EARNINGS REPORT – 11 DECEMBER 2019

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MEC COMPANY LTD. (4971 JP)

THE NEW CZ-8401 PRESENTS GROWTH POTENTIALQUARTERLY EARNINGS SUMMARY
3Q EARNINGS RESULTMEC reported FY19 3Q cumulative earnings – OP of ¥1,366mil (-21.8% YoY)
on sales of ¥8,104mil (-3.9% YoY), due to weak earnings in 1H.

EXECUTIVE SUMMARY•

MEC reported 3Q cumulative OPof ¥1,366mil (-21.8% YoY) on salesof ¥8,104mil (-3.9% YoY).
However, for the 3Q alone, OP
was the second highest quarterly
OP in history at ¥755mil (+6.6%
YoY / +86.8% QoQ) on sales¥3,128mil (+6.7% YoY / +18.1%
QoQ).

•

3Q CZ-8101 sales recovered
thanks to a seasonal pick-up in
smartphone production and a risein server demand. Etching chemical
product EXE – used in COF for TV
and smartphone displays – also saw
an increase demand.

•Data
centreserver-related
demand is expected to remain firm
thanks to a pick-up in 5G
infrastructure
investment.
In
August, package makers – MEC’s
direct customers – announced ca.
¥300bil in CAPEX plans over the
next 2~3 years in response toIntel’s 2020 launch of its next
generation CPU. It has been
confirmed that MEC’s CZ series
will be used in the packages for 5G
serversandahigh-end
smartphone.

•

Opportunities for CZ-8401:
1) It’s been confirmed as the next
generation copper roughening
agent for AiP which will be
used in new 5G high-end
smartphone
2) Packages manufactured by
EMIB, Intel’s unique super highdensity packaging technology,
will use CZ-8401.

•

MEC sees a growth potential for
EXE used in the subtractive
method for fine wiring process of
smartphone motherboard layers,
replacing some made with thecurrent MSAP method.

In 3Q alone, the OP of ¥755mil (+6.6% YoY / +86.8% QoQ), which was thesecond highest quarterly figure in history, on sales of ¥3,128mil (+6.7% YoY /+18.1% QoQ), thanks to solid sales of CZ-8101 (adhesion enhancing chemicals
used in package chips) for the seasonal increase in smartphone production anda rise in demand for data centre servers. Furthermore, sales of EXE, an etchingchemical, was benefitted from increase in application on smartphone display.
3Q sales of adhesion enhancing chemicals, which includes the CZ series, hit anhistorical quarterly record of ¥1,718mil (+4.8% YoY / +8.4% QoQ). Weak salesof V-Bond – especially in the automobile-related business – and the CZ series,
was partially offset by pick-up in demand for CZ-8101 (+3.7% YoY / -4.7% QoQ,
however, CZ-8100 sales fell -5.5% YoY / -1.2% QoQ to ¥257mil. Adhesion
enhancing chemicals, include pre- and post-processing agents for CZ series,
helped offset the decline in sales of other adhesion enhancing chemicals.
Sales of Etching Chemicals rose 11.5% YoY / 32.0% QoQ to ¥1,200mil, with
EXE sales of ¥369mil (+24.7% YoY) putting in a solid performance thanks tobuoyant sales in COF (Chip on Film) for TV and smartphones. The SF (surface
treatment) product – used in high-end smartphone panel sensors – generated¥407mil (+17.3% YoY) in the 3Q, the highest quarterly revenue in history.
However, despite the recovery in the 3Q and having achieved 88% of its fullyear guidance, MEC remains conservative in its outlook and has not changed its
targets for the following reasons:• A large part of 3Q recovery was due to the seasonal pick-up in smartphone
production, although 3Q results were better than the firm’s budget revisedin August.
• Also, 3Q profit level usually tends to be higher as package makers look to
replenish inventory again for the CY 4Q (Oct~Dec), after the seasonal peak.
• Management noted that the Japan-Korea trade friction over semiconductormaterials has led to the Korean package makers stockpiling MEC’s products(Jul~Sept sales ¥150mil), therefore, it is possible to see decline in the
Oct~Dec quarter.
•
MEC is guiding for FY19 OP of ¥1,550mil (-30.3% YoY) on sales of ¥10,700mil(-5.6% YoY).

MEC COMPANY LTD. (4971 JP)NIPPON INVESTMENT BESPOKE RESEARCH UK LTD

EARNINGS REPORT – 11 DECEMBER 2019

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PAST EARNINGS SUMMARY TO 1H
MEC’s FY19 1H – OP of ¥610mil (-41.3% YoY) on revenues of ¥4,976mil (-9.5% YoY) – were negatively affected by
the stronger yen and a YoY drop in sales of adhesive enhancers and etching chemicals. However, there are signs ofrecovery in two core products:
1) CZ8101, which recorded quarterly sales of ¥789mil (+7.6% YoY and +46% QoQ) in 2Q due to an increase inapplications for CPUs used in data centre servers, as well as those used in PCs, and
2) The EXE series, used for COF (Chip on Film) fine wiring formation, which generated ¥349mil in sales for the quarter.
However, although the sales of other chemical products remain sluggish and demand related to smartphones remained
weak in the 2Q, MEC reckons that earnings bottomed in the 1Q.

Chemical Sales by Products
FY2018(¥million)

FY2019

Q1

Q2

Q3

Q4

Q1

Q2

Q3

QoQ
(%)

YoY
(%)

2,454

2,617

2,716

2,685

2,134

2,497

2,919

16.9

7.5

1,598

1,641

1,640

1,577

1,360

1,588

1,718

8.2

4.8

CZ-8100

270

279

272

253

232

260

257

-1.2

-5.5

CZ-8101

723

733

725

713

540

789

752

-4.7

3.7

Etching chemicals (EXE, SF etc.)

855

975

1,076

1,108

773

909

1,200

32.1

11.6

Other surface treatment chemicals

158

156

181

162

132

125

133

6.4

26.4

2,612

2,773

2,898

2,847

2,266

2,623

3,052

16.4

5.3

Copper surface treatment chemicals
Adhesive enhancer (CZ,V-Bond, FlatBOND, UT)

Chemical Sales Total
Source: Nippon-IBR based on MEC's 3Q Result Presentation

Chemical Sales Volume by Products
FY2018(ton)

FY2019

Q1

Q2

Q3

Q4

Q1

Q2

Q3

QoQ
(%)

YoY
(%)

Adhesive enhancer

6,341

6,546

6,527

6,286

5,575

6,356

6,833

7.5

4.7

Etching chemicals

1,978

2,186

2,504

2,462

1,758

1,986

2,777

39.8

10.9

360

377

424

399

338

316

320

1.3

24.5

Other surface treatment chemicals
Source: Nippon-IBR based on MEC's 3Q Result Presentation

MEC COMPANY LTD. (4971 JP)NIPPON INVESTMENT BESPOKE RESEARCH UK LTD

EARNINGS REPORT – 11 DECEMBER 2019

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Source: MEC’s FY19 3Q Results Presentation

MEC COMPANY LTD. (4971 JP)NIPPON INVESTMENT BESPOKE RESEARCH UK LTD

EARNINGS REPORT – 11 DECEMBER 2019

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ONGOING BUSINESS TREND AND FORECAST
Data centre server-related demand is expected to remain strong thanks to a pick-up in 5G-related infrastructure
investment. In August, package makers – MEC’s direct customers – announced CAPEX plans that altogether amounted
to circa ¥300bil over the next 2~3 years. This is in response to requests from customers, such as Intel – which hasannounced a 2020 launch of its next generation CPU – and AMD, amid growth in demand for high-function CPUs usedin high-capacity servers. It has been confirmed that MEC’s CZ series will be used in 5G servers and a high-end
smartphone.
Demand for CZ8101 and EXE continues to be favourable through to the 3Q. Additionally, SF used in touch sensor
panels for the high-end smartphone have started recovering since July. The better than expected demand for one of
the latest high-end smartphone models has led to a 10% increase in production of the phone. However, the firm does
not yet anticipate a pick-up in demand for new generation products such as CZ8401 – a product that is expected to
be used for package technologies such as AiP (Antenna-in-Package) and EMIB (Embedded Multi-die Interconnect Bridge)
this FY. Furthermore, although the current sales trend of SF is favourable, the firm expects a decline of 40% YoY to ca.
¥1,000mil in FY20 as it is expected that some high-end smartphone models to be launched in 2020 might not include atouch panel sensor. However, the firm reckons that the decline in SF sales will likely be offset by higher sales of CZ8401
and EXE in FY2020 and onwards.
While there are opportunities for sales to grow going forward, profit growth is expected to be limited because there
has been a delay in customer approval on MEC’s new factory in Thailand, completed in July 2019, which incurs associatedcosts.
TECHNOLOGIES THAT LEAD GROWTH BEYOND FY2020
As 5G gets rolled out, MEC sees growth opportunities for CZ-8401 – which boasts the most advanced adhesion
enhancement technology. CZ-8401 will be able to deliver 0.1µm in roughness compared to the previous version of the
CZ series, CZ8101, which has 1µm coarse surface widely used for IC packages in applications such as smartphones andtablets. Finer roughened surfaces require less etching – a feature required as 5G devices will be ultrafast, having to copewith high volumes of data and deal with multiple connectivity without latency. There are two growth opportunities for
CZ-8401 that are already confirmed – AiP (Antenna in Package), a new type of antenna in 5G devices, and EMIB, aunique super high-density packaging technology by Intel.
Furthermore, MEC is anticipating the replacement of the current dominant fine wiring technology used in (high-end)
smartphone HDI motherboards called MSAP (modified semi-additive Process) with the subtractive fine wiring process
in which the EXE series can be used.
AIP (ANTENNA-IN-PACKAGE)
5G mobile communications system services, the successor to LTE / 4G communications, are starting up worldwide. In
5G communications, radio waves in the millimetre wave band are used to achieve ultrafast large-capacity services,multiple concurrent connectivity, and ultra-low latency.
5G communication will use a 28~100GHz frequency range compared to 3.6~4.5GHz used in the 4G environment. The
characteristics of such wave bands are:• Each base station can cover shorter-distanced areas• Millimetre waves are prone to shielding by objects
Due to these characteristics, multiple small cell base stations will be required in order to have 10X+ faster and seamless
communications without latency compared to 4G. Antennas used in the 4G environment cannot sufficiently perform
under the millimetre wave environment, therefore, they need to be replaced with a package that is loaded with antenna(AiP). Around 2~5 AiP will be mounted inside a 5G high-end smartphone.
MEC’s new adhesion enhancing solution, CZ-8401, has already been confirmed to be used in AiP for a high-end 5G
smartphones for the millimetre wave environment. The Fuji Chimera Research Institute, Inc., argues in its publication“Future Perspective of Core Technology to Realize 5G / High Speed Large Capacity Communication 2018” published

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EARNINGS REPORT – 11 DECEMBER 2019

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in July 19, that 5G smartphones will typically be loaded with 2~5 5G RF modules (with each module being equippedwith AiP, filter, switch IC, RF and RFIC) per handset.
The 5G infrastructure investment is expected to gradually start from 2020. The publication suggests that the global
market for 5G-related products is predicted to be worth $38bil in 2023, 70% of which is estimated to be products andservices related to small cell base stations. As smartphone handsets gradually shift to millimetre wave applicable models
from CY2020 onwards, it is estimated that the penetration of fully 5G applicable smartphones will make up 40% of
total smartphone in the market in 2025.
Smartphone Market Trend by Shipment Volumes – Read-across to AiP Growth Potential(mil units)

CY18

CY19EST

CY20F/CCY21F/CCY22F/CCY23F/CCY24F/CCY25F/C

3Q/4Q compatible

1,400

1,324

1,220

1,120

1,040

940

860

780

YoY (%)

-5.4

-8.9

-8.2

-7.1

-9.6

-8.1

-9.3

5G compatible

26

150

260

320

400

460

520

5.8x

73.3

23.1

25

15

13

1,350

1,370

1,380

1,360

1,340

1,320

1,300

YoY (%)

-4.6

1.5

0.7

-1.4

-1.5

-1.5

-1.5

5G / Total (%)

1.9

10.9

18.8

23.5

29.9

34.8

40.0

YoY (%)
Total

1,400

CAGR (%)
CY19-25
-8.4

64.8

-0.6

Source: Estimate by Fuji Chimera Research Institute

EMIB (EMBEDDED MULTI-DIE INTERCONNECT BRIDGE), 2.5D PACKAGING
Another promising opportunity for CZ-8401 lies with Intel’s 2.5-dimensional packaging technology, Embedded Multidie Interconnect Bridge (EMIB). The aforementioned boost in CAPEX plans by package makers is mainly for EMIB.
MEC has been the sole supplier of copper roughening agent CZ series to package makers since Intel started changing
the PWB material from ceramic to organic resin. Hence, Intel’s unique EMIB technology should provide another growth
opportunity for MEC’s CZ-840.
EMIB is expected to become the packaging technology applicable for ultra-high-speed processors for cloud storage andAI deep learning as well as next generation PCs and laptops.
Server Market Trend – Growth Implication for EMIB
No. of servers(mil units)

CY18

CY19EST

CY20F/CCY21F/CCY22F/CCY23F/CCY24F/CCY25F/CCAGR (%)
CY19-25

Non-AI applicable

15.0

15.6

16.4

17.1

17.9

18.4

18.9

19.4

3.7

4.0

5.1

4.3

4.7

2.8

2.7

2.6

1.5

1.9

2.4

2.8

3.4

4.0

4.7

25.0

26.7

26.3

16.7

21.4

17.6

17.5

17.1

18.3

19.5

20.7

21.8

22.9

24.1

YoY (%)

5.6

7.0

6.6

6.2

5.3

5.0

5.2

AI-applicable (%)

8.8

10.4

12.3

13.5

15.6

17.5

19.5

YoY (%)
AI-applicable

1.2

YoY (%)
Total

16.2

21.5

5.8

14.8

Source: Estimate by Fuji Chimera Research Institute

MEC COMPANY LTD. (4971 JP)NIPPON INVESTMENT BESPOKE RESEARCH UK LTD

EARNINGS REPORT – 11 DECEMBER 2019

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GROWTH POTENTIAL OF MEC’S FINE WIRING FORMATION TECHNOLOGY – THE EXE SERIESIn the 1H, sales of the EXE series hit ¥646mil of which ca. 90% was for COF (chip-on-film) and less than 10% for HDI(high-density interconnect) motherboard used in smartphones. High-end smartphone HDI motherboard circuit wiring
presents another business opportunity for the firm’s subtractive method.
The fine wiring technology that is mainly employed today for high-end smartphone motherboards is MSAP (modified
semi additive process). MSAP is a wiring technology using the additive method along with SAP (Semi-Additive Process).
There are two types of wire pattern formation methods – the subtractive process and the additive process. MEC’s
anisotropic solution for fine wiring, the EXE series, is one example of the subtractive process. The subtractive process
is based on etching technology and mainly used in HDI substrates today, to form fine wires on the substrates byremoving and dissolving non-wire part of copper surface by the etching chemical solution. An example of the additive
process is the MSAP currently used in a high-end smartphone motherboard. In the MSAP process, a thin seed layer ofcopper (>1.5µm) is coated on the substrate first, followed by a negative pattern design. Copper is then electroplated
to the desired thickness and the seed layer is finally removed.
MSAP is not new to the electronics industry. It originated from the IC packaging technology and was reinvented in 2017
for HDI motherboards in smartphones. Compared to fine wiring by the subtractive process, MSAP has the advantageof having a thinner L/S (current major L/S is 30/30µm. In the high-end smartphone, L/S is as advanced as 25/25µm).
While MSAP is considered more advanced in terms of L/S size vs the subtractive method, there are certain issues:• Technological complicatedness – especially in regulating the thinness of the plating• Costly – the process is based on electroplating, therefore, requires an investment in a plating facility• Low production yield – due to technological complicatedness, the production yield of MSAP tends to be low.
As battery requirements for smartphones and tablets increase, smaller electronic parts – including multi-layered (10layers) motherboards, with each of the ten-layer having finer and thinner wiring patterns – are required. MSAP isconsidered a more suitable method for fine wiring, however, it is more expensive and less efficient. Therefore, thenumber of MSAP layers was reduced from 6 in the previous high-end model to just 4 in the current model due to theseissues. However, number of motherboard layers made using the subtractive method increased from 4 layers to 6 layers.
MEC sees this as an opportunity to promote the EXE series to be used in high-end smartphone motherboards that willfurther advance with finer and thinner wiring patterns.
MEC’s EXE currently offers 40/40µm with the subtractive process. MEC has already achieved seamlessness in wires of
40/40µm L/S that are currently used in some smartphone models. The firm has already developed the upgraded version
EXE with 30/30µm L/S, yet the L/S 25/25µm that is currently made available for motherboard layers by MSAP will bedifficult to achieve by the subtractive method.
While the firm sees an opportunity and aims to supply to the high-end smartphone motherboard fine wiring, it is still
unclear if the EXE’s latest 30/30µm L/S technology will be used for HDI in future high-end models.

MEC COMPANY LTD. (4971 JP)NIPPON INVESTMENT BESPOKE RESEARCH UK LTD

EARNINGS REPORT – 11 DECEMBER 2019
MEC (4971 JP) : Financial Summary(¥million)
Sales
Operating Profit
Recurring Profit
Net Profit
EPS (JPY)
Adjusted EPS (JPY)
Cash flow from operation (CFO)
Cash flow from investment (CFI)
Cash flow from finance (CFF)
Cash and cash equivalentFree cash flow (FCF)
CFO per share (JPY)FCF per share (JPY)
Total asset
Liabilities
Net asset
CapitalShareholders' equity
BPS (JPY)
OPM (%)ROE (%)ROA (%)
Shareholder equity ratio (%)
D/E ratio (%)
Total asset turnover (X)Interest coverage (x)Current ratio (%)
Interest-bearing debt
EBIT
EBIT Margin (%)
EBITDAEBITDA margin (%)
Dividend (JPY)Dividend payout ratio (%)
Shares outstanding (shares)
Treasury (shares)

FY3/2015
9,057
2,008
2,129
1,344
66.98
1,489
-399
-220
3,997
1,090
74.19
54.31
14,4492,606
12,039594
12,039599.85
22.17
12.05
15.70
82.20
21.65
0.66
408.60465.02
0
2,134
23.56
2,470
27.27
14.00
20.90
20,071,093
34

Page |7
FY3/2016
9,078
2,185
2,207
1,514
76.26
1,796
-1,372
-912
3,422
424
90.42
21.35
15,5183,465
12,250594
12,250632.41
24.07
12.47
14.68
77.95
28.29
0.60
556.00293.52
0
2,211
24.36
2,571
28.32
18.00
23.60
20,071,093
700,089

FY3/2017
9,259
1,887
1,888
1,642
84.86
1,633
-2,461
1,128
3,723
-828
84.37
-42.78
17,797
4,883
13,110594
13,110683.86
20.38
12.95
11.34
72.86
37.25
0.55
318.00279.82
1,750
1,894
20.46
2,262
24.43
20.00
23.60
20,071,093
900,089

FY12/17
9,641
1,993
2,063
1,567
81.77
1,591
-832
-885
3,664
759
110.6552.79
18,985
4,660
14,587594
14,587760.92
20.67
11.30
11.20
75.79
31.95
0.69
335.00290.46
1,250
2,069
21.46
2,541
26.36
22.00
26.90
20,071,093
900,089

FY12/18
11,328
2,222
2,236
1,778
92.85
1,928
-706
-1,2283,599
1,222
100.6763.80
18,601
3,731
15,166594
15,166799.46
19.62
11.95
11.78
80.26
24.60
0.59
373.33321.00
750
2,242
19.79
2,851
25.17
26.00
28.00
20,071,093
1,100,232

FY12/19
10,700
1,550
1,600
1,150
60.60
14.49
26.00
42.90
20,071,093
1,100,232

Source: Nikkei Value Search

MEC COMPANY LTD. (4971 JP)NIPPON INVESTMENT BESPOKE RESEARCH UK LTD

EARNINGS REPORT – 11 DECEMBER 2019

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MEC COMPANY LTD. (4971 JP)NIPPON INVESTMENT BESPOKE RESEARCH UK LTD