E Ink Holdings Inc. (8069) Earnings Call Transcript & Summary

And welcome to E Ink Third Quarter 2022 Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. The WebEx replay will be available on E Ink's website after today's conference. Joining me today are Chairman, Johnson Lee; CFO, Lloyd Chen; and Financial Senior Director, Patrick Chang. Now I would like to turn the call over to Lloyd.

Hi. Good day everyone. Welcome to E Ink third quarter earning conference. Before we start, I would like to spend a few minutes on the photo on the cover page that show on the screen. Basically, this photo is about the Alaska Airlines. They partner with a Dutch company called a BAGTAG announced that ePaper bag tag program which made Alaska Airlines become the first U.S. airlines to introduce the ePaper bag tag with our 3.7 inch battery-less display. It basically enables the entire checking process almost all of airport and reduces the time spent dropping off on checked luggage by nearly 40%. All right. Let's move to next page. Let's take a quick look at our safe harbor statement. Okay. Next page. All right. Let's look at the third quarter individual quarter first. The sales revenue was around TWD 8.1 billion, operating profit TWD 3.22 billion, net income TWD 4.24 billion, EPS, TWD 3.72. And for third quarter cumulative from Q1 to Q3 revenue 11 year best. Operating profit and the net income almost, I mean, hit the record high and operating profit more than twice 2021 whole year's. So that's for the P&L part. And for operating profit, basically, it continues to grow due to strong demand from markets through different applications such as eReader, eNote, Retail Logistics and Signage. As I mentioned earlier, the third quarter cumulative operating profit more than, as you can see from the screen, the triple the 2021 third quarter cumulative and operating profit and operating profit percentage against the total sales revenue hit the record high. Next page. So ROE and ROA basically, they have been rising since 2018. And third quarter cumulative ROE was 21.2% and ROA was around 13.5%. Both returns grew positively. And both ROE and ROA more than 2021 whole year's. Basically, once again, it shows the growing profitability and how we efficiently and effectively utilize shareholder equity and assets to generate the profit at E Ink. Next page. Okay. A strong balance sheet with an increase in net assets. So if you look at the cash and cash equivalent from third quarter last year to third quarter this year, basically, the cash has been increased from TWD 12.2 billion to TWD 15.7 billion. And by third quarter this year, the total assets was around TWD 64 billion. Next page. And for cash flow, cash increased to TWD 10.3 billion by third quarter. So we basically we utilize cash inflow from operations and investments to further financial investments, to dividend payment, and to CapEx on ePaper production line. The total financial assets plus cash was increased to around TWD 37.5 billion by third quarter this year. So that's for the cash flow. The next page is about the third quarter accomplishment. The first one is Asia Responsible Enterprise Awards, AREA. It's the second year we won AREA in 3 categories in comparison with 2 categories we won in last year. The third categories are Corporate Sustainability, Reporting and Green Leadership and Social Empowerment. And also it's the consecutive second year we won Best Company to Work for in Asia. Also some local recognition in Taiwan, and this is the first time we participated in Taiwan's Sustainability Action Award. Basically, this award is consistent with the United Nations SDGs, sustainable development goals. We were honored by winning awards in 3 categories. The first one is eReader for the future, which is consistent with SDG 4, quality education. The second one is diversified renewable energy leads to net zero, which is consistent with SDG 7, affordable and clean energy. And last one is sustainable ePaper-enabled smart green retail consistent with SDG 12, responsible consumption and production. The next one is one of the leading Taiwanese magazine called Commonwealth Magazine. We were honored in top 50 companies excellence in corporate social responsibility. And in August, we also received the World's First ePaper Module Carbon Footprint Verification in compliance with the ISO 14067 standard, which define carbon footprint of products by selecting 6.8-inch and 2.9-inch module certification bodies. And the last one is, we understand the importance of the information security. So we started implementing ISO 27001 to protect our data confidentiality, integrity and availability. And during the implementation, it was also recognized by TPSA, Taiwan Panel and Solution Association with the award, it's called Cybersecurity Excellence Award. Right. Next page. Further recognition on our technologies with the continuous product innovation, we won the 2022 SDIA, Smart Display Industrial Alliance vision display award, silver award. And basically, we are stepping up with the new color ePaper technology Gallery 3, that is not only more colorful, but also flexible. And the next example -- next in recognition was the battery-free color ePaper device. We won the bronze medal in the invention competition at 2022 Taiwan Innotech Expo. When the display image needs to be updated, the wireless power transmission module provides power for the SOC of the device to communicate with computers or mobile phone applications. The color images can be updated instantly. After the update, the display image can be maintained for a long time with no power consumption. And last but not least, BMW iX Flow, the conceptual car is [indiscernible] in E Ink ePaper field, which enables color changing. It was also selected as one of the best innovation of 2022 by Time magazine this month. It's absolutely one of the best examples of E Ink on every smart surface. So that's innovation, the technology that we recognized in the third quarter. And next page, so I believe during the post-COVID period, the hospital and the government around the world would have more time and resources considering how to implement Smart Medical and Smart City. So a few examples we would like to share. So the first one is we have been showcased with NTU hospital, the local hospital in Taiwan, GISKY, [ Kstar TPV ] of [ Lake Union ], basically those partners in our ecosystem in the Smart Medical. And we also collaborate with Darwin Precision Corporation, utilizing in campus ePaper signage product demonstration at Chang Gung University, that's a university at the southern part of Taiwan. The [ Smart Campus ] sunlight-readable digital signage uses 31.2 E Ink Triton on color ePaper and 28-inch black-and-white ePaper module. The next example was the Shanghai Commercial Bank, even Shanghai, but that's a bank in Taiwan. Basically they switched from the conventional poster to ePaper digital signage for market promotion to enhance the ESG implementation. And last but not least, in cooperation with Taipei MRT, Taipei Metro and a value technology, the system integrators, adopted on the color, ePaper signage in MRT station, metro station in Taiwan with the timely information and less manpower to improve the operational efficiency. So that's few examples to explain how to use the ePaper on the smart lines. All right. Next page. So the next one is something about the ESG committee on E Ink. Currently, we already have the corporate level ESG committee internally. But the Board level ESG Sustainability Committee was created in November. As you can see from the screen, there are 7 subcommittees under both corporate ESG Committee and Board ESG Committee. They are product sustainability, green production, enterprise care, corporate governance, supply chain, project and stakeholder. And the very important one is risk management. So basically, the creation of the Board level ESG Committee can guide management to allocate the appropriate resources and attention. So the Board member and the E Ink management can jointly see ESG issues and connect to E Ink long-term success. Right. The next page. All right. Based on the E Ink sustainability framework, as I just explained now, as for the social engagement, we have been conducting eReader for the future project since 2017. We collaborate with ePaper ecosystem partners jointly to donate eReader devices and eBooks in order to build up eLibraries for schools. After years of solid works, we have humbly donated nearly 3,000 eReader devices, more than 261,000 copies of books to nearly 135 elementary schools, 19 libraries benefited more than 40,000 students with accumulated more than around TWD 200 million value equivalent. And this year, 2022 eReader for the future ceremony was held outside of Taiwan in [ Penghu ] and we are glad to share this information with you. And one of the important sustainability event, TCSA, Taiwan Corporate Sustainability Awards was held yesterday for the consecutive second year joining this event. We continue to be awarded with the most prestigious sustainability, top 100 corporate, also corporate sustainability report platinum under the platinum, growth through innovation leadership. So that's the achievement we made in terms of the sustainability. Next page. In third quarter, we also joined another initiative is called EP100, so EP100, EP is short for energy productivity. Basically, it is initiated that calls of global enterprises to actively respond in 3 ways: doubling energy productivity and implementing energy management system and net 0 carbon buildings. Currently, there are 125 companies around the world have joined committed the EP100 and this program basically encourages the company to use energy in a smarter and more efficient way to improve the productivity. It requires all committed members to submit energy saving reports every year to specifically reduce greenhouse gas emissions. It is expected that enterprises can reduce the rate of global warming through their environmental impact, which are reducing our long-term operating costs and climate risks. We already are committed to achieve net zero in 2040. So this EP100 program is definitely a good one for us to achieve net zero more efficiency and more systematically. All right, the last page. All right. Last but not least 1,500 solar-powered ePaper bus stop in Puxi, Shanghai are set to become the first carbon-neutral bus stop in the world, thanks to ePaper technology low power consumption. And this great example basically also certified by BSI. The whole system, the operation system for that 1,500 solar powered ePaper bus stop only produces on 42.9 tons CO2 equivalent emission by utilizing the benefit from ePaper low power consumption. So whatever corporate or organization can spend limited budget on the carbon credit in order to achieve the carbon neutrality target. So that's my sharing for what we achieved in terms of the financials and some events we have done in third quarter. And we can move to the next session for Q&A.

[Operator Instructions] The first question is from [ Ajay Sharma ].

I wanted to check on Q3, there was a pretty substantial jump in both gross margin and operating margins. So can you talk about that? Like it's almost strong from 47%, 48% to almost 60% gross margin.

This is Johnson. Yes, I mean it's a onetime thing. It's not really the trend that E Ink is going to be doing 60%-plus gross margin. That's not how we operate. We really want to share profit with our partners so we can grow this market together. The main reason for that 60% is really like in Q1, Q2, Q3 -- Q1 and Q2, we have yield losses in our FPL E Ink material sales. And we found a way that we can save that. But because of IFRS, well, you need to book that expense right away. But when you are able to save it and then ship it out to your customers, then it gets booked as a revenue and then which indirectly affects the gross margin. So it's really a onetime thing. And also, we were shipping out some of our inventory that we weren't able to ship and that kind of also increases that gross margin as well.

Okay. Okay. So we should think the average of the 9 months as the realistic margin, right, because it is a onetime adjustment in Q3 for what you saved in Q1, Q2, right, basically? So effectively, you are still realizing that margin, right, on a 9-month basis?

Yes, I guess so. I mean, from a 9-month basis, yes. Yes, true, though. But do -- we do have -- we also ship out some inventory that we weren't able to ship and that also helps the gross margin. That's a onetime thing.

Right. Okay. And then I see that October revenues are a bit light. So are you seeing some slowdown? Or how do you see this quarter panning out?

You mean October, right?

Yes, yes.

Yes, I mean, it's a month-to-month thing. And then sometimes we just ship more E Ink materials, which is lower sales revenue, but higher gross margin. If we sell more module, you get higher revenue and then less gross margin. But we don't really look at month-to-month, there might be some variation, but we do believe that Q4 will be better than Q3 in the single digit. And looking further out to Q1, year-to-year, we expect it to grow. But quarter-to-quarter, we expect to fall, which is quite normal for us because Q1 is usually the low season for us. So yes, that's how we look at it.

Okay. And just lastly, can you update on the expansion progress?

Sure. So last year, we decided to expand on our E Ink material line, which is we expand 3 lines and that's installed this year, and it's been helping us grow our business. And next year in Q1, we'll have the fourth line -- fourth additional line ready and that's where we are. And looking further down, which is we call H5, we expect that to be ready in 2024 -- yes, 2024. And then H6, maybe in 2025. But recently, we've been looking at whether we can make the equipment with bigger to service the signage market. And so we're looking at whether the H6 -- yes, the H6, if we can modify that whether that's going to affect our schedule or not. So we're still in that phase of determination. Our expansion plan and -- that's the expansion plan in Taiwan. In U.S., we're -- that's on track. We're expanding the ink manufacturing part and that's on schedule. So that's according to plan. And also the China part, we're also expanding that. But our [ Guantian ] factory, which is a new site for us, we may slow that down a bit because we feel that the construction costs may come down in the middle or Q3, Q4 next year. So we were planning to start that construction in Q1 next year. But we're going to push that back maybe to Q2 or Q3, Q4, depending on the cost of construction because this year or -- yes, this year, the construction cost in Taiwan has really went up due to lack of labor and also material costs. So we believe because there's going to be a global slowdown in the economy that there should be a lower cost in terms of the construction of the building. And so we're going to push that back.

Okay. And just the last bit, would you have the revenue split between the eReader and the ePaper for Q3?

Yes, we usually don't disclose the breakdown because it varies quarter-to-quarter and month-to-month. And yes, we really don't disclose that. And like a lot of customers always ask us that. And we always don't want to share that type of information. Sorry about that.

Okay. But what you report in your financial statement in terms of monitors and electronic shelf labels, that number is available for Q1 and Q2. So I'm just looking at a comparable number for that for Q3.

Right. You could see that historical information in our financial statement. So that will be released very, very soon here.

Next question is from Jerry Su with Credit Suisse.

So I just want to follow up on the capacity expansion. I think you mentioned that H6 could be a bigger line. I thought that you previously already guided that H5 or -- and H6 is going to be 50% bigger compared with the existing lines. Are you suggesting that H6 can be even greater than the 50% you guided earlier? That's the first question. And the second question about the one in sight. I remember this is -- either should be supposed for buildings for some material. So if you are delaying this construction, this shouldn't be impacting your FPL or your overall revenue, right? And then last one, probably on the business model. Can you help us or give us update about how you are thinking about the business model for signage because right now I think majority or all of your shipment for reader should be in module and then majority of the ESL should be in [indiscernible]. How about signage? That's all my question.

Thank you, Jerry. Yes, it's a great question. So H6, yes, we're looking at how do we make H6 going to be bigger than H5 as possible because I think there's a trend of bigger sizes for ePaper. And we wanted to really push that boundary to see whether we can make even bigger E Ink materials or E Ink film. So yes, that's -- so I think because now we have the time to really look at that. We worked back then, I mean, this year, we're just trying to meet the demand, which is not really good for us. I mean trying to run a company, I don't think that's really good for us. So now we do have time. We really want to see if we can expand H6 to even be bigger than H5. And we're looking into that. So we don't know yet at this time whether that's going to delay installation of H6. We want to keep the same time. So like every year, you get a new line in place. That's what we're thinking about. So we're still trying to consider what makes the most sense for E Ink. That's your first question. The second question is about signage, right, in terms of business model. Let me say this, like, for our ESL business, I think the business model is quite successful where we sell the E Ink materials, which we call it FPL. And then we also do some modules, which gives our SI partner more choices to choose them, which module partner they want to do. And that has been really successful for E Ink. And we're also reviewing whether we should be doing the same thing with eReaders and eNote where we open up instead of just E Ink doing the whole module, you can buy it from our partner to get those modules as well. So we're looking into that as well. So for signage, we'll probably take the same strategy where we also make the module and we sell the FPL to our module partners. And hopefully, that can help get ePaper everywhere. I mean, the goal is to get E Ink everywhere. So if it requires E Ink to be more open for more partnership to open that market, that's a strategy we will take. What about the second question? Jerry, can you repeat your second question? I kind of forgot your second question.

Second question is about Guantian...

Yes, yes, yes.

This one should be more material, right? So a delayed ramp-up shouldn't impact your revenue or your shipment. I just want to check to see that's correct.

Yes, Jerry, I think that's a great question. Yes and no. Because when we're thinking about Guantian factory, right, we're also thinking about what to -- we're just building out our Hsinchu factory. But after that, we want to -- we really run out of space either to expand more FPL lines or if we want to build E Ink at Guantian so -- or expand more FPL lines. And that fab can also be support our PI materials and other materials that we want to choose. But because of the CapEx, which is quite high next year and we're really trying to push it out to see how do you get the best bang of the buck to build that factory because that really comes online in 2025. But does a 2-month or 3-month delay -- 2-quarter or 3-quarter delay, does that really impact it? We think that we should be okay. I mean considering if we can -- for H6, if we can go for a bigger way and if that's possible, then that gives us some leeway. So yes, that's what we're thinking about. And -- yes. So that's what our thinking is behind these.

Okay. And after H6, you should have some space for H7, H8, right?

Correct. We have space for H7. H8, maybe not because it really depends on the coating with and how -- what kind of size we want to go to. And also, we also have a new process of making E Ink material, which hopefully by then, it should be ready. But before that's ready -- yes, so you know we're working on how we can spray it on a much bigger -- yes, you can spray the E Ink material over a large surface. That's something we're really looking at, especially going to smart surfaces. I think that's really important for us. Making E Ink display is one thing, but in order to get E Ink everywhere, we've got to be able to spray E Ink material over a large surface and we can start doing that. We can start going after real architectural projects or automotive projects where spraying E Ink material over a surface will -- yes, I think that's really a game changer. We're still working on that.

Okay. Got it. Maybe just on the signage side. I know this could be the next growth driver after the ESL. But how should we think about the timing or what kind of revenue contribution we can see in the coming periods?

That's a great question. I mean, yes, we do believe the next growth from E Ink is going to come from signage as a new application. But really, we're seeing growth from ESL. And hopefully, with the introduction of color to eReaders, to eNotes, we can grow that business. But unfortunately, next year, we're thinking, the world is really hitting a recession and how that's going to impact the consumer business, it's really hard to say. So we're taking more of a conservative approach looking at that. We don't really know if we can really grow the eReaders and eNote next year in such economic environment and also how quickly our customers adopt color and how it's -- it's going to be accepted into the marketplace. That remains to be seen. But in a general sense, we do believe that by introducing color to eReaders and eNote, it can really open up the category because for eReaders, it was mostly fictional novels, right? It was all about novels. But once you get color, then different kind of nonfiction books can really come in to the mix. And that size really goes up. When you're talking about, I don't know, travel books or other types of books, which the size is a lot bigger. And I think that's good for us because what we're really selling is meter square, how big we can go and -- or even get into the educational market, which we always think that E Ink has a great opportunity to go after this market because of the characteristic of E Ink technology that's by stable, it's easy on the eye, long battery lives and paper like display. And we think that that's something we really want to go after and which brought us back to Guantian because we think that if we really want to go after educational market by doing flexible PI, you can get the whole device really thin, light and unbreakable, which is -- I think it's quite necessary for educational product because students do throw their bags around. How do you make it more robust and by making our own PI, then we could really drive that cost to a point where educational market is possible. And also as we expand in terms of our FPL lines, we really get that economy scale, which help us really drive our cost down. And I think that's needed in order to enter the educational market. At the same time, when you talk about signage, when you go up in size, no matter it's 50-inch, 60-inch or even 30-inch, right, the ASP really goes down. I mean, if you look at LCD displays, if you look at a 32-inch LCD, it's -- I mean an open cell 32-inch today is relatively cheap. It's like, what, $30 or less because of the economic situation. So yes, so that means that we need to get that economy scale to help us really win that signage business for masses. I mean we're winning signage business, but it's more of a niche market like digital bus stops, poster signs. But if we could really go after the outdoor signage, that's a huge market. I mean, that's a lot of meter square being consumed. So we can start winning those markets, I think it's a game-changer for you. When that will happen at this moment, it's hard to say, but we're still working on it.

This is [ Max ] from [indiscernible] and Partners.

You may ask your question.

Perfect, thank you so much, and first of all, congratulations on these really amazing Q3 results. I just wanted to touch up on one point you were previously mentioning regarding the inventory levels. Do you have some visibility on your customers? If you're talking SES prices, et cetera, how they're currently coping with the inventory levels? And do you expect the recession you were just previously talking about also to impact the demand for [ ESL ] in 2023?

Max, I think that's a great question. In terms of inventory, if we look at the whole ecosystem partner side, on our module partner, I think it's relatively healthy. And also on the ESL side, I think that's relatively healthy. But in terms of like the driver IC partners, They do have some inventory and also some CFD makers, they do have some inventories. I think that the main reason for that is, last year, IC and TFT was in shortage. So we really worked hard on enabling more partners -- IC partners and more TFT partners into the ecosystem. And I think especially the new players that's coming in, they're more aggressive in terms of pricing, which cost some inventory on our existing partner and so forth. But it's really up to them to make that adjustment. And so I think from a ESL perspective, I still feel it's relatively healthy, at least, E Ink looking through -- we sell mostly FPLs to our module partners for ESL. We do sell some modules, but we think it's relatively healthy. And yes, I think it should be okay.

Okay. Great. Just a quick follow-up. So you're basically working as a market constraint for the ESL market or like the paper market in general in that case. So do you -- how often do you speak to the likes of SES and Pricer in terms of orders? Is that happening on a monthly or on a semiannual or annual basis?

So customers, you mentioned like Pricer and SES, we really don't really like to comment on the FPL partners because they're a listed company, you can get a lot of answers from them. But we do sell some modules to them, but usually, they're our indirect customer. We sell the FPL to our module partners and they sell to these SI partners. So they're 2 levels down -- 2 level down in that supply chain. But we do sell some modules for them when they needed us to help service them.

Next question will come from [ Patrick Patel ].

I just wanted to follow up on the second part of the question of the last question about the outlook for ESL demand next year. Do you see a recession impacting that? And are you still seeing retailers looking to adopt ESL despite the tougher macroeconomic conditions?

Thank you, Patrick, for that question. Yes, we do believe ESL will grow next year, but it's going to be less than what we forecast in Q1 this year. We do think that there is some impact because of recession, I think mostly the anticipation of recession that will hit the world market next year. But usually, during the inflation, retailers are more willing to adopt ESL because the price change they need to do on the stores really push them to really adopt ESL. But because of the anticipation of possible recession hitting the world market, I do see some conservativeness in some of the retailers in terms of adopting ESL. But overall, because there is still inflation that's happening, some retailers are very eager to install ESL as soon as possible. So in an overall sense, we do believe next year ESL will grow. But to what degree or what percentage of growth, it's hard -- it's really hard to say.

Got it. So I think previously, you've spoken about most of your 2023 capacity being sold out already. Is that still the case? Or is that no longer [indiscernible]?

I didn't understand the question.

Yes. Johnson, I think what Patrick mentioned is previously, maybe not last quarter or the quarter before, someone ever ask, have we already sold out the capacity next year. So I think our answer was this year is pretty much booked and we think it should be okay for next year. So I think Patrick just mentioned, if the capacity next year, we already saw other capacity next year?

Oh, I see. So basically, like even if we sold our capacity for next year, it's hard to say because if the market is not as strong, then we're going to let our partners off. We're not going to force them to take our FPL into it, although they do pay some down payment. But we're really not going to force them to take it. I mean, if there is a slowdown. So we're asking our partner not to really book as much as they wanted because the overall global economy is not in the best shape. So that's -- I guess it's not the average way of doing business, but we think that we really treat our partners as a long-term partnership. How do we grow this market together and how do we make sure that our partner remains profitable and not be burdened with inventory if the market slows down? So we're taking more of a different approach. We're not really taking the approach like the foundry where they kind of force the IC designers to -- or IC design house to commit. I mean, we do make them commit, but we don't force, we don't penalize them for not making that commitment. We get their down payment, but we're not going to really force them that if you don't pull x number of volume, we're going to penalize you for not doing it. We could do that, but that's not the approach at E Ink. So yes, I mean, we're still looking at -- from the end market, how does it look? I mean, is that strongest? Is it going to suck up all our capacity? Or it's going to grow, but not really sucking up our capacity. So at this moment, it's hard to say. Does that answer your question?

Yes. Got it. That's very clear.

Next question will come from [ Guido Darsey Lombardo ].

I'm slightly newer to the story, so apologies if the company is slightly high level. But on the first point is just on the royalties which I noticed on your P&L. If I look over the last few years, they have kind of slowly been declining. So could you please just remind me the business model around these royalties? What are these payments? And are they expected to continue to decline going forward?

Sure, Guido. Yes, so the royalty income that we've been receiving, I think for the past 10 years.

10 years.

Yes, it's been 10 years, it's mostly from LCD. So we have this technology, what we call FFS, or fringe-field switching technology that's been used for mostly smartphones and tablets, where if you press on the LCD, you don't get that watermark, like old LCDs, you press on it, you get that ripple effect. And a lot of people call it IPS because it was -- there is an IPS technology, there's an FFS. But when IPS went to IPS 2, it was licensed from our subsidiary, Hydis that owns the FFS technology. So they licensed that from us. And most of the world LCD players license that technology from Hydis. And we've been collecting pretty good royalties over the years. I think maybe $1 billion -- or $1 billion already, something like that. I think it's $1 billion already. We expect it to come down. The first reason is because mobile phone, most of the premium has switched to OLED. And so most of the phones have been switching to OLED. Only the low end are using LCDs now. Tablet, although the majority is still LCD-based, but there is a sign that that's moving to OLED as well. And so we expect the royalty of the FFS license to come down, not so -- it's almost the end of life for our technology in terms of IP protection. So yes, we expect that to come to an end in the near future.

Okay. Understood. Just second question is just broadly on your competitive positioning. My understanding is that you obviously have a lot of patents in this area, which is sort of a key barrier to entry. Could you maybe just touch on are the patents your key barrier to entry? If so -- or your key competitors mode, if so when do the key ones expire? And who are the sort of competitors you're keeping an eye on? And is anyone kind of making inroads?

Okay. That's a great question again. So in terms of E Ink IP, I think we have like 6,000-plus IPs that's related to ePaper. And I think our IP position is quite strong in that space. We really invented this ePaper technology. It was first invented at MIT Media Lab and we took a little spin-off to form a company called E Ink and then we bought E Ink in 2005, I believe, 2005 and we really have invested a lot of money taking this technology from black and white to color. So we really have built up a new portfolio of IPs around how do you do color E Ink technology. And today, most of the growth from E Ink is really some of the color ePaper displays. I think from an IT perspective, E Ink is in a good position. But I think the most important thing is, can E Ink continue to open new markets or in markets that E Ink has opened up, can it continue to grow. From the current outlook, we believe that, yes, we can continue to grow in the ESL space because the market penetration rate for ESL is low. We maintain a very good position in terms of technology leadership and innovation on the latest technology and also driving the whole cost down in terms of ePaper module using the ESL space. Now you're seeing ESL, some of them go up to size of a 10-inch display into the traditional 2-inch or 1-inch display. So that size has really moved up as well because as we introduce more color, it becomes more like a signage product on the retail space. And there are talks about if you can really advertise where the product is, like say, if you go in a store and then you look at Coca-Cola or Pepsi and then you see the advertisement from Coca-Cola about the latest flavor of Coca-Cola or promotional buy 2 get 1 free, and that helps drive the revenue at the store. So we do believe that there is a possibility for E Ink to expand from ESL into retail signage as well. And also outdoor signage because of the shortage of electricity bills and the change in regulations about not able to use 8K LCD displays in Europe and that's mostly driven by the energy consumption of 8K LCDs because doing 8K, you consume twice or even 3x as much power as a 2K or 4K TV. And that has really been banned in use in Europe. And now that people are talking about outdoor signage that you can only lit it up for like 8 hours or 10 hours a day because it consumes so much power, the LEDs or outdoor LCDs. And people are talking with E Ink and say whether E Ink can provide a solution with ePaper for outdoor advertisement. And I think that's a great market for E Ink to go after because we're by stable, we don't consume any power when it's in that static stage. We only consume power when we start changing the advertisement. And also it looks better outdoor than indoor for E Ink display because it looks great when it's under the sun. And how it can be powered with purely solar power on the display. So you really don't need to drain the electric -- electricity from the city. And there is really a shortage of electricity in Europe with the Ukraine, Russia war that's happening that really drives the natural gas price up and the whole world environment. So I think there is a great opportunity for E Ink in the signage space. Yes. So...

Okay. But sorry, just on the competition point, are you seeing any competitors when you're bidding for projects or work? Are you beginning to lose to other people? Or are you still -- is your win rate still essentially 100%?

Yes. I mean we're really trying to replace paper, right? I think -- so we're really competing against paper. Paper is a hard thing to compete with. It's cheap, right? It's dirt cheap and how do you compete with that? So that's -- I think paper is our major competitor. We're making some inroads, but we really wish that we can make bigger inroads into -- with pacing all the paper that's out there and also replacing textbooks, right, and all these books out there. That's something E Ink is striving to do. And we just got to get our color good enough, the user experience good enough to really start replacing paper books, right? That's something we really want to do. And so competition is against paper. It's not really -- well, you can say I had like using LCD or and AMOLED, it's a competition because of prevalency of iPads, right, or tablets. Now once we start getting to color, how well E Ink can compete in that space or we're going to be a niche player, that remains to be seen.

Very clear. And if I can squeeze just one final one. It's just on color. You talked earlier on the call about getting color into the eReaders and I think you used the word game-changer, which always sounds quite exciting. I think I read somewhere and maybe you alluded to just that, that kind of at the moment, the refresh rate is still maybe not quite that fast. And is that a barrier? Could you maybe just give me a bit of a sense of the ASPs? How much more of a black and white would you be selling the color for? And finally, have you had any sort of commitments from eReader customers that they'd be willing to take this color stuff in large volumes? Or is it kind of more of a wait-and-see approach?

Yes, that's another great question. Color, so for eReaders, I mean, no, we do have 2 technology that we're going after. One is our Kaleido technology, where we print the color filter on top of our capsules or FPL. And another one is our Gallery product line where we make color ink instead of using black and white ink. Our strategy for that market is, let's price it the same as black and white for now. And the plan is to drive it even cheaper than the black and white because we think that it's a much bigger market here. That's our strategy for the eReader and eNote in terms of our color product line. And we're going to price it more competitively than our black and white. And we believe that with the scale that E Ink is having right now at this moment where we just have 2 lines, right, one in Massachusetts and one in Linkou, Taiwan. Now we have -- well, in Q1 next year we'll have 6 lines. So with that economic scale, we can really drive our unit costs to drive it to be even more competitive. So that will -- I think pricing is also an important factor in terms of adoption of color. And yes, there is a lot of interest from our customers, but how quickly they can build the product because -- I mean, designing a color, let's say, eReader or eNote, it's a lot different than designing a black and white. The whole software needs to change, the whole driving method is different. So it's going to take some time for our customer. And hopefully, next year, you're going to see more and more color launched through the marketplace. And so that's why we're -- it's hard for us to predict how the outlook for eReaders and eNote will be for next year and how quickly, let's say if they launch in Q4, that only gives us like 1/4 of revenue, right, but if they launch in like Q1, that's like music to what you have a full year to drive that revenue. But when customer launches, it's hard for us to say, and it's up to them to decide when they want to launch it. They have their own strategy behind it.

It's pretty much full classified. So we're going -- so let's take the final question from [ Jamie Bashi ].

I really have 3 questions here. So first of all, I wanted to follow up on the reserve pricing when you referred to the same pricing, do you mean both ACeP and Kaleido are aiming for the same price as black and white? And how about the eNote with more functions versus eReader, do we expect the ASP growth and big margin growth as well?

[ Jennifer ], yes. So our strategy for color, no matter it's Kaleido or Gallery product line, it's going to be just as competitive as our black and white from a customer perspective. So yes, we hope that they can -- we -- eventually, it's going to be cheaper than black and white. That's our strategy moving forward. And because with scale, I think our overall cost structure will go down and that could help sustain it.

Okay, I see. And how about the eNote with more function embedded? Can we expect higher ASP or margin versus eReader here?

So I mean -- so eNote is usually a lot bigger. They're roughly like 10-inch or sometimes going up to 13-inch. eReader is from -- well, eReader is moving from 6 to 7, and then I think it's also migrating to 8 as well. So yes, there is a shift in size. That will help -- it does help on the ASP. But yes, so it's hard to say for us how well that will do and how quickly our customer can launch their product. So it's hard to predict next year.

So another question for ESL. Do you see any potential for smaller retailer about ESL or are major customers are still mega retailers like Walmart or those international companies? I'm just trying to get the color of to what extent this ESL can be adopted in retail market? Yes.

Well, most of the ESL partners we talk with the SIs, they're relatively bullish about the growth of ESL even in a down economy. Hopefully, it doesn't hit a recession. But even in down economy they're relatively optimistic about the growth. And they're talking about -- and maybe the only growth in terms of electronic business, right, if you look at mobile phones, tablets, TVs or even notebook computers, none of them are really expecting growth next year, right? And they think that ESL maybe one of the few that will be growing next year. And so most of them are pretty bullish about it. We do get some positive feedback from retailers. They usually do pilot sites with ESL. And if they love it, they get the budget, they'll sell it. So yes, I think, ESL should be -- we're expecting growth next year from ESL. But we really don't know what percentage of growth is going to come from, whether it's going to be 10, 20, 30 or 5 or 50. We don't know. I mean we don't really know what that kind of growth will be. But overall, we believe that ESL should grow next year.

So my last question is about the Guantian site. So you have slowed down the construction. So as far as I know, the CapEx plan mainly be based on customers' outlook. So do you see any outlook revision or as you mentioned previously, the H6 line can maybe be much larger that H5 to compensate the delayed construction? I'm just trying to get the schedule of the overall, say, new capacity coming online, is there any change?

Okay. Jennifer, let me clarify this. I think it may sound a bit confusing. So H4 will be ready next year in Q1. So that's -- that plan is done, we're installing it right now. We want to get it ramping by Q1 next year. So that H4 is done. Now H5 is something that we expect to come online in 2024, okay? And H6, we're expecting to be coming online in 2025, okay? So the construction of a new building in Hsinchu where our headquarter is, that's going to be ready by end of next year. So we can have H5 running by 2024, okay? So that building is set, that's a done deal. We've got to make sure it's on schedule, whether we can pull that ahead or not, most likely not, probably hitting that on schedule is a key we're trying to achieve. What I talked about was we're going to delay the Guantian, which is a new factory site. That's in Taoyuan area in Taiwan. We got a lease -- well, we got a release from -- we got a lease on that land and we want to build a building on top of that. And we were expecting to build that building in 2023 in Q1 next year. I expect that to be ready by 2025. We're pushing that a bit out, maybe 2 quarters or 3 quarters out because we feel that the construction costs at Taiwan right now is quite high. We expect the construction costs to go down maybe 10%, 20% by middle of next year or even Q3 next year. So we're going to delay that until the construction cost is at a price that we think it makes sense. Building that building is not cheap. How much does it cost us? Like USD 60 million or something. And if we can get a 20% saving that's, what, USD 12 million right there, USD. If it's 10%, it's $6 million. So we really want to get that right pricing for it. And so we're delaying that until we can get the right price to start that construction. We filed all the papers that's necessary so we can get that permit, but when we're going to start that construction depends on the price, okay? That's the part that's going to be delayed. The plan for U.S. in Massachusetts, that's ongoing. That -- there's -- we've got to get that ready as soon as possible because that's a fundamental technology at E Ink, which is the E Ink ink, right, the ink that makes everything tick. We've got to have that capacity ready, especially now we're introducing more color. We've got to have it ready. So that plan is ongoing. The part in China as well, we need to get that part ready because if we don't have that ready, we might get issues with our supply chain. So we got to get that Yangzhou site expansion ready as well. Okay.

Thank you for all of the questions and your participation. So talk soon next quarter. Thank you very much. Bye-bye.