Unisem Update | 27 June 2012

Unisem Update 27 June 2012

Existing Business:-

Manufactures semiconductor, microchips andPDN packaging components used in most appliances we find today. 75% of these components are used for computing, communications and consumer products and <25% are used in industrial and auto-centric parts.

Among their legacy products which they’ve been producing for the last 20 years are the timely semi-conductors called Shrink-Small Outline Package (SSOP) and Dual in-line Package (DIP) which are mainly used in electrical appliances such as the PC, microwaves to radios, mobiles etc.

The newer products that Unisem produces such as the Quad-Flat no-leads package (QFN), Wafer Level Chip scale Packages (WLCSP), Flip Chip, Waver Module, MEM are used in Smartphones, Media Tablets, LCD Screens are more.

Changed in business Model:-

How & Why?

1.       Exiting their current business producing what they call their “legacy products”, e.g SSOP,DIP which currently contributes about 42% of their revenue generated from the Ipoh plant itself. This gives them excess base to concentrate on manufacturing their newer products which has a higher demand, growth and margin. Management said that the rising cost in raw materials and fixed operating cost would largely affect the margins of the company. He stated that the margins 20 years ago were almost 50% compared to now of 5-15%. Management believes that the new products would increase margins back to 35-40% in the next 2 years.

2.       By getting rid of the old asset which management claim to be fully depreciated, Unisem would realign the factory to ramp up capacity. (Current capacity for the newer products is 90% utilized).

3.       Downsize their customer base from 280 to 150. Unisem would like to select a more specific tier 1 client base that gives them more consistent orders such as BroadCom, Skyworks, Texas Instrument etc. The ideal client base is a blend mix of niche market players who’d give a higher margin in profit as well as tier 1 clients that would give consistent order albeit with lower margins. This mix allows the co to always fully utilize their manufacturing capacity and reduces the chance of any overloading or shortage of orders.

4.       Reducing headcounts. Recently implemented Minimum Wage Policy will add to costs. Technology that the new machines possess relies less on manual labour and can operate with the same efficiency without anyone behind its controls. With an exception of the plant in Chengdu, other plants at Ipoh and Batam would face some 1/3 reduction in head count by 2013, bringing down labour cost to 12% of total manufacturing cost from current 15%.

Unisem Q2 outlook

-          As long as demand for tablets and smartphones maintains, strong demand for WLCSP, flip chips and extra thin QFN will continue to drive orders.

-          Have anchored Broadcom and in midst of anchoring Texas Instrument for new bumping, wafer and flip chips so that demand is assured.

-          Reducing the bottom line cost will contribute significantly to margins.

-          There are still talks of keeping a small segment of the old machinery to produce legacy products for those clients that could guarantee orders. Unisem will increase the ASP so revenue would not be affected.

-          Numbers would be flattish and would not reflect true earnings as it is still in the transitioning quarter where changes are still being made. Management also mentioned that there is a possibility of them reducing div yield pay out for the remaining quarters to be used for capex. Capex will be increased to RM220m from initial projection of RM120m to be used for bumping business segment.


-       A tier-1 USA customer is moving forward to bring up Chengdu (China) as a key bumping and WLCSP supplier. Chengdu has passed the audit. Qualifications has alreayd started with production scheduled to start in Q3. The same customer has also started bumping and CSP production in Ipoh as well on a different device.

Others

-          Management believe that Chip Inventory is in equilibrium (no access in inventory). HDD shortage has been corrected.

-          Semi-conductor assembly and tests service (SATS) to increase 6.8% in 2012 and 10.6% in 2013. Expecting CAGR of 8.1% for period 2011-2016.

-          Unisem has no clients from Malaysia.

-          100% of company’s earnings are in USD. Recent strength in USD v RM augurs well for Co.

-          Unisem offers an in house wafer bumping service that competitors don’t offer. A long process of manufacturing then shipping it to separate plant to go thru the bumping process would take at least another 3-4 days more. Will not be in direct competition with MPI save for small QFM segment as MPI is in high density lead frame business. Co’s competitors are all outside of Msia.

-          Co will be making an announcement on management changes soon but assured us that Mr John Chia (MD) will continue to spearhead group forward.

Results
Core net profit for Q1 -11.1mil (-68%) vs  2.4mil last year. Management indicated that the worst is over but will only be returning into the black in 3Q12 once cost cutting and business model realignment takes effect. 2012E EPS 8.0sens, Fy12 PE of 6-7x.

Conclusion

Need to wait for confirmation of business turnaround plan to kick in before seeing improved numbers by year end. Trading buy at best on a technical rebound or improvement in tech sector on growth in IT spending.

Appendix:-

A shrink-small integrated circuit (SSOP) is a surface-mounted integrated circuit (IC) package which occupies an area about 30–50% less than an equivalent DIP, with a typical thickness that is 70% less. Used in older electronic devices we have today. From PC to remote controls to calculators etc.

 

Dual in-line Package (DIP) is an electronic device package with a rectangular housing and two parallel rows of electrical connecting pins.

The package was well-suited to automated assembly equipment; a printed circuit board could be populated with scores or hundreds of integrated circuits. Used in printers, PCs etc.

Wafer Level Chip Scale Package (WLCSP) low cost solution that enables direct connectivity at the substrate or board level.Cost effective yet efficient Integrated circuit technology that are used in tablets, mobiles, TV, etc. Individual units of the Wafer Chip are called a die.

Wafer Module – is process where multi die wafer like the illustration on top is broken down into individual units and then built into a customized circuit. Requires a lot of personal customization which makes is difficult to manufacture.

Bumping - Wafer bumping is an advanced packaging technique that attaches solder spheres or gold bumps to the bond pads on a selected die.

Flip chip literally means to flip over so that its top side faces down, and aligned so that its pads align with matching pads on the external circuit. This is in contrast to wire bonding, in which the chip is mounted upright and wires are used to interconnect the chip pads to external circuitry which are the legacy products uses.

MEM- is a motion sensor which are used in newer mobile phone & tablets that detects movements and tilts when the product is forced into different positions.