 16, giving the company a valuation of 9.3 times historical earnings and a market capitalisation of $394.4 million.

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