Micro-Mechanics (MMH SP)

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Micro-Mechanics (MMH SP - US$147 million) is a manufacturer of precision tools used in the back-end processes of semiconductor chip manufacturing.

The company’s founder, Chris Borch, is an American who was sent to Singapore as an expat working for a semiconductor equipment maker. After two years, he left his job and used his US$600 of savings to build a precision manufacturing company in the back of a hat factory in suburban Singapore.

Fast-forward to today, his company, Micro-Mechanics, is now a major producer of parts for the back-end of semiconductor chip manufacturing across its five manufacturing plants. Such parts include:

• Die ejector needles to separate the die by pushing it out from the wafer
• Rubber tips to pick up dies from wafers and place them onto leadframes
• Dispensing nozzles to spread out adhesive on leadframe before dies are placed on them
• Wire bond clamps, wedges and wire cutters, used in the wire-bonding process to provide electrical connections between the chip and external leads

While these products may seem like commodities, they’re anything but. Chips are becoming smaller and smaller, and extreme precision is therefore needed for the tools involved in their making. The parts are also mission-critical, and any defect can be very costly for customers. This has provided Micro-Mechanics with pricing power.

Micro-Mechanics’ moat can be observed through its financial track record. For most of its history, it’s enjoyed 60% gross margins and 30% operating margins. And its return on equity has historically stayed between 20% and 30%.

Growth has been steady, though not spectacular, at around 8% per year in the past two decades. The driver seems to have been higher global chip sales volumes, as well as more complex packaging. Dies have increasingly been stacked on top of each other, requiring multiple layers of wire bonding.

As chips become smaller, the technological barriers to entry have also increased, enabling Micro-Mechanics to gain market share. It currently enjoys an 11% global market share in its core segments.

The company benefitted from COVID-19. Sales of consumer electronics boomed, and the electronics industry benefitted. However, fearing production and supply chain issues, customers ordered too many parts, and inventory was built up. That’s led to a slack in new orders, and Micro-Mechanics revenues have therefore dropped significantly.

Its share price is now close to its March 2020 lows. It will be difficult to judge exactly when the current downturn ends, as I see no clear signs of a turnaround yet. However, it is a cyclical industry, and Micro-Mechanics seems to be entrenched in its customers' businesses. The turnaround will come sooner or later.

I estimate that Micro-Mechanics will likely end up with a 2026e P/E of 11.7x. The multiple has historically been volatile, so it’s hard to say what a reasonable multiple might be.

The only real question mark in my mind is the promotion of Chris Borch’s son, Kyle Borch, to Deputy CEO, overseeing the Asian operations. Micro-Mechanics has won many awards for how it operates, specifically when it comes to corporate governance. However, promoting the founder’s 30-year-old son to become Deputy CEO doesn’t like a decision entirely based on merit.

Shortly thereafter, long-time CFO Chow Kam Wing and COO Low Ming Wah resigned on the same day. This is presumably a sign of discontent.

I believe that Micro-Mechanics is one of the best-run companies in Singapore. The 50%+ drop in the share price since 2021 is primarily due to a cyclical downturn and an associated inventory build-up. Whether Micro-Mechanics will thrive long-term will depend on how well Kyle Borch eases into his new role.

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