Unfazed by chip cycles
 Micro-Mechanics was founded back in 1983 with a capital outlay of just S$1.200, which included payment for a 30-year old lathe machine. The business operated out of a 500 sq ft workshop located at the back of a garment factory in Balestier Road, and had only one employee – the lathe operator.
From such humble beginnings, it has since grown into a niche player in the semiconductor industry – involved in the design and manufacture of micro-assemblies and process-critical consumable tools and parts such as rubber pick-up tools, adhesive dispensing nozzles, die ejector needles and wire-bond clamps which are used in the assembly and testing of semiconductors.
The group has now a worldwide clientele base of more than 300 semiconductor manufacturers including the likes of Infineon Technologies, Fairchild Semiconductor and STATSChipPac.
Micro-Mechanics has since also spawn a new custom machining and assembly (CMA) division in 2002 that leverages on its strengths and expertise in precision engineering of miniature parts to diversify into the medical, instrumentation and high-tech equipment sectors.
The company, which was founded by its current chief executive officer, Chris Borch now has a workforce of more than 500 with manufacturing facilities in five countries – Singapore, Malaysia, China, Thailand and the Philippines – and sales offices in Taiwan, the United States and Switzerland.
Prior to starting up Micro-Mechanics, Mr Borch had worked for a US-based supplier of equipment and tools for electronics firms in Singapore and Malaysia. That company was subsequently acquired by a New York Exchange-listed company, prompting him to strike out on his own with dreams of having a listed company one day.
That became a reality when Micro-Mechanics was listed on the second board – now known as Catalist – on the Singapore Exchange in 2003. He hopes to see the company promoted to the mainboard within the next two years.
Despite being embedded firmly in the notoriously cyclical semiconductor business, Micro-Mechanics has been able to grow its revenue and profits as well as maintain consistent margins of about 60% since its public listing.
 Explaining how this is possible, Mr Borch notes, "We make consumable tools and items used by our customers in the packaging and testing of semiconductor chips. These are items that need constant replacements. Our business is volume-driven rather than price-driven, and chip volumes are not as volatile as chip sales. So our revenues are not as cyclical, nor are they highly susceptible to the price swings of semiconductor chips."
"Irregardless of the stage of each business cycle or the price of chips, the semiconductor companies still need to make the chips and we supply the miniature tools and parts that make it possible. As my wife like to say, Micro-Mechanics' business is similar to that of a firm that sells needles for sewing machines, or makes ink cartridges for printers."
Adds Mr Borch, "Micro-chips are now an indispensable part of our daily lives. If you lose your cell phone today, would you wait for a few days or replace it immediately? When we talk about improving power and fuel efficiencies in our vehicles, homes, and businesses, it all boils down to the use of the chip in the control devices, doesn't it? The semiconductor industry now is worth an estimated US$250 billion a year. Even if growth slows down to 3% to 5%, it's still about US$10 billion worth of growth."
Micro-Mechanics is a company that is probably without peer in the region says market observers and analysts.
Its competitors would normally be small machine shops that do not possess the financial capacity or intellectual capital to upgrade their operations, personnel and expertise to match the group's range of products, economies of scale or geographical coverage.
Barriers to entry are also high. "It was possible for me to start twenty years ago with US$300 worth of equipment when the chip market in Asia was still in its infancy. These days, it may easily cost $3 million for a piece of machinery. Customer and regulatory demands are also more stringent. Then, there's also the industry trend towards miniaturisation."
The group, for instance, has recently developed new tools with nano-sized features, including one of which is used for assembling hearing aid devices that uses a MEMS chip.
"At Micro-Mechanics, we create hundreds of designs and specialty tools each month. We have developed proprietary designs and processing techniques that would be difficult for others to duplicate. There's really no commoditisation and hence less price erosion for our products and services. Our customers are not just buying replacement parts but also getting engineering performances that enhance their manufacturing processes."
Which is why the group prides itself on its staff training and retention efforts, which is often highlighted in its annual reports. The staff attendance rate so far for the first three quarters of FY2008 has been at 99% while retention rates at 80%. For FY2007, they were 99.1% and 84.4% respectively.
Micro-Mechanics reported a 7.4% rise in net profit of S$8.4 million on the back of a 9.4% increase in turnover to S$34.7 million for the financial year ended June 2007.
It has since also chalked up a sterling set of results for the 3rd quarter FY2008.
Revenue for the quarter ended March saw a 14% growth to $9.2 million – underpinned by double-digit sales growth from China, Europe and Malaysia, despite what is usually the seasonally slower period between January and March for the chip sector. Net profit was up 22%, thanks to expansion in profit margins.
Operating cashflow continued to be healthy. As a result, the group has a cash balance of $12.4 million and is debt-free. According to Mr Borch, this puts Micro-Mechanics in a good position to weather any unforeseen setbacks as well as exploit future opportunities for further expansion such as through acquisitions or strategic tie-ups.
As for cost pressures from raw materials, he points that they make up less than 10% of selling prices and hence not a primary concern.
Due to the different locations of its plants, Micro-Mechanics is also able to deploy different currencies in its procurement, which act as a natural hedge against the weakening US dollar, adds Mr Borch.
The stock is currently rated a buy by OCBC Research which has cited a fair price of S$0.77 based on a forecast price-earning (PE) ratio of 10 times for FY2008.
See OCBC analyst report:
http://www.sias.org.sg/sites/sias.org.sg/CMS/File/singaporeInvestor/Micro Mechanics-080611-OIR.pdf
http://www.listedcompany.com/ir/micromech/misc/Micro_Mechanics_080505_OIR.pdf
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