Airtac International Group (1590) Earnings Call Transcript & Summary

Welcome to join AirTAC's Third Quarter Earnings Call hosted by UBS. I am Ally Chen, covering the industrial sector in Taiwan. It's our pleasure to host AirTAC's CFO, Ivan Tsao today. Before we begin the call, I would like to ask for your support in the upcoming Extel survey next month. Please vote for UBS and myself in 2 categories: Taiwan and Industrial. Now let's begin the call today. We will have Ivan to do briefing on earnings results first and then open up for Q&A later. Now let me hand the call to Ivan, please.

Okay. Thank you, Ally, and good day, everybody. This is Ivan Tsao speak from AirTAC, and welcome to join this conference call. And please let me brief our third quarter results and the current market situation. First of all, pneumatic demand have entered a recovery cycle, and we expect this upcycle could sustain longer than 2 to 3 years. Both shipment and order book amount have exceeded our expectation since the beginning of the year. Pneumatic components are replacing human business direction, and this industry can sustain single-digit growth annually once there is no too severe economic issue. By continuously developing new product and improving our brand image, we expect our annually revenue growth rate can be 10% higher than the industry growth. And as pneumatic products support production line rather than in end product of customer side, as long as customers launch more new models or engage in production activities, there will be a greater demand from pneumatic. In addition, recently geopolitical issue or impact on raw material costs remain within our control. Through ongoing improvement in internal production efficiency and product sales mix, the operating profit margin this quarter still is better than our expectation. Next, let's announce the financial figures of third quarter and first 3 quarters of the year. Unapproved consolidated revenue for the third quarter of 2026 was RMB 2.427 billion, a 23% growth year-on-year. Gross profit was RMB 1.198 billion, a 32% growth year-on-year. Gross margin was 49.4%. Operating income was RMB 823 million, a 40% growth year-on-year. Operating margin was 33.9%. Net nonoperating income was RMB 11 million, including RMB 8 million subsidy from government, RMB 7 million of interest income, RMB 4 million loss on fixed asset disposal and RMB 1 million of FX gain. Income before income tax was RMB 834 million, a 32% growth year-on-year. Pretax margin was 34.4%. Net profit was RMB 600 million, a 20% growth year-on-year. Net margin was 24.7%. EPS for the third quarter of 2026 was TWD 14.23 and approved consolidated revenue for the first 3 quarters of 2026 was RMB 7.238 billion, a 23% growth year-on-year. Gross profit was RMB 3.552 billion, a 33% growth year-on-year. Gross margin was 49.1%. Operating income was RMB 2.469 billion, a 42% growth year-on-year. Operating margin was 34.1%. Net nonoperating income was RMB 38 million Income before income tax was RMB 2.497 billion, a 40% growth year-on-year. Pretax margin was 34.5%. Net profit was RMB 1.098 billion, a 35% growth year-on-year. Net margin was 26.2%. EPS for the first 3 quarters of 2026 was TWD 44.14. Effective tax rate is around 24%. Revenue from top 8 industries for the third quarter of 2026. The biggest one still was electronics, around 28% to consolidated revenue. It's around 33% growth year-on-year. Second one, battery was around 14% to our revenue, 25% growth. Auto was around 10% to revenue, 16% growth. Packaging was around 8% to revenue, 15% growth. Machine tool was 8% to revenue, 35% growth. General machinery was around 5% to revenue, 20% growth. Textile was around 5% to revenue, 33% growth and energy lighting was around 3% to revenue is around 23% growth year-on-year. For current market situation, China government continues to release many stimulus policies and attempt to restore the confidence of people or enterprising and try to improve their domestic economy and let people enterprise to spend more money on end product consumption. In addition, the China government have proposed 15th 5-Year Plan, emphasizes intelligent manufacturing and industrial upgrading, both of which will drive demand in pneumatic market to be better and better. As for the demand of various industries for pneumatic, the revenue of the electronics industry growth by 33% in third quarter of 2026, which is better than our expectation. AirTAC is not an AI player, but a strong demand from AI-related devices needs more pneumatic to support their production activities. We expect we could have double-digit revenue growth from electronics revenue in 2026 and 2027. For battery demand, this industry has enjoyed a high revenue growth rate for around 2 years. China government also has released some new policies in the third quarter of 2026 to prevent the industry from falling to overcapacity again. Only when specific conditions permit can expand new capacity in domestic. We think this is good for battery development in mid- to long-term, even we have to suffer weaker demand from battery in short term. We think it's good for battery industry development. And usually, in the early stage of the government release new restriction policies, industry players used to reduce their capacity expansion in accordance with government policies. However, after a period of time, competitive players will still do what they need to do and expand their capacity again. In addition, more countries have relaxed their restriction policies on China players and those players plan to expand their overseas capacity. So the demand trend of the battery industry still need to be observed for next couple of months. And better revenue growth rate from automotive industry also could be expected in 2026 and 2027. We have improved our brand image on auto customers and enjoy better share gain. Even the overall auto industry has not recovered significantly, we have had double-digit revenue growth for a couple of years, and we still expect double-digit revenue growth in 2026 and 2027 from auto industry. Moreover, government stimulus process for replacing old equipment to be new equipment can get subsidy is still in the market and government stressing industrial upgrading in their proposed 15th 5-Year Plan, those traditional demand like machine tools, general machinery, textile and packaging still can enjoy double-digit revenue growth in 2026, even 2027. However, we still have some demand issues on solar or energy lighting in past 2 years. But after government intervened in the overcapacity issue at the beginning of the year, the marked revenue growth rate has turned positive since this July. We expect solar energy lighting revenue can turn positive in 2026 and 2027. Selected items for selected customers have pricing competition in pneumatic market, but it's still regional basically. We have increased our selling price in overseas market, but maintain stable pricing in China market to sustain our customers' relationship and accelerate revenue from those various new products and new business from AirTAC. The increased raw material cost can still be offset by our internal efficiency improvement, but gross margin and OP margin still have to depend on revenue scale and capacity utilization rate, even we can improve our margins by launching more higher gross margin new items, improving our selling product mix. and continue to improve internal production efficiency to reduce our production cost. We define 100% capacity retention rate based on 24 days a month and 21 hours a day with 2 shift operator working systems. Current pneumatic capacity retention rate is around 100% and the inventory level still in low position and inventory turnover days just around 110 days, then we will increase our capacity utilization rate in fourth quarter of this year. For the development of linear guide, despite the overall weak demand and peer pricing in 2025, our shipment volumes still have more than 20% growth. We also have a 27% revenue growth in third quarter of 2026. We have increased our capacity utilization rate from 20-plus percent last year to 40-plus percent currently and expect to reach 50% by the end of 2026. When we have 20% utilization rate, gross margin is around teens percent. 50% utilization rate, gross margin is around 30%. Even 30% gross margin is lower than our existing pneumatic business. We use the same sales team to do cross-selling pneumatic and linear guide without too much additional OpEx. Linear guide business won't be a burden to our operation from 2027. Our product quality is superior to our Taiwanese competitors and our pricing is lower, but we missed the best timing entering linear guide market. We also missed customer expectation in 2020. Our current sales strategy is to enhance our brand image and just compete with Taiwanese and Japanese peers. After achieving a certain brand image within 1 to 2 years later, we will design additional new spec to reduce our production cost and selling product -- and selling prices to compete with local China players, continuously improve our utilization rate, enjoy better fixed cost leverage and implement another aggressive pricing to compete with all the peers. When we have 80% utilization rate, gross margin is around 40%, it can improve our consolidated OP margin. When the utilization rate is higher than 80%, we will consider changing the current 2-shift operator working system to 3-shift to increase equipment working hours and enjoy better fixed cost leverage. This will give us the opportunity to implement more aggressive pricing strategy further to compete with all the peers and accelerate our market share in coming years. We expect we could have around RMB 3 billion revenue from linear guide in around 10 years. Furthermore, most of the linear guide peers also produces ball screw and the pricing of ball screw has significantly increased in the past few months. As we know, although the linear guide peers have extended their delivery time, the price has only been raised for smaller customers and selected items for a few large customers. Pricing still not been raised obviously in the past couple of months. Even we are happy to see peers raise their selling price and increase the pricing difference with AirTAC, which we can convince more customers buy more linear guide product from AirTAC. We have third business. Electrical controller is a very good business for AirTAC with low CapEx and higher gross margin at around 60%. We began to launch this product in 3 to 4 years ago and have had RMB 400 million revenue in 2025 and 20% -- higher than 20% revenue growth year-to-date. There are another 3 series new products will be launched by end of this year to support higher revenue growth from 2027. Total market cap of electrical controller is around RMB 100 billion with many different kind of components in China, and we will pick up more higher-yield product to develop them and launch them gradually. We expect we could have another RMB 3 billion revenue from electrical controller in around 10 years. For the development of the supporting semiconductors business, based on our strategy, we have not developed products to meet semi customers' demand by end of 2024 due to those products can enjoy higher gross margin, that's around 70%, and also caused by China government localization policies. We began to develop semi items from early 2025 and scheduled to launch them gradually from 2027. The current development progress is a little faster than expected, and we can gradually launch some items from fourth quarter of 2026. But based on past experience, it used to take around 1 year for new product launch and have a better revenue contribution. Currently, we can find some products which were developed for other sectors in past, but still can be shared by semi customers currently. As such revenue has increased from RMB 5 million monthly in around 1 year ago to current RMB 13 million per month. We expect we could have around RMB 1 billion revenue annually from semi customers in around 10 years. And we expect pneumatic industry can return to mid- to high single-digit growth in 2026 and also caused by government policies and potential labor shortage issue, we also expect the pneumatic industry can sustain low- to mid-single-digit growth for the whole industry. In AirTAC, we could have additional 10% revenue growth from pneumatic product, plus the revenue contribution of linear guide and electrical controller. The shipment in the first half of the year exceeded our expectation and maintain a stronger year-on-year growth. We also have increased our CapEx budget in this July to around TWD 3 billion for the whole year of 2026. Even we are optimistic about the market demand in 2026 due to the short lead time of the pneumatic industry, we still provide guidance for 2026 based on a conservative basis. We maintain our guidance for 2026 to achieve a revenue growth of over 20% in RMB terms. It will be higher revenue growth rate when based on NT dollar terms. And if we had over 20% revenue growth, our OP margin guidance will be around 34%. And we have generated free cash flow for years and also have increased our cash dividend payout ratio from 55% in 2025 to 65% in 2026. And this still could be higher in coming years. It's my briefing. Should you have any further questions, we can discuss it. Thank you.

I think we -- I already see one hand raised. Iris.

This is Iris from Deutsche Bank. I've got a few questions. And the first one is on the, I guess, the outlook. Thanks for somewhat guidance somewhat guidance for 2026. And do we have like a top-down guidance for 2027, if possible?

Just late of the October currently, and lead time is short. So maybe we will give our 2027 guidance in later 2026 or early 2027. It's better for the market reference. So basically, what's based on our current expectation, we expect pneumatic industry still could be low- to mid-single-digit growth in 2027, and we could have additional 10% revenue growth higher than industry growth is the best thing of our business.

Understand. And then maybe can you kind of give us a flavor on how October is looking like? I mean, no precise numbers is fine, just in general, the trend.

Yes. Basically, the average of the daily shipment in October month date is higher than past 3 months, but the less working days in October caused by the national holidays. So the monthly revenue number still will be lower than past 3 months.

Okay. But we don't have like a somewhat insight into the year-over-year growth rate?

Yes. Basically, we have total market. The pace of the monthly revenue in fourth quarter of 2025 is higher than regular seasonality. So our monthly revenue growth rate in this fourth quarter will be lower than first 3 quarters of the year.

Understand. And then maybe just on linear guide because I think if I got it right, so the revenue growth is 27% in the third quarter and then the shipment volume sounds like it's a bit lower at 25%. So does it mean that we have raised the price for linear guide?

No. Basically, the shipping volumes were 25% in 2025 and revenue growth rate is 27% in third quarter or first 3 quarters of 2026. 25% is shipping margin growth in 2025. 27% is revenue growth in 2026.

Understand. Very clear. So we basically haven't raised the price either for the linear guide or for the ball screw despite the price increases from the competitors?

Yes. To convince more customers buying linear guide from AirTAC, we still keep stable pricing to support our customers and potential customers.

Understand. And my other question is on just electronics and outlook. So because I recall that 10 years ago, when Apple had their like 10th anniversary of the iPhone launch in 2017, we had a very strong revenue growth from the electronics or electrical sector in the third quarter, so around the launch of the like iPhone X back then, I think. And in general, that year delivered a very strong growth of like over 40% after already a very strong like 30% growth in 2016. So now 10 years from that time, we are now going to have the 20th anniversary and the industry is basically talking about some big spec upgrades. So just based on your experience, so how long is the lead time for us to get, say, like related orders and sales because I understand that our sales is more related to CapEx? So is it right to presume that if, say, Apple launches a new product in September next year, then we will see some orders for the related capacity in maybe March, April time? And then maybe if the sales volume is good, then we will see a further boost in September or October time? Is that the time frame generally we should think about? And feel free to correct me if I'm wrong.

Yes. Basically, smartphone customer demand used to be around 3 to 6 months previous to their launching days. So your expression is correct.

Okay. Understand. And within that double-digit growth target for the electrical department in 2027, then maybe how much is the growth for like smartphones and traditional electronics? And how much is more like AI-driven broader electronics? Do you have a rough kind of split and also expectation in terms of the growth?

Yes. Basically, smartphone revenue is around 25% to 30% of our electronics revenue. And it's difficult to quantify how many -- how much of the revenue growth contributed by smartphone-related or AI-related because so many customers did not just support AI or smartphone individual, maybe they produce so many different kind of products in their operation. And we expect we could have double-digit revenue growth from electronics in 2027, mostly caused by AI-related devices demand still could be good in 2027. And just what you mentioned, 2027 could be 20-year anniversary for Apple. And so many customers say maybe they will launch some new spec in 2027, and it's good for new demand. So we expect we could have double-digit revenue growth from electronics in 2027, but it's a little difficult to quantify the contribution for AI, smartphone or another electronics component individually.

Iris, I think there are several participants raised their hands and maybe we go to them first and then come back to you if you have more. Next, we have Ming.

So I also have a few questions. So first of all, since you already see the battery orders slightly slowed down recently, so in your guess, in 4Q and the next year, do you think the battery sector orders could decline on a Y-o-Y basis or it still grows, but just at a lower growth rate?

Just what you mentioned, you still have to observe for next couple of months because the new prices just announced by government and maybe players or customers still have to observe the foreign situation. And even our battery revenue was declined by 10% in this September, but it's around 20% growth in October. So it's still too early to tell the demand trend of battery in 2027 currently, still have to observe.

Got it. And my second question is regarding on the margin trend. In third quarter, your OP margin declined QoQ. That's mainly because you have the salary hike in the third quarter. So in the past, usually, you will spend a few quarters to absorb the salary hike and gradually to recover your margin trend. So in your view, like next year, what could be the more reasonable GP margin or OP margin level if the demand continue to be strong in 2027?

Basically, once we have 10% or teens percent revenue growth in 2027 and the raw material cost still in or lower than 5% raised year-on-year. Maybe we still could sustain our gross margin to be around 50%, 5-0 percent and OP margin still could be higher than 34%. But still -- we still have not given the guidance for 2027.

And my last question is related to semiconductor-related orders. So could you give some colors regarding the sales contribution from semi this year? And what is your expectation for its sales contribution in 2027?

We will have more than RMB 100 million revenue from semi customers in 2026. And it's still too early to tell the revenue number for 2027 because it depends on how fast the customers give orders to AirTAC and what's the volume orders -- orders volumes for AirTAC. So basically, it should be higher than RMB 150 million, but we have not given any exact number of forecast to the market. Just like I mentioned, we have had RMB 13 million monthly in 2026 year-to-date.

Next, we have KekYee. You can ask questions.

Iva, KekYee here. So I just want to understand the 4Q utilization, right? You said you're trying to increase the utilization in the 4Q. Why do you do that? Just want to understand the logic behind it?

Okay. First one, the electricity expenses hourly rate is pretty high, even around additional 1.5x higher than regular time. So basically, we just kept our shipment could be smoothly in third quarter and will not increase too much of our inventory level. But when the hourly rate -- the electricity expenses hourly rate turn to very regular, from October of the year and we used to increase our utilization rate around 1 to 2 months earlier than our peak season. So basically, our fourth quarter utilization rate used to be higher than third quarter. And what we mentioned, our current inventory turnover days just around 110 days is not healthy. It's too low. So it's better to keep the turnover days to be around 130, 140 days. It's good for our production efficiency and support customers' demand smoothly.

Next, we have Jason.

This is [ Jason Lu ] from the FirstCapital. The first question, I'm curious about the third quarter effective tax rate, it looks like almost 29%. Is that because of onetime effect? And for the full year and the fourth quarter, could we expect back to maybe 21% or 22%?

Yes. Basically, we increased our cash dividend payout ratio. And most payout from the contribution from our China subsidiary. And when we want to remit the profit out of China, we have to pay additional 10% withholding taxes. So basically, we prepared to increase our payout ratio in 2027. So we had to accrue a little higher withholding tax rate in second half of 2026. So we have a little higher effective tax rate in second half of 2026.

Okay. The second question is about the cost of goods sale. We see the material price like aluminum dropped down in the third quarter. And so could we expect in fourth quarter, we have product mix accelerate and utilization rate goes up and lower material price, we expect the gross profit margin in fourth quarter and 2027, it will be better and better?

Basically, all of our aluminum cost, even raw material costs was procured from local China. And the cost could be a little different from international pricing. And as we know, the aluminum cost in China in third quarter still have not declined. So basically, raw material cost is still in the high level currently.

My last question is about the end user demand. In the second half in 2026, we see the textile machine and general machines, they have 20% -- double-digit growth year-on-year. So in 2027, in addition to the auto, energy and electronics, could we see other end users keep the double-digit year-on-year growth in 2027?

Yes. Basically, it still depends on China government subsidy policies and also depends on different provinces have different fund situation that also will affect their subsidy policies. So basically, we could base on the China government, they try to do more industry upgrading and intelligent manufacturing and also good for those traditional demand from subsidies. In addition, in past, some traditional customers, they expand their overseas capacity because U.S. government have some additional tariff policy for China player. But from second quarter of 2025, most of the global countries also have suffered tariff policy from government. And we have seen some customers, they spend -- they back to China, expand their capacity again, especially for those traditional industry customers. So basically, we expect those traditional demand or revenue growth rates still could be double digit in 2027, including machine tool, machinery, packaging or textile.

Okay. So I think there is no queue in the line. So maybe let me ask my questions. So I want to come back to the iPhone because iPhone will launch a non-foldable new model in first half next year. And Ivan, like you just mentioned, there might be a need for more machinery like 3 to 6 months before the product launch. So if we think about the time line, how should we think about it to contribute to our orders? Would it be helpful for fourth quarter this year or first quarter next year?

Yes. Basically, our revenue from smartphone customers was declined by single digit in first half of 2026, but it's around 26% growth year-on-year in third quarter. And maybe some of those products scheduled to launch in first half of 2027, such capacity have began to deliver in third quarter already and how the demand in fourth quarter will be still depends.

Okay. So maybe that's one of the cause for stronger daily shipment in October or any other factors. Because fourth quarter typically is a lower season, but daily shipment is still like improving MOM. What are possible factors driving that?

Basically, except auto was not the high growth rate in this October. So many sectors, demand is still pretty good. And smartphone demand or smartphone revenue in October was lower than third quarter. It's just flattish monthly year-on-year. So basically, maybe we have pretty good revenue growth from electronics and mostly still contributed by other electronics sector.

Understand. I see Jason raised hand. Jason.

I would like to know some clients moves their manufacturing basis or say they build new manufacturing basis in overseas out of Mainland China. In your own opinion, what do you think is a positive effect for AirTAC's business sales or it's a negative effect in the long-term?

Yes. Basically, once customers they have existing capacity in China and expand additional capacity out of China, most of their equipment supply chain still come from China because maybe customers cannot find any countries with such high efficient and low cost for the equipment supply chain. So from 2018 or 2019, the trade tension between U.S. and China, so many customers they set up new capacity in non-China areas, most of the equipment supply chain still come from China. But pneumatic is a very upstream or frontend of the equipment component. We just delivered our pneumatic product to the equipment maker customers who's located in China. And this equipment maker made a whole set of equipment and export to non-China countries to support such non-China expansion. And most of the such non-China expansion could be new equipment. So it's good for AirTAC. So with a trade tension between U.S. and China, maybe AirTAC still could be a beneficiary of such overseas expansion.