This article first appeared in The Edge Malaysia Weekly on February 5, 2024 - February 11, 2024

AT the height of the Covid-19 pandemic, Penang-based integrated engineering solutions provider UWC Bhd stood out as one of the most valuable technology firms on Bursa Malaysia, boasting a market capitalisation of almost RM8 billion.

In 2020 and 2021, the global chip shortage had propelled the share prices of semiconductor and semiconductor-related companies, including UWC, to historical highs. These counters, however, experienced a sharp correction in 2022 as the supply from oversized capacity expansion came on stream amid tapering global demand.

Simply put, the chip crunch eventually turned into a glut. Consequently, UWC’s market value was halved to about RM4 billion in 2022. The group’s net profit almost halved to RM54.3 million in the financial year ended July 31, 2023 (FY2023), from its record high of RM106.8 million in FY2022.

In an exclusive interview with The Edge at UWC’s headquarters in Batu Kawan Industrial Park, executive director and group CEO Datuk Ng Chai Eng highlights that the worst is over for the global semiconductor industry, which faced oversupply issues over the last two years.

He observes that industry bellwether Taiwan Semiconductor Manufacturing Co Ltd (TSMC) had gradually depleted its stockpile of chips and, since early 2023, the Taiwanese chip giant’s utilisation rate has picked up.

“In fact, many of our customers from the front-end segment have indicated that the global semiconductor industry will be seeing a ‘tsunami of orders’ in 2025. Therefore, we are expanding our capacity to cater to our clients’ growing demand,” says the 61-year-old.

Chai Eng points out that over the past 40 years, the semiconductor industry has had its ups and downs, but it always bounced back and came back stronger.

“This trend is evident in history. The up cycle has always been more significant than the down cycle, because global consumption of semiconductors has kept increasing. Like it or not, humans can no longer live without technology. UWC has to be prepared to capture the ‘tsunami of orders’ and opportunities,” he says, adding that the group will ride on the global growth over the next two to three years.

Chai Eng co-founded UWC with his business partner Datuk Lau Chee Kheong in 1990. The company, which was incorporated under the name of Unique Wire Cut Sdn Bhd, began as a trading outfit that supplied wire cut machines to customers from various industries, and subsequently forayed into metal stamping, welding and making of machined components.

Today, UWC is capable of providing high-end engineering and manufacturing services — including precision sheet metal fabrication and value-added assembly services — to industries such as semiconductor, life science and medical technology, as well as telecommunications. It is essentially a one-stop solutions centre providing modules for full turnkey assembly manufacturing automated test equipment (ATE).

“Today, the majority of our clients are from the semiconductor industry, as well as the life science and medical technology sector. We have some exposure to the telecommunications sector as well, but it is not our bread and butter,” says Chai Eng.

For the semiconductor sector, UWC specialises in functional and reliability test equipment, whereas some of its ATE peers, like ViTrox Corp Bhd, build automated vision inspection equipment.

“Typically, after the chip packaging process, there will be multiple testing activities, including functional tests that need to be carried out. Our job is to manufacture the testers,” he explains.

Chai Eng was one of Forbes 50 richest men in Malaysia in 2022, with a net worth of US$255 million (RM1.21 billion). However, the self-made tycoon dropped off the list last year.

UWC Capital Sdn Bhd — an investment vehicle jointly owned by Chai Eng and Lau — is the major shareholder of UWC with a controlling stake of 50.23%. In addition, they each directly own about 7.5% of UWC.

The company’s 30 largest shareholders include the Employees Provident Fund (EPF), Kumpulan Wang Persaraan (Diperbadankan) (KWAP), Hong Leong funds, Public Mutual funds, Kenanga funds and Vanguard funds.

Interestingly, Chai Eng and Lau also control UMediC Group Bhd, an ACE Market-listed medical device distributor and manufacturer (see “UMediC devises path to steady growth” on Page 60), whose operation is just a stone’s throw from that of UWC.

According to UWC deputy group CEO Dr Matin Ng Chin Liang, the new buzzword in the semiconductor industry is advanced packaging, and the Main Market-listed engineering services firm has started to include advanced packaging testing in its product portfolio.

“Advanced packaging essentially involves embedding the integrated circuit (IC) into the packaging. In today’s context, the development of artificial intelligence (AI) chips relies heavily on advanced packaging. This implies that the capabilities of test equipment must be highly advanced,” he explains.

Chin Liang, who is Chai Eng’s son, goes on to say that although the size of the tester and test equipment may remain the same, their functionality, capacity and technological advancements need to be greater than what they used to be. Therefore, UWC needs to continue to innovate to stay relevant in the advanced packaging space.

“Over the past few decades, we have been building testers, and we realised that as technology evolves, our test equipment also needs to be improved,” says the 31-year-old, who serves as alternate director to Chai Eng.

The beauty of the semiconductor industry is that even though the nanometres — a unit of measurement that is one-billionth of a metre — are getting smaller, meaning better, the world still needs such chips, he points out.

“In other words, we will continue to get new opportunities, while the existing orders will not disappear overnight. Definitely, advanced packaging requires higher precision and capacity, while the materials will be more expensive,” says Chin Liang, who has 0.04% equity interest in the company.

For perspective, the front-end semiconductor segment currently contributes less than 10% to UWC’s revenue. Chin Liang expects the segment to contribute 30% to 40% to the group’s top line in the next three years.

“If you look at the entire semiconductor value chain, about 30% of the total capital expenditure (capex) is allocated to the back-end segment, whereas 70% is for the front-end … In short, the front-end is where the money is,” he says.

“Right now, just like most Penang tech firms, UWC is playing in the 30% space, which is the back-end segment. But going forward, we want to tap into the 70% new playing field, which is the front-end segment that provides more than two times the spending as compared with the back-end.”

Chin Liang says that in the past, many front-end players set up their operations in Singapore but in recent years, Penang has started to attract them.

“Previously, front-end customers were not in our customer base. But today, as we expand our product portfolio, we are able to serve this market segment. Looking at our ongoing expansion projects, I think our capacity should be sufficient for at least the next two years,” he adds.

Chin Liang says UWC is an original equipment manufacturer (OEM) that provides complete solutions for its high-tech strategic partners and customers. As a contract manufacturer, it does not showcase its products publicly, even more so now that the group is entering the front-end segment.

“We consider ourselves an ATE company. We build test equipment for our clients, which are mainly ATE vendors. It is just that we don’t produce equipment with our own brand,” he says.

UWC currently operates in five locations — its HQ in Batu Kawan, two factories in Taiping, one in Johor and one in Thailand. By the second quarter of this year, its new four-storey building at HQ, dubbed Building 7, will be up and running.

“We are in the midst of upgrading and integrating our machines to the cloud systems and dashboard for higher productivity and efficiency,” says Chin Liang.

Meanwhile, UWC is building its second factory in Batu Kawan, dubbed Batu Kawan 2.0, at a 12-acre site that is located about 2km from its HQ. Its neighbours there include other ATE firms, namely Pentamaster Corp Bhd and Greatech Technology Bhd.

“The first phase of Batu Kawan 2.0 will be ready soon and, subsequently, we will work on the second phase. We previously announced that in total, UWC will invest more than RM200 million for our Batu Kawan 2.0 expansion project,” says Chai Eng.

UWC is planning to build a new factory in Taiping — its third plant there — on a 10-acre site. Its intention is to shift the lower-end manufacturing processes and components to Taiping so that the group can focus on high-end activities in Penang. After all, Taiping is only 30 to 45 minutes from Penang, says Chai Eng.

“The unique part about industrial parks in Penang is that they are clustered and controlled, which means not everyone can come here. But in Taiping, there is a mixture of various industries. So, the idea is to shift our stable business to Taiping,” he explains.

UWC’s total workforce is more than 2,000 people, of which 20% are foreigners. In Penang, the group currently employs 1,700 workers.

“We probably need another 100 workers for our first phase in Batu Kawan 2.0, but most of our new hires will be skilled workers, such as engineers. We will try to automate as much as we can in Penang as we plan to move the labour-intensive activities to Taiping,” says Chai Eng.

Chin Liang notes that while UWC does not make complete wafer fabrication equipment, the group can produce modules for the manufacturers of these equipment.

“We currently have about three to four front-end customers, but we expect more to come. Today, there are only fewer than 10 major front-end players in the world. Most of them are in the US and Europe, and they prefer to set up operations in countries with established wafer fabs such as Singapore, Taiwan and South Korea,” he says.

To cater for the front-end business, UWC has built two cleanrooms at its HQ, while its upcoming Building 7 will be fully equipped with cleanrooms as well.

Notably, UWC floated its shares on Bursa Malaysia in July 2019. The timing was just right for the company to ride the tech rally in 2020/21 during the pandemic.

At its peak in mid-February 2021, UWC’s market capitalisation reached as high as RM7.8 billion amid a global chip shortage, and Chai Eng’s wealth stood at about US$450 million.

Although UWC’s market value and his net worth have now shrunk by half, Chai Eng remains unfazed as he believes the financial performance of the group is more important.

“I always tell people, my first love was UWC, after Matin’s mother [my wife]. My three children could study abroad, we live in a nice house, we drive some nice cars, all thanks to UWC. So, my next target is very clear — either revenue of RM1 billion or profit of RM300 million,” he says.

UWC’s stock price had declined 25% over the past 12 months to settle at RM3.17 last Wednesday, giving the company a market capitalisation of RM3.49 billion. The counter is currently trading at a historical price-earnings ratio (PER) of 116 times.

By comparison, its closest peers SFP Tech Holdings Bhd and Coraza Integrated Technology Bhd are trading at PERs of 54 times and 39 times respectively.

Bukit Minyak-headquartered SFP Tech is a computer numerical control (CNC) machining and mechanical assembly services firm, while Nibong Tebal-based Coraza is an engineering support services (ESS) provider involved in sheet metal fabrication, precision machining and sub-modular assembly.

In FY2023, UWC’s profit declined 49% to RM54.3 million, while its turnover decreased 21% to RM271.7 million (see bar charts).

The group’s bottom line in the first quarter ended Oct 31, 2023 (1QFY2024) fell 85% to RM4.4 million from RM29.25 million a year earlier. As at Oct 31 last year, its net cash position stood at RM99.3 million, while its net assets per share was 39 sen.

“If you asked me, my ultimate goal is to hit an annual revenue of RM1 billion. If I could achieve that target while maintaining a net margin of about 30%, I think I might want to retire,” Chai Eng says half in jest.

Initially, his aim was to increase UWC’s revenue by RM100 million every year. However, the downturn in the semiconductor industry affected the group’s financial performance in FY2023 and 1QFY2024. “I think Matin must now work harder to get us back on our growth track,” he says.

Chai Eng says since UWC set up its first manufacturing plant in Bukit Minyak and ventured into the provision of sub-assembly services in 1997, the group had achieved revenue growth for more than 25 years.

“Personally, I was very sad when this record was broken in FY2023, so I decided to cut my own salary by 60%. Moving forward, my target is to achieve RM1 billion in revenue for UWC when I am 65 years old. Frankly, I do not want to stay in the company as CEO for too long. I want to grow the company and pass the baton to Matin.

“Profit-wise, we reached our all-time high of RM106.8 million in FY2022. We hope to at least revisit this level or break our profit record by FY2025.

“Some people may think that we are too bullish, but our mentality is that if we know for sure that the industry will do well in the next few years, we should at least grow in tandem. If the whole industry is doing well, but our company is not performing, then something is wrong. So, we need to continue growing and we cannot rest on our laurels.”

In UWC’s second quarter ended Jan 31, 2024 (2QFY2024), the group started to see signs of orders gradually coming back, says Chai Eng.

“Actually, there were some early signals in 1QFY2024 too, but the signals got stronger in 2QFY2024. If everything goes well, I believe our group should be able to perform well in 2HFY2024, and our performance in FY2025 will be even stronger,” he adds. 

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