Recently, Malaysia's largest semiconductor burn-in and testing services provider, KESM Industries Berhad (KESM, 9334), released its latest quarterly performance, marking a successful turnaround from losses in the previous quarter. Is this a sign of growing demand in the automotive semiconductor sector? Indeed, according to data from the Malaysian Automotive Association (MAA), Malaysia's automotive sales in the first half of 2023 grew by 10.3% year-on-year to 366,037 units. Furthermore, global automotive sales also showed strong growth in the first half of 2023, especially in the United States, Europe, and Japan.

Before delving into the company's performance, let's take a brief look at KESM.

According to its official website, KESM was founded in 1978 and went public on the Main Market of Bursa Malaysia in 1994. The company primarily provides burn-in* and testing services to global leading automotive semiconductor manufacturers. Additionally, KESM also offers electronic manufacturing services (EMS) to industries such as industrial, communication, and computing. By the way, this EMS segment represents a smaller portion of its business.

*Burn-in, in semiconductor chip manufacturing, is a process aimed at testing and optimizing chip performance to ensure smooth operation. This process typically involves applying a series of electrical signals to test and activate various electronic components on the chip, eliminating potential manufacturing defects and ensuring stable operation during use.

To date, KESM operates three factories located in Kuala Lumpur, Penang, and Tianjin, China. Notably, Mr. Samuel Lim Syn Soo, the major shareholder and founder of KESM, holds approximately 48.41% of the company's shares and comes from the Singapore-listed company SUNRIGHT Limited.

Revenue Comparison (YoY +10.83%, QoQ +6.65%)

For the fourth quarter ending July 31, 2023 (Q4 FY2023), the company reported a revenue of approximately RM61.69 million, marking an increase of around 10.83% compared to approximately RM55.66 million in the same period last year. Management attributes this significant growth to new capital expenditures driving growth in the burn-in and testing business. Based on research, the capital expenditure amounted to nearly RM140.00 million, mainly for the purchase of new testing equipment used for electric vehicles.

Compared to the previous quarter, the company's revenue increased by approximately RM3.85 million or 6.65%. Management did not provide a specific explanation for this, but it can be inferred that the revenue growth is also a result of the expansion of the burn-in and testing business.

As for the full-year revenue for FY2023, the company achieved approximately RM228.28 million. This is a decrease of approximately 7.47% compared to the total revenue of approximately RM246.73 million for FY2022. This decline is primarily due to the decline in electronic manufacturing service (EMS) business and reduced sales in burn-in and testing services.

Net Profit Comparison (YoY +112.64%, QoQ +126.55%)

Compared to a net loss of approximately RM2.50 million in the same period last year and a net loss of approximately RM1.19 million in the previous quarter, the company successfully turned losses into profits in the current quarter, achieving a net profit of approximately RM0.31 million. This achievement can be attributed to a significant increase in interest income and reduced other expenses, including maintenance costs.

However, for the entire fiscal year ending July 31, 2023, the company recorded a net loss of approximately RM3.13 million. This was reported to be due to declining revenue, coupled with increased financial and utility costs, marking KESM's first annual loss since its listing in 1994.

It's worth noting that the company's borrowings increased by approximately 243.46% in the current quarter, reaching approximately RM93.71 million. Nonetheless, KESM remains a net cash company, holding approximately RM99.42 million in cash.

Outlook

Currently, the semiconductor industry faces challenges, with global semiconductor revenue expected to decline by 12.3% to USD 525.9 billion in 2023, primarily due to oversupply of memory chips and weak demand in consumer and computer markets. However, with the reduction in semiconductor inventory, the industry is expected to rebound, with an estimated 20.4% growth, reaching revenue of USD 633.0 billion in 2024.

KESM has made significant investments in production equipment and machinery and is gearing up to increase its production capacity for automotive devices. However, given the possibility of rising production costs and a soft computer market, among other macroeconomic challenges, management remains cautious about the company's future growth.

In conclusion, KESM Industries Berhad's latest financial results reflect a turnaround from losses in the previous quarter, potentially indicating positive trends in the automotive semiconductor sector. As the semiconductor industry navigates its challenges, KESM's focus on capital expenditures and operational efficiency will be crucial in seizing future growth opportunities.

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Disclaimer: The above is purely for educational purposes and reflects personal opinions. It does not constitute any buying or selling recommendations.

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