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Transformation reverses AEM's fortunes

Leaving behind its dark past, maker of high-density semiconductor test handlers now seeks to acquire some promising tech firms.

AEM chairman Loke Wai San is a managing director of the technology buyout fund behind the transformation of AEM.

JUST about five years ago, AEM Holdings was on the SGX Watchlist. Fast forward to 2017, and the designer and maker of high-density semiconductor test handlers has reported robust earnings results for the first half of this year.

How did the company transform itself from its dark past, when some of its former leaders were convicted of corruption, into its current positive growth?

Enter the transformation guys - the technology buyout fund AEM's chairman Loke Wai San is a managing director of.

Together with his partners, Mr Loke runs private-equity firm Novo Tellus Capital Partners, which buys out technology companies with good technology and process innovations.

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Mr Loke told The Business Times: "We usually take control of these companies and try to reinvent them. . . When we invest in a company, it's not just for punting or necessarily just growth.

"So we are hands-on investors and usually our transformation takes many years.

"To be honest, to turn a company around to be where it is today is not just (about the) product - we need to have quality, process control; being manufacturing or field services. It takes a lot to be a very good industrial company because you are providing full services."

Mr Loke, whose first job was as an R&D (research and development) engineer, returned to Singapore in 2008 after a stint in the United States, including eight years in the Silicon Valley doing technology investing.

He joined AEM in 2011. "When I came in, there were no founders in the company. There was an interim CEO (chief executive officer), and the board was a professional board trying to do their best. This was a company that was on the watchlist, so I would consider it as (being) quite distressed," he said. "But it did have quite a bit of technology in it and it had been supplying this customer for about 10 years when we came, so it has that kind of customer relationship, just that it was mismanaged in another part of the business."

The key customer he was referring to was one of the largest semiconductor companies globally. Although he did not disclose any names, some research reports have linked it to semiconductor giant Intel Corporation.

The key customer, the longevity of the old product and the view that they had a new product concept in the pipeline at a very early stage were the reasons Mr Loke felt the company had potential.

AEM used to have two businesses - a substrate business which was bleeding cash, and the equipment business which was doing okay.

"We decided to focus on the equipment business and get rid of the substrates facility in Tuas," said Mr Loke.

He added: "We actually had to take the view that we are going to do the best in the future and so beefed up engineering. While distressed, you cut the loss-making part of it, you structure the loss-making part of it and reinvested in what we thought is going to have a lot of potential."

As there are various views about private-equity firms taking over a firm, the first thing it did was to reassure customers that it is here to stay.

He said: "The first thing is to let our customers know that we are the transform guys. What we did do was to rationalise the operations, so the part that didn't make sense, we got rid of and we focus on their business.

"Words are only words - we backed it up with real investments in our people. We beefed up our R&D engineering team, production engineering team, and then supply chain, quality and field support services guys. So if you look at our expenses, it has come up quite a bit."

Over a five-year period, it has invested more than S$10 million to S$15 million in more headcount and some capital expenditure.

He said: "There's no way you can build a company by cutting cost if you don't have anything in the pipeline. You can sustain it for one or two years and, after that, you are irrelevant because you have not innovated - you have not done anything that the market demands or has any cutting-edge value, especially in technology and industrials."

In this vein, AEM has been working on the next-generation handlers which can test semiconductor chips at various temperatures in one sitting. It also does test environment simulation for integrated circuits.

Said Mr Loke: "This prototype that we are working on is five years in the making, and (by the) end of last year, we had signed off a ship acceptance on production volume."

In its second quarter of 2017, AEM's revenue was up 264.4 per cent to S$62.3 million from S$17.1 million from a year ago. For the three months ended June 30, net profit skyrocketed to S$8.2 million from S$1.3 million in the previous year.

With a sales order of S$198 million as at end-July in the bag, the company gave a profit guidance of at least S$200 million in revenue and S$24 million in operating profit before tax for the full year of 2017.

AEM competes globally with US-listed companies such as Cohu and Astronics. It hires about 300 people across three bases - Singapore, Penang and Suzhou. Singapore remains the R&D hub while its Penang base will start to manufacture some equipment from Q4 this year.

Said Mr Loke: "This shows what a Singapore company can do. If we look at our employees, we hire quite a few more senior people who have come from larger companies that have moved out of Singapore on the manufacturing side.

"This is an example of how a Singapore company with local talent can be one of the global players in the world. You have to reinvest. If we've gone through the mantra of better, faster, cheaper, we would not have survived.

"The path to get AEM from the time we invested till now has been a lot of investment in our people, training, systems and processes. And it is not just the people. In this day and age, you have to wrap and support the people with information systems and IT (information technology)."

A DBS research report dated May 23, 2017, said that the key risk for AEM is that the key client is projected to contribute 80-90 per cent of the group's earnings, noting that delays to the client's migration plans could weigh significantly on AEM's future performance.

However, the report said that AEM has over 15 years of partnership, spanning four generations of test handler platforms, with its key client, which provides a high barrier to entry and AEM is likely to remain the sole supplier in this migration exercise.

AEM is on the lookout to acquire, in the next 18-24 months, some promising technology companies with "something unique about their manufacturing processes that allows them to produce those components more efficiently".

"We will be looking at capability enhancements that will enable us to broaden our solution, and to also move outside of semiconductors if possible," said Mr Loke.