This is one industry that's thriving even during the pandemic

The Covid-19 pandemic reared its ugly head in the beginning of 2020. The year is almost coming to an end, yet the virus is still running rampant.

There is also the constant threat of a new wave in Singapore. In some countries, infection rates are even rising.

This uncertain environment is frightening for some investors, making them afraid to invest in the stock market as they worry about another market crash occurring. Although the pandemic has resulted in many companies incurring losses, there are some who have benefitted.

Let’s take a closer look at an industry which has ridden the waves of digitalisation, excelling while others are failing. This is none other than Singapore’s semiconductor industry.

Share prices of many companies within this sector have risen back to pre-Covid levels, with some even scaling all-time highs. The three largest Singapore semiconductor companies by market capitalisation are AEM Holdings Ltd, UMS Holdings Ltd and Micro-Mechanics Holdings Ltd, or MM.

Here are some reasons to be excited about this resilient industry amid the pandemic.

Growing demand

According to the Semiconductor Industry Association, semiconductor sales are expected to rise by 3.3 per cent in 2020 and 6.2 per cent in 2021.

The association collects data from 95 per cent of US semiconductor companies and roughly 67 per cent of non-US semiconductor companies.

Similarly, industry-recognised SEMI forecasts a 6 per cent increase in global sales of semiconductor manufacturing equipment by original equipment manufacturers for 2020 and a 10.8 per cent increase in 2021.

The latest financial results from the Singapore semiconductor companies affirms these projections.

AEM’s revenue soared by 81.7 per cent year on year, from $150.6 million to $272.7 million in the first half of 2019 and 2020 respectively.

UMS reported a year on year revenue increase of 28 per cent, from $58.6 million to $75.2 million in the same period.

Lastly, MM’s revenue grew 15.2 per cent year on year, from $28.3 million to $32.6 million. With the world’s increased reliance on technology, the demand for semiconductors is poised to grow in the coming years.

Stable dividends

To remain competitive, semiconductor companies need to continually spend on capital expenditure and research and development.

Despite these ongoing financial commitments, the companies still continue to pay out attractive dividends.

AEM has a trailing twelve-month (TTM) dividend yield of 2.3 per cent, UMS boasted a TTM dividend yield of 4.8 per cent, and MM’s shares traded at a 5.3 per cent TTM dividend yield.

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While a steady dividend is captivating, dividend chasers should be cautious of the company’s pay-out ratios.

Pay-out ratio is the proportion of net income used to pay its dividends. In the first half of 2020, the dividend pay-out ratio of AEM, UMS and MM was 25 per cent, 48 per cent and 114 per cent, respectively.

From the above, it can be seen that MM is paying out more than it earned for the latest fiscal year compared to AEM and UMS.

This could be due to confidence in the company’s prospects, but investors should monitor this ratio as a pay-out above 100 per cent is unsustainable in the long-term.

Globally diversified

As investors, we try to diversify our portfolios as much as possible to lower risk. One way to do this is through geographical diversification. As semiconductor demand is worldwide, this industry checks this box.

All three companies have at least three countries which they supply to with each comprising more than 10 per cent of their revenue.

For AEM, their main customers are from Malaysia, Vietnam, and the US. They are accountable for 31.6 per cent, 24.8 per cent, and 21.1 per cent of sales, respectively.

For UMS, their main customers are from Singapore, the US, and Taiwan. They are accountable for 66.8 per cent, 16.2 per cent, and 13.6 per cent of sales, respectively.

Lastly, MM’s main customers are from China, the US, and Malaysia. They are accountable for 29.0 per cent, 20.0 per cent, and 15.0 per cent of sales, respectively.

Such a distribution would lessen the influence of any individual country. While the risk is lowered through geographic diversification, it is important to note that the companies’ exposure has increased.

This means that the company is susceptible to disruptions from a wider variety of sources. This is exemplified by the ongoing trade war between China and the US.

On 15 May, 2019, US President Donald Trump issued an executive order banning the use of telecommunications equipment from foreign companies seen as national security risks. This order has led to US-based Google cutting ties with China’s Huawei, banning the Chinese company from utilising flagship Android applications such as Gmail, YouTube and even Google Play Store.

Just last week, the Trump administration announced a US download ban on two China applications: TikTok and WeChat.

Once again, national security was cited as the reason. All these nationalistic developments are worrisome for technology-focused stocks. Investors should closely monitor the relationship between the world’s two largest economies. 

This article was first published in The Smart Investor. Disclosure: Zachary Lim does not own shares in any of the companies mentioned.