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MStar

An Enigma on the Rise

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With many of MStar’s products overlapping with MediaTek’s line, a showdown looms as the IC design industry warily eyes this formidable contender.

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An Enigma on the Rise

By CommonWealth Editorial Department
From CommonWealth Magazine (vol. 383 )

In July, the Industrial Technology Research Institute’s Industrial Economics and Knowledge Center (IEK) released its 2006 rankings of Taiwan ’s top ten IC design companies. MStar, with its 2006 operating revenue of NT$7.3 billion, came in at 10th on the list – the new kid on the block.

Established in 2002, MStar’s core business is LCD display control chipsets. Statistics provided by MStar, which has recently been hiring in China , indicate that the company now holds more than 60 percent of the global LCD chipset market. To turn that into a tangible figure, according to market research group Display Search, the scope of the global LCD display market this year will reach 170 million units, which could translate into MStar shipping more than 100 million display control chipsets on the year.

MStar has long prided itself on the solid foundation of its core design team in analog signal processing. Founder and president Dr. Steve Yang joined Texas Instruments more than 20 years ago, where he began to hone his analog chipset design skills.

“The whole time they were working for other companies, this team was thinking of starting their own, and they were constantly making provisions for it,” says one industry CEO.

MStar has been relentless in its quest for talent. For example, its personnel roster boasts deputy director for technology Hsiao Shuo-yuan and engineer Chou Chung-wan, both former researchers from Chiao Tung University ’s Laboratory 307, which made its name in analog IC research.

With the turn of the century and the proliferation of LCD-related IC applications requiring a top-flight designer adept with both digital and analog technologies, the MStar-trained engineering team was able to squeeze onto a single chip functionality that had previously required ten or more individual chips to attain, offering clients savings in both cost and space.

What’s noteworthy about MStar is that its products largely mirror those of MediaTek, with whom it faces a looming showdown, and its technological capabilities are impressive.

A Competitor in MediaTek’s Sights

In addition, MStar has earned kudos for its control chipsets for digital television sets, particularly in China , where it now competes head to head with major players like Trident, MediaTek and Genesis. For the past two years, MStar has also been quietly releasing a new product line – baseband chipsets for cell phones, a niche that puts it in direct competition with MediaTek. In second quarter, MStar announced that it had secured a deal to supply a major South Korean mobile phone manufacturer. MStar’s scope of operation is intersecting to an ever greater degree with that of MediaTek, whose strategy is to focus on ICs for China ’s unbranded cell phone market.

During MediaTek’s first-quarter investor’s seminar this year, analysts queried chairman Tsai Ming-kai about details of the company’s handset and digital television sales. Tsai, however, was reticent, replying only, “Apologies, but I can’t reveal too much, as some of our competitors are not bound by public disclosure [regulations], and therefore aren’t inclined to reveal too much about corporate operating figures.” Tsai’s response was a virtual tacit acknowledgement that the competitor not bound by disclosure regulations was MStar and that it was now firmly on MediaTek’s radar.

“Non-transparency” is the biggest complaint about MStar within the chip industry and the most frequent focus of their attacks.

Non-Transparency Leaves Adversaries in the Dark

Since the start of this year, MStar’s unlisted share price has broken NT$800 several times. But as it is not a publicly traded company, it will only release operating profit figures for “the previous year” at a shareholders meeting in November, despite having more than 2,000 shareholders. This arrangement allows MStar to disclose financial information a year later than ordinary companies listed on the Taiwan Stock Exchange or over-the-counter market. Competitors seeking to get a handle on MStar operations are out of luck – the best they can get are figures that are a year old. For example, the notes at the end of the IEK’s list of Taiwan ’s top ten IC design companies explain that the operating revenue figures for MStar are projections and the true figures will be known only when the company releases them.

In the past, when the IEK calculated projected earnings for companies reluctant and not bound to disclose the information, it would use industry projections, market share, and average product price information and consult import-export statistics from the Bureau of Customs to formulate a ballpark figure. In fact, industry insiders familiar with MStar unequivocally agree that the company’s earnings for last year were “definitely more than NT$8 billion.”

Whether among industry competitors or industry analysts, gathering full sales information on MStar from within the Taiwan industry is decidedly difficult. It was once relatively easy to come up with a rough estimate of the orders received by an IC designer through sounding out wafer manufacturers, packagers and testing companies. But MStar only sources a small portion of its wafers from Taiwanese companies, with the majority coming from Israel ’s Tower Semiconductor, South Korea ’s Dongbu Electronics and Shanghai Hua Hong NEC Electronics. It also packages and tests overseas. With its contractors scattered abroad, gathering information on MStar is difficult in the extreme.

With such limited information, currently the only available measure of MStar’s recent success is its 2005 financial report.

In 2005, after only three years of operation, earnings had already reached NT$5.6 billion, double the figure for 2004. Profit margin rose from 51.2 percent to 54 percent during the same period. After-tax earnings were NT$2.05 billion. Calculated against the company’s then NT$729 million in outstanding shares, that comes to earnings per share of NT$18.21.

At a shareholders meeting on August 16, MStar chairman Wayne Liang would only reveal that “corporate net assets will be around NT$75 per share.” Despite the clamor from shareholders on the scene demanding a statement on 2006 operating profit, with some even demanding proof of rumors that “EPS would reach NT$ 30 in the first half of 2007,” Liang smiled vaguely and remained silent.

The purpose of the August shareholders meeting was to explain to shareholders the procedures involved in converting shares in MStar Taiwan into shares in MStar Cayman Islands, which dovetails neatly with recent scuttlebutt that MStar is seeking listing on a U.S. stock exchange.

Yet its competitors keep watching with vigilance. Once it chooses the path of listing on a stock exchange, MStar will be bound by financial disclosure regulations and be required to book employee bonuses as an expense. Whether the company will be able to maintain its dazzling operating profit figures under such circumstances will have to wait for the next report card from the Mstar team.

Translated from the Chinese by Brian Kennedy


Chinese Version: 神秘的IC設計新星

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