DAGANG Nexchange Bhd (DNex), the information technology and trade facilitation services company that has won the bid for SilTerra Malaysia Sdn Bhd, is confident that it will be able to turn the semiconductor wafer fabrication company around within two years.
The stakes are high for DNex as it will, together with its partner, a fund under the Beijing CGP Investment Co Ltd, invest RM970 million in the venture, in areas including access to technology, capital and markets, as well as building a digital industry ecosystem with SilTerra as its anchor in Malaysia.
The question is, can DNex turn around a company that has been making losses for years and seems unable to keep up with the rapid growth in the evolution of semiconductors? Can it transform SilTerra into a sustainably profitable and competitive concern?
“In business, you have to take calculated risks. We have been studying SilTerra for about two years; I think we know the pain points. And we have been seeing how it was operated before, and we know what are the structural changes that we need to do to turn things around,” DNex group managing director Datuk Seri Syed Zainal Abidin Syed Mohamed Tahir tells The Edge in an exclusive interview.
“What gives us more confidence today is we have a partner like CGP. So when people say that we are crazy, I don’t think we are. But of course, there are always two sides of the coin. Some people say this is a smart move because the timing is right. Now, the overall demand [for] semiconductors is very high, there is a global shortage. The shortage will continue to exist until 2022. So SilTerra today is now operating at full brim.”
To recap, DNex, together with Beijing Integrated Circuit Advanced Manufacturing and High-End Equipment Equity Investment Fund Centre (Limited Partnership) (CGP Fund), won the bid to acquire SilTerra from Khazanah Nasional Bhd for a total of RM273 million, outbidding three other bidders, two of which are global companies.
DNex will own 60% of SilTerra and CGP, 40%. They will share the capital outlays and injections according to their respective shareholding of the Kulim-based semiconductor foundry.
The cost of the acquisition to DNex is RM163.8 million, by virtue of its 60% stake. To fund the acquisition, it is placing out new shares representing a maximum 30% of its enlarged share base of 2.97 billion shares. Assuming an issue price of 78.6 sen per placement share, DNex is raising a total maximum amount of RM700.81 million from the exercise.
As part of its proposal to Khazanah, DNex, together with CGP, will inject RM200 million into SilTerra to recapitalise the company, and provide another RM300 million over the course of three to four years to enable the company to acquire technology to upscale its production.
DNex and CGP will also set up a RM300 million innovation fund to develop an ecosystem of electrical and electronics (E&E) start-ups that will use SilTerra’s chips and sensors, says Syed Zainal. This will create a sustainable market locally for SilTerra and help develop Malaysia’s digital industry.
According to Syed Zainal, DNex will be driving SilTerra’s turnaround, although subject matter experts from CGP’s investee companies will be brought in to contribute to the upgrading and upscaling of the foundry.
“We are not going to waste any time. So, from now till then, we are going to have a transition team, and the team’s task is to work with some of the management of SilTerra to come out with a clear blueprint. They already have a blueprint, and we are going to revisit the blueprint.
“[We will need] some realignment, and identify quick ways to improve the numbers, productivity and so on. On that, we are not going to wait. So, I think a two-year timeframe is quite realistic,” he says.
One of the core strategies for improving margins and turning SilTerra into a profitable entity is to move the company’s products and services further downstream in the semiconductor value chain.
Up till now, SilTerra has been producing only 200mm semiconductor wafers for its global clients. However, this is not the end stage of the value chain as there are another three to four steps downstream before the chips reach their designated end-users, says Syed Zainal.
The wafers are sent out to vendors who then cut them into chips, which are then delivered to suppliers to undergo various other processes before they are sent out as finished products. This leads to margin leakages along the way for SilTerra.
“So do we stay here (just producing the semiconductor wafers), or do we go to one downstream process? Already, as I understand, in SilTerra, there was a plan to go into downstream, but they didn’t have access to capital,” he says.
This is where DNex and CGP, especially, come into play. CGP is a venture capital and private equity firm focusing on investing in semiconductor industries around the world, on behalf of the municipal government of Beijing.
Semiconductor companies with CGP as a shareholder include Semiconductor Manufacturing International Corp (SMIC), China’s answer to Taiwan Semiconductor Manufacturing Corp (TSMC), the world’s largest chip fabricator.
Besides SMIC, CGP has investments in a plethora of other companies that form an ecosystem of semiconductor industry players. With SilTerra now part of that ecosystem, it will be able to tap the expertise of the other investee companies and have a market for its products.
“All these companies within CGP, there’s already back-to-back agreements with SilTerra. Agreements to buy products from SilTerra, to transfer technology are already there. When you get a licence to a product, you have now the right to produce this product and the right to market it.
“Time is of the essence. There is a demand, the equipment can produce, so why reinvent the wheel? Bring the technology there, so that is one thing we are going to do,” says Syed Zainal.
Technologies that will be brought into SilTerra include new technology to produce more complex and higher-precision microelectromechanical systems (MEMS), he elaborates.
SilTerra will then target the E&E and automotive industries to capture the growing electric vehicle (EV) component market, Syed Zainal says.
MEMS comprises electronic, mechanical and wireless communication components typically housed on a single silicon chip integrated circuit (IC). It is different from traditional IC manufacturing as the latter only allows for the fabrication of E&E components.
While SilTerra is already an integrated foundry producing various types of chips, much more investments are needed to ensure that it can catch up with the technology leaders. This does not mean it will try to compete with the leaders as the investment required to do that would be enormous, concedes Syed Zainal. There are, however, spaces within the semiconductor fabrication industry where SilTerra could play a role, he points out.
“We are not there to compete with the majors. What we want to see with CGP is find areas where we are more sufficient with. There is still that space, but we cannot operate at where they are today.
“Secondly, we also want to optimise the partnership with TSMC because it is also one of the customers of SilTerra today, but not by a big volume. With CGP, they also talk with TSMC. You know how to deal with the Chinese ... if you are not part of the team, it is very difficult to get into.
“You get squeezed with a very low-end margin. So with CGP, we’ve been talking to them. They speak the language and they are also a shareholder of some of these companies. They do have some influence,” says Syed Zainal.
The top five pure-play foundries by the annual volume of wafers produced are TSMC, United Microelectronics Corp (UMC), GlobalFoundries Inc, SMIC and Powerchip Semiconductor Manufacturing Corp.
TSMC, UMC and Powerchip are based in Taiwan, while GlobalFoundries is an American company. Samsung is another major chip producer, but it is not a pure-play foundry as it also does chip design and development.
Intel Inc produces more wafer chips than UMC, but like Samsung, it is also not a pure-play foundry, which is the space SilTerra is in. Other major electronic chip manufacturers that are not pure-play foundries include Micron Technology Inc, SK Hynix Inc and Texas Instruments Inc.
Early this month, TSMC unveiled its plan to spend US$100 billion (RM413.8 billion) over the next three years to expand its chip fabrication capacity. Its closest competitor, Samsung, is taking the stakes higher with a plan to invest US$116 billion to mass produce 3nm chips by 2022.
Is DNex losing focus?
One of the concerns about DNex acquiring SilTerra is that it will lose focus on its bread-and-butter IT and trade facilitation system business. Besides SilTerra, DNex is also investing in Ping Petroleum Ltd, a low-cost oil and gas exploration and production company.
DNex is increasing its stake in Ping to 90% from 30% through a RM314 million cash and shares acquisition. DNex is also in the submarine cable-laying business through a single cable-laying vessel that is now contracted to Telkom Indonesia.
Addressing this, Syed Zainal says that every company within DNex has its own management team, and that the group is just a shareholder in these companies. He admits, however, that it is looking at optimising its structure in the long run.
“We have to see what our long-term play in energy is. Nevertheless, I always look at opportunities to form a bigger entity. Whether you look at merging it with another, and listing it to make it bigger, anything can happen,” he says of DNex’s stake in Ping.
By having investments in industries other than IT and the trade facilitation system, DNex is addressing the risk of having just the government as a client, says Syed Zainal. The government is replacing DNex’s National Single Window trade facilitation system with uCustoms, although the plan has been put on hold for several months.
As the group’s managing director, one of his commitments to DNex’s shareholders is to balance the portfolio revenue. Management’s job is to make sure that the group’s profits and dividends can be sustainable, he says.
“At least now, there is a base (for diversification), then we go further downstream (with SilTerra) to build value. For the IT business, we are going into data analytics and artificial intelligence (through the innovation fund). Create an ecosystem, go into fintech. That’s what we want to invest.
“For energy, we are looking at acquisitions of marginal fields. When we talk about production costs of US$19 per barrel, there are a few marginal fields here in Malaysia that we can look at. But we don’t want to lose focus. Ping must retain their DNA as a low-cost operator.
“So at US$19 per barrel, when the price is at US$65, your margin is about US$40. So this is better than people like Petronas or Shell, where their production cost is about US$40 to US$45. But we have to make sure that Ping doesn’t lose that DNA.”
He says Ping is also increasing its production yield from 3,000 barrels per day (bpd) to 4,500bpd based on the enhance recovery technique.
“So with the current platform that we have, increase the yield, better selling price. I think that is good to our bottom line and cash for the company, now that we own a 90% stake.”