Business
Q. Tell us briefly what Micro-Mechanics does?
A. Our business is related to the semiconductor industry. Just as sewing machines require needles, and printers require ink cartridges, we manufacture precision consumable tools and parts used by the tens of thousands of machines installed around the world that assemble and test semiconductors. We are already producing consumables for two of the 10 or so major assembly and test processes, which are for die-attach and wire-bonding. We are currently developing a range of products for another process called encapsulation. Our five manufacturing facilities in Asia serve a very broad customer base that includes nearly all of the American, European, Japanese and Asian semiconductor makers.
Back to topQ. What's your outlook for the semiconductor business? What are the long term prospects like for the company's business?
A. Semiconductors underpin the digital world. They drive the cell phones, computers, servers and thousands of applications in our lives. Micro-Mechanics manufactures consumable tools and parts used on the tens of thousands of machines that manufacture semiconductors throughout the world. So while the industry can be volatile, we believe MM is less susceptible to the industry swings because there is regular demand for our products due to their consumable nature. Together with our continuous focus on quality, cost and operational improvements, as well as ongoing efforts to maintain a sensible expense structure, our goal is to achieve a high level of operational and financial performance.
Q. The company's gross profit margin has consistently been high at around the 60% level over recent years. This is exceptional. How are you able to enjoy such a high profit margin? Are there significant entry barriers to the business?
A. The answer starts with our business philosophy. We like to think of Micro-Mechanics as the "Toyota" of the semiconductor industry. In other words, we strive to offer customers a well-engineered product of superior quality at a fair price. With this price positioning, our aim is to maintain healthy gross profit margins through a continuous focus on quality, cost and operational improvements. While we constantly develop proprietary designs, materials and manufacturing processes to maintain high barriers to entry, we believe the best long-term barrier is to ensure our customers get top quality products at a fair price.
Q. What is the competitive landscape like for your industry and who are your main competitors?
A. We do not have any single direct rival who competes with us on our full range of products and technical services in our current geographical markets. Companies that compete with us in certain ranges of our product offerings are GL Mechatronic, Craftronics and Futani Engineering in the wire bond clamps business; and SPT Asia in the die attach business. While there are a number of small machine workshops capable of producing precision tools, they do not have the resources or scale of MM.
Q. Is the nature of Micro-Mechanics' business such that your customers tend not to switch suppliers because of the high quality standards?
A. Our customers primarily select suppliers based on three measures of performance: Quality, cost and cycle time. We believe that constant focus on these areas will help ensure satisfied customers and long-term competitiveness.
Q. What do you see as the key growth drivers for the company in the next few years?
A. We presently have five manufacturing facilities located in Singapore, Malaysia, Thailand, the Philippines and more recently China, supported by sales offices in Taiwan, Switzerland and the U.S. As the semiconductor industry continues to shift to lower-cost locations in Asia, in particular China, we are well positioned to participate in these key market areas.
We are also working to expand our range of products. Our product development activities centre on improving our existing products and developing new consumable items for various processes in the manufacture of semiconductors.
Q. How does MMH decide on when to have a capital expenditure? Are capital budgeting tools such as internal rate of return, payback period considered?
A. For existing products, we look at both capacity needs and traditional return models, such as return on investment or a payback period. For new products, it's not always so easy. Sometimes you have to develop capability first before business develops. We also think our practice of paying a dividend helps us in our capital budgeting process by distributing "excess" cash and, therefore, being less inclined to invest in low-return projects.
Q. How important is R&D to MMH? In particular, how is MMH innovating to respond or be abreast of its customers' needs?
A. One of MMH's key competitive strengths is our strong design capabilities, where we work with customers to provide solutions to their changing needs. In addition, we are constantly working on improving our capabilities to ensure we have new and innovative manufacturing processes to meet the industry trends of densification and miniaturization of chip package sizes.
Q. Which markets are you most excited about? What are prospects looking like for your China operations?
A. Certainly, China is an exciting market for MM as the market there is quickly becoming not only a center for semiconductor manufacturing, but also the largest market in the world for cell phones, computers and other consumer electronics. Many of our customers are establishing operations in China and our new manufacturing facility there will strengthen our local presence to improve the level of support to existing customers as well as facilitate our reach to new customers. But while our aim is to capitalise on the potential of this market, we believe there are also exciting opportunities within the boundaries of our other geographical operations which we intend to continue developing.
Q. Can you share what benchmark the remuneration committee uses to derive management and director compensation?
A. Our underlying approach to compensation is based on a pay-for-performance philosophy. Beginning with the four Executive Directors of our Board, who play an active role in the day-to-day operations of the company, down to each employee on the shop floor, our aim is to have a significant portion of total compensation based on performance. Every six months, we assess each subsidiary and the Group on seven key areas of performance growth, profitability, liquidity management, quality, cycle time and employee attendance. At the Executive Director level, performance compensation during FY2004 based on these measures accounted for between 28 and 38% of total remuneration. While we believe such compensation is necessary to encourage a high level of operating and financial performance, we also believe that these distributions should be balanced with shareholder interests. As such, we limit total performance compensation for all employees (during each six-month period) to a maximum of 15% of Group pre-tax earnings.
Our Board also includes a remuneration committee that assesses the Executive Director and Management salaries on several factors including the Group's financial performance, market practices, as well as the individual performance and contribution to the growth of the organization. The recommendations of this committee are put forth to the Board for approval. Directors' fees are determined individually based on the effort, time spent, level of responsibility and contribution to the Board.
Q. What are the key investment merits for someone looking to invest in Micro-Mechanics' shares?
A. A key feature of MM's business is that our products are consumable and need to be replaced regularly. This means customer demand is recurring and less susceptible to the industry cycles than, for instance, an equipment supplier to the semiconductor industry. At the same time, our products and manufacturing equipment are less susceptible to obsolescence because the processes our customers use in their manufacturing, such as die attach, wire bonding and encapsulation, are maturing. Our proprietary technology and manufacturing know-how also creates significant barriers for new entrants. In addition, our established international presence enables us to reach an extensive base of over 300 blue chip customers that comprise most of the world's leading semiconductor companies. We have also maintained a healthy gross profit margin of about 60% over the past few years while our balance sheet remained sound with no debt. Last but not least, the Group is led by an experienced and diverse management team supported by dedicated staff at all our worldwide facilities.
Q. What's the vision for MM over the next five years?
A. Given our humble beginnings, our goal is to continue putting the building blocks to make the company a manufacturer that can provide complete solutions for the assembly and test process. This will ensure that Micro-Mechanics stays in a position to continue delivering steady and sustainable profits to reward our shareholders in the coming years.