ASMPT Limited (522) Earnings Call Transcript & Summary

Good morning, good afternoon and good evening, ladies and gentlemen. Welcome to the conference call. Mr. Leonard Lee, please begin your call, and I'll be standing by. Thank you.

Good morning, and good evening, ladies and gentlemen. Welcome to the ASM Pacific Technology 2020 Second Quarter 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 Technologies' 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 2020 second quarter results can be downloaded from our website, www.asmpacific.com. With us this morning are Mr. Robin Ng, CFO -- CEO of ASM Pacific Technology; and Ms. Patricia Chou, CFO of ASM Pacific Technology. Robin will start with a brief discussion about our 2020 second quarter results followed by a Q&A session. Without further ado, let me hand this over to Robin, please.

Thank you, Leonard. It was a challenging first half of 2020 with the global economy's steep economic downturn, triggered by the COVID-19 pandemic and lockdowns in multiple countries. The net effect dampened shipments to our customers serving the automotive and industrial sectors, especially in the U.S. and the Eurozone, and also for the CMOS image sensor or CIS market. Nevertheless, I'm pleased to report that we have [ stayed resolved ] and able to achieve year-on-year growth in revenue and profits. Multiple factors such as 5G infrastructure buildup, the localization of China semiconductor supply chains and a strong position in Advanced Packaging were contributing factors driving our first half revenue performance. Overall, group bookings for the first half of 2020 was USD 1.14 billion. This is an increase of 7.4% compared to the first half of 2019. Notably, net profit, HKD 390.8 million, grew by 119.2% over the same period last year. Quarterly performance. Second quarter performance was relatively good. For example, all 3 business segments delivered both Q-on-Q and year-on-year revenue growth. Our second quarter billings of USD 557.4 million came in slightly above the midpoint of our revenue guidance issued in our first quarter 2020 results announcement. We also delivered close to the midpoint of our second quarter gross margin guidance given our first -- given during our first quarter 2020 results announcement. Notably, our net profit, HKD 365.4 million, in the second quarter was a healthy 421.8% increase over the same period last year. Revenue for both Semiconductor Solutions and Materials Segments recorded double-digit year-on-year growth. And while second quarter group bookings decreased 29.4% Q-on-Q and 21.6% year-on-year, respectively, this was in line with the previous guidance and a restructuring of the overall dampened business sentiment due to the COVID-19 pandemic. Let me now provide some highlights about our segment performance. First, the Semiconductor Solutions Segment. Our second quarter billing for Semiconductor Solution was USD 279 million, an increase of 43% Q-on-Q and 33.8% year-on-year. Strong year-on-year billings growth was underpinned by Advanced Packaging, Optoelectronics and IC/Discrete segments. Notably, advanced packaging deposition tools for RDL, or redistribution layer, and copper buildup applications from NEXX delivered strong billings growth compared to Q2 2019. The ongoing market ramp for high-performance computing application continues to drive strong performance from our NEXX business, while the traditional wire bonders and the die bonders still delivered relatively strong year-on-year Q2 revenue growth despite a challenging business environment. 6-month billings, USD 473.3 million, increased by 16.6%, while new order bookings of USD 536.5 million, increased by 14.2% versus the first half of 2019. While Q2 segment booking decreased slightly by 8.1% on a year-on-year basis, this was due to a confluence of the pandemic and the U.S.-China trade tension dampening overall business sentiment. Gross margin of 42.9% in this quarter and 42.2% for the first half of 2020 were mainly driven by higher volume effect, positive results from our productivity initiatives, our group product mix and continuous cost reduction efforts in our manufacturing operations. On to highlights for our SMT Solutions Segment. While new order bookings for SMT Solutions of USD 166.6 million is [indiscernible] [ sell by ] 38.4% Q-on-Q and 43.7% year-on-year, respectively, new order bookings for the first half 2020 of USD 437.1 million represented an increase of 13.7% as compared to the last 6 months of 2019, although still less than the first half of 2019. As expected, bookings for SMT Solutions have decreased from the high levels they achieved in the preceding quarter. A 6.9% increase -- decrease, sorry, in 6-month billings of our SMT Solutions business of USD 382.6 million year-on-year and gross margins of 31.3% for the second quarter and 31.8% for the first half of 2020 were impacted by the overall market weakness in automotive and industrial application market and the relatively larger customer base that the group served this year compared to last year. Nevertheless, SMT Solutions benefited from the 5G-related investment in China in the first half of this [indiscernible]. Another bright spot in this segment is system-in-package, or SiP, which is expected to deliver sustained and long-term returns to the group. On to highlights for the Materials Segment. This quarter, Materials Segment bookings remained at a high level, although Q-on-Q bookings declined by 11.8% after 5 consecutive quarters of Q-on-Q booking growth, an indicator that the demand for semiconductor deposits remain healthy. On a year-on-year basis, our Q2 Materials Segment bookings rose by 32.7% and the first half booking achieved a record for the Materials Segment of USD 167.3 million, registering an improvement of 25.2% versus second half of 2019 and 59.3% versus first half of 2019. In the second quarter, billings of our Materials Segment of USD 74.2 million remains healthy, representing increases of 43.2% Q-on-Q and 28.2% year-on-year. The Materials Segment contributed 13.3% to our group billings for the second quarter. Billings of the Materials Segment for the 6-month period amounted to USD 125.7 million, representing a decrease of 3.2% against the preceding 6 months, but an increase of 15.6% comparing to the first half of 2019. Gross margins were 16.9% for second quarter and 13.5% for the first half of this year. This segment achieved a healthy profit of $58.1 million in the second quarter. This represented a 193.7% year-on-year increase and the segment profit of HKD 73.9 million for the first half of 2020 represented an increase of 134.4% year-on-year. Gross margin improvement this year compared to last year for the Materials Segment was underpinned by a higher volume effect and the discontinuation of the loss-making Molded Interconnect Substrate business in the early part of 2020. Taking the Material business forward. Our Material business is healthy and our Materials Segment is consistently among the top global lead frame manufacturers consistently. This is a strong business in tandem with the growth of the global semiconductor market. However, the lead frame business is extremely competitive and requires economies of scale in order to be sustainably successful. We have been closely monitoring lead frame market trends for some years and also industry consolidation amongst its market participants. This is why we have reached an agreement to form a Strategic Joint Venture involving our Material business segment with key partners. We have undertaken a rigorous process to identify suitable strategic partners to help accelerate the business growth of this Material segment. Our partners are Wise Road Capital Limited and Asia-IO Capital Management Limited. And together with them, we will collectively guide the management and development of this Strategic Joint Venture. We expect the Strategic Joint Venture to begin operating by the end of 2020. In the meantime, our Materials Segment will continue its business with the management team, operations, expansion plans and product development unchanged. When the Strategic Joint Venture begins operation, we will operate as an independent business [ here while ] in Hong Kong under the auspices of the SJV partners, tapping the deep and complementary network and market experience of Wise Road and Asia-IO to help extend and solidify its leadership position in the lead frame market. ASMPT will hold a minority equity interest in strategic joint venture, while our partners will collectively hold a controlling interest through their designated investment vehicles. The financial of the SJV will be equity accounted for by the group once the SJV begins operating. I'm confident that the excellent track record, financial strength and the collective attributes of the partners in this Strategic Joint Venture form a very strong and capable foundation to fully actualize the immense potential inherent in the lead frame business. This will, in turn, benefit all stakeholder in ASMPT's Materials Segment and give our customers the assurance that their needs and the future requirements are well looked after. Let me now give my comments on our business outlook. While we seem to have navigated global economic headwinds relatively well, with the COVID-19 pandemic and the ongoing political tensions, uncertainty remain. The IMF or International Monetary Fund revised their global full year 2020 growth projection downwards during the June 2020 review from minus 3% to minus 4.9%. For the second half of 2020, the threat of another wave of COVID-19 infections and the continued fallout from the worsening U.S.-China tension will remain major concerns globally. For revenue, we anticipate this to be in the range of USD 480 million to USD 560 million for Q3 2020, and that takes into account the subdued demand for automotive solutions and the weakness in the Eurozone demand. Despite these uncertainties, one thing is clear. The rapid transformation of global workforce and industry norms have added to [ over ] trends that point toward a future increasingly in need of more digital capabilities and features. This includes increased telecommuting use, a huge terse of high-performance computing and data centers, 5G infrastructure buildup, localization of China's semiconductor supply chain and an increasingly wider and more complex range of equipments for digitally driven capabilities across multiple industries. ASM is now placed to help meet this growing and evolving requirements. Our diverse customer base remains one of the key competitive advantages as we make good progress in capturing new market opportunities in Advanced Packaging, Silicon Photonics, Industrial Internet of Things, mini and micro LED solutions, Power semiconductors and Industry 4.0 solutions. We are also preparing our business for the future such as the formation of the Strategic Joint Venture to take our business -- our Material business forward. I'm confident that we are in much stronger -- even stronger relative to the competition. With that, we are ready to take some Q&A questions.

[Operator Instructions] Our first question comes from Donnie Teng from Nomura.

I have 2 questions. First is regarding to your outlook. So despite of you're not providing any booking outlook for third quarter, just wondering whether if you can guide us the direction of your different businesses? This is the first question.

Yes. Because of the -- really the uncertainty still remaining in the market, so it's kind of difficult to really give some kind of definitive kind of outlook for our bookings especially. Now if you look back in our trend for many years, typically, the trend is that the second half booking will be lower than the first half booking, and that seems to, as a bit, especially for the Semicon Solutions Segment book. For Materials, kind of like inconsistent, sometimes higher, sometimes lower. But for SMT, the second half tends also to be lower than the first half in terms of booking.

And a quick follow-up is on the -- regarding the first question is your announcement on selling some stakes of your Material business. Because I think Wise Road Capital is one of the important China fund. It used to invest in Nexperia before. So just wondering if you can elaborate more on whether ASM Pacific in the future will continue searching for the strategic investor, particularly from China.

Yes. I think, so far, this is the first time in the history whereby we formed a Strategic Joint Venture with a partner. So at this point in time, we have no plan for any future joint ventures in any other party.

Our next question comes from Kyna Wong from Crédit Suisse.

So I want to have a follow-up question on the direction of like Material Business. So as -- right now, one of the key benefits is actually to accelerate the growth. I think from my understanding it's like -- it actually could like capture like more different customers, [indiscernible] customer in the future and especially when we can also pursue the growth in the Chinese -- the China semiconductor industry, then this divesture of Material business could be one of the advantage. I think -- and then may I know like if there's any future plan for these subsidiary that is working with -- I mean, any other like business structure that could be changed in the future? And if this is also something that is a direction you are working with the strategic PE investors? This is the first question.

Okay. Kyna, I'll answer your first part first. As I've mentioned in my opening remarks, we have gone through this very rigorous process to identify suitable joint venture partners for our Material business. Now we are very pleased to have found very strong partners in Wise Road and in Asia-IO as -- let me just say just now. Wise Road is known in the market when they have acquired Nexperia. And both these companies, in our opinion, have very deep connections and experience in the semiconductor market, in particular in the Chinese semiconductor market. Now as we have mentioned earlier, China is definitely a high-growth region also for the lead frame semiconductor market. So I think it's a combination of their experience and expertise and their expertise -- and also financial expertise and also coupled with our experience in managing our -- the lead frame operation, I think it's a marriage of strength. And I think we are very confident that this marriage or this JV will further enhance the growth of the lead frame business in the years to come.

Our next question comes from Arthur Lai from Citigroup.

I have 2 questions. One is a follow-up question [indiscernible]

Sorry, Arthur. We can't really hear you. Sorry, Arthur. Can you speak a little bit closer to the mic?

Yes, yes. Sorry. Is it better?

Yes, yes, yes.

So the first question is a follow-up question on the quarter 3 revenues. How we think of the composition of the SEMI Solution and SMT? We want to know that given this guidance breakdown.

Yes. I think the main drivers are still there. So we mentioned them both. 5G, I think 5G-related investments are driving demand across both the IC, IC/Discrete, NEXX as well as SMT Segment. So it is a common [ growth theme ] propping up the demand for the semiconductor market. So that applies, as I say, across to both segment. Now for the China localization effect, it definitely is taking hold. So we have been saying that. So the drivers remain the same, actually the same from Q1 going into Q2. And we see these drivers also continue to be there for a period of time. Now for SMT, I think the -- as I said, the outlook for Q3 in this segment, right? So we see a weakness in automotive. And also in terms of region, we see that Europe and America are slowing down. So as a result, that tempered our guidance a little bit in terms of revenue guidance for Q3.

Understand. And given the Europe and U.S., they have a higher tax rate, and then -- so how we think of the tax rate going forward?

Yes. I think you can see our tax rate this quarter have gone down to a much lower level compared to Q1, primarily because of -- we have been saying, if you guys have been following our results, right, so the profit mix between the SEMI side and the SMT side does play a big part so -- in terms of determining the overall group tax rate. So for Q2, because of the higher profit generated by the SEMI segment, we see the tax rate coming down to around 14% and on the first half basis to around 18%. So if this profit mix remains the same going forward, we can expect to see the kind of ETR or estimated tax rate for the rest of the quarter.

Our next question comes from Wu Liuyan from Everbright.

I'm Wu Liuyan [indiscernible] Everbright. I have 2 questions. The first is I'm really curious about the opportunity for SMT business for next year. Which area of demand will rebound to drive the whole business go up?

Yes. Yes, we still believe the 5G infrastructure buildup would be a multiyear program. And we believe and we are confident that our SMT Segment would continue to benefit from this particular segment because our superior capability in handling more advanced devices, placement on more advanced devices so -- in terms of accuracy, in terms of flexibility, in terms of speed as well. So I think 5G would continue to drive it. Now I also mentioned in our announcement that SiP or system-in-packages, this demand has been around, has been around for a couple of quarters already. We see customers using our SMT tools to assemble devices onto SiP packages. They use -- they like our tools because of the speed and the accuracy. And most of these devices [ on mode ] is actually going into consumables, like for example, the AirPods, those wireless AirPods, they are kind of very popular now among all of us, and also smartwatches and so forth. So we see these 2 demand will continue for a period of time. And of course, we are -- I mean, looking at the smartphone market, if the smartphone market starts to pick up in the later part of this year hopefully, with our SMT segment, we believe will also stand to benefit from this demand in smartphone.

Yes. I understand. The second question is more detail. We can see the demand from the base station and like module released this year. Where this kind of demand decrease next year?

I hope I got your question correct. I -- as I said, the base -- the 5G infrastructure base station buildup is, in our opinion, a multiyear driver. So it will also continue into 2021.

Okay. And I'm wondering about the equipment demand. With customer release in end of this year, but not next year, will this happen this year?

Sorry. Can you repeat your question one more time, sorry?

I'm wondering about customers will build up their capacity in this year of -- in end of this year, but not next year, and the demand from, for us, is released most in this year, but not next year when this circumstance happens.

Yes. I think for -- as I say, for 5G, we still believe that it's a multiyear driver for the industry. So as long as countries over the world continue to build up their 5G infrastructure, I think the demand will continue for a period of time.

Our next question comes from Leping Huang from CICC.

I have 3 questions. So the first question is, what's your exit strategy for the Material business? And how this will, you think, will benefit the ASMPT shareholder? Because you consider the good track record of the Wise Road or the carve-out, the ASP and the -- did they sell -- I mean, finally go to the Asia market, which has a very large valuation gap. So how you look because you still keep above 40% stake in this Material business? What's your plan for this Material business exit plan, yes?

Yes. Thank you for the question. Now the reason that we hold still a significant percentage, 44.44%, of shareholding in the joint venture is an indicator of the strong signal that ASMPT is fully committed to this strategic investment and fully committed, together with our partners, to further grow this investment and bring this SJV into a new high. So we believe, as I mentioned earlier, the lead frame market is primed for growth. And looking at the cost trend, the consolidation trend among the market participants, we believe that it's a opportunity for us, together as a JV, to capitalize in this current macro environment to bring this joint venture to a much higher growth than if we were to remain as a 100% owned business under ASMPT Group. So as I explained earlier, I think the complementary -- the strength of the partner will be able to deliver on a superior growth return for both shareholders in this particular joint venture. Now we just mentioned about this joint venture today. So absolutely, we have no plan. There's no divestment -- divesting plan at this point in time. But of course, looking at the profile of the investors that we have partnered with, they are very strong in terms of financial expertise. So of course, we can't go out that going -- IPO is definite -- is one of the routes that we will take eventually.

Okay. The second question is about your SMT business margin. So I mean your SMT business margin keep going down in the last few quarters. And now roughly, it's around, I think, 31 percentage. So what we should model your SMT business margin in long-term? So I think you explained in previous quarter, you have the larger exposure in Chinese customer and then you have gained market share, but how we should look this business in terms of margin long-term?

If you look at SMT margin, we have been saying that, on one hand, we are happy that we have been able to penetrate into the Chinese market in a very sustainable manner. On the other hand, typically, this market has a lower margin compared to if we sell to the European and American market. Now, this year in particular, we see the China mix are much higher than the European and American mix because of the slowdown in Europe and in America. Now if things -- if the economy in -- or the demand in Europe and America start to pick up again, the gross margin of the SMT Segment will also start to improve. So I think primarily it's driven by the geographical mix of this SMT segment. However, of course, having said that, we are, of course, looking into measures and initiatives to continually to bring down the cost of the SMT tools. As I mentioned, we have mentioned some quarters back, our manufacturing factory should be fully operational probably in the early part or mid part of next year. And if that comes into fall, I think we can expect our SMT margins will continue to improve from there.

We have another following question come from Donnie Teng from Nomura.

I would like to discuss maybe a long-term or midterm trend. As you know, Advanced Packaging has been an important driver for ASM Pacific in the past 1 to 2 years, but I'm seeing there is a new trend called chiplet. And I also read some of your presentation showing that you have some equipment, it's on the R&D stage, for this kind of chiplet assembly. Just wondering if you could give us some more color on progress and the future market opportunity from this kind of new chiplet design ICs in the future. And maybe if -- it would be better if you could comment on the competition landscape within this new chiplet design.

Yes. You're absolutely right. So you -- I mean, we all know about the limitations of Moore's Law, right? So I think with the limitation of Moore's Law, I think the shift is now towards the Advanced Packaging. So that's the area that the back-end guys like ourselves and the competitors play in this field. Now, yes, I think there is tremendous growth opportunity for everyone who are participating in this particular arena. Now we're talking about chiplet. That's exactly the trend that we are seeing thus far. So basically, in terms of technical terminology, we call it heterogenous integration, so basically placing different chips, whether it's memory chip, logic chips or other kinds of chips into a package, trying to mimic the SoC, the system-on-chip fabricator at the front end. So instead of fabricating this chip in the modem, the GPU and distribute it in one chip in the front end, we are -- the trend is moving towards using Advanced Packaging tools to package individual of these chiplets into the package and try to mimic the function of SoC. So that -- for that to really materialize, I think the -- we need Advanced Packaging tool set. For example, we have been advocating that, for ASMPT, we believe we are a premier interconnect technology player. So we have a whole range of Advanced Packaging tools to facilitate this is [indiscernible] process. For example, we have been advocating -- we have very accurate and very precise pick-and-place tool called the NUCLEUS. You guys are also now very familiar with our TCB, thermal-compression bonding, as well. In our announcement, we have also mentioned that we believe we have the largest in-stock base of TCB for CPU applications. And since the acquisition of NEXX back in 2018, now, we extended another area where we can play in Advanced Packaging areas, and that is for the deposition -- a deposition tool for RDL for copper buildup. So we have been also very successful in this particular area, especially for panel deposition tools so which -- we have been saying NEXX has been performing very well this year compared to last year. So the landscape is that this -- we see Advanced Packaging will continue to grow, but that would be -- also be [ a friend ]. Advanced Packaging, as a whole, in terms of market size, is still smaller than traditional wire bonders, the traditional die and wire bonders. We're still a small market, although growing at a faster rate compared to this particular segment. So in terms of competition landscape, now, of course, because these tools are highly advanced and highly precise, so there are not many competitors in this particular area, so not many competitors have the technology to enter this space. So the entry barrier is very high for this particular space that we play in. Now, typically, also from the customer perspective, such tools are new tools. So we're quite a technology buy. So when it comes to technology buy, customers tend to be also very selective. They want to look at the company profile. Does the company have the breadth and the depth in terms of technology and the resources to deliver these Advanced Packaging tools alongside with the customer? So they tend also to choose a customer with a lot of financial strength, a lot of technological resources in order to carry this program through multiyear -- sometimes it can be a multiyear program, together with the customers. So in terms of -- and as a result, in terms of competition landscape, there are not many areas of entry in this particular area.

Got it. And a quick follow-up is on, you mentioned about the high-precision bonder. So can we assume that besides the new bonders that you are currently under R&D stage, maybe AMICRA can be part of this high-precision bonder supplier for the potential new chiplet design ICs in the future? And another small question is that you have talked about SiP gross momentum has been pretty strong this year. So maybe next year, also pretty strong, driven by premium smartphone company. So could you give us a little bit idea about how much sales contribution is from SiP right now under your SMT business?

Certainly, answer your first question first, AMICRA is also in Advanced Packaging tool, very precise down to SoC micron precision. So we -- AMICRA is well placed and positioned to benefit from this Silicon Photonics area. As you all know, right, as we demand more and more faster data, so the plan is to keep on increasing. So silicon photonic is not exactly a new technology, but is it's a technology that's coming out very strongly because I think in all this space, cost conservation is not successful, the industry believes that Silicon Photonics is a much lower cost alternative compared to the conventional photonics. However, it requires very high-precision tools in order to do the packaging. So AMICRA is a premium tool supplier for this particular space. So we are very confident that in the years to come, with the growth in terms of data center, the growth in terms of telecommunication, bandwidth, all these bodes well for the AMICRA business. Now in terms of SiP, yes, I think this growth started a couple of quarters back. And as I said, it was driven by the consumables that the wireless phones and so forth. So we believe with the 5G phone combo, I think this also will underpin this particular business, this SiP, for the SMT business, yes. Now as to your question, we don't really detail how much is the contribution from the SiP segment for the SMT business. But I can say -- I can only say that this is one of the fast-growing segments within the SMT business.

Our next question comes from Chris Yim from BOCOM.