The global semiconductor industry has been on fire over the last few years, thanks to cloud computing and the advent of artificial intelligence (AI), which are driving the need for advanced semiconductor technology.
For Singaporean investors, three local beneficiaries stand out: AEM Holdings Ltd (SGX: AWX), UMS Integration Ltd (SGX: 558), and Frencken Group Ltd (SGX: E28).
Despite operating in the same industry, these companies perform rather different roles: AEM provides semiconductor testing products, UMS provides equipment manufacturing and engineering services to semiconductor companies, and Frencken functions as a high-end, outsourced manufacturing muscle for semiconductor companies.
Why Semiconductor Stocks Are Back in Focus
Trillions of dollars are set to be poured into AI infrastructure over the coming years, creating a direct tailwind for chipmakers and their equipment suppliers.
Semiconductors are the backbone of AI, and demand for them is not slowing down.
Although the semiconductor industry has historically been plagued by boom-and-bust cycles, the AI-driven buildout is shaping up to be a more structural and sustained wave of spending.
Singapore’s semiconductor ecosystem sits at the heart of enabling this transition, with local companies such as AEM, UMS, and Frencken being direct beneficiaries of major chipmakers expanding their AI capacity.
Meet the Contenders
AEM plays a pivotal role through its testing solutions that help chipmakers test chips faster and at lower cost. Its technology reduces the time and capital required to validate chips before they reach end markets.
Originally, AEM relied only on Intel Corporation (NASDAQ: INTC) as its anchor customer.
But AEM has been making inroads in diversifying its customer base.
Recently, it announced a new partnership with Taiwanese heavyweight ASE Technology Holding Co., Ltd. (TWSE: 3711).
UMS manufactures high-precision components and sub-systems primarily for semiconductor equipment makers, with Applied Materials (NASDAQ: AMAT) being its dominant customer.
This long-standing relationship, spanning decades, is a testament to UMS’s ability to meet exacting quality and delivery standards consistently.
UMS’s operational consistency has translated into stable earnings, with the group having reported positive earnings over the last decade, which are duly returned to shareholders via consistent dividends.
Finally, besides the semiconductor segment, Frencken also has industrial, medical, and analytical instrumentation customers.
Frencken’s semiconductor business rides the same AI-driven equipment upcycle as AEM and UMS, but its other segments provide some buffer against semiconductor downturns.
This mix has kept Frencken in the black consistently over the last decade.
Growth Potential: Who Has the Longest Runway?
As AI chips grow more powerful and complex, rigorous testing becomes increasingly non-negotiable given the high cost of a defective chip. This plays directly to AEM’s strengths.
Beyond Intel and ASE, AEM is actively seeking new customers that are developing AI accelerators and high-bandwidth memory chips, where testing demand is growing rapidly.
Striking new partnerships will significantly expand AEM’s market opportunity and reduce its earnings reliance on its two aforementioned customers.
UMS’s growth is closely tied to semiconductor equipment spending, which historically follows chipmaker capital expenditure cycles.
With AI infrastructure buildout driving sustained equipment demand, UMS is well-positioned through its Applied Materials relationship.
UMS’s growth strategy is less about winning new customers and more about deepening existing ones, supplying a broader range of components as equipment complexity increases.
As already mentioned, Frencken has customers outside the semiconductor industry. In particular, its medical customers add further insulation, as healthcare spending is largely independent of technology cycles.
Business Quality Showdown
Frencken leads with the most balanced revenue mix given its exposure to several lead markets, although it still has heavy exposure to the semiconductor industry.
Both AEM and UMS carry significant customer concentration risk with Intel and Applied Materials, respectively, although AEM’s recent partnership with ASE bodes well in terms of reducing concentration risk.
All three appear to compete on precision and reliability more so than on price, which means the primary barrier to entry is the supplier qualification; once embedded in a customer’s production process, switching costs are high.
AEM’s edge is proprietary testing technology, UMS’s is manufacturing consistency, and Frencken’s is its ability to manage cross-industry complexity.
On profitability, UMS stands out with a trailing-12-months (LTM) net margin of 17.4%, compared to AEM’s 6.5% and Frencken’s 4.5%. Cash flow trends were broadly positive across all three names.
Dividend Battle
Currently, UMS offers a trailing dividend yield of around 1.2%, continuing a dividend streak stretching back to at least 2010.
AEM, which only just resumed paying a dividend, offers a trailing yield of approximately 0.14%.
Frencken offers a modest yield of roughly 1.0%, though it has paid dividends without interruption since at least 2018.
UMS is the clear income play of the three, with both AEM and Frencken prioritising reinvestment over shareholder returns.
On a sustainability angle, all three businesses should be able to grow their dividend payments, depending on how long this upswing in the industry lasts.
Risk Assessment
AEM’s key risk is its dependency on Intel; although the company has been diversifying its customer base, it is still highly reliant on Intel.
UMS is heavily dependent on the capital expenditure spent by Applied Materials; any slowdown in equipment spending would impair the group’s earnings.
Frencken’s main risk is that its diversified model could dilute growth as softer segments weigh on stronger ones.
Which Stock Fits Your Investing Style?
AEM suits investors seeking pure-play exposure to AI and semiconductor testing, with higher growth potential at the expense of possible greater earnings volatility.
UMS presents a more stable option with reliable dividends, making it suitable for income-focused investors.
Finally, Frencken sits in the middle, offering broad diversification, and currently offering the most balanced risk-reward, in terms of valuation and growth, without the concentration risks of AEM and UMS.
Get Smart: There Is No One-Size-Fits-All Winner
In summary, AEM, UMS, and Frencken each offer a distinct way to invest in the semiconductor industry.
The right choice comes down to what you value most – growth, income or a balance of both.
While the semiconductor industry’s prospects look robust, selecting the right local company matters just as much as choosing to invest in this sector.
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Disclosure: Wilson. H does not own shares of any companies mentioned.
