We chat with Sudhan, Content Strategist at Seedly. Sudhan shared with us one of his favourite and best investments so far, Micro-Mechanics (Holdings) Ltd. Micro-Mechanics is a small-cap company serving the semi-conductor industry. Find out why the best is yet to come for this company.
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Disclosure: Sudhan owns Micro-Mechanics Holdings at the time of recording.
The Interview Transcript of Value Invest
Asia, on Investing Ideas between
The Interviewer: Stanley Lim from
Sudhan (Content Strategist from Seedly, and co-author of the book
“Invest Lah; An Average Joe’s Guide to Investing)
Stanley: Great! Yeah! we
definitely put the link down below for you guys as well, but let’s jump
straight into the main core of why we are doing this episode; every week, one
of our guests will be sharing one investment idea that they have been thinking
about currently, and this week Sudhan, why don’t you share with us which
company you’re looking at, and why you like it?
Sudhan: Okay! The company I’m going to share with you Stanley and the
audience is Micro Mechanics. So, it’s a company that’s in the semiconductor
industry, so they design and manufacture high precision tools and parts used in
the semicolon industry, so these parts are consumables, so once you use them you
are to discard. So, basically they supply parts that are used in the testing
and assembly of the semiconductor value chain, so basically they’re parts; such
as rubber tips, or for their semi-conductor value chain and so all these products
are one-off use, so we have to whenever use it, and you want to have a new part,
you will replace the parts. So, this kind of gives them the recurring revenue.
Okay! why don’t you share with us a little bit more about their business model,
so how have they been growing why don’t you share with us what’s the business
behind MICRO MECHANICS?
Micro Mechanics has a great growth in the business, but in the latest FY we
just ended in June 2019, they have slowed down the growth, because due to the slowdown
in semiconductor industry, but over the long term they still have potential for
this company because as you know, smart phones, Internet of Things, AI are all
the raging stuff now right. So, for the long term, semiconductors will still be
in demand, but for the short term, there’s always like a … in this industry so
short term hit, but long term there is great prospects for this company.
Okay! Are they only serving the SEMICON industry or they do serve other industries
believe they only serve the semiconductor industry right now.
Okay! So, that means that their sale is very dependent on the semiconductor
That’s right. The semiconductor industry it’s super volatile, super cyclical,
so yeah its ups and downs, there are often ups and downs, and if you don’t
believe me, you can take a look at Singapore’s Deputy Prime Minister Heng Swee
Keat, he recently said that despite the slowdown in industry, the future of the
global semiconductor industry remains bright, and the demand looks healthy, so
if Minister Heng is… go-to guy then yeah I think this is a great company to invest
in the long term.
if that’s the case, if it is in a very cyclical industry, how do we actually
predict you know, their sales and demand, how do you actually look at this company,
just mainly from the entire industry growth?
So, for investing, for myself in general, I don’t really look at short-term
demands, so I look at the long-term demands, so even though short-term the
company might face head winds, I see it as an opportunity to buy more shares in
a company, if the share price would fall, valuation would fall. So, as long as there
is long-term growth in the company, I will be prepared to hold on to the
company through the cycle also, and especially for micro mechanics, they pay
great dividends. So, it’s like you’re paid today while the cycle turns around.
Okay, and they supply globally? Or are they only supplying to manufacturers
here in Singapore?
their main three markets are; China, USA and Malaysia. They also have sales in
Singapore, and the Philippines, Thailand, Taiwan, and some of the other
countries. So, in Singapore, their sale for 2019 was 75%.
just looking at their financials, and Wow! Their profit margin is quite amazing
with a gross profit margin of more than 53 percent, and a net profit margin of
21 percent. Why is that the case does this company have a moat? Why are they
able to have such a high profit margin?
of the ways to look at margins, high margins would actually show that the
company has pricing power, so that’s the case for Micro Mechanics, like you
rightly pointed out, gross margin of fifty four percent, and net profit margin
of around twenty two percent, for FY 2019. So, some of the reasons for the high
margins is that they they’re always looking to improve the productivity, so they
have strategies such as reducing setup time, and having more highly automated
machines, and smart factories. So, in the manufacturing industry set up time reduction
is a big thing because I’ve experiences in the manufacturing line, so when you
can reduce the set-up time, you can do things faster, and you can reduce costs,
and stuff, so this gives the company has an advantage over its rivals as well. If
you can produce more parts within the set period of time, you will see more
output, you’re more efficient, so that’s what is going well for Micro Mechanics,
and that shows in its high margins as well.
you’re basically saying that they are able to research, R&D more into the
efficiency of how they do things, that’s why they end up having a better margin
than their competitors.
that’s the case, and also even simple things like putting – for example moving
through their production right, for their components, when they put in their
capacity, even having things near their machines, makes a lot of difference. For
example, you don’t have to travel like one minute to take a new part, to put
into their product so if you have it all just inside on your arm’s length right.
That makes a big difference in manufacturing, so I think they do a lot of all
these lean stigma stuff to reduce the cycle time, and reduction of set-up time.
I’m trying to try and find ways to challenge your ideas right here, when you
look at this company, because it’s not a very large cap company, how can you
tell how well they are they are basically doing to their industry, or to their competitor,
is there a way that you look at it, is there any comparable for this company?
Micro Mechanics, there’s no direct rival for them, because of their competitors
compete in specific areas of the semiconductor industry, what their company
offers, so Micro Mechanic has this whole range of product and services, but his
competitors only have certain aspects of those products, so there’s no one
direct competitor for them, so that also gives them I think the competitive
Stanley: Because from my understanding,
this kind of companies, when they produce customized tools, or consumable for
the SEMICON industry, isn’t it that almost any machine shop should be able to
do the same thing?
So, from outside it might look like that way, because anyone it seems like
anyone can make the parts, but what is hard to replicate is the quality and the
cycle time. So, basically if I want parts, I want it in quick time, but let’s
say I want I want a thousand parts in within the next few days, if a company
can meet my demand at a low cost and high quality, so I would go with that supplier,
so for Micro Mechanics, I think it has that advantage, it’s known for its
quality and its cost, low cost I think and cycle time as well. So, meeting
customer demand is very important in this industry.
Okay, you sort of feel that they are able to maintain this kind of profit
margin even going forward, and able to convince their clientele to stay with
I believe so, as long as they don’t screw up basically, so I’m sure they can
keep their customers happy.
they screwed up before in the past?
that I know of, and hopefully not.
And how long has this company been around?
Micro Mechanics has been around for many years, so it was founded in 1983 in Singapore,
so that’s like so many years ago, and it was listed in 2003, so they have a
long list of history and long existence in the industry, I’m sure they would
have been through many cycles, and emerged stronger from each cycle, and one
particular thing I like about this business is that, it’s balanced sheet is
very strong. So, it is full of cash with no debt, so the last I know that
companies without any debt, I don’t think they can go bankrupt. So, they have a
lot of cash and no debts. So, they are a strong business.
Okay and so how are you seeing this company? Maybe as a disclaimer, assume you
own the stock yourself?
Yes, I do.
and you seeing this as a growth company, or as a dividend company, how do you
see this company?
I would say this currently can be classified as a dividend company, like I
mentioned earlier, its yield is currently around 6%, so strong yield, even if
you take away the special dividend so nine cents of total ordinary dividends you
have a dividend yield 5%, strong balance sheet and even if you look at their
earnings, price to earnings it’s around 18 or 19 times, but I think if you
normalize it, I think it’ll be much better.
do you mean by the normalised price to earnings because you just mentioned that
they are facing a slowdown you mean the earnings have already slowed or it’s
So, the FY 2019 have actually slowed down, so it was just reported a few I
think last month or two months back. The FY 2019 earnings, so that has already
slowed down, so if you use that earnings, reported earnings, the valuation will
be around 18 19, but if you were to normalize, I think the valuation would be
much better, the Price will be much lower.
if you are seeing this as a dividend counter, okay I’m just looking through
their dividend payout right now, it seems that they have been increasing the
dividend payout over the past few years from 54% in 2014, all the way now to
more than 100%, do you still think that this dividend is sustainable?
So, if you look at the dividend valuation itself, like you pointed out is going
up, and even above hundred percent, so various companies payout more than what
they earn, but the thing is that, if you look at the free cash flow, they are
paying much lesser than their free cash flow, and the company also said that
they are confident, they are basically maintaining the 10 cent dividend given out in 2018, because they are confident
of their business, and the cycle and that it will do well basically, the company
can be much stronger basically.
Oh, you mean that even as they are facing this slowdown, they have no plans to
cut their dividend?
So, they have no plans; basically maintain the dividend, showing confidence in
the business and industry.
if that’s the case, maybe the slowdown is not as bad as we might think, because
if we look at the global financial crisis back in 2008, this company actually
cut their dividend more than half, from five cents to just two cents. So, you
don’t see this as a risk that this would happen again?
I don’t see that as a risk, I don’t believe we will go back and face the same issues
we faced in 2008-2009, this slowdown is just I think it’s short-lived, won’t be
as painful as what we faced in 2008-2009, and if you look at a dividend payout
ratio in 2009 it was 100 percent, so it was really not sustainable, so they had
to cut dividends.
Okay, how would this company be affected by the current macro environment that
we look at, the trade war and we look at you know just everything that’s
happening right now, what’s your view on that, and how would this company be
their sales from China’s for 2019 was 29 percent you know, so the trade war
between China and US might be on investors’ minds, but in fact during the 2018
AGM, the company said that there’s no direct impact on the company’s business
from China, because they only supply to the manufacturers within the country, so
maybe Chinese companies or multinational companies based in China, so they
don’t really export out of China.
Okay! So, whatever business that they serve, they actually have a local machine
shop right there?
That’s right, and they serve within the country.
That’s pretty interesting, what’s in your own opinion might be the risk for
this company then?
the risk basically is that the business cycle, I mean the semiconductor industry
doesn’t turn around, so it’s a protracted downturn, structural decline, but I
don’t see that happening, yeah like I mentioned, we still use the smartphones,
and there’s still growth in this tech industry, so all these smartphones and all
the machines still need all the chips that goes into all these equipment; and
valuation wise, it’s kind of low risk, I think if investors will look into this
company, so from income perspective, they’ve got great dividend yield from this
company, valuation wise I don’t think it’s demanding.
How would you look at the valuation, what is a fair price for this company in
just look at the earnings, and the dividend yield, because it’s the price to
earnings rate, the earnings is much lower, and you know that the Price is
higher, I’ve not looked at the normalized earnings, its price and normalized
earnings, but I believe it’s still decent around this price.
just on the last point I’m trying to challenge your idea here, because I look
at their past performance right, and this company right now has a market cap of
roughly S$240 million market cap, and I just look at their past performance. Over
the past 10 years, it hasn’t really grown in terms of revenue, it hasn’t really
grown dramatically fast, and if they have already been in the business for say
30 odd years, almost coming to 40 years, and they’re still at this size, do you
feel that this is just how big the market is going to be for them, they might
just become a non-growing company in the next few years?
think the company can grow with the demand in the semiconductor industry, like
I think many years back, the industry was still much smaller, SEMICON for
smartphones were not there, I mean not that prevalent compared to now, and but
it’s always talked about this AI, IOT and variables, so I think the next few
years might see different kind of growth phase compared to the past many
I let you go, if an investor is looking at this stock, how would you see this
stock on your whole portfolio, in terms of sizing, how do you size such a
position in your portfolio?
first for myself, I understand this is a cyclical industry, the companies in,
so when I started buying the company, I bought very slowly, I didn’t like go
all in, so I bought it even slower than the other companies that I have, compared
to more stable companies. So, I try to buy only like twice a year, so I really
was deliberately slow in purchasing more shares in this company, and also
because I kind of knew that the industry was going to slow down, so I purposely
pace my investments slower, and kind of take advantage of the decrease in share
Wow! You only invest in it twice a year, that’s very disciplined. How many people
can do that?
So, even for the overall portfolio position, I think I don’t want this company
to be too huge compared to my whole portfolio, so yeah there’s a reason also I pace
I see. Okay, maybe just go give all the audience a little bit more context, why
don’t you share a little bit more about how you actually invest, what type of
investor do you categorize yourself as?
wouldn’t say I’m like a strict value or growth or dividend investor, basically I
invest in companies that can grow for the long term, and pay decent dividend,
and there’s a huge market that they can tap into, so I think that’s me,
probably like Motley kind of investor.
and how many stocks do you own personally?
I have around 20 to 30 stocks.
Well, very diversified, and so a stock Like Micro Mechanics will take up maybe like
2 to 3 percent in your portfolio. I see, this is pretty fascinating, and thank
you so much for sharing so much detail, not just on the company, but also on
how we should actually think about, when we are investing, and sizing up our
position, and so once again this is a Sudhan, contributor at Seedly, we will
provide the link down to the Seedly blog, so you can read some of Sudhan’s blogposts
as well. thank you so much for your time Sudhan, I think this has been an
extremely interesting company, and I think many of our audience will definitely
be checking it out very soon.
Stanley, thank you for having me here, and I hope that your audience like Micro
Mechanics as well.
I hope to chat with you very soon.
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Stanley Lim has spent the last decade in the investment industry. Over the course of his career, he has kick-started a few businesses, worked in the family office industry and most recently in the investment advisory industry. He has been a writer and analyst for The Motley Fool Singapore from 2013 to 2017. He has written close to 2000 articles online, on investment education and market analysis. He is the co-writer of the investment book: “Value Investing In Asia”, published in 2018. Stanley is currently the chief editor of Value Invest Asia.