Posted by: donmihaihai | October 13, 2007

It is in the culture.

Call it luck, skill or anything else or just like what being said and written, “Fortune favour the brave”, because of the hardwork or just simply being lucky. Thinking back, I just can’t determine what is the exact reason how I can fished out Micro Mech out of over all listed stocks. Not much to do with all the numbers, share price or margin of safety. These are easily quantifiable, even if I am way off the mark. What cannot be easily understand or figure out is the qualities of the management (not just CEO) and culture of the whole company. Looking back, I didn’t give much thoughts on the culture, not in Micro Mech when I made my 1st purchase, it come later, slowly, bit by bit until I was able to witness it during FY2007 AGM( I should have go early after being a shareholders of 4 yrs).

It is very hard to know their culture or what Micro Mech trying to tell shareholders thru annual reports, presentation or just thru CEO Mr Borch, also the main public face of Micro Mech. It can be fake or just what they trying to project themselves as in front of minority shareholders. But after putting all the information I gather which include small little parts here and there being spoken by CEO and spent huge amount of time talking to COO Mr Low Ming Wah, CFO Mr Chow Kam Wing, Independent Directors Mr Ng Beng Tiong and Ms Menon @ Rabia that the culture of Micro Mech is strongly printed in my mind.

After spending almost 3 hrs in the AGM, I think there is a need to document some of the little observation that I gathered.

1) Mr Borch. started the session by telling a story(what a way to start an AGM) of how 2 sons where one with assets but no knowledge is unable to rebuild the assets when they are gone while another with knowledge is able to rebuild back the library. He related it back to Micro Mech which I certainly agree. Micro Mech is a people company and using NTA to value Micro Mech as one fellow shareholder suggested is way off the mark. What Micro lack of is people capacities not asset capacities. Assets can be easily bought but right peoples cannot. If it is the assets that Micro Mech is lacking, what need to be done is all shareholders to forgo dividends every year and Micro Mech can grow at least 2X faster than the current growth rate.

2) Mr Ng, managing billions in funds (from exchange between him and CFO) is the one with most control of what he said infront of shareholders(my personal opinion). And he thinks that Micro Mech is a well run company by a group of outstanding people. I think he expressed at least 3 times on this area.

One on the composition of the board of director where he disagree one shareholder comments that the directors’ skills are concentrated in the area of engineering.  He thinks the directors skills are wide and diversify.

2nd on Mr Borch where he said if I analysis all the moves by Mr Borch, I will find him a very generous man.

3rd is on the people of Micro Mech which included the top management. I think he use “unusual” and “focus” group of people which is hard to come by.

3) The comment from Mr Low is not much diff from Mr Borch on how the people and culture that makes Micro Mech. But as the conversations gets more casual and relax, he begins to reveal more. One of it is he personal think that Micro Mech is in ahead of their competitors as non of its competitor can achieve what Micro Mech did in a long period. Many of their local competitors are started by former employees(mid to low level) cannot keep up after a few years and diversify into other area. The primary reason is they can copy everything but not the culture of Micro Mech.

Mr Low agreed that Micro Mech need to be in China but the culture of Chinese are so different from Singaporean that Micro Mech culture is very difficult to implant into these Chinese. Despite that he sees some light as there are a core group of about 15 employees that are doing better. This is certainly good news and with a Focus and hardworking COO, the chances of Micro Mech manufacturing in China maintaining the culture is higher.

4) When asked on why Micro Mech is paying their suppliers so promptly that trade payable is at bare minimum. Mr Low looked right at me and told me in a very firm and lecturing manner, this is how he wanted to be treated when the role is in reverse. With the firm current resources, there is no need for them to do such thing as delaying their payment. He followed by telling more things about Micro Mech which reveals more on Micro Mech culture. He is very operational and focus on even going down to the shop floor and to plan and position their machines to improve their efficiency, telling the employees on improving the non value added job to do better and lastly to drive sale.

5) There is no secret that the management of Micro Mech is determined to drive sale in FY2008. The management is actually very disappointed when the final number of FY2007 came in where growth in sale was in single digit. They are actually being prepared for a tough AGM. I think it is very disappointed to Mr Low as he said he been always telling his people that to drive for 15% increase of sales every year as the actual sale may not be 15%(some years lower and some years higher). If they never set the target, they will never achieve it.

The same thing happened when a fellow shareholder congrate the management team for achieving increment in sale for every quarter. Mr Borch actually does not acknowledge it in the 1st place. Later while chatting with Mr Ng on why Mr Borch total remuneration is decreasing, he said, ” this was actually initiate by Mr Borch himself where the fixed part of his salary is reduce while increasing the variable portion so that he will drive the sale up.” What more as a shareholder can I ask?

6) Mr Chow actually said it out himself that they are understating profit as those who follow cashflow benefits when asked about the change in depreciation period of some of the equipments for the 2nd time.

7) From comments and exchanges from Mr Ng, Chow, Low and Ms Menon, Micro Mech is a very well run company. Some of it is hard to notice by looking at the number alone such as the working capital cum hedging process cum handon approach on shop floor operation and the close working relationship between COO and CFO, executive and independent directors. The independent directors are very active in Micro Mech. As comment by Ms Menon, “It is not an easy job.” Mr Low said, ” If he retired, he will never do it again. It is too stressful.”

Had I decided to crowd around Mr Borch, I may not be able to get this culture right. Looking forward to attend future AGM where I am able to chat with him. Especially when he mentioned Warren Buffett on what is the compensation like for employee. Bonus incentives for hard work and becoming an owner themselves by buying in the open market which he said many did. And he said, what the management really care is at the end of the day what really count is the cash that come in.

Ms Menon, appreciate your kind comments.

I must start to look for way not to fall in love with Micro Mech. Am I already in love? No.

Addition

1) After confirmation with Mr Low during the conversation, the hyper on custom, machining and assembly (CMA) that is will be the next growth is truth but something may not be filter thru is that despite the growth potential, the margin from CMA is much lower. It is the management or Mr Low goal to push the GP margin back to 50% mark.

2) Mr Borch spoke in the AGM that Micro Mech want CMA to take up a much higher percent of total. During casual talk later, Mr Low wants the CMA to take up half of the sales. He doesn’t know when they will achieve it but they will work toward it.

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Responses

  1. […] got interested in this counter by 2 investment bloggers Donmihaihai and DragonCapital . What i like about this company is its margin, ROE and its every increasing […]

  2. donmihaihai, It was insightful to read your comment about the management of MM. While I could not value the stock to validate the price as cheap or costly, I just went ahead and bought this counter more than 5 months back. I was just late to acknowledge your valuable comment.

    What is satisfying is the management is pro-minority shareholder and forthright with their explanations. I like this micro gem.


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