Stock In Focus: PSPC

PSPC (Phoenix Semiconductor Philippines Corporation)

The Underdog of Semiconductors

PSPC was among the five companies who had their IPO last year of 2014 (CNPF, DD, SSI, PSPC, X) and seems to be the unluckiest of them all, and as of the moment, still trading below its IPO price of 3.15php/share. Could it be that PSPC will someday prove to the market they were wrong in dictating PSPC’s fate and drove the price lower than its initial strike price? As of this writing, May 03, 2015, current market value of PSPC is around 5,022,855,938 PHP trading at 2.32php/share. Although in the technical aspect looking at the chart, PSPC is surely an unattractive fellow, but why does the numbers and valuations for this company seems do not give justice to its chart. Most Fundamental Analyst will agree that as of the moment this feeble stock is currently trading undervalued, but the big question would be, is it worthy of keeping in the portfolio or would it be capable of something big to be qualified as a bagger stock? In these section I will be presenting information about this neglected stock so that PSPC holders or non-holders alike may weigh in risk versus rewards in their outlook for PSPC.

Company Background

PSPC is a Korean semiconductor company which was established in 2010 at Clark Freeport Zone, Philippines. The company offers wide variety of products from SD cards and memory modules used for mobiles, laptops and PCs. Aside from the product itself, it’s business encompasses the manufacture, assembly, test and warehousing of these semiconductors and memory devices. PSPC is a limb of the Korean Based company STS Semiconductor known in Korea as its leading provider of semi-conductor packaging. In the present though, it only relies to a single client which is SAMSUNG but PSPC is recognized by these tech giant as 1 of the five Outsourced Semiconductor Assembly and Test (OSAT) that provides outsourced service to SAMSUNG and the ONLY ONE with the capacity to provide SAMSUNG with 3 production processes in a full range of assembly, test and module, the other being 1-2 processes only.

STS Semiconductor – Parent Company

“STS Semiconductor was created during the financial crisis in 1998 as Samsung Electronics decided to split its semiconductor business division. Since then it has undergone incessant transformations and sought technological development through aggressive management to grow as a leading non-memory semiconductor OEM (Original Equipment Manufacturer). 21st century is to be a network society based on advancement and extended use of computer and internet technology. They have competitive edge in a wide range of fields from semiconductor PKG test service to chip development for message transmission and imaging in telecommunication industry. They’re also planning to expand beyond their current business areas in an effort to earn solid loyalty from customers and contribute to the growth of the nation and the global community in general.”

Website: http://www.sts-semi.co.kr/english/about/philosophy

Bokwang Group – The Business Empire

Bokwang Group was established in October 1983 and built a firm base as a full-scale business group with the production of TV picture tube in 1987. Bokwang Group’s effort to become a leading company in various area such as distribution, finance, service, and manufacturing started with expanding business field to Food and Beverages distribution with Family mart CSV business in 1989 and leisure industry with completion of the Phoenix Park in 1996.

Website: http://www.bokwang.com/english/

Business Line

• Leisure/Finance (Bokwang Phoenix Park, Phoenix Island, Phoenix Springs CC, Bokwang Investment Corp., Phoenix Development & Investment) 
• Food and Beverages Distribution (Bokwang Family Mart, Phoenix Vending Service) 
• Advertisement/Culture (Phoenix Communications, Dentsu Korea, Korea Culture Promotion, C & Marketing Services, Interworks Media) 
• High Technology (BKE&T, Core Logic, Phoenix materials, Clairpixe, STS Semiconductor) 

For those of you who do not know, STS Semiconductor belongs to the family business of the Samsung family... The South Korean Business Empire Bokwang Group's current CEO Hong-Seok Gyu is a first-degree brother of Hong Ra-Hee, director of Leeum Samsung Museum and the wife of Samsung Group Chairman Lee Kun-Hee -- Korea's richest individual. Mrs. Hong Ra Hee happens to own a stake hold in STS Semiconductor...which I only found out upon stumbling around a Korean News release. If we will trace therefore blood ties and relationship of the Samsung Group with the Hong Family (who owns the Bokwang Group), we can start by looking at what Wikipedia has for us regarding Mrs. Hong Ra hee and Bokwang CEO Hong-Seok Gyu’s father Hong Jin-Ki.

Fundamentals

Let’s look at the numbers: Data as date of writing May 3, 2015.

OUTLOOK: 2015 and Beyond - Stronger and Promisingly Will Be Bigger 

• Analyst forecast the semiconductor industry to grow between four percent to seven percent. 
• From an application point of view, tablets, smartphones, and ultra-mobiles are expected to register the highest growth (Garter Report). 
• Building a new facility in Clark by 4Q2015 to meet an expected surge in global demand for its products. The new production facilities will be expected to generate an additional monthly output of 40 million units of memory chips (62% of 2014 output). 
• The new production machineries and equipment installed in 2014 is expected to significantly increase its production capacity from 65 million to 72 million units beginning January 2015 (around 10% increased capacity compared to 2014). Estimated impact to the 2015 net earnings will be around +$1.9m. 
• Debt balance is relatively lower in 2015 than 2014 by around $20m resulting to lower interest expense in 2015 as compared to 2014. Estimated net impact to the 2015 bottom line will be around +$0.8m. 
• US Dollar is expected to be stronger in 2015 due to impending Fed rate hike. Stronger dollar is very positive to PSPC since big chunk of the costs and expenses which are in Phil Peso will be relatively lower in USD equivalent. This means higher income in USD terms.

Just a brief comparison with stocks in similar industries: Take note; although the industry is the same, the business scope and target market of these companies may differ. This is for the purpose of showing how PSPC is currently valued in the current market environment. 

Note: Data as of April 26, 2015

Any other reasons why PSPC “MIGHT” be an ideal stock to keep? Here are just some of the list

1. It has an IN DEMEND product with a global market
   ...that is, Semiconductors… who wouldn't want a smartphone these days? A Laptop? Tablet? Or PC? Mostly everybody who can afford right? Semiconductors surely is an essential element to these gadgets. And who wouldn't want to invest in technology? It’s not as if we are going back in the stone-age… we are surely on our road for more technological advancements… Robotics perhaps? Robots has semiconductors. The point is, we don’t know where the future is headed but surely technology is always there as people always find ways to make life easier and easier for us.
   
2. PSPC upholds its vision “Strive to be the WORLD’s BEST SEMICONDUCTOR Company”. 
   Great things starts from small beginnings. We all do know that PSPC is still a young company having just started merely 5 years ago (2010) but it has already achieved much.“Since 2011, PSPC has been the front-line of semiconductor production consistently producing chips that have made their way into devices such as industrial servers and consumer goods like the trendiest gadgets”
   
   source: Phoenix Semiconductor Philippines Corporation: Taking the Lead in the Semiconductor Industry (Manila Bulletin - 10.31.2014).
   On Dec 14, 2012, PSPC was awarded as TOP Export Performer in FOB value in Clark Freeport zone As of 2014, PSPC still reigns to be on the TOP exporters list in Clark as per management during the stockholders meeting.
   
3. PSPC belongs to the electronic sector, Philippine’s TOP product abroad. 
   "Moody’s Analytics also noted that Philippine shipment of electronics -- the country’s top product abroad -- “improved” in January-February on the back of stronger demand from the United States. Overseas sale of electronics, which accounted for 45% of total export receipts in the first two months of the year, jumped by 9.5% to $4.010 billion from $3.660 billion logged in the comparable 2014 period."
   
   http://www.bworldonline.com/content.php?section=TopStory&title=q1-growth-estimatedbr-fastest-in-seven-quarters&id=106772
   
4. PSPC is not only satisfied with product production, manufacture and distribution but has an eye for product improvement and advancement. 
   PSPC addresses a very important factor to assure its future growth by emphasizing their strategy which includes Research and Development. As stated by Mr. Kim Dongjoo, VP&CFO of PSPC, PSPC will FOCUS on manufacturing and are unlikely to involve Research and Development here in the Phil.
   
   “High caliber degreed engineers—this is among our biggest problems, some of the best people you have are not inside the country. More prefer to work abroad”. Kim said the company is looking at maximizing South Korea’s strength in R&D and the Philippines’ strength in manufacturing. Source: Phoenix Semiconductor becomes 1st Korean firm to list at PSE (ABS - CBN News, December 1, 2014).
   
   With this, we see how effective their managing was, as it is essentially true to any company… utilize your workforce’s strength and never send your ducks to an eagle school. This matter has been addressed by them. Although we know that PSPC operates independently of STS, surely, its mother company will stretched out its hand to its son to ride the wave into the future of semiconductors through its advancements.
   
5. SAMSUNG as its single client? No worries, PSPC is already in talks for their additional clients to be added in their distribution list.
   As we've read it in the news,
   
   Mr. Kim said “the company expects to seal any of the negotiations it has with a Japanese and several American semiconductor firms by “early next year” Source: Phoenix Semiconductors eyes more expansion, Shares close flat on debut (Manila Bulletin, December 1, 2014).
   
   This was actually the reason why PSPC needed to go public, for expansion and to accommodate new clients. We, PSPC investors, are excited for the much awaited announcement of WHO??? Lol Even though PSPC will end its contract to SAMSUNG on 2017, I strongly believe that they will make it to renew its contract by then. Why? I already mentioned above, another thing, are you aware that SAMSUNG itself assisted STS when they established PSPC in employee training and selection of machines and equipment to assure quality… would they want to dump them in the long run? And with the qualities of PSPC, it wouldn't be difficult for them to find new clients.
   
6. Will PSPC be satisfied with just 1 Manufacturing Plant in Clark? The answer is No.
   PSPC, although still in the process of undertaking its short to midterm goal in its PHASE 2 expansion. We are assured that its growth will not stop there. As what has been reported to the news,
   
   “Phoenix Semiconductors Philippines Corporation (PSPC) is considering a third phase expansion, even though it is just undertaking the second phase, as it talks to potential customers for its new production capacity. In an interview after the listing of the firm’s shares, PSPC chief finance officer Dong Joo Kim said the third phase is still in the “conceptual” stage although the company is looking forward to its implementation.” Time-span: three-to five-year plan of the company. Source: Phoenix Semiconductors eyes more expansion, Shares close flat on debut (Manila Bulletin, December 1, 2014).
   
   We see a road map here.
   
7. PSPC has our government’s support.
   When President Benigno S. Aquino III has approved the 2014 Investment Priorities Plan (IPP) which identifies the preferred areas of economic activities that will be entitled to government incentives, PSPC is one of the companies highlighted in the list under the electronics sector. In general the IPP will give government incentives to those included. Aside from the fact that PSPC sits in the Freeport Zone which entitles its investors to the same tax-free and other duty-free privileges enjoyed by their counterparts at the Subic Bay Freeport.
   
   See:http://www.philippineembassy-usa.org/uploads/DTI/DTI%20PBR%20Dec%202014.pdf
   
8. Dividend Policy 
   Who wouldn’t be attracted to dividends? As per PSPC’s prospectus, “The Company’s Board has approved an annual dividend payment ratio of approximately 20% of its net income from the preceding fiscal year, subject to the requirements of applicable laws and regulations and the absence of circumstances which may restrict the payment of dividends including, but not limited to, substantial cash requirements of the Company for major projects and developments, and covenants restricting payments of cash dividends in the Company’s loans and credit agreements.”
   
   On March 3, 2015- PSPC declared a 0.0054 USD cash dividend or amounting to approximately 0.24php, that is 10% yield if we are to use the current 2.32 php/share price of PSPC. 

SOME ISSUES…

People who doesn't understand the business of PSPC, especially the semiconductor industry, tends to relate PSPC's ability to generate income based on the sale of SAMSUNG Mobiles alone...

For me, I do not rely simply on that basis, while it is true that when Samsung has a huge demand for its mobile releases, this will increase the demand for PSPC's semiconductors as well, but SAMSUNG's mobile business is independent to that off its SEMICONDUCTOR business. Aside from servicing its own brands, SAMSUNG Semiconductors also caters to other players and supplies semiconductor for other electrical equipment (not only mobile) which makes PSPC an indirect supplier to them.

So will PSPC be gravely affected to the downtime sale of SAMSUNG mobiles? PSPC's claim...UNAFFECTED

"Engaged by Samsung as a main supplier for memory semiconductors, PSPC has been asked of the effects to its operations of the reported slump in sales of Samsung smart phones. “It is unfortunate that most people only think of Samsung as a producer of mobile phones, Kim lamented, even as he clarified: “Samsung makes all kinds of electronic devices and while Samsung may experience slowdown in one particular segment, there are other electronic segments that all need semiconductor chips.”

Han added: “While Samsung may have been down in its mobile phone sales, the entire segment as a whole grew. We see the potential to serve other players in the market, not just Samsung.” Going IPO and building a new facility are the initial steps toward that direction, Han said.

Source:http://punto.com.ph/News/Article/21669/Volume-8-No-34/Headlines/Clark?s-top-exporter-going-IPO

Samsung Profit Falls on Slowing Smartphone Sales

"Samsung said Wednesday its net profit for the three months ended March 31 was 4.63 trillion Korean won ($4.3 billion), down 39% from a year earlier."

So what's up for PSPC? I think we can all agree here that SAMSUNG is not PSPC right, so let's look at the segment in which PSPC's product is directly involved? And what is that? Memory chips and related semiconductor... So what does SAMSUNG numbers has to say...?

"Samsung’s semiconductor business is divided into two parts: the PROFITABLE MEMORY-CHIP BUSINESS and the beleaguered logic-chip division that manufactures microprocessors for clients like Apple and Samsung’s own mobile unit."

http://www.wsj.com/articles/samsung-profit-falls-on-slowing-smartphone-sales-1430266156

"Outside the mobile division, Samsung's semiconductor business continues to flourish, with an operating profit of 2.93 trillion won ($2.7 billion), up from last year's 1.95 trillion won ($1.8 billion). The Display Panel division's also doing well thanks to an increasing demand for UHD TVs, earning a 520 billion won ($490 million) profit that's much larger than last year's 80 billion ($75 million)."

http://www.engadget.com/2015/04/29/samsung-earnings-q1-2015/

Closing Remark

As the great investor Mr. Warren Buffet teaches us,

“When I buy a stock, I think of it in terms of buying a whole company, just as if I were buying a store down the street,” says Buffett.

Analyze the ins and outs of a company then ask yourself if it is a business you are willing to buy if you had the resources. This way, you don’t have to depend on gurus to make investment decisions for you."

With the details presented above which are all based upon information available to the public (prospectus, disclosures, news and releases) feel the need to weigh your own sentiments with regards to this unlucky IPO stock. As for me, as long as I have a reason to believe in a stock as worthy of keeping in my portfolio, I will continue to hold the stock as an investor. What will be my basis? Financial records, growth performance, etch... in other words, as long as my expectations towards the company are met, HOLD... One good thing with this stock, PSPC is very transparent in giving their investors idea with regards to its future goals and ventures. That way, we know what to expect and if that expectations fails us, then we know what to do... 

Author: Jerico Zubiri

Join our group: PSPC Stock Investor Group