Micron Technology Converts China Growth Into Cash in FY2017.

Micron Technology, Inc. (NASDAQ: MU), a global manufacturer of semiconductors, reported US$20.3 billion in sales for the fiscal year ended August 31, 2017. The company was able to derive most of this growth in China without sacrificing cash flow. A few issues stand out about Micro Technology, Inc.’s relationship with China.

First, the company is operating in an industry experiencing falling finished good prices and rising raw material prices. According to the U.S. Bureau of Labor Statistics (BLS), the import price of semiconductors and other electronic components from China experienced the second largest drop on a year over year basis of all the four-digit categories tracked. As of August, 2017, semiconductor import prices had fallen 1.1% over the previous twelve months and 2.9% on an annualized basis over the last five years. According to the United States Geological Survey (USGS), the average U.S. spot price for silicon metal in August, 2017 was 39% higher than the same month in the previous year. Despite this, Micro Technology, Inc. was able to grow global sales revenue by 63.9% between fiscal 2017 and fiscal 2016, but only incur a 20.1% increase in the cost of goods sold.

Second, the company derives more than half of its sales from customers in China, but has minimal transactions in renminbi. Sales in China reached $10.3 billion in fiscal 2017, or 51.1% of global sales. However, it only mentioned the euro, Singapore dollar, New Taiwan dollar, and yen as currencies other than the U.S. dollar that the company’s global operations have significant transactions and balances.

Third, despite selling more to Mainland China, Micro Technology Inc. reduced its net property, plant, and equipment in China on both a nominal and relative basis. Sales to customers in China increased 96.0% from the prior year and growth in China accounted for 64.2% of global 2017 growth. However, net property, plant, and equipment in China declined 7.7%, or $38 million, from the prior year. On a relative basis, 3.3% of the company’s net property, plant, and equipment was located in Mainland China as of September 1, 2016, but this proportion dropped to 2.3% as of August 31, 2017.

In the fiscal year ended August 31, 2017, Micron Technology, Inc. disproportionately benefited from new credit creation and had fantastic performance on a cash flow basis. The company’s U.S. dollar denominated sales in China exceeded the growth in the Chinese money supply and appreciation of the renminbi. Despite global sales increasing US$7.9 billion and China sales increasing US$5.0 billion in fiscal 2017, accounts receivables only increased by US$1.6 billion. On sales of US$20.3 billion, the company generated net income of US$5.0 billion and operating cash flows of US$8.1 billion. New sales did not come at the expense of higher working capital or lower profitability.

Trio-Tech International Shifts Capital Expenditures from East China to Southeast Asia.

Trio-Tech International (AMEX: TRT) is engaged in testing services, equipment manufacturing, and distribution for the semiconductor industry (SIC: 3559). The company generated global sales of US$38.5 million in the year ended June 30, 2017, up 11.8% over the previous year. Net income for the year was US$1.4 million, up 37.1% from the prior year. Free cash flow was 120.5% of net income for the year, whereas free cash flow was negative in the previous fiscal year. Although the company seems to have turned around its operations, events in China that were outside of the company’s control drove these results. At the same time, there are significant opportunities within China to improve future free cash flow.

To support an 11.9% increase in revenue, the company’s cost of goods sold increased 13.2%. The company was not able to control costs. Only the testing segment was able to both grow sales and increase gross margin year-over-year.

The company increased income from continuing operations before income taxes by US$499K year-over-year. However, almost all of that came from a US$467K favorable increase in foreign exchange transactions. The company transacts in the Singapore dollar, Malaysian Ringgit, Thai baht, Chinese renminbi, and Indonesian rupiah. According to the Monetary Authority of Singapore, the renminbi devalued against the U.S. dollar more than the four other currencies during the relevant period. This positively impacted the company’s cross-currency invoicing, but was completely out of the company’s control.

Globally, the company increased additions to property, plant, and equipment by 52.5% year-over-year. However, all of this increase occurred in Southeast Asia. Capital expenditures declined year-over-year at the Tianjin facility, but specific amounts were not disclosed. Although the company had overall decent execution on accounts receivables, the Tianjin subsidiary signed an agreement with a bank for an Accounts Receivable Financing facility for approximately US$871K. This would indicate the company is having cash flow issues in China.

Despite the fact that the company is engaged in the semiconductor industry, about 7.3% of the company’s total non-current assets as of June 30, 2017 were composed of depreciated investment properties in Chongqing, China that were acquired in 2008 and 2010. The current market value of these properties is likely much higher than the book value. The proceeds from these sales, as well as the $4.0 million in cash the company had on its balance sheet, could be deployed elsewhere. If this capital is taken out of China, the company could expand its geographic or product diversification. If this capital is kept in China, the company could expand the testing segment’s capabilities at the Suzhou facility or reduce the need for bank credit at the Tianjin facility.