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Singapore Semiconductor companies (AEM, UMS, Micro Mechanics) dragged down by worsening US-China relations

SG, Stocks

Written by:

Zhi Rong Tan

In an effort to limit China’s access to semiconductor chips, the US has announced new rounds of export curbs, restricting sales of advanced semiconductors and related equipment to China while also prohibiting Americans from working with Chinese chipmakers.

This move is an attempt to stifle China’s capacity to grow its high-tech and advanced manufacturing industries. While you may disagree over whether it’s appropriate, we are not here to debate that today.

Instead, we’re interested in the impact of semiconductor companies in Singapore that generates their revenue from China. Specifically, we will concentrate on the top three semiconductor players by market capitalisation: AEM, UMS, and Micro Mechanics.

What are US’ semiconductor-related restrictions?

According to the new regulations issued on 7th October,

  1. Any chip that exceeds benchmarks defined by the US Department of Commerce’s Bureau of Industry and Security (BIS) will be subject to export regulations regardless of purpose or industry. These include all types of computing chips ranging from graphics processing units, memory chips to other standard or revolutionary computing architecture chips.
  2. Next, unless a license is obtained beforehand, US companies must stop supplying Chinese chipmakers with equipment capable of producing highly advanced semiconductors. (This will have an impact on sales of wafer fabrication equipment, related parts, and services.)
  3. Finally, Americans working in Chinese semiconductor firms must apply for licenses.

This isn’t the first time this has happened.

Previously, the US implemented sanctions that restricted the export of chips to the Chinese telecoms firm Huawei, even those manufactured outside the US. However, the latest restrictions are significantly broader in scope, affecting dozens of Chinese firms.

What are the implications to Singapore’s chip industry?

If you didn’t already know, the semiconductor industry contributes significantly to our national economy.

Currently, Singapore supplies 11% of the world’s semiconductors, 20% of chip-making equipment and serves as a regional manufacturing and R&D centre for some of the world’s leading microchip firms.

On the surface, this regulation appears to be inconsequential because it only applies to US chipmakers; however, given how globalised the entire semiconductor supply chain has become, this is far from the case.

Many of Singapore’s semiconductor companies derive the majority of their revenue from US semiconductor companies such as Applied Materials and Intel. As a result, even if these firms are not directly restricted, the impact on their customers’ revenue will undoubtedly trickle down.

Aside from that, these Singapore-based companies’ manufacturing processes and products rely on US technology, so if the time comes, the US may impose extra controls if they see fit.

So you can see, we are not immune, which is why most of the companies we will discuss today have experienced significant declines.

In the following sections, we will examine the revenue impact of three SGX-listed semiconductor companies. This will be done by assuming the worst-case scenario, in which the entire Chinese market is shut, and the policy will be permanent.

AEM

AEM is a multinational semiconductor test solution vendor. Its extensive semiconductor and electronics test solutions cover numerous stages of the testing process across multiple testing types, from advanced engineering to high-volume manufacturing.

Since the announcement of the ban, its share price has plummeted by 25%.

That being said, when AEM’s revenue is divided by geographical groups, China accounts for only about 10%. So, if we only look at this, it seems unfair that its share price has dropped more than 25%, or more than 2x.

So, what caused the significant reduction in the AEM share price? It’s probably because AEM’s largest customer is Intel, a US semiconductor company affected by the regulations. At present, AEM derives 60% of its income from Intel, highlighting how substantial the impact of US regulation might have on the company.

With this restriction and the slowdown in the semiconductor industry, analysts are already expecting Intel’s 3rd quarter to drop by 15%. With the ban in full force, the possible loss of the China market for Intel’s data centre-related chips would significantly reduce its revenue, bringing AEM down with it.

This could be the whole story of why AEM’s stock price has dropped more than expected.

UMS

USM Holdings is a one-stop strategic integration partner that provides Original Equipment Manufacturers of semiconductors with equipment manufacturing and engineering services.

The company specialises in manufacturing high-quality front-end semiconductor components as well as electromechanical assembly and final testing services.

It’s current main—no, make that “only”—customer is Applied Materials, which is probably why UMS has slipped down the most at 32% since the announcement of the restrictions.

Surprisingly, when we first examine its financial report, China market appears to be negligible, which would suggest that the ban would not significantly harm its revenue.

What then led to this decline?

Similar to AEM, UMS Holding supplies primarily to Applied Materials, another American semiconductor business. In fact, the situation is worse because, historically, Applied Materials accounted for 90% of UMS’s revenue.

UMS Holdings will therefore experience the full impact of these export restrictions. An impact which would likely be immediate as Applied Material has already reduced its 4th quarter sales projection by US$400 million as a result of the new export regulation.

I also pulled up a chart comparing Applied Materials (Yellow) and UMS Holdings (Blue); unsurprisingly, both firms move practically in lockstep. Given that UMS Holdings derives the majority of its revenue from Applied Materials, thus any boom and bust would be shared.

Micro-mechanics

Micro-Mechanics designs, manufactures, and supplies consumable parts and precision tools used in semiconductor assembly and testing.

The group also does contract production of precision parts and tools used in process-critical applications for semiconductor wafer fabrication and other high-technology sectors.

When we compare Micro Mechanics to the previous two companies, Micro Mechanics did extremely well, declining by only 12% compared to 20-30% for AEM and UMS.

Strangely though, Micro Mechanics has the highest contribution from China, at 33.4%. So why is it not the most affected?

For starters, it is likely attributed to the consumable nature of the back-end tools and front-end equipment parts it supplies, which despite the industry’s cyclical cycles, the demand tends to be consistent.

Aside from that, the United States’ ban on semiconductors is unlikely to hurt the company because it has always offered local-to-local service to its clients in its core markets.

For instance, its Suzhou facility largely serves domestic consumers and does not export products outside of China. As a result, the impact is negligible since the product is not exported out of China but consumed domestically.

That being said, Micro Mechanics appears to be the candidate that will lose the most in the years ahead, especially if additional limitations are imposed on companies, including international corporations like Micro Mechanics, when it is forced to choose a side.

Does US’ regulations warrant the drop in share prices?

Many of these SGX-listed semiconductor companies have actually done quite well in recent quarters, despite the sector’s general downturn, as evidenced by the decline of big semiconductor companies worldwide. AEM raised its revenue outlook in October to between $820 million and $850 million, up from $750 million to $800 million before. UMS’s 1HFY2022 revenue climbed by 47% to S$171.3 million, its highest ever half-yearly revenue, while Micromechanics’ revenue increased by 11.8% for the full year of 2022.

However, the prospect of weak future revenues may have overshadowed the recent strong earnings.

The share price collapse for the three companies does appear to be warranted to some extent, with companies like MicroMechanics poised to plummet even further if the relationship between the US and China worsens.

Together with the macro headwinds and the weakening in the semiconductor market, these Singapore Semiconductors companies are facing a revaluation as the risk no longer justifies the high valuation.

Nevertheless, there may be some overreaction in the market. The decline in share price appears to indicate a complete elimination of sales from China, which is not the case because businesses may still sell their much ‘lower’ end chips to China.

Overall, there may be some pockets of opportunities for investors, but we must tread carefully as things may worsen.

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