Travelling for research #1
The move towards EV and the considerable market for SiC
When Singapore opened up the borders, I took the chance to fly up to Penang to not understand Malaysia truly Asia but to understand Malaysia’s Pentamaster and to invalidate some of my understanding on the company.
I had invested in Pentamaster Bhd in 2016 and rode it to MYR 5.00 before selling it in 2021.
I had gotten lucky in buying Pentamaster 2016 and then also have the presence or absence of mind to not interfere for the next 5 years.
That trade seems like a master stroke except that I have also started to invest into their listed subsidiary Pentamaster International listed on the HKEX in Jan 2021 and have been averaging down ever since.
The good thing with investing with in a business for a very long time is that you usually get comfortable with their business that there is nothing much for you to do except a half yearly read of their results.
The problem with investing in the technology space is that things are changing so fast that it is often hard to determine if the business you thought you had understood one year ago is the same business now or one year into the future.
With everyone seemingly souring on everything related to semi-conductor, it seems that there is no place to hide in the semi-conductor space or to in fact any space for the past 1 year.
The interesting thing about investing is that the perceived narrative and the truth can be quite different. While most of the semiconductor market is hurting, the economics within the various semiconductor niches are quite different.
Trying to understand Pentamaster which operates across the semi-conductor ATE space from the traditional semiconductor to the Electro-Optical (handphone camera lenses) to silicon-carbide (automotive) can be bewildering to most.
But sometimes we just need to focus on the most important sector and it is the last category - Silicon Carbide1 which will determine the fate of Pentamaster for the next few years.
In term of automotive, the main equipment that is powering Pentamaster growth is the development of ATE for the front-end and back-end testing of Silicon-Carbide (SiC) wafers and modules.
While Silicon (Si) is expected to continue to dominate the half-trillion-dollar semiconductor industry, SiC is finding an important niche in power electronics, which are critical for EVs, and currently make up a market of about $20 billion per year.
If you are a big believer of electric vehicle, then the clear bet is that SiC would be preferred over the usual Si in EV manufacturing. SiC is preferable as it delivers an improvement in high-frequency switching power converter applications such as allowing for higher operating frequencies, smaller size, and superior thermal characteristics. In layman terms, that means that it could pack in more control with a smaller footprint with lesser loss of electricity between all that switching.
That is precisely the reason why Tesla is an early adopter of silicon carbide-based semiconductors in 2017 when it used them in the Model 3’s traction inverters. STMicroelectronics in turn claimed that the vehicle’s range was increased by up to 10 percent while delivering significant space and weight savings.
The problem with SiC is that the manufacturing process still has a relatively high defective rate. That means that wafer level front-end testing is especially important for the production of SiC as no one wants to be driving a car with a potential faulty SiC module.
The SiC manufacturers leading the charge in this industry2 include Microchip, Infineon, Wolfspeed, Fairchild Semiconductors, STMicroelectronics, and NXP. That also meant that the players above are all building up capacities to manufacture more SiC which also meant that more testers would be needed.
Even with the recession coming, there is a certain level of certainty in the number of testers needed for these billion dollar factories. Similar in a gold rush, it is often better to be invested in the selling the shovels than the race to mine and sell the gold.
Pentamaster being one of the 3 leading provider of SiC testing equipment makers should benefit from this secular growth as it holds a significant lead by being one of the pioneer in the field. They should be able to reap the rewards for the first few years while manufacturer ramp up their production of SiC.
SiC has been under development as a transistor material for decades. As the SiC market grows, thee is currently enough device solutions (voltage class, a current capability, or even a package type) available for designers to consider. That means that the growth of volume of SiC will have positive effects on the entire SiC market, including having SiC to grow3 into industrial, data centers/computing, communication, consumer, and aerospace and defense.
As a Malaysian company, Pentamaster is in the sweet spot of being able to supply to the Americans and the Chinese. The lower ringgit will also continue to work in favour for Pentamaster.
With their US listed competitor reporting 89% revenue growth in the past quarter, we will expect a similar level of growth for Pentamaster for the coming quarter?
As I dwell more into the unit-economics of the different testers, I realise that that it is getting very hard to understand the pro and cons of the different testing solutions. The ability to burn 18 wafers at a go on a 12 hour cycle versus burning 2 wafers on a 4 hours cycle with multiple different options (voltage, proprietary or industry probe cards) meant a hell of a difference in economies of scale for the manufacturer of SiC.
But with the proliferation of different type of SiC (using their own proprietary substrate), the general perspective is that the market is growing fast enough to benefit all the players in the SiC manufacturing and SiC ATE space.
Currently, Pentamaster seats clearly at the bottom of their 52 weeks cycle, some investors are throwing in the towel while others are picking it up.
As for me, I am taking the opportunity to continue to average down the price for my shares.
For industry growth, read Examining What’s Behind SiC Market Growth - EE Times
On a side note, engineers have also started using materials such as gallium nitride(GaN) in power electronics. More companies expect gallium nitride to eventually replace silicon in solar and wind inverter applications which could power even more ATE sales.