Established since 2012, MI is an emerging leader in equipment manufacturing for advanced semiconductor packaging. Their clients comprises of outsourced assembly and testing (“OSAT”) companies and integrated device manufacturers (“IDM”).

In this article, we introduce and discuss the growth prospect of MI, why we are optimistic about the Group, and whether it is worthwhile at its current price.

MI operates via three business units, as follows:

1. Semiconductor Equipment (“SE”) – The bread and butter of the Group

MI is principally involved in the design, development, manufacture and sale of wafer-level chip scale packaging (“WLCSP”) machines as well as providing after sales services and sale of related spare parts and components.

Its flagship products are the MI Series WLCSP sorting machines, which make up more than 90% of its total sales. In addition, four other series, namely, Ai, Li, Vi and Si have also been developed and commercialized. The table below provides brief information of the respective series:

2. Automation & Robotics (“Robotics”)

Under the Robotics segment, MI has three products, namely, Oto Series (specialized in artificial intelligence (“AI”) enabled machines), Kobot Series (a mobile robot), and Engeye Series (an AI product to perform data mining, AI analysis, and decision-making to assists engineers and operations to respond to and prevent the possible excursions).

This is a relatively new segment, started contributing in December 2019. For the first 9 months of 2020, its sales totaled RM3.3m, contributed by the newly launched KOBOT series and OTO series.

3. Semiconductor Materials and Components (“SMC”) – yet to make any contribution

In 2019, MI designed and developed the PH Series, an in-house designed pick & place precision module that has been qualified and is ready for production.

On 8 Oct 2020, the Group inked a Memorandum of Understanding (MoU) with Taiwan-based Accurus Scientific Co (“Accurus”) and its shareholders for the acquisition of 99% equity interest in Accurus. Accurus’ principal activities are manufacturing solder spheres, which are widely used for Advance Packaging in the semiconductor industry.

As at 9MFY2020, MI’s revenue by business units is mainly contributed by SE, 98%, followed by Robotics, 2%. Within the semiconductor industry value chain, MI operates as a semiconductor packaging equipment and material manufacturer.

UPDATE ON MI’S DEVELOPMENT SINCE ITS IPO

During MI’s IPO in June 2018, the Group raised a total of RM190.8m, of which RM140.0m / 73% was allocated for construction of new factories cum office buildings to accommodate for higher production capacity.

From the remaining RM50.8m, RM36.7m was budgeted for working capital requirements, RM6.0m for research & development (“R&D”) and RM8.1m to defray listing expenses. Table below illustrates MI’s utilization of the funds to-date.

These overseas centers will keep MI on top of evolving technology trends and provide them direct exposure to top technology players, as well as access to a deeper pool of talents to develop products and know-how.

As part of the Group’s 10-year business roadmap, these centers are tasked to undertake the development of different series under the SE business unit i.e. Home 1 will focus on Mi Series, Taiwan operations will focus on Vi Series, and Suwon, Korea will focus on Ai Series, etc.

For more information on the Group’s long-term strategy, you may refer to The Breakfast Grille podcast, which was presented by Noelle Lim from BFM featuring the CEO of MI, Mr. Oh Kuang Eng on 5 January 2011.

MI’S KEY STRENGTHS AND ITS GROWTH POTENTIAL IN THE LONG TERM

• Significant investment in R&D. As at 31 March 2020, MI’s R&D team comprises 99 personnel. As at FYE2019, MI has been granted 5 patents, 21 patents pending, and a further 2 in the drafting stage. Being an equipment developer cum owner, its superior proprietary technology would act as an effective barrier to entry and shield the Group from the duplication of its designs, systems and methods by potential competitors.

• Tremendous growth expected from the Robotics segment. Albeit seeing only a small contribution over the last few quarters, Management sees tremendous growth in this segment for years ahead. Management has recently revised up its target for the capacity utilization rate from 25% to 40% by end-2020. This poses a strong signal to the encouraging demand in the near-term. They estimate production capacity to increase in stages and will be instrumental to its growth plans for the next 3 years.

• Tier-1 clientele. MI has been able to secure three Tier-1 OSATs, notably, Advanced Semiconductor Engineering Inc (“ASE”), Amkor, and United Test and Assembly Center Ltd (“UTAC”). Local OSAT customers under their belt includes Inari and Unisem. The Group also has a strong presence amongst the IDMs from US.

As of end-2019, MI has approximately 53 active customers, with its five largest customers accounting for 59.5% of its FY19 revenue. The success in securing and retaining global customers is a testament of its product quality, customer service and proven track record.

• Horizontal growth strategy with acquisition of Accurus. Solder spheres are widely used for advance packaging such as Ball Grid Array and wafer level packaging in the semiconductor industry. Besides, Accurus also involves in metal surface treatment, metal forming of aluminum, copper and tin-based solders, as well as electronic parts and components assemblies.

The acquisition provides an opportunity for MI and Accurus to establish business integration for wider product portfolio within the same distribution channel and value chain. This is in line with MI’s business plan to expand into business activities that are complementary to its existing business.

Table below summarizes Accurus’s past 3 years financial results.

The purchase price of RM217m was proposed to be settled via issuance of 74.25m new MI shares at RM3.65 per share. The acquisition was valued at 16.22x PE multiple of Accurus’s FY2019 results (peers valuation range between 21x – 46x). The lower acquisition value (industry mean was 29.4x) may be to consider for the inconsistent PAT margin over the years.

• Promising industry outlook. US-based Semiconductor Equipment & Materials International (“SEMI”) forecast the assembly and packaging equipment segment to grow 8% to USD3.4bn in 2021, driven by advanced packaging capacity build-up. It also said the semiconductor test equipment is expected to increase by about 13% in 2021 on the back of 5G demand. In terms of region, SEMI expects China, Taiwan and South Korea to be the top semiconductor manufacturing equipment markets in, making up for 68.7% of the global semiconductor markets.

• Surplus capacity is available to ramp up production when demand increases. As of end-2020, Home 1 & 2 utilization rate is estimated at about 60% and 40% respectively. MI has plenty of room for growth in the near term, whenever market demand increases. Furthermore, the Group is already building new manufacturing plants in China and Taiwan to prepare for future growth.

SOLID FINANCIAL PERFORMANCE

Over the past 5 years, MI’s revenue grew at a cumulative average growth rate (“CAGR”) of 16.1% p.a. Growth was steadier in the recent 3 years as demand became stronger and more consistent. The dip in FY2016 results was mainly owing to the cyclical nature of the semiconductor industry. During 2016, orders were lower as customers delay production plans.

Profitability-wise, MI’s gross and net margins were strong and consistent over the years, recording between 38% – 54% and 27% – 39% respectively. Its operating model is proved resilient as they do not sacrifice on margins despite the strong revenue growth. As a measure of efficiency, the Management sets a target for its gross and net margins to be maintained within the range of 40% – 50% and 20% – 30% respectively.

MI is currently enjoying a low tax rate, as its SE unit (Mi Equipment (M) Sdn Bhd) has successfully renewed its pioneer status for a further 5 years, up to 17 January 2024.

Growth over the years were mainly contributed by its SE unit and its top exporting countries are Taiwan, China, Korea and USA etc.

MI generates healthy and consistent cash flow from operations (“CFO”), with an average CFO to Net Income of about 0.6x. The slightly below average CFO to net income ratio was due to the increasing trade receivables in recent years as business grew. Comfort drawn on the fact that most of MI’s clients are top-tiers OSAT and IDM players in the market. The Group has incurred minimal impairment on trade receivables over the years.

KEY RISKS FOR CONSIDERATION

• Cyclical nature of the semiconductor industry.

• Stiffer competition. The Group could see margin pressure for its machinery in the event there are new entrants or change of packaging equipment in the technology field.

• Highly dependent on semiconductor spending. Weak consumer confidence and slowdown in the 5G roll-out would force the fabless companies and integrated circuit fabricators to push back their CAPEX spending.

• Sensitive to foreign exchange exposure. MI’s sales are predominantly priced in USD and it has been a beneficiary of the strong USD over 2016 – 2019. Based on a sensitivity analysis, every 10% change in USD will affect the Group’s bottom-line by about RM10.7m or 15% – 20% of our FY20 estimated earnings.

• Requires constant R&D for innovation. Failure to keep up with industry R&D could see them being phased out in the technological race.

• Fluctuations in material costs. The Group’s cost of sales comprises raw materials, direct labour costs, subcontractor costs and factory overheads. Raw materials account for at least 60% of the total cost of sales. The raw materials consist of i) high speed and precision motors, ii) cameras and lenses, iii) maintenance free grade sliders and bearings, iv) precision fabrication parts for both aluminum and steel tools.

• Increased operation cost (completion of Home 1 & 2) may cause margin to depress in the near term, given additional / new sales expected from SE & Robotics segments may not achieve its economies of scale yet.

• High market expectations have been priced-in, with its current valuation at about 40x PE on its 1-year forward results (FY2021).

MAJOR SHAREHOLDERS AS AT 9 APRIL 2020

The founder, Mr Oh Kuang Eng controls the Group via a personal stake of 68.8%.

Institutional investors in MI include, Namal Ltd, PMB Shariah, Kenanga, Areca Equitytrust Fund, JPMorgan, Oregon, Ocular Asia Fund etc.

Based on the Top 30 shareholder listing, institutional investors hold a total stake of about 7% in MI only.

PEER COMPARISON

Table below compares MI to its peers within the automated test equipment and / or other technology equipment segment.

Comparisons may / may not be relevant to MI. Nevertheless, we have included them for purpose of reference.

Overall, given MI’s strong profitability, promising demand outlook and in-place capacity for growth, we would value MI within a PE range of 40x – 50x.

At a median of 45x PE, MI’s price/earnings to growth (“PEG”) ratio would be equivalent to 1.0x, on our base-case assumption that FY2021 earnings per share (“EPS”) to grow by 45% (FY2020 PAT estimated to close at RM54.4m). A PEG of 1.0x is deemed reasonable when valuing growth stocks like MI.

According to the Management, its current order visibility is around 8 weeks (2 months), which is considered healthy.

MI’s PE during FY2018 – FY2020 ranged between 14.5x – 38.9x. We applied a higher forward PE to consider for the promising industry outlook, low interest rate environment, and the relatively high valuation priced by the market on the industry.

HOW MUCH IS MI WORTH?

At the closing price of RM4.16, MI is valued at about 40x PE on assumption that 1-year forward (FYE2021) earnings to achieve RM79.2m – base case assumption (PAT was RM40.8m for the 9MFY2020 results).