FREE KIC - NO. 14 DECEMBER 06
ENJOY YOUR RETIREMENT PATRICK LAM
In my role as an Asian Fund Manager I travelled to the region at least once each year. In each country I would generally try to meet companies in a number of different sectors. In other words I would try to meet a bank, an insurance company, a consumer company, a manufacturer etc. One sector that I always liked to see was the technology sector. This was easy to do in Japan, Korea and Taiwan but when it came to Hong Kong I suddenly realised that there were no large quoted technology companies. There were one or two smaller companies but it hardly seemed worth the effort to visit a company that was probably too small to invest in.At this stage I cannot remember who first mentioned ASM Pacific to me but for my 1993 Hong Kong trip I arranged to go and see them. I thought that they might help me with my understanding of the semiconductor industry because they were a small company making equipment and components used in the assembly of semiconductors.
When we arrived at the ASM Pacific office I knew this was different to what I was used to because for a start I was no longer on Hong Kong Island. Normally company visits would be held in the swanky head offices in an area called Central. A company visit on the other side of Hong Kong Harbour was a new experience because the buildings were far more rundown.
I was brought into the office of the Chief Executive Patrick Lam. This was reasonably unusual because normally I got to meet the Chief Financial Officer or somebody from investor relations. We started chatting about the history of the company and I immediately warmed to the man. I just got the sense that he was down to earth and had a passion for his business. The biggest problem for me was that I knew so little about their particular part of the semiconductor industry. I had a basic idea as to what a gold wire bonder did but that was as far as it went. I thought that the best way to learn would be by seeing the factory. Normally in this situation a production manager would be sent to give me a tour around the facility. To my surprise Patrick volunteered to do it himself. As we went along the assembly line he explained how a lot of the components were manufactured in their factory across the border in China because labour costs were so much cheaper. The one thing however that he put a lot of emphasis on was the quality of the research and development people they had. They had PhDs from all over the world and he saw this as critical to their future success. I remember leaving Patrick that day thinking that I would do more homework on the company and from that day to this I have tended to read every piece of research I can find on the company.
Through the rest of 1993, 1994 and into 1995 I saw that ASM Pacific was gaining market share over their biggest competitors Kulicke and Soffa (an American company) and Shinkawa Electric (a Japanese company). I also saw that this was a highly cyclical industry that could have periods of rapid growth in demand and then just as dramatic contractions. Even though it was a cyclical industry it had the compensation of being a growth cyclical. Each cycle had higher highs in terms of demand. My instinct told me that this would continue to be a growth industry because semiconductor volumes should continue to grow.
Patrick´s claims that their machines were the best value in the market appeared to be backed up by the research I was reading. At the end of the day I am not an engineer or scientist myself but everything about this company made me feel that it was doing something right. Eventually in 1995 I began to buy shares for AIBIM clients as the valuation looked reasonable and on November 28th 1995 I finally took the plunge myself buying 6000 shares at HK$6.5.
As you can see from the chart below the timing of my purchase was not particularly brilliant. In 1996 and 1997 the highest price that ASM Pacific reached was less than HK$8. I was happy however because I believed that the company was continuing to do well and in the meantime I was receiving a reasonable dividend (and because it was a Hong Kong company there was no domestic withholding tax on that dividend)
Little did I know that there was going to be an Asian crisis in 1998 and irrespective of the fact that ASM Pacific had been doing relatively well in its industry its share price was absolutely hammered to the point where in October 1998 it fell below HK$2. I was as sick as a parrot. (I had left AIBIM in 1996 and they had sold the shares in 1997)
On the chart above 1998 looks like a small blip but at the time I can tell you it felt like a major recession was going to spread across the world from Asia. Nobody cared about ASM Pacific. I didn´t have the balls to buy more at the time. I was married just over a year with what felt like a big mortgage over my head. I just do not take those kinds of risks.
As you can see from the chart above I have not looked back from 1998. It has been onward and upward. ASM Pacific has become the world number one in its industry. It has been a simple story of good R&D and low cost manufacturing resulting in strong organic growth with no expensive acquisitions. Good cash generation has resulted in a balance sheet with no debt and dividends have been consistently increased. Through all this time Patrick Lam has remained as CEO.
You can imagine my disappointment when Patrick announced his retirement earlier this year. I had hoped that he would continue to run the company because now not only do I have my own money in the company but now I also have advised my clients to buy it as well. I still believe that most professional analysts spend too much time looking at the short term prospects for ASM Pacific and do not focus on its long term strength. As far as I can tell it still looks well positioned for the future. With a market share of less than 20% there is still plenty of opportunity to grow.
I suspect that Patrick will make sure that his successor WK Lee is someone that will maintain the culture of the company. Lee has been with the company for 20 years and so I have every reason to believe that he is the right man for the job. Naturally because it is a technology company one always worries that it will miss out on the next big development but so far their track record for the 13 years I have followed the company is excellent. They have consistently invested in research relative to their competitors as the following chart shows:
I know that Warren Buffett would never buy a technology company and maybe I have just been lucky but in Patrick Lam do I trust. So here is to you Patrick. I have written this in the month you retire. May you have a long and happy retirement.