July 25, 2024

Earn Money

Business Life

Edited Transcript of 522.HK earnings conference call or presentation 26-Feb-20 12:30am GMT

Hong Kong Mar 6, 2020 (Thomson StreetEvents) — Edited Transcript of ASM Pacific Technology Ltd earnings conference call or presentation Wednesday, February 26, 2020 at 12:30:00am GMT

Nomura Securities Co. Ltd., Research Division – VP & Analyst of Greater China Semiconductor and Technology Research

Good morning. Good afternoon. Welcome to the ASM conference call. Mr. Leonard Lee, please be informed and I will be standing by. (Operator Instructions) Thank you.

Good morning, good afternoon, ladies and gentlemen. Welcome to the ASM Pacific Technology 2019 Annual Results Announcement Investor Conference Call.

Before we proceed, I would like to note that during this conference call, there may be certain forward-looking statements with respect to ASM Pacific Technology’s business and financial conditions. Such forward-looking statements may involve known and unknown uncertainties and risks, which could cause actual results, performance and events to differ materially from those expressed or implied during this conference call.

For your reference, the IR presentation related to our 2019 annual results can be downloaded from our website, www.asmpacific.com.

With us this morning are Mr. WK Lee, CEO of ASM Pacific Technology; and Mr. Robin Ng, CFO of ASM Pacific Technology. Our CFO, Robin, who is also our CEO-designate, will start with a brief discussion about our 2019 annual results, followed by a Q&A session.

Without further ado, let me hand this over to Robin, please.

Thank you, Leonard. Good morning, and good evening, ladies and gentlemen. We appreciate you joining us for our 2019 fourth quarter and annual results investor conference call today. I will first provide you with a summary of the company’s performance followed by the Q&A session.

In 2019, the semiconductor industry went through a slowdown, largely due to global economy uncertainties amidst the trade war and weaker demand from some end markets, such as optoelectronics and automotive.

Let me first give you some highlights to the 2019 fourth quarter numbers, followed by the full year. During the fourth quarter, the group achieved USD 568 million in revenue, an increase of 7% over the preceding quarter and a decrease of 6.7% over fourth quarter of 2018. Our group bookings recorded USD 445.2 million, a decrease of 13.3% and 6% — 6.1% over the preceding quarter and the fourth quarter of 2018, respectively.

In terms of net profit, excluding restructuring costs and related tax effect HKD 106.9 million, we achieved net profit of HKD 328.7 million, an increase of 47.9% over the preceding quarter and increase of 44.4% over the fourth quarter of 2018. As such, the group managed to reestablish momentum in this business in the second half of the year, with a strong 18.3% revenue growth, and 149.1% improvement in net profit over the first half of the year.

For the full results, despite the challenging economic conditions, ASMPT made good progress during the year as a result of successfully implementing a range of initiative, such as focusing on higher-growth markets and realigned operations to reduce costs.

For 2019, group revenue came in at USD 2.03 billion, a decrease of 18.8% over 2018. New order bookings came in at USD 2.02 billion, a decrease of 21.5% over 2018. Net profit came in at HKD 729.2 million, excluding restructuring costs and related tax effect, representing a decrease of 67.3% over 2018.

Before I go to the segment results, let me provide you with a quick overview. During the fourth quarter, both the Back-end Equipment Segment and the SMT Solutions Segment achieved revenue which was better than our guidance. The Back-end Equipment Segment revenue achieved both Q-on-Q and year-on-year growth, while the SMT Solutions segment revenue achieved Q-on-Q growth, but on a year-on-year basis, declined as guided.

Materials Segment performed in line with guidance with revenue growth for both Q-on-Q and year-on-year. Group bookings declined 13.3% Q-on-Q due to seasonal pattern and in line with our guidance.

In 2019, Back-end Equipment Segment contributed 44.1%. In 2018, it was 47.4% of the group’s total revenue. We continue to hold the #1 position in the global market, a position it first attained in 2002. It has also further widened the revenue gap with the closest rival.

On a full year basis, gross margin of this segment was adversely impacted because of lower revenue and lower manufacturing capacity utilization. However, demand momentum for traditional tools, in particular, wire bonders, started to pick up in the second half of the year.

Traditional tools, like wire bonders, typically have lower margin, compared with Advanced Packaging and CIS tools. This, coupled with higher IC and LED, but lower CIS mix revenues, pulled down the gross margin for the fourth quarter.

The group continued to make progress in its Advanced Packaging business. Revenue from Advanced Packaging contributed to more than 20% of the revenue of the Back-end Equipment segment. CIS and Advanced Packaging tools collectively contributed to more than 50% of the segment’s revenue. Billings for CIS and Advanced Packaging grew year-on-year, despite the soft market condition in 2019.

CIS billings continued its momentum in 2019, brought about by the rising adoption of smartphones, with higher resolution cameras, multi-camera features, 3D sensing, ToF, wide Field of View, and telescopic lens features. In fact, full year billings for CIS grew year-on-year, while billings for IC and Discrete and LED decline.

ASM NEXX make a significant contribution to the bookings and billings of the IC and Discrete business in 2019. It has also strengthened ASMPT’s position in the Advanced Packaging market. The group remains confident that its investment in Advanced Packaging over the past few years has put ASMPT well ahead of its peers.

With effect from fiscal year 2020, we will rename the Back-end Equipment Segment to Semiconductor Solutions Segment. This is to better reflect the inclusion of the ASM NEXX business, acquired in October 2018, which served the mid-end deposition tools market and has grown to become a significant part of the business, as well as the group’s transition to an integrated hardware and software solution provider for the semiconductor packaging market.

In 2019, the Materials Segment contributed 11.7%. For ’18, it was 11.5% of the group’s total revenue. The segment recorded 4 consecutive quarters of Q-on-Q growth in bookings.

The semiconductor is clearly on the path of recovery. Gross margin in the fourth quarter was adversely impacted by the increase in commodity price, in particular, copper and palladium. On a full year basis, gross margin declined, largely due to the drop in revenue.

As part of our ongoing effort to drive for greater efficiencies and to reduce costs, the group decided to relocate the lead frame operations in Singapore to the newly expanded Malaysian plant. The relocation to the Malaysian plant starts in Q1 2020 and is expected to be fully completed by the mid of 2021. The group also decided to discontinue the Molded Interconnect Substrate or, short name, MIS, business in Q1 2020 after an extensive evaluation of the competitive landscape of this business.

The group is of the opinion that the conventional substrate has an edge over MIS in terms of price and technical features, like finer line spacing and higher I/O capabilities. This discontinuation is expected to have minimal impact on the group’s revenue. These 2 initiatives that we have undertaken will have a positive impact on the segment’s gross margin and profitability going forward.

The SMT Solutions Segment contributed 44.2%. In ’18, it was 41.1% to the group’s revenue in 2019. Despite the headwinds of weak economic conditions and the slowdown in the automotive demand, the SMT Solutions Segment benefited from the increase in 5G infrastructure-related investment. However, the higher revenue contribution from China and the slowdown of the automotive industry adversely impacted the gross margin of this segment on a full year basis.

To mitigate this, this segment has looked at ways to lower its cost of operation. One initiative was to increase the volume of assembly work done in Malaysia after the group has expanded the plant there. The other was to deploy a satellite operation in Hungary to support the assembly operation in Munich, Germany.

This segment recorded an improvement in gross margin Q-on-Q and year-on-year for the fourth quarter, due partly to the warranty provision write-back, indicating that the tools sold were reliable and thus less warranty claims are needed. There was also a one-off charge in Q4 2018 relating to the discontinuation of the Solar business, which pulled down the gross margin in that particular quarter.

Looking ahead, the group ended the year with an increased optimism that the global semiconductor manufacturing equipment and material sales are expected to stage a 2020 recovery and set a new high in 2021.

There are several other factors contributing to this optimism: Pickup in demand from Chinese manufacturers to localize their supply chain; the accelerated deployment of 5G infrastructure; the roll-out of 5G handsets and the progress the group is making in capturing new market opportunities, such as advanced packaging, silicon photonics, IIoT, mini and micro LED solutions, power semiconductors, Industry 4.0 solutions and AOI, it stands for Automated Optical Inspection.

The rapidly escalating COVID-19 outbreak has struck China at a time when its economy has grown larger and established greater connections with the rest of the world. Given the widespread nature of the outbreak, and the fact that it’s still evolving, the impact to the group is unclear and difficult to estimate at this point in time.

Due to the extended shutdown in China during and after the Chinese New Year, the group had lost around 1/3 of its production capacity in China in Q1 2020. On a full year basis, we estimate the impact to be less than 10%.

While the booking momentum was certainly tempered by the COVID-19 outbreak, we are cautiously optimistic that Q1 2020 group booking would achieve a year-on-year growth.

Based on our estimate at this time of this announcement, we anticipate that Q1 2020 group revenue will be in the range of between USD 370 million to USD 450 million, and more than likely, the group will record a loss for Q1 2020.

With this, we thank you for your attention, and we are ready to take your questions.

================================================================================

Questions and Answers

——————————————————————————–

Operator [1]

——————————————————————————–

(Operator Instructions)

Our first question comes from Leping Huang from CICC.

——————————————————————————–

Leping Huang, China International Capital Corporation Limited, Research Division – Analyst [2]

——————————————————————————–

I have 2 questions. The first one is about your first quarter guidance. Can you show us some colors on this — the uncertainty of the guidance, which has mainly come from the Chinese customer or which type of the product you are affected or which type of the customer you are affected?

Yes. And sorry, I — and the second question, maybe I’ll just say all the 2 questions. So the second question is at the — we’ve seen the news lately, U.S. may introduce new regulation on Huawei at the — some of the — if you have some American materials, you cannot supply to Huawei.

So can you share that — do you have any U.S. material? Because if most of your operations in Asia, do you — if a [new] regulation is introduced, will you be affected?

——————————————————————————–

Wai Kwong Lee, ASM Pacific Technology Limited – CEO & Executive Director [3]

——————————————————————————–

Let me answer the first question first. For the Q1 guidance, I would say, as of this time, we have received very strong booking before Chinese New Year. So that’s why, booking-wise, we are still cautiously optimistic. And then customers start to hold back and push back, otherwise, it’s very likely, we will achieve a year-on-year growth for Q1 booking.

After the Chinese New Year, when purchase in China, our customers in China start to resume their operations, we have extensive checked the customer. As of today, we don’t see any significant cancellation, almost 0, small pushout, that’s reasonable because of their factories’ reopening has been delayed. But most customers are indicating, for the orders they have paid to us, they still want it to be delivered in March, April time frame.

So the pushout will be in a month, maximum 2 months’ time. So at this point in time, you can see, definitely, it will affect our Q1 billing because our own production capacity has been affected. Our suppliers in China also has been stopped, so they have interrupted our supply chain. However, they have less impact on the SMT because SMT mainly manage the location for us in Munich and Malaysia.

However, they also face some price hike issues because the supply chain in China has been stopped. It has made good impact on the Back-end Equipment as well as the Materials. So I would say, this is the picture. So if China — the activity in China can be resumed very quickly, actually, we are pretty optimistic about that. However, with the development for the last few days, in Korea, in Europe, in Middle East, I would say that comes more uncertainty looking forward.

Okay. Therefore, the U.S. regulation changes, I will say this is still unknown at this point in time. We don’t know the content of the changes, so it’s difficult for us to comment. In general, I would say, for high tech products, high tech equipment, like what we are producing, it’s difficult not to have a U.S. content for that, okay?

So I would say, only until we know more about whether that’s really such a restriction, what’s the scope of the restriction, I think at this point in time, it’s difficult for us to comment.

——————————————————————————–

Operator [4]

——————————————————————————–

Next question comes from Kyna Wong from Crédit Suisse.

——————————————————————————–

Kyna Wong, Crédit Suisse AG, Research Division – Associate [5]

——————————————————————————–

So my first question is about the fourth quarter Back-end Equipment revenue and also the brand — the gross margin for the group is actually better than guidance. Where’s the upside came from? Is this because of the mobile or like 5G infrastructure continuing to drive the upside?

The second question is about looking into the Advanced Packaging’s mix that there’s a new customer base. So I just wonder if, like, it is a — is it actually from Japan customer? Because we noticed that the Japan revenue, the revenue from Japan has actually achieved year-over-year growth in 2019. Is this due to Advanced Packaging?

——————————————————————————–

Cher Tat Ng, ASM Pacific Technology Limited – CFO & Executive Director [6]

——————————————————————————–

Kyna, this is Robin. On the gross margin development for Q4, yes, indeed, it came in better than what we had guided. We guided for slightly down. However, it was aided also by the top line. So a top line increase for Back-end. So that also helped to push up the margin.

Now the other factor affecting the blended margin is SMT. SMT, as I read out the conference notes just now, you noticed that we had to true-up our warranty claim provision because of better performance in the field in terms of our quality. So by trueing up, that also helped the gross margin of SMT.

So as to your second question, in terms of customer mix, yes, you can see Japan has now become the #5 major location for us. So indeed, we said, in fact, the announcement as well that right now we have a leading high-density substrate vehicles in the Japan area.

——————————————————————————–

Operator [7]

——————————————————————————–

Next question comes from Sebastian Hou from CLSA.

——————————————————————————–

Sebastian Hou, CLSA Limited, Research Division – Research Analyst [8]

——————————————————————————–

If I look at the gross margin, the profile in the past few years, I know it’s been declining. So my question is that, how do you — what happened in the past few years regarding your product mix or price erosion, competition and such, that have driven that?

And also, from this point onwards, what’s your outlook down the road, whether we have some ability to recover gross margin to high 30s or even 40%? And under what kind of the revenue still? Or what kind of the product mix? Also, some of the exciting new products on Advanced Packaging side, do you see that could be the game changer to inflection point to drive your margin upward again? That’s my first question.

——————————————————————————–

Cher Tat Ng, ASM Pacific Technology Limited – CFO & Executive Director [9]

——————————————————————————–

Now in terms of your first question, the GM trending down over the years. I think one of the factors that you should know is also, volume does play a big part. To a certain extent, we have internal manufacturing. So internal manufacturing comes with a fixed cost element. So imagine if the volume comes down, our margin tends to be lower. So I think that’s a fact that I think you should know.

Now let me comment a little bit more on SMT. Now SMT margin has indeed come down in the recent quarters. We have explained in a couple of quarters already that on one hand, we made good progress in terms of penetration into the Chinese-branded smartphone arena. But on the other hand, typically for China mix, they typically have a lower margin compared to European or American mix. So as a result of our sustained penetration into the Chinese market for SMT smartphone, we have to trade off the gross margin.

——————————————————————————–

Sebastian Hou, CLSA Limited, Research Division – Research Analyst [10]

——————————————————————————–

Got it. I — just to follow on that. I saw the — I understand the revenue scale that yes, revenue come down, your average base cost is higher, so margin is lower. But even if we compare your current revenue still at, like, for example, right now it’s about HKD 4 billion, this level of HKD 4.5 billion, this dollar level of competitive past 3 years.

The margin is still lower. It used to be in the high 30s, but now it is like low to mid-30s. That’s my — but maybe you already answered that because some of the questions [said] the margin is lower.

And the second follow-up on that is the — I think in the — earlier, I think in the prepared remark that you mentioned that you’re purchasing power just dialed a recovery in 2020 and also to set new high in 2021. And the first reason you mentioned is driven by the China localizing the supply chain.

So if I put that into context, which means the drive China may potentially be one of the many drivers next year, and localization of the manufacturing, which I will assume that maybe a large part of it, but not all, can still be relatively quite low-end — mid- to low-end technology equipment.

Correct me if I’m wrong, but if that should be the case, which means that your margin recovery may not be that strong down the road if China continue to be — is that the right way to think about it?

——————————————————————————–

Wai Kwong Lee, ASM Pacific Technology Limited – CEO & Executive Director [11]

——————————————————————————–

This is WK here. Well, actually, you will be surprised to see that, actually, the China localization actually is more within that low end. They are not having the highest, I would say, the most advanced, advanced packaging equipment yet. But actually, because — the driver behind all this demand are still the high-end smartphones, infrastructure equipment.

So actually, those semiconductor chips are quite advanced. So probably from the media report, we also know, those chips are fabricated, almost the most advanced developed technology. So that’s why from a packaging point of view, it’s also quite advanced. So I will not consider this localization is necessary to drive out our gross margin.

——————————————————————————–

Sebastian Hou, CLSA Limited, Research Division – Research Analyst [12]

——————————————————————————–

Okay. My second question, and after this I’ll go back to the queue, is that — how is the overall outlook on the OSAT market? And also, the follow-up on this one is that you mentioned that the pre-virus outlook before Chinese year, the booking was very strong.

And what has been most — which segment has been most impacted on the booking side after Chinese New Year’s? Is it OSAT? Or SMT? And how’s your overall outlook for the OSAT market for this year?

——————————————————————————–

Wai Kwong Lee, ASM Pacific Technology Limited – CEO & Executive Director [13]

——————————————————————————–

Well, actually, we don’t know the answer to your question because as you see, the Chinese customer only started resume work in the last 2 weeks and gradually. And I think probably everybody assessing the situation, solving the manpower supply issue, but because the transportation system in China has — the traffic overall has reduced significantly. So I think people are coping with all these changes.

So far, as Robin has elaborate, last year, we see communication mobile segment is the strongest segment for us, while overall, this is combined, but this particular segment actually, we beat the #1 and actually performing quite good.

So we expect this will be still the segment to drive the business. And particularly, the size of the 5G infrastructure, we also see the 5G handset devices to come on board strongly in this year. So I think this would still be one of the major sector driving the business.

——————————————————————————–

Operator [14]

——————————————————————————–

Our next question comes from Donnie Teng from Nomura.

——————————————————————————–

Donnie Teng, Nomura Securities Co. Ltd., Research Division – VP & Analyst of Greater China Semiconductor and Technology Research [15]

——————————————————————————–

My first question is to have a follow-up from Leping and Sebastian’s questions. So if break down into a different business segment, IC/Discrete, CIS, and with the SMT, so do you have any idea about what’s the outlook change before and after coronavirus outbreak? Because I was thinking that maybe CIS and SMT will be hammered much more than other business because they are more leaning toward to module and assemblies.

And could you also elaborate more, what kind of booking momentum we used to have before Chinese New Year? Because our guidance right now is like the bookings still growing year-on-year, but I just — I’m just curious about if we just look at January, what kind of booking momentum in terms of year-on-year and month-on-month magnitude would be?

And my second question is regarding to our capacity. So for ASM Pacific, how much percentage of capacity is now in China? And what kind of equipment is now is made in China’s factories?

And lastly is a housekeeping question. So the OpEx was still pretty high in the fourth quarter. What kind of expectation for OpEx into 2020?

——————————————————————————–

Wai Kwong Lee, ASM Pacific Technology Limited – CEO & Executive Director [16]

——————————————————————————–

Well, I think regarding the question on comparing the demand impact before and after the COVID-19 outbreak, actually, I would say, to this, it’s difficult to really have answer to this question. No customer really gave us an indication that after the shutdown, they want to push back significantly, they want to cancel. As I mentioned earlier, there’s no — almost no cancellation.

The pushback is more because of the delay in — these are the opening of our factory. So the indication is still talking about 1 to 2 months. Then actually, I also forgot to mention just now, on the other hand, there are also some customers actually pool up their delivery, okay?

So today, our own headache is to structure our production capacity to satisfy the delivery demand by our customer, rather than to deal with the delay — rescheduling of their delivery. When they told us — when they have us — they want to delay by a few weeks. Actually, strictly speaking, at this point in time, it’s a relief for them — for us rather than a headache.

So regarding the booking momentum before Chinese New Year, the booking was received only for 3 weeks, the first week of February. But it was a very strong number. You can imagine, there’s so much uncertainty around this COVID-19 outbreak. But we’re still cautiously optimistic about our year-on-year booking growth for Q1. So if there’s no good confidence, we won’t dare to comment on this one. Okay? So I would say that is the situation.

In terms of our capacity in China, as I mentioned earlier, are fair — our back-end equipment and materials business model, China contribute to a very significant part of our capacity for back-end equipment and also materials more than 50%.

So even the — for our factory in Malaysia and Singapore, we also depend on supply, materials supply, module supply from China. So when China was shut down, so it affected us quite badly, okay?

So first, SMT assembly locations mainly in Munich and also Malaysia, but however, once again, when it comes to material supply and module supply, is still from China.

On the OpEx side, actually, if you compare on a full year basis, we — the group actually has come down, the OpEx has come down. If we take away the acquisition, because in 2018, we have 3 acquisitions. AMICRA was effective into April, then this Critical Manufacturing in August and this NEXX in October.

So in — when you compare the 2018 OpEx, so it’s not an apple-to-apple comparison. So that’s why when you compare to this, you still see a high time. However, on 2020, you can make the assumption that we will do a very good effort to maintain the 2020 OpEx at a similar level, a slightly low single-digit higher than 2019. That’s our target.

——————————————————————————–

Operator [17]

——————————————————————————–

Our next question comes from Mr. Arthur Lai from Citigroup.

——————————————————————————–

Yu Jang Lai, Citigroup Inc, Research Division – Director & Analyst [18]

——————————————————————————–

WK and Robin, I want to ask a NEXX question. You just mentioned this business create significant booking and billing in 2019. And we also recall last time, clients had qualification timing situation. Can you elaborate what is the current progress? And also, in your long-term view, is that the multi-year growth category in your business? That’s my first question.

——————————————————————————–

Cher Tat Ng, ASM Pacific Technology Limited – CFO & Executive Director [19]

——————————————————————————–

Arthur, we can’t really hear you. But I suppose, you’re referring to the revenue recognition that we mentioned in Q3, right? So yes, let me answer that question first. Yes. So yes, indeed, we told you that in Q3, we have to defer a certain amount of revenue recognition for the NEXX tools to Q4. Yes, indeed, we have realized those revenue already in Q4. And that is all partly why the Q4 billing was better than expected.

So we have resolved that. But however, NEXX are supplying typically new tools. So there are still some tools that are still subject to certain conditions, which is basically — they have to be accepted by a customer before they can recognize. But we don’t — at this point in time, we don’t see a major issue in recognizing those new tools as well.

——————————————————————————–

Yu Jang Lai, Citigroup Inc, Research Division – Director & Analyst [20]

——————————————————————————–

And second question is from your presentation, you highlight that CIS part, the Advanced Packaging make up over 60% of segment revenue. Can you give us more color about the growth momentum of this? 60% is very strong? Or are you seeing some pent-up demand in the second half of this year? And how is the margin assumption compared to the other businesses, such as SMT or such as Material?

——————————————————————————–

Cher Tat Ng, ASM Pacific Technology Limited – CFO & Executive Director [21]

——————————————————————————–

Arthur, I think you’re right. We made a statement that for 2019, the contribution by Advanced Packaging and CIS are more than 50% and AP, Advanced Packing, is more than 20% of the Back-end revenue segment.

Now we mentioned before, typically, for these 2 segments, they command a better margin than the traditional tools.

Now as to your forecast, as I said earlier, is because of this situation, the current situation is really difficult to forecast too long down the road for this particular segment as well.

——————————————————————————–

Operator [22]

——————————————————————————–

Our next question comes from Kyna Wong from Crédit Suisse.

——————————————————————————–

Kyna Wong, Crédit Suisse AG, Research Division – Associate [23]

——————————————————————————–

So I wanted to follow-up about the CIS because we see that AOI business actually grew at 4x in last year, and is this also booked in the CIS? And is this also the driver that CIS, at the end, that drove year-over-year growth last year?

And the second thing is about the outlook this year because we also see more upgrade in the smartphone side this year. And what kind of, like, growth momentum we should expect? Could we, like, see, like, there’s another kind of like a major upgrade at the back for 3D and also for those AI feature could drive the momentum like 20 — maybe kind of 2017 or something? And does this contribute from the new machine that you provide to the dedicated customer?

——————————————————————————–

Wai Kwong Lee, ASM Pacific Technology Limited – CEO & Executive Director [24]

——————————————————————————–

WK here. For the AOI business, we recognize the revenue according to the business application. So for the CIS part, you will see our group under CIS. Same for those — the IC/Discrete area, we will put under IC/Discrete, okay? So as Robin has mentioned, last year, most of this have came from — relating to AOI, came from CIS. So they are part of the CIS business revenue.

Yes, we expect — for your second question, we expect more smartphone upgrade. So however, whether this COVID-19 outbreak will push back, we don’t know, because I think it really depends on the COVID-19 outbreak, how much it would damage the global economy and how much it would damage this consumer demand. So at this point in time, a little bit too early for us to comment on this one.

Assuming this outbreak is not going to have a serious effect on the global economy, so actually, we are expecting — our original expectation, this will be a good year for the smartphone infrastructure-related area.

——————————————————————————–

Operator [25]

——————————————————————————–

Our next question comes from Flora Lai from Hang Seng Bank.

——————————————————————————–

Flora Lai, Hang Seng Bank Limited – Team Head of Corporate Banking [26]

——————————————————————————–

I’ve got 3 questions on the road. The first question is that I just want to confirm that there are actually 4 main manufacturing arms in China, including Weizhou, Longgang, and then Pudong and then Chengdu. Is it — are all 4 of them is already operating now? This is my first question.

And the second question is about SMT. I saw that in the presentation, SMT has been a little bit going down because of there is a weakness in automotive, especially in Europe. Do you expect that this lack of demand will continue in 2020?

And my last question will be about the outlook. I saw that in the presentation that ASMPT is going to experience a loss-making in the first Q, more than likely. So do you expect that this will be turned around in the second quarter of 2020?

——————————————————————————–

Wai Kwong Lee, ASM Pacific Technology Limited – CEO & Executive Director [27]

——————————————————————————–

So WK here. I think for the — your question on the first one, actually, there are 3 manufacturing plants in China: in Weizhou, in Longgang and in Pudong. So the facility in Chengdu is an R&D center. Yes, they are — all 4 of them has already resumed operation. For the 3 manufacturing plants in the southern part of China, this week, we are already reaching around 70% to 80% of workforce have already worked in the plant.

So we are expecting by end of this week, we should be able to achieve slightly more than 50% workforce working in the plant. We still have ranging — in terms of the plant, ranging from 10% to 30% people has not been able to come back to these 3 cities yet. They were either trapped in Hubei or other province, other regions outside Hubei because of this traffic restriction or traffic arrangement. So we are working out to get those people back, okay?

For the SMT, actually, for the whole year in 2019, actually, yes, it was bad, but it was better than expected. So because 2018, it was a record year for SMT, we originally expect it to come down more. But as a result of the very strong demand from 5G infrastructure buildup and also generally, the demand for SMT equipment in China, so it turn out to be better than expected. The Q4 came on as more seasonal and also comparing to the very strong Q4 a year ago.

Automotive was bad last year. However, we expect it probably — it will still be weak in 2020, that’s what we expect. Hopefully, 2021, it will bounce back but we expect 5G infrastructure and the smartphone segment, application markets, continue to drive our SMT business demand, okay?

As for the potential of loss-making in Q1 is mainly because of a very low revenue forecast at this point in time, USD 370 million to USD 450 million for Q1. And also, we also expect we are incurring additional expenses in Q1 to deal with this COVID-19 outbreak because the Chinese government are very demanding on the conditions to allow factories to resume work. So we also expect that we will incur higher G&A expenses related to this area.

However, we don’t expect this to continue in Q2 and I think the global economy is not going to be damaged too much. There’s a good chance we will turn around this loss in Q2, even, hopefully, we may report a positive first half of 2020, but this is still subject to the development of the COVID-19 outbreak in the rest of the world. Thank you.

——————————————————————————–

Operator [28]

——————————————————————————–

Sebastian Hou from CLSA.

——————————————————————————–

Sebastian Hou, CLSA Limited, Research Division – Research Analyst [29]

——————————————————————————–

On average, I think very simple, some questions on the SMT tool. I think the company is pretty optimistic about the 5G infrastructure in smartphone to drive the investment cycle. But just a very simple question on the whether or not 5G smartphone will require a newer or more advanced, with a better precision SMT tool for the 4G smartphone?

——————————————————————————–

Cher Tat Ng, ASM Pacific Technology Limited – CFO & Executive Director [30]

——————————————————————————–

Yes. I think to answer your question, for 5G, certainly, I think the requirement for higher quality tool, higher throughput, for example, definitely is there. So I think for SMT being the leading toolmaker in the SMT segment, we will tend to stand to benefit when customers require high-quality tools.

——————————————————————————–

Sebastian Hou, CLSA Limited, Research Division – Research Analyst [31]

——————————————————————————–

Okay. So what is the — is there any difference between like the flagship smartphone and the mid- to low-end smartphone?

——————————————————————————–

Wai Kwong Lee, ASM Pacific Technology Limited – CEO & Executive Director [32]

——————————————————————————–

This is WK here. I think that typically is, I would say, the features that tailor this — the capacity of the electronics part. So for advanced smartphone, you put in a lot more semiconductor electronics over there. However, the phones are still the same. So that’s why you have to put the components closer to one each other.

For the 5G phone, because of — generally, will consume more battery power. So typically, a phone maker will put a large battery over there. So they have a further squeeze — the space for the electronics. So that’s why the components has to be put even closer together, so add topping a 5 high-spacing substrates. So all this demand, the charging for demand for this high-accuracy SMT equipment, actually, SMT can produce high accuracy, but to maintain the high accuracy at a high throughput, that is a real challenge, and that is the strength for the equipment — SMT equipment from ASMPT.

——————————————————————————–

Operator [33]

——————————————————————————–

Our next question comes up Simon Woo from BoA.

——————————————————————————–

Dong-je Woo, BofA Merrill Lynch, Research Division – MD and Tech Analyst [34]

——————————————————————————–

Well, number one — sorry, let me double check your guidance for March quarter loss. So usually, your gross profit around HKD 1 billion or HKD 2 billion, and then the operating expense is usually around HKD 1 billion per quarter.

So to derive the operating loss, we have to assume that the — at least HKD 3 billion extra losses, extra expenses. So I wonder how you derive the maybe negative gross margin with HKD 1 billion or HKD 2 billion extra expenses or even operating loss? And then I will ask some follow-up questions.

——————————————————————————–

Cher Tat Ng, ASM Pacific Technology Limited – CFO & Executive Director [35]

——————————————————————————–

Yes, thank you for the question. Now in terms of the profitability metrics for Q1, we look at the top line. So as WK has mentioned, we are guiding a lower range to kind of between $370 million to $450 million. So at that kind of range, we expect the gross margin also to come down from the Q4 level because of the volume effect.

And also, coupled with the fact that because of the COVID-19 outbreak, we had an extended shutdown in our China plant. So you can imagine there were lost capacity. So that — I think these 2 factors, the volume effect as well as the shutdown effect, that contribute to expected lower gross margin in Q1.

——————————————————————————–

Dong-je Woo, BofA Merrill Lynch, Research Division – MD and Tech Analyst [36]

——————————————————————————–

Okay, very clear. I do appreciate. And second follow-up question is — sorry, maybe double check, number one, overall, your production capacity, mainly with the SMT and then the other equipment, the — what’s the China portion versus the Malaysia or ASEAN overseas? And then [opposite way], what’s your overall 2019 revenue mix for the China-based customers versus the non-China-based customers?

——————————————————————————–

Cher Tat Ng, ASM Pacific Technology Limited – CFO & Executive Director [37]

——————————————————————————–

Simon, we don’t really disclose the geographical mix of individual segment. We, however, have disclosed always the geographical mix of the group, the blended one. So you can see the China mix typically is around 40%, high 40s to 50%. So this time around, for full year, it was around 40-plus percent for China, then followed by Europe, America, Malaysia and Japan.

Now I can give you a bit of color. Certainly, SMT also has a substantial shipment to China, for sure. However, the European and the American mix are mainly coming from the SMT segment.

——————————————————————————–

Operator [38]

——————————————————————————–

Our next question comes from Leping Huang from CICC.

——————————————————————————–

Leping Huang, China International Capital Corporation Limited, Research Division – Analyst [39]

——————————————————————————–

Okay. The question is about the — if you look at your — the Back-end Equipment growth in this year, 2020, so if you rank by different applications, like CIS, like Advanced Packaging and LED, what will be the fast-growing and the weakest-growing driver this year?

And I think I also checked — CPT also show one slide about the LED. So it seems to be currently the panel company seems — the financial improvement, at least the share price was rebounded. So have you seen any recovery of the LED market this year? Or any like the slide you show with mini LED — So this application, whether it’s ready to take off this year? Or is this still next year’s story?

——————————————————————————–

Wai Kwong Lee, ASM Pacific Technology Limited – CEO & Executive Director [40]

——————————————————————————–

Yes. The CIS market for the Back-end Equipment, let me talk about the Back-end Equipment first. Now for — among the Back-end Equipment segment, CIS, IC/Discrete and LED, CIS is — it was the only segment that saw bookings and billing grew year-on-year. IC/Discrete and the LED came down.

However, within the IC/Discrete Segment, the Advanced Packaging did well. So we certainly highlighted that the Advanced Packaging now contributed to more than 20% of the Back-end Equipment Segment. So in short, CIS and Advanced Packaging did well.

Now for Advanced Packaging, you can also attribute this to also NEXX. NEXX has done very well this year since the acquisition. We acquired them in October 2018 for 1 quarter. This year, we reported a full year results for NEXX. And I’m happy to — I’m also happy to let you know that in just 1 year after we acquired them, we have turned in a small profit already for ASMPT.

——————————————————————————–

Operator [41]

——————————————————————————–

Our next question comes from Arthur Lai from Citigroup.

——————————————————————————–

Yu Jang Lai, Citigroup Inc, Research Division – Director & Analyst [42]

——————————————————————————–

So I think this virus also create — change our life, such as using more online education [from chip] and also cloud computing with more — working with the module. How do you impact your backlog centers of demand? So can you share with us the impact to the — each product line?

——————————————————————————–

Wai Kwong Lee, ASM Pacific Technology Limited – CEO & Executive Director [43]

——————————————————————————–

So Arthur, we are not able to tell this one, right, too early. However, we do expect, after the COVID-19, probably, the impact actually should be positive. I think in our business, more organization, more countries, more society, will get more prepared for this kind of online or more kind of learning, even work from home.

So this kind of a setup, so we do expect, we will have a positive impact. But I don’t think our customer can be at — so fast yet at this point in time. So I would say, if you ask me at this point in time, I can’t tell. We don’t really see that impact yet, but we do expect it will come.

——————————————————————————–

Operator [44]

——————————————————————————–

Our next question comes from Kyna Wong from Credit Suisse.

——————————————————————————–

Kyna Wong, Crédit Suisse AG, Research Division – Associate [45]

——————————————————————————–

Robin, I just wanted to follow-up the question that Leping actually asked, because I think you adjust the segment growth, the outlook is more 2019 because you mentioned about CIS and Advanced Packaging in growth where the others stand. But I think — that can also wanted to check out the outlook in 2020? And also the LED recovery? I mean — if the LED segment will see the recovery in 2020, driven by mini or micro LED business?

——————————————————————————–

Cher Tat Ng, ASM Pacific Technology Limited – CFO & Executive Director [46]

——————————————————————————–

I think on the LED, yes, I think so far, today, we see the booking for LED has been quite encouraging. It has certainly gone up compared to Q4 as well. So I think that’s a good sign, a very good start for LED at this point in time.

——————————————————————————–

Operator [47]

——————————————————————————–

Next question comes from Simon Woo from BoA.

——————————————————————————–

Dong-je Woo, BofA Merrill Lynch, Research Division – MD and Tech Analyst [48]

——————————————————————————–

Just a follow-up question regarding the mini or micro LED, which shows very tiny chips per wafer. So question is, LED chip makers or a packaging guy need a new assembly packaging machine of the ASMPT, given the fact 1 milli of the micro LED, even much, much smaller than 1 square millimeter or is micromillimeter level. So you could just see typical LED back-end machine not enough for the micro LED packaging process, or they need a completely brand-new ASMPT back-end machine?

——————————————————————————–

Wai Kwong Lee, ASM Pacific Technology Limited – CEO & Executive Director [49]

——————————————————————————–

This is WK here. Well, for the micro LED, they definitely need to have a brand-new equipment because the chips are so small. Okay? So the traditional or conventional packaging equipment, most of them are. For mini LEDs, technically speaking, people can use the traditional assembly equipment either way. However, the throughput — the cost will be very high because an LED panel use a 4-key vessels of LED panel. It will consist of 24 million of LED.

So it will take a long time to transfer those LED one by one, to do the wire bonding one by one. So actually, they have, for LED is promoting a new way of assembling it, okay? So that’s why, today, we are working with many mini and micro LED makers, not only the LED packaging houses, but also the panel makers together. So we are composing — we are promoting a new concept of assembling all those equipment.

And today, I think ASM is almost the only company proposing those — these effective solutions. In micro LED, I will say we are far ahead of anybody else at this point in time.

——————————————————————————–

Dong-je Woo, BofA Merrill Lynch, Research Division – MD and Tech Analyst [50]

——————————————————————————–

Yes, very, very clear. So lastly, any shareholder return policy for 2020 who are the payout ratio target?

——————————————————————————–

Cher Tat Ng, ASM Pacific Technology Limited – CFO & Executive Director [51]

——————————————————————————–

So we had declared a dividend of second half of 2019 of HKD 0.70, so if we take the first half dividend of HKD 1.30, and then you take our earnings per share of HKD 1.52 for the full year, we are talking about a very high payout ratio of 132% for the full year of 2019.

Now on this note, we also want to stress a few things. You know that we have been promoting a sustainable and gradually increasing policy since 2017. Now based on this policy, you probably realize that last — the second half of 2018, we declared a dividend of HKD 1.40. So this time around in the second half of 2019, we are only proposing a half of it. So we are fully aware of it. We want to stress that we are fully committed to continue this sustainable and gradually increasing dividend policy.

However, I think we have to be cognizant of the fact that the COVID-19 outbreak is a highly uncertain event, rapidly evolving situation. Things outside China are getting not better. Every day, we see more and more infections outside China, especially in Korea, especially in Europe and the Middle East. So we also kind of worry how this will develop in the near term.

So as a prudent measure, we decided to not to pay out the — full dividend of $1.40. However, we pay half of it. And as you see in our announcement, as soon as the economic conditions improve, and ASMPT starts to make good profit, we are committed to pay the balance of the $0.70 when such conditions appear.

——————————————————————————–

Operator [52]

——————————————————————————–

(Operator Instructions) There seems to be no further question at this point in time. Mr. Lee, would you like to wrap up the call? Thank you.

——————————————————————————–

Leonard Lee, ASM Pacific Technology Limited – Senior Manager of IR [53]

——————————————————————————–

I think we’ve had a very good discussion this morning with very good questions. In the interest of time, we would like to conclude this call. And we would like to thank you well for joining us today, and we’ll talk to you again next time. Goodbye.

——————————————————————————–

Cher Tat Ng, ASM Pacific Technology Limited – CFO & Executive Director [54]

——————————————————————————–

Thank you.

——————————————————————————–

Wai Kwong Lee, ASM Pacific Technology Limited – CEO & Executive Director [55]

——————————————————————————–

Bye-bye.

——————————————————————————–

Leonard Lee, ASM Pacific Technology Limited – Senior Manager of IR [56]

——————————————————————————–

Thank you.

——————————————————————————–

Operator [57]

——————————————————————————–

For your participation. This conclude your conference. Thank you.

Source Article