Results for the financial year ended 30 June 2019 (FY2019)
Q1. How has the trade war between the USA and China affected the business of your China operations?
Our factory in Suzhou is a strategic market location for the Group as China continues to develop into a major hub for semiconductor manufacturing. It does not function as a low-cost manufacturing base for the Group to address the export market. Our sales there are mainly targeted at customers in the domestic market which comprises of multinational companies and local enterprises. As a result, the Group’s sales in China remained relatively steady during FY2019 despite the ongoing trade tensions.
Back to topQ2. The Group’s gross profit margin declined to 53.7% in FY2019 from 57.0% in FY2018. What are the reasons for this contraction in profit margin?
At Micro-Mechanics, we have a consistent focus on our gross profit margin as we believe it is a key indication of our competitive strength and the value that we bring to customers. During FY2018 and FY2019, the Group made investments totaling S$15.5 million on new equipment to improve the efficiency and productivity of our worldwide operations. Amid the downturn in the semiconductor industry in FY2019, slower sales coupled with the higher depreciation costs arising from these capital investments caused a slight dip in the Group’s gross profit margin.
Going forward, we will maintain our focus on gross profit margin by continuing to work on enhancing the efficiency of our operations and focusing on parts and tools that offer opportunities for attractive profit margins.
Q3. The Group has a capital expenditure budget of S$6 million to S$7 million for FY2020. How much of this will be for additional production capacity?
We plan to spend about one third of our capital expenditure budget on machines that will increase our production capacity and strengthen our manufacturing capabilities. The remainder will be spent on replacement and maintenance of older production-related machines, as well as office IT systems and equipment to continue enhancing the overall efficiency of our worldwide operations.
Q4. Given the Group’s low utilisation rate of 57% during FY2019 and the current weakness in the semiconductor industry, why are you still investing in new equipment?
The Group’s capacity utilisation measures the usage of all our production equipment including supporting machines that are not constantly in use. Because our manufacturing involves many different types of processes which are not easily modeled into a single denominator, we consider our capacity utilisation rate to only be a very rough guide to our overall factory efficiency.
As the semiconductor industry transitions to 10-nanometer and below device geometries, chip fabrication is becoming increasingly more difficult. The Group is working constantly to improve our manufacturing of the critical tools and parts that our customers require to achieve their production goals. Hence, we believe it is important that the Group continually invests to upgrade our capabilities to meet the increasing demands of our customers, even though it can be difficult to align our investments in new equipment to short-term industry conditions.
Ultimately, we believe that only a handful of suppliers will possess the unique capabilities, skilled personnel and intellectual property to meet the critical manufacturing requirements of the semiconductor industry.