Solomon Systech take aim at wireless video

CEO Humphrey KW Leung believes wireless video is the next big wave - and that Hong Kong is a good place to ride it.

You've partnered with Nasdaq-listed Kopin Corporation to sell your latest device, the BDM -230k, a wearable device for watching video. What's the logic behind that?

Leung: Solomon Systech is a fabless semiconductor design company specializing in integrated circuit chips for the displays, which appear on all kinds of electronic instruments. We have a lot of expertise in this area. Why are we partnering with Kopin to sell this device? Because the product contains parts developed by Solomon and parts developed by Kopin. Selling these parts separately means the customer had to put the parts together to make the video device. This is a complicated business, so we decided to simplify things by putting the parts together ourselves and sell the complete unit to customers.

The device looks like a pair of spectacles through which you can watch a film by attaching the device to a DVD player, for example. What other applications does it have?

You can use the device to play online games or, as you say, to watch a film. You could also connect it to your laptop and leave the monitor at home. The next generation will be Bluetooth and wireless

Eventually, I suppose one could use a pc with a much smaller hard drive because you will be able watch streaming video thanks to a wireless Internet connection. But why do you emphasize selling this device to China?

Because China is increasingly the global manufacturing centre for electronic devices. We believe that if we provide this technology to the OEM manufacturers in China they will see the potential of this device and incorporate it into their wares. We are also marketing it to Japan and the US.

Many people think that after wireless audio, wireless video is the next step - look at video i-pod just put out by Apple. But of course at the moment this device is a very small part of your total sales.

Yes. It's more for the future. We're also very optimistic about our existing businesses, which is to provide the display chips in devices such as mobile phones and MP3 players. Industry wide, demand for mobile phone display chips has increased by 15-20% this year, while demand for MP3 chips has gone up even faster, by up to 100%, although from a much lower base. In the large panel segment (for liquid crystal TVs, for example) demand has also gone up 20-30% this year compared to last year. We don't see any evidence of a global slowdown. Even if there were, thanks to our fabless model (ie we don't own any production sites) we would be insulated from the problem of factories being operated at less than full capacity.

Which fabs do you like to use?

We use fabs in China, China and Korea.

How good are the Chinese fabs? It's a fairly new industry in China.

We use SMIC in Shanghai. It's a very good fab. The Taiwanese fabs TSMC and UMC, thanks to their long experience, provide an excellent, very rounded service.

You are not worried by rising US interest rates?
Actually, we are sitting on $150 million of funds. So rising interest rates actually benefit us.

What do you intend to use the funds for?

Potentially we could use them for M&A, as a growth driver. Or we could use them to buy licenses for new technology. We could also use it to ensure manufacturing capacity by buying equipment for our fab partners. If we have excess funds at the end of this year, we are thinking of distributing part of it to our shareholders.

You are now a mid-cap, with a market cap of around $1 billion. How do you plan to take the company to the next level?

M&A is one way, doing it all in-house is another, while licensing is a third. We are leaning towards the second and third options. The key to expanding revenue is generating new products. To do that we work closely with our clients, for example, Motorola. We have a dynamic discourse with them which enables us to produce the models at the exact point the market needs them. Basically, for each of our products, we always work with a global partner.

Is it lonely being a listed tech company in Hong Kong?

Of course, it's not perfect. We believe Hong Kong gives a lower valuation to tech stocks than in the US. What seems to happen is that whenever we announce an initiative our stock price goes up. Actually, investors know us and like us.

What is the human resources situation?

Our experience shows that Hong Kong has the potential to be a tech centre! 70% of our staff have local university degrees. The rest are educated abroad.

How has your share price performed since your IPO in April last year?

Our stock price is currently around HK$3.10 and our IPO price was HK$1.75. So I think we have provided our investors with value. And our earnings have been solid: In the first half this year we made a net profit of $36 million, with a 20% profit margin. The profit figure represents's a 60% improvement year-on-year.

Most of your VC investors have sold down. What does this mean for the company?

That's what VCs do, they sell their stakes. But what it does mean is that the freefloat of our company is very high, at around 80-90%. Management holds about 10% of the company.

What are the ramifications of such ownership dispersal at board level?

There are increasingly fewer non-executive directors, who were previously appointed by the minority shareholders. (Of the original VC investors, only Singapore's GIC is left, holding around 5% of our stock) So now the board is dominated by executive directors and independent directors. In the future, the previous non-executive directors could become independent directors, after a suitable time lag.

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