Sunday, November 22, 2015

Global Testing Corporation -- Semiconductor testing services


Global Testing Corporation is a Taiwanese company listed on the Singapore Exchange. It provides testing services -- e.g. wafer sorting, final testing services, test program development, conversion and optimization services, load board and probe card design, and leasing of testers -- to the semi-conductor industry, focusing on logic and mixed signal semi-conductors used in consumer electronics and communication devices. 

Its main testing facilities in Hsin Chu, Taiwan and Sunnyvale, CA service customers such as Taiwan Semiconductor, United Microelectronics, Marvell Technology, ALi Corp, Realtek Semiconductor and Sunplus Technology Co Ltd.

There top line declines seen above are a indicative of the secular decline in consumer electronics over the period and, as one can see from the Return on Invested Capital line, this is not a wonderful business.

The Investment Case

1. Depreciation rates in excess of its maintenance capital expenditure requirements have caused GTC to accumulate large accounting losses since its incorporation in 2004.

2. Singapore incorporated businesses with retained losses are restricted from paying out dividends. One way around this is to instead buy back shares sufficient to reduce the equity capital of the company by (at least) the amount of the accumulated losses. Capital  reduction  in this way enables  the company write  off  its  accumulated  losses  by  cutting  an  equivalent  amount of stockholders’ stakeholding.

From GTC's Letter to Shareholders prior to its capital reduction excercise this year:

and from the 3Q 2015 Financial Statements (the left hand column is at Sep 30, 2015):

3. Given the state of play in GTC's end markets -- and given also the capital allocation practices at Yageo Corp, also owned by Pierre Chen -- it is more likely than not that it intends to return the lion's share, probably 100%, of its free cash flows to shareholders by instituting a dividend policy and opportunistically buying back shares.

From the Letter to Shareholders

4.  GTC's free cash flows can likely support  payouts in excess of SGD $10 million per year, implying a payout yield of > 35% 

Disclosure: I own some shares in Global Testing Corporation


  1. Hi Red,

    Noticed that you bought more of Future Bright. Wanted to ask if you considered the potential dilution that can come from rights issuance as management continue to develop their central kitchen and look to start Hengqin land development? They have quite the history of doing that in the past. Should the Macau situation not improve, they might not have the cash flow they previously envisioned to support those developments.

    1. Hi

      2014 Annual Report page 118 Note 2b

      I'm not sure I understand your commentary about their past share issuances. They raised $48 million and used it to buy a building that has since appreciated by $250 million. Thats a 5x return on investment.

      Last year they raised 280 million to buy land that, when developed and leased out at currently prevailing Hengqin rents, will be worth >$2,000 million for a 4x return after construction costs. It was a wealth transfer from the government to the private sector. That's why there was a long line of applications for the Hengqin auction and why the company didn't get the full 150K sq M allocation that it tried for (despite the MD being both an official of the Macau govt and chair of the local Food & Beverage Association.

      Along with that wealth transfer came obligations: break ground very soon and finsh up within 3 years. It will cost ~300 million and FB has the FCF to support that capex -- whether or not VIP GGR recovers (it won't recover). Nevertheless I'd prefer it if the company found a developer partner to buy a minority stake in,and manage, the construction project.
      If you think that the restaurant business is so poor that it requires a recovery in VIP GGR to survive/prosper then diluting at $4.45/share was a highly advantageous development.

    2. ps The risk here is that it gets taken private. That's one reason why I have been a buyer on the down slope.

  2. Agree that they have made great investments through those issuance. My concern is more on those issuance being private placements which diluted existing shareholders back then. As a shareholder who believe in the prospects of the company, I wouldn't want them to go diluting me without offering me the option of buying in for more. So feels like Chan Chak Mo is not really minority friendly (that's my biggest concern). If historically, they have done these rights a little differently, I think this will be a much more compelling opportunity. Though there is no denying the tremendous MOS here (yellow house alone is worth the current market cap).

    1. Well I think I see Chan Chak Mo's shareholder friendliness in a different light. For example, (1) he taken on rent risk of the souvenir shops himself rather than laying it off on the company and (2) there is no need for him to attribute the management fees to the company instead of pocketing it personally but he does it anyway. I am for share issuances when the purpose clearly enhances value per share AND internal cash generation is inadequate to fund the transaction -- i.e. in those instances where share issuances are not dilutive but accretive. In fact I first bought shares in Future Bright because of the share issuance to fund the Hengqin transaction: it removed altogether the food and beverage business from the calculation of the safety net for the value of the shares. As you say, Yellow House = market cap. Or cash + hengqin = market cap. Or food & beverage ex VIP exposure = market cap. etc. Not rocket science, this. Thanks for sharing your perspective.

  3. Hey Red. Given the recent market downturn in the region and FB at ~$.75 a share, you looking to add more at this point or holding steaady?

    1. I have been adding.. The "tracking portfolio" tab at the top of this page indicates what I've bought and sold

  4. Hi Red,

    I was wondering what do you think of Global Testing's 4th quarter results. Revenue is down and the outlook guidance is not good. The stock at SG$1 seem to still have value.

    1. Semiconductors -- and therefore semiconductor testing -- is cyclical so you don't want to paying 8x FCF for these shares.

      But >$13 million FCF on $24 million capitalization ex-cash is 50% FCF yield. And in April we'll find out what dividend they'll pay this year and whther they'll buy back more shares. I think the numbers suggest that these shares are good value.

    2. Hi Red, thanks for your perspective of the current situation

  5. May 3rd:

    "The Board of Directors of Global Testing Corporation Limited (the “Company”, and together with its subsidiaries the “Group”) wishes to announce that the Company intends to undertake the following exercises:
    (a) the proposed declaration of a dividend of S$0.10 per ordinary share of the Company (“Share”) for the financial period ended 31 March 2016 (the “Dividend”); and
    (b) a capital reduction exercise (the “Capital Reduction”) to return to Shareholders surplus capital of the Company in excess of its needs by way of a cash distribution (the “Cash Distribution”) by the Company to Shareholders of S$0.10 for each Share held by the Shareholders."


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