UMS Holdings Limited

Letter to Shareholders

Extracted from Annual Report 2020

Dear Shareholders,

It gives me great pleasure to present to you the Group′s annual report for the financial year ended 31 December 2020 (“FY2020”). The year under review stands out in two aspects – the COVID-19 pandemic and the highest-ever revenue recorded in our history as a listed company.

During FY2020, COVID-19 was designated a pandemic and the resulting restrictions put in place worldwide impacted the Group′s supply chain and operations. In the countries that the Group operates in, the semiconductor industry was deemed to be part of their essential services. This allowed the Group′s entities to continue operations, while ensuring compliance with rules and regulations imposed by local authorities.

Despite the unprecedented challenges faced during the pandemic, chipmakers continued to make strategic investments in new technology transitions as well as capacity expansion. In last year′s annual report, I wrote about my concerns over the chip sector recovery, being weighed down by US-China trade disputes and the challenges posed to global supply chains due to the pandemic. It turned out that global sales of semiconductor manufacturing equipment by original equipment makers hit a new industry high of $68.9 billion in 2020. The Group is pleased to report that it has achieved a record-breaking revenue of S$164.4 million during the year.

Business Performance

The Group faced severe challenges shortly after the start of the year. Both the Malaysian and Singapore governments imposed their Movement Control Order (“MCO”) and Circuit Breaker measures which caused supply chain disruptions, manpower constraints and other issues to the Group. The UMS Team responded quickly to put in place precautionary measures as well as making extraordinary efforts to overcome the many challenges. Although 1QFY2020 revenue suffered a drop compared to 4QFY2019, it rose steadily throughout the rest of the year.

The Group′s revenue in FY2020 surged 25% to S$164.4 million from S$131.9 million for FY2019. The Group′s core business segment reported significant growth. Sales in the Semiconductor segment surged 27% while its Others segment rose 2%. Revenue went up in all of the Group′s key markets, except US which remained relatively stable and Others, which declined 21% due to lower revenue from Kalf. Strong demand for Semiconductor Integrated Systems drove Singapore sales up by 33% while sales in Malaysia and Taiwan climbed 54% and 17% respectively.

Gross material margin improved to 53.3% in FY2020 from 52.9% in FY2019.

Higher employee benefits expense, depreciation costs, exchange loss due to the declining US dollar and non-cash impairments weighed on the Group′s overall earnings for the year.

The Group made a one-off S$5.9 million impairment of investment in associate company JEP Holdings Ltd (“JEP”) and wrote off the balance $1.1 million of goodwill from the acquisition of its subsidiary Kalf. The Group also took a hit from a $2.1 million share of loss in JEP. The loss in JEP was mainly attributed to a goodwill impairment of S$6.25 million and the Group′s share of the impairment loss was S$2.5 million.

The Group′s net profit attributable to shareholders for the year rose 9% to S$36.5 million.

Excluding the S$7 million of impairments and S$2.5 million share of goodwill impairment in JEP recorded in 4QFY2020, the Group would have achieved net profit attributable to shareholders of S$46.0 million, a 37% surge from FY2019.

Outlook and Foward Strategy

The Group delivered a robust performance in FY2020 as it continued to reap the benefits from the sustained global semiconductor demand. Despite significant impairment costs, the Group managed to outperform FY2019.

This demonstrates UMS′s operational resilience and its ability to meet the surge in customer’s demands in spite of unprecedented supply chain disruptions and factory lockdowns caused by the COVID-19 pandemic.

Looking ahead, global chip demand is expected to stay strong.

According to World Semiconductor Trade Statistics, chip sales are expected to accelerate - growing 8.4%, to hit US$469 billion in 2021. There have also been shortages due to the pandemic-fuelled demand. Global chip demand for automotive electronics has been gaining momentum since 4QFY2020 and will continue to serve as a key growth driver as demand exceeds supply.

Similarly, in the medium term, SEMI expects global sales of semiconductor manufacturing equipment to continue to grow till 2022, hitting US$76.1 billion. According to Global Market Insights, the adoption of technologies such as, artificial intelligence (AI), IoT in fabrication and the constant use of advance chipsets in automotive and consumer electronics, will drive demand for semiconductor manufacturing in the longer term. This demand is expected to boost support for the semiconductor manufacturing equipment market and is projected to reach US$80 billion by 2026.

These positive figures bode well for the Group as it remains well positioned to capitalize on the industry′s bright prospects.

Customer forecasts for orders for the next few quarters remain strong. While our order book will keep us busy in FY2021, we are on the lookout for more opportunities from outsourcing of manufacturing by global semiconductor firms to lower-cost destinations in Asia.

The impairment in JEP which is a non-cash accounting treatment was taken by the Group as a prudent measure against the current challenging business conditions affecting the aerospace industry. The Group is confident that aviation and aerospace demand in the longer term will recover when international travel resumes and that the impairment in JEP will be written back. As many current aerospace component makers may have gone out of business by the time the business returns, JEP has been selected by some of its customers as a strategic vendor moving forward. It has started first article inspections (“FAI”) with many new complex and high value added parts. These FAI are expected to turn into volume production within the next 2 years.

The non-ferrous metal alloy distribution business of Starke Singapore Pte Ltd (“Starke”) continued to grow in FY2020. Revenue grew about 26% during the year. Kalf Engineering (“Kalf”) continues to face challenges as project delivery in FY2020 was delayed because of COVID-19. The Board is closely monitoring the performance of Kalf.

Dividend

To allow the Group greater financial flexibility in uncertain times, and to take advantage of new growth initiatives in the short-term, the Board has recommended moderating the final dividend to 1 cent per share.

The Group′s objective is to conserve cash to maintain a strong balance sheet to drive future business growth which could reap longer term returns to shareholders.

A Note Of Thanks To Our Stakeholders

On behalf of my fellow Directors, I once again thank you, our shareholders, for your loyal support. I would also like to express my sincere appreciation to our vendors, technology partners and business associates without whom our success would not have been possible.

I would also like to thank the management and staff for their exceptional dedication and hard work during this challenging time.

I remain confident that our solid foundation, strong partnerships and competent team will propel the Group to greater heights. We look forward to the continuing support of all our stakeholders as the global economic outlook brightens, driven by accelerated digitalisation programmes triggered by the coronavirus pandemic and governments worldwide making concerted efforts in its vaccination drive to contain the viral crisis and boost business growth.

Luong Andy

Chairman and Chief Executive Officer
UMS Holdings Limited