AEM HOLDINGS: Chairman's video interview with Maybank KE

Maybank Kim Eng spoke with Loke Wai San, non-executive chairman of AEM Holdings. Watch the video. The transcript is below.

Q: AEM Holdings has been one of the best-performing companies in Singapore as well as Market Insights' top pick for growth. Here with us today we have Loke Wai San, the chairman of AEM Holdings, to tell us more about the company and its growth story. Good day Wai San, for a start can you share with us some background of the company and the nature of its business?

A: AEM Holdings, at least from the last five, six years, has not been a typical company. I run a private equity fund called Novus Tellus Capital Partners and when we first came into contact with AEM, its founders had left the company for a variety of reasons and a board member had stepped in as an interim CEO, and did the best he could.

We saw a lot of opportunity in terms of what AEM does -- and I'll go into a bit more detail about what it does -- and its potential just because of its relationship with a certain key customer.

What AEM does is, it's part of a semiconductor manufacturing process. There's the front-end, which is about 90 percent of the capital expenditure – we are not there -- we are at the back-end. The front-end encompasses the photolithography, the production of the ICs and all the wet processes etc. At the back-end is where you assemble the chip and test it -- that's where we play, we play only in the testing part of it.

AEM produces the handlers, not the testers. We work with our key customer which develop its own testers and we provide customized handlers for all three types of tests at the back-end. The three types of tests include a burn-in test which tests for infant mortality, a functional test which tests the electrical characteristics of an IC, and a system-level test which loads the operating system and test the IC in mission mode.

Loke Wai San, non-executive chairman of AEM Holdings. NextInsight file photo We have been servicing one of the top semiconductor companies since 2002 and that was what's interesting about AEM -- its long term relationship with one of the best semiconductor companies in the world and we took that in terms of in 2011 when we came to be part of the turnaround team at AEM to focus AEM on that part of the business -- the handler equipment business for semiconductor tests.

With a tight partnership with our customer, we have developed what we view as one of the lowest cost solutions in terms of back-end tests.

Q: To help our clients understand AEM better can you elaborate on the competitive advantages of AEM?

A: Our competitive advantage boils down to it being designed for a specific purpose and utility for our key customer which is one of the largest semiconductor companies in the world.

On a macro level, back-end tests have not followed commensurately with the front-end in terms of cost reduction. Over time the cost of producing a semiconductor has not kept in tandem so the back-end cost is now actually quite a significant part of the costs of producing a semiconductor IC.

When you drill down to why it's so expensive it's because really most of the back-end test guys have used pretty generic tests and handling platforms. If you want to reduce the cost of tests, customization is one way and that's what we've done -- when you customize a solution you're able to test many in parallel and effectively get a faster throughput which drives the cost of tests down.

Our view is that it drives the back-end tests cost down by 50 to 80% and so that is a pretty significant number.

Q: You mentioned the key customer of AEM is one of the world's largest semiconductor manufacturers.  Can you describe a bit more about this client?

A: Well, they're traditionally known to be the market leader in microprocessors – be it for the PCs or the data centers -- but over the last few years, they've transformed themselves by entering into even your mobile modem chips and the IOT space and in automotive.

We do believe that they will be a key beneficiary of the 5G economy and if you believe in any of the reports from McKinsey or Goldman Sachs, in the next 12 years the number of connected devices in the world is going to increase tenfold. So if you think about how our key customer being one of the larger semiconductor companies in the world, their demand, their number of chips produced ought to increase somewhat over the next 12 years. And we believe that will benefit AEM.

Q: What about the key growth strategies of the company?

We think about growth in a couple of vectors -- horizontal and vertical. If you take a look at horizontal, we have semiconductors, we have solar, we have smart cards and we can get the medical etc, so that's one way of growing and our preference really is acquisition – though we do focus a lot on organic growth --but we also openly explore inorganic opportunities.

When you look at what AEM has been able to do -- not only do we have core technologies that can be applicable to other vertical segments but what we have is the ability to support one of the world's largest semiconductor companies 24 by 7 across multiple geographies and sites. In terms of taking an acquisition with a set of customers and scaling them globally, I believe that's a huge engine of opportunity for us.

Now the other vector is a vertical integration, so along the semiconductor test developing our own tester speed in mixed signal or radio frequency -- that is also an option and that probably will have to come by way of acquisition as well.

Q: Finally, perhaps can we also get you to share some key risk factors for AEM?

Clearly, customer concentration is a risk. We've announced that our key customer accounts for over 90% of our revenue. It is a very stable company. It's one of the largest in the world but customer concentration has always to be cited. The health of our key customer in a way as it moves from capability migration to demand capacity planning with our equipment -- that could introduce some seasonality and cyclicality.

The other risk is in terms of M&A. I've articulated the need for acquisition to grow aggressively. How we make those decisions and how we then execute that post-merger integration of those acquisitions would be a risk as well.

(Published on 1 Jun 2017)