When many A-share semiconductor companies soared recently, ASM Pacific (00522), the leading company in the semiconductor packaging industry in Hong Kong, can only "sigh."

On February 26th, ASM PACIFIC announced its annual results for 2019. For the year ended December 31, 2019, the company realized HK $15.883 billion in revenue, down 18.76% from the same period last year. More surprisingly, the profit attributable to the owners of the company was HK $620 million, down 71.9% from the same period last year!

Due to the negative impact of a 70% drop in net profit, the share price of ASM fell to HK $89 in half an hour from HK $94.45 at the beginning of trading, a drop of more than 7% at one point, and although it rebounded later, it still closed down 3.22%.

It is not difficult to see that most of the market interpretations of this annual report are bearish, but is this really the case?

Net profit fell by 70%

Judging from the annual report alone, the challenges facing ASM PACIFIC in 2019 are extraordinary.

Zhitong Financial APP learned that the profit of ASM PACIFIC mainly depends on three business segments: development, production and sales of post-process equipment, surface mount technology solutions and materials. Among them, ASM's post-process equipment and SMT solutions are the first two major businesses of the company and account for a similar proportion, while the contribution income of the material sector accounts for only a small proportion.

In terms of business segmentation, in the revenue structure of ASM PACIFIC in 2019, the post-process equipment, SMT solutions and materials business contributed 44.1%, 44.2% and 11.7% of the company's total revenue, respectively. Although the proportion has not changed much, the contribution of all business segments to revenue has declined significantly compared with the same period in 2018.

Of this total, the revenue from the process equipment business after 2019 was US $890 million, a decrease of 24.4% compared with 2018, and the gross profit margin decreased by 472pips year-on-year; the material business revenue was US $240 million, down 17.8% from 2018, and the gross profit margin was down by 135pips year-on-year; and the SMT solution business revenue was US $900 million, down 12.6% from 2018, and the gross profit margin was down 154pip per year.

During the period, CIS (Image Sensor) revenue in the post-process equipment business recorded growth, thanks to the extensive use of multi-lens, high-resolution lenses, 3D sensing and other functions in smartphones, but was dragged down by reduced revenue from integrated circuits, separation devices, and LED.

In terms of gross profit margin, the rate of decline accelerated significantly in 2019. Since 2013, ASM has maintained a steady increase in comprehensive gross profit margin due to improved product structure and lean production. However, due to the price reduction pressure caused by product updates and the average selling price of Android devices decreasing year by year, the company's gross profit margin is also under certain pressure, resulting in a compression of profit margins.

In addition, affected by Sino-US trade frictions throughout the year in 2019, the group's total new orders in the fourth quarter totaled US $450 million, down 13.3 per cent from the previous month and 6.3 per cent from the same period last year. The total amount of outstanding orders at the end of 2019 was $650 million, down 0.7 per cent from the end of the previous year.

Overall, the company's operations are affected by investment in semiconductor equipment, and the cyclical performance of the semiconductor equipment market affects ASM Pacific's business from time to time. It is worth noting that the company also mentioned in its annual report that at a time when the epidemic is still changing, it is difficult for the group to make an accurate forecast of revenue. According to the best estimates made by the Group on the day of this announcement, the Group is expected to have revenues of between US $3.7 and US $450 million in the first quarter of 2020 and is more likely to record a loss in the first quarter of 2020.

In fact, the market is not optimistic about the annual report has long been apparent. Long before the release of the list, ASM had already suffered a series of sharp declines. within a short period of more than a month, the share price fell below the 100 mark from a high of HK $120 in late January, and then continued to fall after a 10% drop on February 18, with no obvious signs of stabilisation.

Is it possible to reverse the future?

From this annual report, it is not difficult to see that 2019 will not be easy for ASM, which is related to the sluggish growth in both shipments and sales of smartphones worldwide in 2019.

In recent years, the growth rate of China's semiconductor market leads the world, and the domestic market has great potential, which drives the development of the domestic semiconductor manufacturing industry chain. Among them, the sealing and testing industry is developing most rapidly in the manufacturing field. Chinese mainland has become the region with the highest share of ASM revenue.

Although 2018 and 2019 belong to the small years of consumer electronics innovation, especially the acceleration of 5G business in 2019, it officially kicked off the prelude to the upgrading of consumer electronic products. However, at present, it is just in the early stage of the replacement of 4G and 5G consumer electronics, and it has not yet met the outbreak of the 5G era. At present, the attitude of the major manufacturers is still optimistic but prudent, which directly affects the number of orders placed to ASM.

However, with the gradual promotion of 5G, the global smartphone has entered a new replacement cycle since 20 years. 5G infrastructure configuration and the gradual arrival of 5G smartphone era are accelerating the development of the industry, not only because 5G directly drives the demand for semiconductor chips, but also because technological innovation brings many benefits to global business and economy, the outbreak of downstream demand may become a driving factor for the growth of ASM.

In addition to consumer electronics such as smartphones, the innovation brought about by 5G has constructed a long-term prospect, which will help promote the expansion of economic activity, cloud Internet, AR/VR, self-driving cars and the Internet of things and other application scenarios, all of which will further boost the demand for semiconductor hardware. Taken together, the long-term development of ASM is relatively bright.

However, we also need to be on guard against some uncertainties. In order to reflect the impact of the epidemic, China International Capital Corporation lowered the forecast of China's smartphone shipments by 11% to 348 million units in 2020, according to a report released on February 25. The epidemic will have a significant impact on the mobile phone industry chain, especially the first-quarter results of Android phones and the second-quarter results of semiconductor and panel manufacturers.

Market research firm Counterpoint predicts that China's mobile phone market sales will decline by more than 20% in the first quarter of 2020 compared with the same period last year, because public health incidents have had a great impact on the mobile phone market, and many mobile phone manufacturers have been affected to varying degrees.

However, it is a little comforting that, first of all, ASM said that no customers have cancelled orders as a result of the outbreak, and a small number of customers have asked for delays in delivery due to time to return to work, but the company may lose 1/3 of its production capacity in the first quarter due to public health incidents.

From this point of view, if the downstream demand and consumer market is really affected, and the negative impact is transmitted to the middle reaches, the future of ASM still seems to be uncertain.

Or face a personnel earthquake.

In addition to the rapid decline in performance, ASM also faces a personnel earthquake on the board of directors. At the same time as the annual results, there is also an announcement of a change of directors.

Li Weiguang and Xu Jingmin, executive directors of the Company, have decided that they will not stand for re-election when their current terms of office of directors expire at the forthcoming annual general meeting of the Company on 12 May 2020. Therefore, Li Weiguang and Xu Jingmin will step down as executive directors of the company. At the same time, Li Weiguang will also retire as Group Chief Executive Officer, while Xu Jingmin will continue to serve as the Group's Chief operating Officer.

The Board further announced that it is recommended that Guenter Walter Lauber, Chief Executive Officer of the Group's SMT Solutions Division, be appointed as the Executive Director of the Company after Xu Jingmin retires from office at the Annual General meeting.

In the face of a major setback in the company's operation, can the new management turn the tide? This still needs to be observed for time.