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Maxtek Technology
Rated 'twBB'
Taiwan Ratings Corp. today assigned its 'twBB' long-term corporate credit rating and 'twB' short-term corporate credit rating on Maxtek Technology Co., Ltd. (Maxtek). The outlook on the long-term rating is stable. At the same time, Taiwan Ratings also assigned its 'twBB-' issue rating on the company's upcoming five-year NT$100 million unsecured convertible corporate bond. The unsecured convertible corporate bond is rated one notch below that of the corporate credit rating because Maxtek's secured debt amounts to more than 15% of its assets. As a result, a smaller pool of assets will be available to satisfy claims from unsecured corporate bond investors. The ratings reflect Maxtek's niche position as a distributor within the integrated circuit (IC) industry, its adequate research and development (R&D) capability, and its above-industry-average profitability. These strengths, however, are partially offset by the highly competitive and fragmented nature of the IC distribution industry in which Maxtel operates, characterized by short product life cycles, declining selling prices, and frequent new product introductions. The ratings also reflect Maxtel's high supplier concentration and rising leverage. Established in 1992, Maxtek is an IC distributor based in Taiwan. The company sells various non-standardized IC products, including, among others, analog IC, frequency IC, logic IC products which together accounted for about 60% of Maxtek's total revenue in 2003. The company's business strategy is to position itself as a niche IC distributor, avoiding the more competitive memory IC products, and to utilize its R&D capability to assist customers in designing IC products. As a result, Maxtek has been able to earn higher margins than most of its competitors. The average gross margin on memory IC products was only about 2.5% in 2003, while Maxtel achieved a gross margin of 11% in the same period. Moreover, the company is the exclusive IC distributor in Taiwan of certain IC products for Integrated Circuit Systems Inc., Richtek Technology Corp., and Agere Systems Inc. (rated BB-/Stable/-- by Standard & Poor's Rating Services). Maxtek has maintained a good business relationship with these three companies for over five years. However, about 82% of Maxtel's 2003 revenue came from selling these three companies' products, indicating high supplier concentration. Maxtek's profitability is adequate and above industry average. The company's consolidated revenue grew by 65% in 2003 to NT$5.55 billion from NT$3.36 billion in 2002, while its pretax income increased by 23% in 2003 to NT$250 million from NT$204 million in 2002. Its operating margin (before depreciation and amortization) ranged between 3.3% and 6.3% over the past four years (2000-2003). Going forward, Maxtel plans to expand its product mix to include higher margin products, such as ICs for consumer electronics products, to further lift up its profitability measures. Maxtek's leverage is rising. The company was in a net cash position in 2001, but its ratio of net debt to capital rose to 36% in 2003. The company's level of short-term debt increased by a total of NT$822 million in 2003 to help meet its working capital needs. The current rating does not take into consideration the company's planned equity fund raising in 2005. Liquidity. OUTLOOK: STABLE
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