StockPick

Updates :

1. Sold the last of my hldgs on 25-Jan-06 @ $0.34 even tho' I believe there's a possible 10-20% potential upside due to the coming good Q4 results and the many bullish analysts' recommendations for semicon stocks. My reasons - GTC to me is a a very speculative stock and I'm more than happy with the profits I've made for the last 3 mths. The 6mths lock-up period imposed on the previous major shareholders and employees will also be due soon and there may be some selling. If so, I may pick up some GTC if the price should weaken, but in the meantime I'll be able to sleep much better :D
2. Added Q305 Results on 7-Jan-06 (Released on 27-Oct-05)

Background
I got GTC during the IPO at $0.30 which was listed on 24-Aug-05. I also bought more on 24-Aug @ $0.28, $0.285 on 29-Aug and $0.25 on 8-Sep for an overall average cost of $0.273. My initial studies of the IPO prospectus had given me the confidence to apply for the IPO, although the share price subsequently did not perform to my expectations. Next, the 1H results on 5-Sep-05 provided rather positive outlook for the coming months. Still, the share price didn't even attempt a breach of the IPO price of $0.30. Finally, a rather optimistic report was released by UOB-KayHian on 22-Sep-05 with a 1-year target price of $0.40. GTC share price managed to come off its low of aro' $0.25 and hit a high of $0.28 but now it looks likeit's going back down again.

So, now, a study to see what direction I should take, ie. to sell or to accumulate more shares :D

Financial Data
All the data in this case study are extracted fm the GTC IPO Prospectus and 2005 Mid-Year reports. Some of the figures in the fllwg table are extracted fm the periodical "Shares Investment",

Global Testing	2002	2003	2004	Q105	Q205	Q305	FY05
Margin (%)	18.69	NA	22.16	-	-	-	30.3
ROE (%)	-	-	14.96	-	-	-	-
DIV (US$)	-	-	-	-	-	-	-
EPS (US$)	--	--	-	-	0.0035	0.0083	0.0213
Turnover (US$M)	25.61	25.2	45.18	8.286	11.726	16.110	53.484
Cash + Bank Bal (US$M)	?	-	6.072	-	2.237	34.460	19.374
Short Term Investment (US$M)	?	-	5.282	-	1.674	1.582	-
Current Liabilities - Bank Borrowings (US$M)	?	-	29.37	-	14.19	15.664	12.183
Long Term Bank Borrowings (US$M)	?	-	22.09	-	39.1	65.356	57.856
NAV / Share (US$)	?	-	0.1101	-	0.1138	0.1308	0.1393

Issued Shares = 875,000,000 @ $0.10 Par ; PE 12.7 @ $0.28

Note : FY05 is end-Dec

Substantial Hldgs

• Yageo Corporation : 21.45% + 5.8% Deemed
• Investar Semiconductor : 6.63% (TSMC Deemed)
• Lee Hwei-Jan : 0.39% + 8.19% Deemed
• Others (> 400 minority shareholders of GTC Taiwan) : 20.92%
• Free Float : 24.41%
  

Q305 Results (Extracts)

Singapore, October 27, 2005 – Global Testing Corporation Limited ("GTC" or the "Group") ("寰邦科技有限公司"), a leading company specialising in mixed signal and logic IC testing, today reported that its net profit for the quarter ended September 30, 2005 ("3Q2005") doubled to US$6.4 million, compared to US$3.1 million recorded in the previous corresponding period. This was achieved on the back of a 32.8% increase in revenue to US$16.1 million in 3Q2005.

On a sequential basis, Group revenue rose 37.4% to US$16.1 million in 3Q2005, compared to US$11.7 million in 2Q2005. The Group’s net profit surged 159.4% from US$2.5 million to US$6.4 million in 3Q2005.

Mr Paul Yang (杨燿州), President and Chief Executive Officer of Global Testing Corporation Limited ("GTC"): "Our strong sequential growth in the third quarter of 2005 was driven by the continued recovery in the semiconductor industry which resulted in higher volume for final testing and wafer sorting services from our major customers such as Marvell and TSMC during the quarter under review. The demand was more apparent for consumer IC testing, which is our forte. We also successfully increased our revenue share for some of our existing major fabless customers such as Realtek and Sunplus and secured new customer wins.

"In addition, our gross profit margin rose significantly to 56.0% compared to 43.8% in the prior quarter. This was mainly due to the Group’s better product mix and improved machine utilization rates, which rose from approximately 80% to 90% during the same period." Capital expenditure ("capex") committed in 3Q2005 was approximately US$34.0 million, principally for new capabilities and production equipment. Total capex committed during the nine months ended September 30, 2005, was approximately US$49.8 million.

Basic earnings per share registered was 0.83 US cent in 3Q2005. Net asset value per share was 13.08 US cents as at September 30, 2005.

Outlook
Looking ahead, GTC believes that the Group will continue to benefit from the increased wafer testing opportunities brought about by the gain in pace of the recovery in the semiconductor sector. The Group has also secured new business wins from existing customers, which is expected to boost its top and bottomlines.

The Group’s customers, which include major foundries, integrated device manufacturers ("IDMs") and fabless companies, are also indicating higher tester loadings in the following quarters. An increasing number of its customers have expressed their willingness to pay higher prices for testing capacity such as Agilent 93000 capacity.

Mr Yang said: "We expect the strong demand for consumer and wired communication IC testing, such as DVD chips, STB chips, HDD ("hard disk drive") controller IC, gaming applications IC and LAN IC, to continue to drive our growth. Our machine utilization rate is expected to exceed more than 90% in 4Q2005."

Going forward, the Group intends to continue its strategy of focusing on the provision of higher margin wafer sorting of mixed signal semiconductors to fabless companies and IDMs.

In addition, the Group plans to extend its capabilities to meet the demand for testing of larger wafers such as 12 inch (300 mm) wafers. The Group plans to utilize part of its IPO proceeds to purchase new factory premises, plant and equipment and construct ancillary facilities to handle this demand.

UOB KayHian Report (Extracts)

Thursday, September 22, 2005 (BUY)
Current Price : S$0.26Target (12-mth) : S$0.40

Global Testing CorporationLeading Specialist In Wafer Sorting
Global Testing provides testing services for logic and mixed-signal semiconductors used in consumer and communications applications. It specialises in wafer sorting, a test process that ensures circuitry on a die is correctly etched, verifies that it functions effectively and provides yield information as a feedback to improve the wafer fabrication process. Global Testing's main testing facility is at Hsin-Chu Science Park, Taiwan and has a smaller facility in Sunnyvale, California, US.

Wafer sorting provides superior margins. Global Testing focuses on wafer sorting, which provides longer test time of more than 40 minutes per wafer and generates more revenue per hour of test time due to high operational complexity. It has developed expertise in testing mixed-signal semiconductors that requires more sophisticated test programmes. Specialisation in wafer sorting provided above-average EBITDA margin of 58.6% and net margin of 25.5% in FY04.

Leveraging on engineering services to capture new customers. Global Testing provides comprehensive engineering support including test programme development, conversion and optimisation, probe card/load board design and probe card maintenance. Leveraging on the strength in engineering services, it has expanded its customer base from 39 in FY04 to 50 in 1H05. Customers are guiding rapid increase in wafer volume for consumer and wired communications applications such as DVD (Sunplus), set-top box (ALi), HDD controller (Marvell) and LAN (Realtek) in 2H05.

Blue-chip customer base. Global Testing's customers are reputable players in the semiconductor industry. Its top five customers are TSMC, Marvell, UMC, PMC Sierra and ALi, which accounted for 76% of sales in FY04. Its largest customer, TSMC, holds a 6.6% stake in Global Testing through a 97.1% interest in InveStar Semiconductor Development Fund.

Attractive valuation. Global Testing trades at a discount to regional peers in the backend assembly and test space. The overhang from selling by minority shareholders in Taiwan has brought valuation to an attractive level with FY05 PE at 8.5x (sector: 15.3x) and P/B at 1.2x (sector: 2.1x).

Our target price of S$0.40 represents FY05 EV/EBITDA of 5x (STATS ChipPAC: 8.8x, UTAC: 4.1x) and FY05 PE of 13x (UTAC: 18.5x).

FY05 Mid Year Results (Extracts)

Singapore, September 5, 2005 – Newly-listed Global Testing Corporation Limited (“GTC” or the “Group”), a company specialising in mixed signal and logic IC testing, today reported that revenue was down 12% to US$11.7 million for the quarter ended June 30, 2005 (“2QFY2005”), compared to 2QFY2004. Net profit decreased by 55% to US$2.5 million, compared to US$5.4 million recorded in the previous corresponding period.

On a half-yearly basis, Group revenue was down 14% from US$23.4 million in 1HFY2004 to US$20.0 million in 1HFY2005. Net profit declined 67% to US$2.5 million in 1HFY2005 from US$7.6 million in 1HFY2004. Mr Yang said: “On the back of a strong 2QFY2004 performance which coincided with the peak of the last semiconductor cycle, our interim results were impacted during the half year under review. This is in line with our earlier guidance in our IPO prospectus that Group’s net profit is expected to be lower year-on-year for the first half of FY2005, compared to the previous corresponding period. New designs for mobile handsets and digital handheld devices fueled volume growth and inventory build-up.”

On a sequential basis, Group revenue rose to US$11.7 million in 2QFY2005, up 42% from US$8.3 million in 1QFY2005. The Group’s net profit surged 6025% to US$2.5 million in 2QFY2005. Mr Yang commented: “Our strong growth in the second quarter of 2005 compared to the first quarter was driven by the rapid recovery in the semiconductor industry. We also successfully increased our revenue share for some of our existing major fabless customers such as Realtek and Sunplus.”

Capital expenditure (“capex”) committed in 2QFY2005 was US$12.8 million, principally for new capabilities and production equipment. Total capex committed in 1HFY2005 was US$15.8 million.

Gross margin for 2QFY2005 remains at a healthy level of 43.8% compared to 55.1%

in the previous corresponding period, despite a decrease in utilization rate in 2QFY2005. However, the Group’s gross margin improved on a sequential basis from 33.1% in 1QFY2005 to 43.8% in 2QFY2005. This was mainly due to the Group’s better product and improved machine utilization rates, which rose from 56% in 1QFY2005 to 80% in 2QFY2005.

Basic earnings per share registered was 0.35 US cent in 2QFY2005. Net asset value per sharewas 11.38 US cents as at June 30, 2005.

Growth Strategies

Going forward, the Group believes that its growth in 3QFY2005 will be driven by increased wafer testing opportunities as its customers are guiding for a rapid increase in total wafer volume during the period. The demand for consumer IC testing, such as DVD chips, STB chips, HDD (hard disk drive) controller IC, gaming applications IC and LAN IC, is also expected to be strong.

Mr Yang said: “We expect our gross margin in 3QFY2005 to improve further with higher machine utilization rates, compared to the average of 80% recorded in 2QFY2005, as well as increasing wafer testing volume from major foundry customers and improving average selling prices. We expect these positive trends to continue, based on our customers’ current forecasts.”

Going forward, the Group intends to embark on a concerted sales strategy to focus on the provision of higher margin wafer sorting of mixed signal semiconductors to fabless companies and integrated device manufacturers. “We plan to leverage on our strong capabilities in wafer sorting and consumer mixedsignal IC testing to tap on these opportunities brought about by the growth in the trend of outsourcing semiconductor testing services by IDMs and fabless companies,” added Mr Yang. In addition, the Group plans to extend its capabilities to meet the demand for testing of larger wafers such as 12 inch (300 mm) wafers. The Group intends to utilize part of its IPO proceeds to purchase new factory premises, plant and equipment and construct ancillary facilities to handle this demand.

IPO Prospectus (Extracts)

The fllwg were comments I previously made in forum,

Fm Page79 of IPO Prospectus,
Due to generally unfavourable and difficult market conditions in the semi-conductor industry, we expect our Group’s net profit to be significantly lower year-on-year for the first half of FY2005 as compared with that of the previous corresponding half-year. Assuming that there is no significant decrease in global demand for communications and consumer electronic devices from current level, our Directors remain confident of the prospects of our Group for FY2005.

My Comments

Bad
1. 1H05 profits will be significantly lower than 1H04 (see above), prob that's why it's offered at a low Historical PE of 10+
2. Debts of US$59Mil
3. Short history
4. Business is highly competitive and cyclical in nature

Good
1. Top 3 customers are well-known names; TSMC (21.6%), Marvell (20.3%), UMC (14.6%)
2. TSMC is an indirect shareholder but 9.48% drop to 6.63% after IPO

This one is for sure not a yield play, but likely a growth play. Look at the prospectus on what they plan to do with the IPO proceeds. They don't plan to clear/lower their debts, but rather, plan to expand/upgrade their facilities.

Other comments,

1. Why GTC chose to list in S'pore?
There're many similar cos. in Taiwan and GTC would find it hard to raise more cash there.

2. How do you compare GTC with UTAC and STATS in terms of Engineering capability?
I think their ability to get Marvell biz in S'pore and even got awards 2 years in a row shows that their enginering capability is not lacking.

The original shareholders of GTC were shareholders of GTC Taiwan, which was listed in Taiwan GreTai Securities Market. They were given GTC in share swap.

Fm the prospectus (pg64), the major shareholders have a lock-up period of 6mths. But, for 20.92% (183Mil shares) which are held by 400 minority shareholders, there's no mention of any lock-up period.

I think this must be the public shareholders of Taiwan, so very likely, many will sell to get back their money as S'pore will present them with uncertainty and risk.

Comments

• Results - Good or Bad?
  Fm the 1H05 results,
  
  • Bad compared to FY04
  • Q205 improved over Q105 and expected to improve further for Q305

• Share Price
  
  • Likely large selling activities by GTC Taiwan minority shareholders on listing
    
    • Likely will view S'pore listing as troublesome for future transactions
    • Currency risk as in S$
  • Range bound $0.25 to $0.27


• Comparisons with other Semiconductor Test Stocks
  In terms of revenue, GTC is still very small as compared to the other 2 locally listed cos, aro' 15% of UTAC and 4% of STATS.
  
• STATS (Mid-Yr05) : 1,964,264 Mil Shares @ $0.25 Par
  
  • NAV ?? vs $1.07 (2-Sep) ; EPS -$0.022 ; PE NA as losses
  • Revenue US$494.5Mil ; Net Losses US$42.18Mil ;
  • Losses since FY01 or earlier??


• UTAC (Mid-Yr05) : 1,497,980 Mil Shares @ US$0.15 Par
  
  • NAV US$0.3394 vs S$0.645 (2-Sep) ; EPS US$0.007 ; PE 42.5
  • Revenue US$140.5Mil ; Net Profit US$11.17Mil ;
  • Profitable for last 8 Quarters

Conclusions
Be warned, the above had been created to justify my recent buy :D

Based on 1H05 results and mgmt guidance, GTC results will only get better fm now till year end, but, it'll not be as good as FY04. Still, at least it's expected to be profitable.

GTC have good blue chip customers, but they may be over-reliant on the top 5 which accts for the bulk of their revenue. The loss of 1-2 of the top customers will have major impact on their profitability.

As GTC is rather small, there's room for aggressive growth and I believe this is what the mgmt intends to do. This is seen fm their decision to move their listing fm Taiwan to S'pore where there's less competition for them to raise cash (fewer similar semicon cos. here) and their use of the IPO proceeds for expansion rather than to pay off their huge borrowings. GTC shld thus be seen as a potential growth stock, rather than a dividend yield play. Still, one lingering question I have is why they'd not been able to grow despite their listing in Taiwan previously. Semicon biz is also a highly cyclical biz and this is evident fm their good results in FY04 and the subsequent pull-back in Q1-05.

GTC must thus be seen as a high risk stock and be treated with due respect.

My Action

Haha.. U tell me :D

Maybe trade between $0.25-$0.27 and wait for rally aro' end-Dec to B-Jan. Watch Q3 results closely and the mgmt guidance. May rally if Q3 results surpasses that of Q2. Also got to watch the 6-mths lock-up period (Feb-06) closely as insiders may be waiting to sell. Good thing it shld be after FY05 results are out :D

Share Price

• $0.25 - $0.295

References

• 21-Mar-06 : Set Up Home Video IC Testing Centre
• 14-Mar-06 : Set Up Advanced CMOS Image Testing Centre
• 9-Mar-06 : Clarification - Major Shareholder will not sell out in Open Mkt
• 13-Feb-06 : FY05 Results / Press Release
• 27-Oct-05 : Q305 Results / Press Release
• 22-Sep-05 : UOB-KayHian Report
• 5-Sep-05 : Mid-Year 2005 Results / Press Release
• 23-Aug-05 : Balloting Ration
• IPO Prospectus

Disclaimer : Use the above at your own risk! We'll not be responsible for any losses incurred but you can give us credit if you make money :D