Cover Story: ATE firms continue to outperform OSAT players

TheEdge Thu, Jun 04, 2020 03:00pm - 3 years View Original


OVER the past 15 years or so, the Malaysian semiconductor scene has largely been dominated by three major outsourced semiconductor assembly and test (OSAT) companies: Malaysian Pacific Industries Bhd (MPI), Unisem (M) Bhd and Globetronics Technology Bhd.

Together with Inari Amertron Bhd, which was listed as Inari Bhd in 2011, these companies have been dubbed the Big Four, given their sizeable market capitalisation of over RM1 billion each.

Then came the rise of the automated test equipment (ATE) manufacturers, led by ­ViTrox Corp Bhd and Pentamaster Corp Bhd, whose growth in terms of market cap has been nothing short of explosive.

Notably, the meteoric rise in ViTrox’s share price catapulted its co-founder, CEO and president Chu Jenn Weng, into Forbes’ Malaysia’s 50 Richest list for the first time in 2020. He was ranked 47th with a net worth of US$280 million (RM1.22 billion).

Similarly, the strong share price performance of semiconductor equipment maker Mi Technovation Bhd since its listing in 2018 also propelled its group CEO Oh Kuang Eng into Forbes’ list. He was ranked 50th with a net worth of US$255 million in 2020.

A compilation by The Edge shows that the combined market cap of the Big Four OSAT companies, together with KESM Industries Bhd — the largest independent burn-in and test service provider in the country — has more than doubled from RM4.995 billion in 2014 to RM11.238 billion in 2019 (see table).

In comparison, the combined market cap of the ATE manufacturers and technology equipment makers has risen more than 10 times, from RM933 million in 2014 to RM9.723 billion in 2019.

Simply put, the equipment firms have grown faster and more significantly than the OSAT players.

This growth was driven mainly by ViTrox and Pentamaster, followed by their smaller peers such as Elsoft Research Bhd, MMS Ventures Bhd and VisDynamics Holdings Bhd. The group also got a boost from the listings of Aemulus Holdings Bhd, Mi Technovation and Greatech Technology Bhd.

From a business perspective, what are the reasons for this trend?

More importantly, for investors who are looking for exposure to semiconductor stocks, are ATE manufacturers and technology equipment makers preferable to OSAT companies?

Note that there is a third, albeit smaller, category, comprising JF Technology Bhd and FoundPac Group Bhd, which produces high-performance test sockets and equipment consumables.

 

Enormous demand for equipment

ViTrox’s Chu firmly believes Malaysia has tremendous opportunity to become the regional hub for advanced technology equipment, given its strong local supply chain and talent, as well as more than 35 years’ experience in this market.

“The world is moving into the Industry 4.0 era and artificial intelligence (AI), where more manual and tedious processes across various industries will soon be automated or digitised with smart machines with AI and big data analytics. The demand of such machines is enormous, not only in Malaysia but globally,” he tells The Edge.

Therefore, Chu urges local technology equipment companies to work with the government to formulate a long-term strategy to position Malaysia as the hub for high-tech equipment and automation.

“With the presence of a strong local equipment technology industry, we will be able to strengthen other industries such as OSAT, electronics manufacturing services (EMS) and electrical and electronics (E&E), where they will be equipped with more local state-of-the art and cost-effective equipment, and thus be less dependent on foreign labour and foreign technologies. That will make them more competitive in the world,” he explains.

Pentamaster co-founder and chairman Chuah Choon Bin points out that the OSAT industry has grown highly competitive since China started to champion semiconductor manufacturing.

“With Industry 4.0, the manufacturing sector needs ATE and factory automation solutions to stay competitive with high quality and high output. With the advancements and fast-changing semiconductor technology, ATE of high technology and quality is in high demand,” he says.

Mi Technovation’s Oh highlights that equipment makers and OSAT companies operate on different models, the former being technology owners and the latter, large-scale service providers.

He adds that superior proprietary technology would act as an effective barrier to entry and shield his company — which has been granted four patents, with 20 pending — from the duplication of its designs, systems and methods by potential competitors.

“Investors are getting increasingly savvy and see value in ownership of technology. Moving forward, ATE manufacturers and equipment makers may benefit from new ecosystems as demand will increase based on new investment into new locations, while OSAT companies may face new competitors if they choose not to build new facilities in other countries,” Oh warns.

 

OSATs driven by volume

Globetronics CEO Datuk Heng Huck Lee concedes that OSAT companies in Malaysia require high capital expenditure (capex) and are volume-driven. Therefore, most of the local OSAT providers tend to be more cautious in new expansion decisions and new capex commitments, unless they are backed by strong customer assurance.

“[In comparison,] the local ATE manufacturers have been able to provide equipment solutions and automation to their end-customers with comparable machine functional performance. Besides, their total cost against machine performance is much cheaper than their competitors from the US or Europe,” he says.

Heng adds that the US-China trade war has also opened up new opportunities for the ATE firms to secure higher orders from more customers from China.

“Overall, I think both OSAT and ATE companies from Malaysia will continue to see growth potential, owing to our cost-competitiveness, and the advantage we may be enjoying, owing to the US-China trade war. However, I cannot specifically predict which one will grow faster,” he says.

JF Technology group managing director Datuk Foong Wei Kuong believes companies that participate in new technologies and have a healthy pipeline of new products supporting the advent of new applications such as 5G and other advanced applications will see faster growth in their market cap.

“We supply our products not only to integrated device manufacturers but also to OSATs that provide manufacturing services to these IDMs. OSATs in Malaysia and the rest of the region are very important contributors to the semiconductor manufacturing ecosystem and we work closely with them to provide efficient and cost-effective manufacturing services to our IDM customers,” he says.

Meanwhile, Electrical and Electronics Productivity Nexus chairman Datuk Seri Wong Siew Hai acknowledges that the overall profit margin of OSATs is thinner than that of ATE and equipment makers, as the former’s value-added services are less significant.

“OSATs have to rely on high volume. But if you are designing and developing equipment, your margin will be higher. Moreover, the equipment makers generally have higher exposure to the growing market segments, such as telco, cloud computing and memory,” Wong says.

He adds that as long as equipment players can maintain their competitive advantages and good reputation, they will continue to grow.

“Some local makers have been receiving requests to build more equipment for their customers, which are already preparing for the market recovery next year. They may want to order the equipment now and put their capacity in place by the end of this year,” he says.

 

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Related Stocks

AEMULUS 0.390
ELSOFT 0.520
FPGROUP 0.370
GREATEC 4.700
GTRONIC 1.480
INARI 3.160
JFTECH 0.905
KESM 6.220
MI 1.830
MMSV 0.480
MPI 30.300
PENTA 4.440
UNISEM 3.800
VIS 0.395
VITROX 7.640

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