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(extracted from Annual Report 2018)

To all our stakeholders,

Micro-Mechanics delivered another record financial performance for the 12 months ended 30 June 2018 (“FY2018”) as our Group’s net profit improved 16.1% to S$17.1 million on the back of 13.8% growth in revenue to S$65.1 million.

During FY2018, the Group witnessed higher sales in our major geographical markets, particularly in China, the USA and the Philippines. As China continues to develop into a major center for global chip manufacturing, we remain focused on strengthening our operations in Suzhou to ensure fast, effective and local support to customers. As a result of these efforts, we have benefited from multi-year sales growth in China.

Sales in China increased 21% to S$18.0 million in FY2018 to remain as the Group’s largest market and accounted for 27% of revenue. Sales in the USA jumped 33% to S$12.2 million. At 19% of Group revenue, the USA has overtaken Malaysia’s contribution of 18% to become the Group’s second-largest market. Together with the Philippines (10%), Singapore (8%) and Taiwan (7%), these six countries represent nearly 90% of the Group’s business. With factories in China, the USA, Malaysia, the Philippines, Singapore and a sales office in Taiwan, the Group is wellpositioned to provide fast, effective and local support to our customers in these major market areas.

While growing the Group’s top line and the value we create for our customers remain key priorities, we have also been working tirelessly to maintain a strong gross profit (GP) margin by focusing on various strategies, such as 24/7 Machining, IT automation and department integration to improve our efficiency and operational effectiveness. In spite of ongoing cost pressures, these and other efforts enabled us to hold our GP margin relatively steady at 57.0% in FY2018.

We also continue to work diligently to keep a tight rein on our overhead expense structure. In FY2018, the Group’s total distribution, administrative and other expenses, including other income increased by just 6.1% to S$15.2 million. When measured as a percentage of sales, our overhead expenses declined to 23.4% as compared to 25.1% in FY2017.

Our improvement initiatives have also allowed the Group to maintain a lean manpower structure. Although we added 19 people to end FY2018 with a headcount of 485, these new personnel were mainly in non-supervisory and production roles aimed at strengthening our core manufacturing and delivery responsiveness. As we move forward, we intend to continue automating our operations and enhancing our processes.

At the beginning of FY2017, we announced the cessation of our efforts at the Group’s subsidiary in the USA (“MMUS”) to make parts for equipment makers in a variety of industries. After evaluating the engineering and investment requirements for success in each of these different market segments, and after making promising inroads with several leading makers of semiconductor wafer-fabrication equipment, we decided to align our efforts at MMUS with the Group’s core business of manufacturing process critical parts and tools primarily for the semiconductor industry.

During FY2018, MMUS increased its sales by 29.6% to S$12.3 million and posted a net profit of S$0.5 million compared to a loss of S$0.6 million in FY2017. With these encouraging results, growing customer engagement and positive long-term outlook for the semiconductor industry, we believe our strategy of focusing the Group’s five plants on the semiconductor industry is the right approach.

As we move into FY2019, the Group remains in a strong financial position. We had total assets of S$73.3 million, shareholders’ equity of S$60.3 million, cash and cash equivalents of S$21.1 million and no bank borrowings at the end of FY2018.

Although the chip industry has continued growing strongly into 2018 with worldwide sales up 20.4% in the first six months, the World Semiconductor Trade Statistics expects the industry’s growth to moderate to about 12.4% for the year 2018. This implies a much slower growth rate of 4% to 5% in the second half of the year.

Because the tools and parts we manufacture are typically purchased by our customers well before the sale of the finished chip is recorded, the Group’s revenue growth generally tends to reflect the future direction of the semiconductor industry. Indeed, our top line growth in 4Q18 slowed to 1.5% compared to 4Q17, which is in line with the industry projections for slower growth in the second half of 2018.

As such cyclicality is typical for the semiconductor industry, our approach is to focus on its long-term trends and not get preoccupied by short-term variations. We continue to believe the semiconductor industry is poised for a prolonged period of solid growth as chips are becoming increasingly embedded in nearly every aspect of modern life, from today’s smart phones to tomorrow’s driverless cars. Hence, the key to the Group’s success lies in our continuing ability to seize long-term opportunities and correctly identify the initiatives and investments that bring value to our customers.

During FY2018, we invested a record S$10.6 million for new equipment to increase the manufacturing capacity and capabilities of our factories. Because the time to specify, order and qualify new equipment can easily stretch beyond a year, it can also be difficult to align our investments to short-term industry conditions. For example, our net profit in 4Q18 fell S$0.6 million to S$4.0 million, which included S$0.5 million of additional depreciation expenses, compared to the same quarter a year ago. For FY2019, we expect to incur capital expenditure of about S$6 million.

At the same time, we are always working to develop new materials and processes based on the long-term needs of our customers for greater precision, repeatability and reliability. For example, in 4Q18, our engineers in California completed the development of a critical part used in the wafer-fabrication process while our R&D team in Singapore produced several proprietary materials we believe are essential to the industry at 10 nanometer and below device geometries. Both of these engineering efforts involved more than 18 months of difficult and costly engineering work.

While we will begin to register revenue from this initiative during 1Q19, we believe that this pattern of longer and more costly development cycles is becoming the norm as the semiconductor industry moves below 10 nanometer device geometries and into increasingly difficult processing methods. Although the landscape is more challenging due to the ever-changing nature and increasingly stringent demands of the semiconductor industry, we believe these requirements play well to our technical, financial and managerial strengths and our focus on building stakeholder value that is sustainable.

While short-term business planning and forecasting remains difficult and continues to be clouded by a host of political and economic uncertainties, we understand what is required for the Group to sustain its growth over the long term. We intend to maintain our focus on customers and the value we bring to their businesses. Whether we design and manufacture a tool for a delicate semiconductor assembly process or machine a part used in a critical wafer-processing application, the Group’s mission is clear: To deliver Perfect Parts and Tools, On Time, Every Time based on repeatable, scalable and cost-effective processes.

Appreciation

In closing, we would like to express our appreciation to all of our people at Micro-Mechanics for their vision, teamwork and tireless commitment. Indeed, as we are fond of saying: People Make Everything Happen!

We look forward to continuing our work to build value for all our stakeholders.

Christopher Reid Borch
Chief Executive Officer
 
Low Ming Wah
Chief Operating Officer
 
Chow Kam Wing
Chief Financial Officer