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 DNEX 4456 DAGANG NEXCHANGE BERHAD banks on new wafer fab

Dagang Nexchange Bhd’s (Dnex) ambitions to become a technology heavyweight are getting bigger.

Two weeks ago, Dnex announced a plan to form a joint venture (JV) with Taiwan-based Hon Hai Precision Industry Co Ltd, better known as Foxconn, to build a new wafer fabrication plant.

Although the announcement did not mention a figure of the investment involved, CGS-CIMB Research has pegged it at US$4bil (RM17.6bil), which is almost 5.6 times Dnex’s own market capitalisation of RM3.15bil.

A wafer fabrication plant sits high up in the semiconductor value chain.

It is essentially the fabrication process of converting integrated circuit designs into a physical product, namely the chip. This process entails manipulating and applying various raw materials to put the circuit design into its physical form.

Most Malaysian firms in the semiconductor space are in one rung lower but by no means low end, in the business of assembly, packing and testing of the chips.

There are not that many wafer fabs in the world as the cost to build and operate is very high.

It is important to note that Dnex is already in the business of wafer fabs, following its purchase of Malaysian semiconductor manufacturer Silterra Malaysia Sdn Bhd (Silterra) back in July last year.

It bought Silterra for RM273mil along with another partner, a private equity fund in China, Beijing Integrated Circuit Advanced Manufacturing and High-End Equipment Equity Investment Fund Center (Limited Partnership).

Soon after, Foxconn, a Taiwanese manufacturing giant and key iPhone assembler, forked out RM108mil to buy a 5.03% stake in Dnex.

That stake has since been diluted to 3.08% following a series of Dnex warrant conversions.

Foxconn is teaming up with Dnex for the new wafer plant.

According to CGS-CIMB Research, the parties will finalise the new plant’s location and enter into a definitive agreement in the third quarter of this year.

The new wafer fab will drive development of a 12-inch wafer fab plant, producing about 40,000 wafers per month, encompassing the manufacturing of 28-nanometer and 40-nanometer technologies.

In a statement issued last month, Dnex group managing director Tan Sri Syed Zainal Abidin Syed Mohamed Tahir said the new fab will be the first 12-inch wafer fabrication plant in Malaysia initiated by a bumiputra company.

He also noted that the 28-nanometer technology node is very advanced.

“This technology node will have a long production life and have the widest range of applications,” said Syed Zainal.

Chips with lesser process nodes are high-end, with global fab leaders such as Taiwan Semiconductor Manufacturing Co and United Microelectronics Corp making chips with process nodes of up to no more than 40 nanometers.Meanwhile, with such a huge investment amount for the new plant, the question is how will it be funded?

It is unlikely that Dnex will tap the capital market for funding the new plant.

CGS-CIMB Research notes that Dnex is in talks with prospective investors as shareholders in the wafer fab plant.

Industry officials do not rule out the possibility of Dnex speaking with large local and foreign institutional funds for this purpose, who have a longer term horizon for their investment, for the wafer fab plant.

A source says that the plan may entail and op-co and asset-co model, in which Dnex will be the operational company while the asset company would have the stategic shareholders.

The plant, once built, may also be injected into a real estate investment trust to ease up the balance sheet of Dnex, according to the source, adding that machinery may be leased so as to avoid any strain on the balance sheet.

“Wafer fabs require investors with a certain appetite for deep technology plays. The pay off can be big, but the initial investment is in the billions. It also requires deep technological knowledge and know-how, otherwise, you risk incurring huge losses due to the high start up and operating costs,” says an industry observer.

Indeed, Malaysia’s experience with wafer fabs in the past has been checkered, putting it mildly.

Malaysia’s history of wafer fabs dates back to the mid-1990s.

The Finance Ministry via Khazanah Nasional Bhd had invested RM5bil to build Silterra. It was the brainchild of former prime minister Tun Dr Mahathir Mohamad for the country to move up the semiconductor value chain from being merely an assembler of chips.

Khazanah had pumped billions of ringgit into Silterra since its formation in 1995, but as of 2020, Silterra had reported losses of more than RM8bil.

Similarly, the Sarawak state government had pumped in some RM6.46bil to build 1st Silicon (M) Sdn Bhd.

Both Silterra and 1st Silicon have been sold, Silterra to Dnex, and 1st Silicon to a German-based foundry group called X-FAB.

The government agencies that funded these wafer fabs have had to write off those investments over the years.

So what went wrong?

It was seen that Silterra’s business was not able to run efficiently, which saw numerous changes in chief executive officers.

The staff costs alone stood at RM130mil per year. The company suffered severe losses mounting to RM5.5bil from 2008 to 2017. As such, Silterra became the second biggest liability for the sovereign wealth fund after Malaysia Airlines.

Another key factor that dragged the company to losses was the lack of an eco-system of related businesses in Malaysia, such as design houses and suppliers of materials and tools.

So will Dnex get it right with the new wafer fab JV with Foxconn?

Indications are that Dnex is in a good position to give it a go. In terms of leadership, aside from Syed Zainal, Dnex has two directors with experience in the semiconductor space.

They are Chandramohan Subramaniam who has more than 40 years experience in the medical device and semiconductor industry and Zalina Shaher, who began her career as a process engineer with Motorola Semiconductor in Malaysia rising to head the radio frequency division. She has been an adviser to a few international semiconductor players.

Since taking over the loss-making Silterra, the company has been able to turn it around.

For Dnex third quarter ended March 31,2022 (3Q22) results, Silterra stood as the largest contributor at RM232.1mil, accounting for 60.7% of total revenue from the sale of semiconductor wafers.

Operating profit for Dnex’ technology division, which involved the Silterra business, increased to RM63.1mil from RM52.5mil previously.

Dnex said the increase in revenue and profit after tax was mainly driven by improved financial performances in the technology and energy segments largely due to increase in sale of semiconductor wafers, and higher average selling prices (ASPs) of wafer and crude oil.

According to CGS-CIMB Research, Silterra’s capacity utilisation hovered at 100% in 3Q22, driven by three long-term agreements, which it estimated take up 70% to 75% of its installed capacity.

“Silterra’s revenue grew 4.2% quarter-on-quarter in 3Q22, mainly driven by higher ASPs per wafer and higher wafer shipment volume,” said the research house.

Moving forward, Hong Leong Investment Bank Research believes that Dnex’s growth prospects are intact partly because of Silterra’s increasing product ASPs and rising wafer shipments.

“We believe that the key variance against our forecasts was attributed to higher-than-projected realised crude oil price and net ASP per wafer throughout 3Q22,” it added.

CGS-CIMB Research also notes that Dnex is looking to leverage its relationship with Belgium-based technology service provider and customer, Imec, as a tech partner for the new wafer fab.

The research house notes that Imec could assist Dnex in developing and carrying out technology transfer on 28 to 40 nanometer process nodes.

Dnex partnership with Foxconn is also noteworthy. Foxconn is the world’s largest electronics manufacturer and also a leading technology solution provider which leverages its expertise in software and hardware to integrate its manufacturing systems with emerging technologies.

In May last year, Foxconn had confirmed to work together on in-car software and entertainment technology with Stellantis, with an aim to develop touchscreens to control vehicle functions.

For Foxconn, the deal would allow it to continue its push to diversify earnings away from Apple, potentially putting its technology into millions of cars per year. It is likely that the new plant would cater to the needs of the clients of Foxconn.


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