Chroma's testing capabilities help break into new markets
Chroma may very well have played a vital role in the production of your mobile phone, your television, your computer, and even your car. Despite its established position in the production streams of so many everyday appliances, however, its remarkable reputation among the general population stems more from its value as an investment target than it does as a maker of highly regarded testing equipment. The former, of course, is wholly reliant on, and testament to, the achievements of the latter.
The firm’s enviable track record of strong long-term organic growth and sophisticated management inspires impressive levels of trust and respect among professionals across the region’s financial community. Chroma has won numerous awards from FinanceAsia in 2010, including Best Managed Company in Taiwan, Best Corporate Governance, Best Investor Relations, Most Committed to a Strong Dividend Policy, and Best Mid-Cap Company.
FinanceAsia named Chroma ATE Inc. as 2010 Taiwan
- Best Managed Company
- Best Corporate Governance
- Best Mid-Cap Company
The firm’s capacity to draw such accolades rests on its grounded understanding of the testing business – Chroma’s reach covers a vast array electric equipment and devices, encompassing a total of 44 product lines and over 500 products, spread across numerous business units.
"In over 25 years of Chroma’s history, we have learnt that extremely rapid adjustments to changing customer needs are very important if you want to succeed in this business,” says chairman Mr Leo Huang. “If you are slow you will stand no chance. The moment the client realises there is a gap in the market, we must already be there with the testing equipment. We have to remain ahead at all times, which is why over 36% of our employees are R&D engineers. Secondly, the product and its support service must be exceptionally reliable. Without these, we cannot build a trusting relationship with our customers."
The company’s quarter century of growth has come in four key stages of development and diversification.
For the first 15 years of its history, Chroma was mainly focused on testing products for IT- and PC-related peripheral devices and components, such as monitor and hard drive – its very first product, in 1986, was for testing display monitors and power supplies. Then from 2000, the firm diversified into testing numerous components for computer peripheral, including resistors, capacitors, conductors, and transformers.
"Though these components tend to be low-priced, volumes have been huge, and so has demand for testing equipment, making it a highly lucrative market," says Huang.
The biggest development leap, however, came with the companies move into semiconductors in 2000.
"The move from testing components to testing semi-conductors proved to be a major challenge,” says the chairman. “It is arguably 1,000 times more difficult to test semiconductors than it is to test the periphery products due to the accuracy that is needed."
In 2008, Chroma embarked on its latest round of expansion, moving into the clean energy sphere and cutting away yet another layer of concentration risk, to create the current highly diversified and far-reaching business empire. In 2009, the firm was capitalised at $109.3 million, with turnover of around $107.9 million and net income of $27 million. 2008 also marked the point when the firm began offering turnkey solutions in the form of entire work stations, combining testing technology with automated mechanical features to reduce clients’ overhead costs by cutting manpower needed. These newer lines of products are far bigger, taking up entire warehouse-sized spaces, rather than being perhaps around the size of a washing machine.
The shift into turnkey and clean energy products would prove transformative for Chroma.
"In 2008 we realised that clean technology was becoming extremely important issue on the global level, so we moved to identify a number of clean technology markets that would require testing equipment, including LED, wind and solar power, electrical vehicle (EV), as well as advanced battery solutions,” says Huang. “If we can continue to develop products in this area that are good for customers and cost effective, then that will represent substantial value for us."
Chroma sees itself at the forefront of the green revolution, ensuring heightened levels of energy efficiency for the latest waves of power generating technologies. In regard to the solar- and wind-power products, the firm makes products to test devices that convert the generated power into a commodity that can be safely and efficiently stored.
The company is particularly well positioned in the solar panel testing market, given that Taiwan is now the world’s second largest solar cell manufacturer, behind China.
"We have one solar cell company client that recently opened a factory in Tainan with capacity of 800 megawatts, and in the next three years they plan to expand five fold to 4.2 gigawatts," says Huang. “This represents a very significant revenue stream for Chroma.”
The second prong to Chroma’s energy storage programme is its move into cutting edge battery technology, particularly for new generation electric automobiles.
"This is a very fast-moving space to be operating in,” notes the chairman. “Vehicle batter efficiency is improving by almost 10-30% every quarter, and electric vehicle transportation is getting ever more popular. Once the infrastructure issues are resolved we think the market will expand extremely fast."
Huang notes that aside from the battery, electric vehicles also need electric controller systems, electric motor functions, power converters, and charger units to ‘fill up.’ All of which point to a highly active business segment.
That Chroma supplies to Tesla, a maker of high-performance electric cars, is clear testament to the company’s status as the leading provider of test solutions for the auto industry.
Meanwhile, LED represents another technological frontier from which the firm is rapidly advancing. As LED gradually replaces the traditional light bulb, it is also gaining ground in numerous other applications.
"Previously the only segments using LED were lighting and decoration, but since LED started being applied in backlighting the demand has been huge,” says Huang. “This is great for us, because this kind of application demands a superior level of testing, in which the LEDs are assessed piece by piece rather than in batches. As such, as the industry expands, it is also becoming much more standards driven, which offers huge opportunity to firms such as ours."
While the company’s business growth neatly displays its savvy as a player in such markets, it is only upon assessment of its internal operations that the full story of Chroma’s success can be understood.
"In regard to corporate governance, we have two guiding principles,” says Huang. “Firstly, we insist that information flow around the company is highly transparent,” says Huang. “It is vital the people on the outside can easily see how we operate. Second is employee integrity, and that goes for employees at all levels. Any employee can make a mistake, and if they commit to improve then we have no problem. But we accept no excuses for a lack of integrity. It is only through doing this that we can build a company that is both efficient and clean."
The chairman is keen to point out that not a single member of his family works at Chroma, highlighting the lack of nepotism in the firm – a problem that has proven prevalent across many companies operating in ast Asia.
Perhaps even more attractive from an investor perspective however, is the consistent stream of cash that flows to them in the form of dividends. The company has achieved a staggering average payout ratio of 60-70% over the past five years.
"We like to maintain a very stable and transparent cash dividend policy so that our investors enjoy certain stable returns every year," says Huang.
The high payout ratio can partially be explained by the fact that the firm has remained in the black ever since IPOing in 1996, eliminating the need for credit, which in turn has kept fixed costs low. Additionally, as a non-consumer business, Chroma has little need to spend on advertising and marketing. The vast majority of its costs simply comprise research and development costs and those relating to sales. That said, the company did spend an average of 12.6% of its annual revenue on R&D from 2005 to 2009.
While the weighting of overall R&D spending has remained relatively stable, revenue has displayed some incredible growth. Chroma’s revenue rose from $48.4 million in 2002, to a peak of $131.5 million in 2007. The firm proved pretty resilient through the global financial crisis, falling only slightly to $107.9 million in 2009.
Though net profit was affected more severely, falling from around $48 million in 2007 to around $27 million in 2009, the rebound in 2010 has been remarkable. For H1 2010, the firm is displaying clear signs of a rebound from the recent lull. Net profits for the first half of 2010 came in at around $28 million, surpassing the total net profit for full year 2009, fuelled by continued demand for panel-, solar- and powerrelated products. The company expects the momentum to continue into the third quarter.
Mr Leo Huang’s optimism, however, dwarfs such short-term positive sentiment.
"Every three to five years we penetrate a new market. And I think the pace is getting faster and faster as we accumulate more and more skill sets and technologies; as our capabilities reach newer and broader horizons. We have built up established positions across numerous markets, and from this solid foundation we will remain ahead of the curve, waiting to serve our customers with testing solutions for the latest high-technology products."
File Download|: /chroma/webdrive/news/2010/financeasia_201010.pdf