GlobalWafers Co., Ltd. (6488) Earnings Call Transcript & Summary

Good day, and welcome to the GlobalWafer Third Quarter 2021 Earnings Call hosted by Robin Cheng. My name is Phoebe, and I'm your event manager. [Operator Instructions] I'd like to advise all parties that this conference is being recorded. And now I'd like to hand over to your host. Robin, please proceed, sir.

Good afternoon, ladies and gentlemen, and good morning for those who have dialed in from a different time zone. My name is Robin Cheng. I cover Asia semiconductor sector for Bank of America Security. It is our great pleasure today to host the third quarter '21 earnings conference call for GlobalWafers. We have Ms. Doris Hsu, Chairperson and CEO; as well as Mr. William Chen, VP and Spokesperson as our main speakers today. I think, first, the management will give a recap of the 3Q '21 results and outlook, followed by a questions-and-answer session. So without further ado, let me hand over the call to the management.

Okay. Thanks, Robin. Hello, everyone. Welcome joining GlobalWafers' Q3 2021 Earnings Call. I'm William Chen, GlobalWafer Vice President and the company's Spokesperson. We also have Doris Hsu, Chair Person and the CEO of GlobalWafers in this call. Doris will give us the executive comments first, and then I will present industry overview, Siltronic's transaction, lower carbon footprint and the Q3 2021 performance update. Next the Q&A session will be hosted by Doris as usual. For today's presentation file, we have uploaded on to company website around 2 hours ago. If you do not have the file on hand, please enter into our website to get the most updated file. Please note that some information during our discussion today will consist of forward-looking statements, which are applied throughout the call and this presentation. These are subject to significant risks and uncertainties. Actual results or trend could differ materially from our forecast. Please refer to safe harbor notice in our presentation, Page 1 disclaimer. Now I'd like to hand over the call to Doris for the Page 2 executive comments. Doris, please.

Thank you, William. Hello, everyone. Good afternoon. Thank you very much for joining GlobalWafers earnings call of Q3 2021. First of all, let me share some summary and comments of our Q3 2021 financial results and update our operation status. First of all, Page 2, please, financial highlights. In 2021, 3 quarters have passed, though it's encountering a lot of headwinds in the semiconductor industry, including China power rationing, surging prices in a lot of raw materials, freight enhanced movement control in Malaysia, all of these headwinds but luckily -- fortunately, GWC managed pretty well. Revenue-wise, our Q3 revenue totaled TWD 15.4 billion this which is almost 9.7% Y-o-Y growth. Accumulated revenue as of September 30, totaled TWD 45.4 billion which is 10.1% growth of Y-o-Y. So this is keeping the record high as well. So up to Q3 2021, GlobalWafers has already been growing for 8 consecutive quarters revenue-wise. In terms of our gross margin, it has been increasing for 3 consecutive quarters and hit 39.1% in Q3. In Q1, our gross margin was 35%. Q2 was 36.7% and Q3 now we reached 39.1%. So we improved our gross margin by 4% in 2 quarters. Our Q3 EPS is TWD 7.13 per share and accumulated 3 quarter EPS amounted to TWD 22.4 per share. Our Q3 revenue, gross margin, operating income were all much better than Q2, but our EPS was lower than Q2 for the following reasons. Our Q3 net income was TWD 3.1 billion decreased by TWD 850 million from our Q2's net income, TWD 3.96 billion. This is mainly due to nonoperational losses from valuation of our financial assets including the mine-to-market law on Siltronic's shares GWC holds, and the interest expenses from the amortization of the discounted value of ECB, which was based on IFRS accounting policy. So both of the aforementioned 2 losses are non cash losses. Except the above non cash, non operation -- non operating losses, our Q3 result is quite remarkable, considering all the uncertainties and frustrations in the macroeconomic, logistic issues and also the pandemic. Page 3, please. I will summarize some of our prepayment status and capacity, first of all, the prepayment. As of end of September this year, our prepayment balance amount is as high as TWD 22.4 billion or around USD 800 million. Our production line of all diameters from small balances up to 300 [ milliliter ] are fully loaded throughout the full year 2021. And the high utilization will continue into 2022 with more LTA signing. And also, I would like to make some comment about China power rationing. China power supply crunch disrupt supply chains. Our Chinese subsidiary factory which locates in Kunshan, with rather small revenue contribution swiftly implements emergency plan and also combined with very flexible allocation strategy and also support from other sites. The impact to GWC is quite minimum. In addition to China, in Malaysia, we had some headwinds as well in Q3. In Malaysia, the Enhanced Movement Control Order or EMCO, not only aggregates -- aggravate chip shortage but also caused GWC Malaysia site a lot of capacity loss in Q3. Fortunately, the operation already resumed to 100% since September. And next, I think I would like to make some update of our Siltronic transaction. Up to today, GlobalWafers has received clearance from Germany, Austria, Korean, Taiwan, Singapore, U.S. antitrust authorities and CFIUS in the U.S. GlobalWafers is continuing to actively and positively very constructively cooperate with the remaining regulators with the aim of closing the transaction before the end of 2021. Next, I will update a little bit about our view of the industry and the outlook, on the macroeconomics and also the semiconductor industry. According to IMF, we are seeing a very strong 2021, expanding by 6%. Yes, the economic development of each country is deeply affected by the highly uneven destination. For a semiconductor industry, strong demand in consumer electronics brings promising -- very promising outlook. However, an even economy recovery, fragile global transportation system, material price surge inflections, all of these factors cast, uncertainties and risks in the semiconductor industry. In automotive industry, we have seen very strong recovery in the automotive market and EV is scaling up with the pillars of supportive regulatory frameworks and additional incentives. And for 5G. 5G is another driver for the growth of the whole semiconductor industry. 5G is enabling revolution in connectivity in an unprecedented pace. Its coverage is widening with accelerated network infrastructure and the replacement demand. Next is for compound semiconductor, especially in silicon carbide and gallium nitride. With compact and reliable features, silicon carbide and gallium nitride offer very high efficiencies, much higher efficiency than silicon-based devices. It is likely to witness a significant growth because it is rapidly growing applications in various products, including EVs and 5G. GWC have already -- have commercial silicon carbide and gallium nitride revenue already. And more wafer samples are under customers' qualification now. It is estimated to have more compound wafer qualified and contributed revenue in 2022 with a significant Y-o-Y growth rate. Last but not the least, that I would like to comment a little bit about our lower carbon footprint. While extreme weather worsens, many nations have already announced carbon tax to reduce the use of fossil fuels. With extensive global footprint, GWC is well positioned to supply both globally and locally to mitigate the environmental impact of long distance shipments as well as macro instability and geopolitical tension. We also -- GWC also commits to 100% renewable energy usage by 2050, with progressive goals and constructive plans. The above my summary and comments. We will share more details on the industry trend and our financial results with everyone. Thank you very much, everyone, and William, please.

Thanks, Doris. Now let's share some pages of industry overview. Please turn to Page 6, global GDP growth forecast. From IMF, caused by the COVID-19 pandemic, there was minus 3.1% contraction in 2020. The latest forecast, global economy is set to expand 5.9% growth in 2021 and 4.9% in 2022. This 2022, 4.9% growth is combining 4.5% in advanced economies with 5.1% in emerging markets. Page 7, 2022 Semiconductor Revenue Forecast, from IC Insights, Gartner, WSTS and Semico. The 2022 semiconductor market growth are 12%, 9.9%, 8.8% and 6%, respectively. The average in semi market growth forecast is 9.2% in 2022, anticipating another year of robust growth on top of surging 2021. Page 8, Global Silicon Wafer Shipment Forecast from SEMI. Global Silicon wafer shipments are projected to reach a record high of nearly 14,000 million of square inches with 13.9% growth rate in 2021. There are almost projected with continued Y-o-Y growth with 6.4%, 4.6% and 2.9% to reach more than 16,000 million of square inch in 2024. Page 9, Semiconductor Revenue Forecast from Gartner. On the right-hand side of the diagram, NAND and DRAM are predicted to be the largest semiconductor segment market in 2025. NAND will be growing to USD 90 billion with 10% CAGR and DRAM will be USD 100 billion with 6% CAGR. Regarding the highest TAM CAGR, Integrated Baseband, RF Front-end devices and the Discrete GPU are the top 3 segments, even there are remaining smaller segments of the industry. Page 10, Semi Fab Count by Diameter Forecast, also from SEMI. The total semiconductor fab quantity will increase from 957 in 2,019 to 1,011 fabs in 2022. Among them, only 6 new fabs adding for 150 millimeter fab, 18 new fabs in 200 and 30 new fabs in 300 millimeter. 300-millimeter wafer will be the mainstream in the future. It is benefited from technology advancements, such as 5G, AI and high-performance computing. Page 11, IC Foundry Sales. According to IC Insights, the total foundry sales will surpass USD 100 billion for the first time in 2021. The growth trend will continue to 2025 at USD 151 billion with rapid average annual growth rate of 11.6%. In 2025, the Pure-Play Foundry market is expected to expand CAGR 12.2% to USD 125 billion. And IBM foundry market expanded 9% CAGR to USD 26 billion. Page 12. 5G coverage in Tier 1 cities will reach 60% in 2024. From Gartner, the worldwide 5G network infrastructure revenue is estimated to grow 39% to USD 19.1 billion in 2021 and will maintain an upward trend with 22% growth rate to USD 23.3 billion in 2022. In 2020, only 10% of communication service providers offered the commercialized 5G service, and it is estimated 60% of CSP will cover Tier 1 cities at the end of 2024. Page 13, Automotive MCU Sales Forecast, from IC Insights. Given chip shortage recently, automotive MCU sales are forecast at 23% growth in 2021, reaching a record high level of USD 7.6 billion. 2022 is estimated to have strong increase 14% and 2023 with 16% increase. Page 14, Electric Vehicles become the mainstream of the future, from DIGITIMES. More and more areas, countries, cities, government have announced significant incentive programs and gradually tighten the fuel economy that has spurred the uptake of EV and scaled up in EV manufacturing. By 2035, most of current internal combustion costs will be replaced by battery electric cars and the hybrid cars. Page 15. Silicon Carbide and Gallium Nitride - Key driver for electric vehicles from TrendForce. Gallium nitride powered devices market will grow to USD 850 million in 2025 with 78% CAGR and silicon carbide powered devices will reach USD 3.4 billion with 38% CAGR in 2025, withstanding high-voltage and high temperatures. 20% of gallium nitride and 61% of silicon carbide will be expected to be used in new energy vehicles in 2025. Next, update to the Siltronic Transaction moving progress. Please refer to Page 17. Development of takeover offer for Siltronic. From the chart, we have newly received the U.S. antitrust agreements on October 5. Up to date, besides U.S. antitrust, GlobalWafers has received agreements from German, Austria, Korea, Taiwan and Singapore antitrust authorities and the CFIUS in the U.S. The settlement stage of the takeover offer, of course mentioned right now is aiming of closing the transaction by the end of 2021. On Page 18, just update the lower carbon footprint. Page '18, ready to respond to carbon tariffs. EU and the U.S. plan to increment carbon tax policies, which will put a carbon price on import of a targeted selection of products. GlobalWafers as a global solution provider with the global footprint, will try to minimize copper leakage by supplying locally and implement the profound experiences of its parent company, Sino-American Silicon Product Incorporation in the field of solar energy to achieve net carbon emission. Now let's move to this quarter performance update. Page 21, Q3 2021 financial highlights. Q3 '21 revenue, TWD 15.4 billion, with Q-o-Q plus 1% growth and Y-o-Y plus 9.7%. As mentioned right now, Q3 Malaysia lockdown is one of the reason of this smaller Q-o-Q growth percentage. The first 3 quarters' revenue is TWD 45.4 billion, which is Y-o-Y plus 10.1% growth. It's a record high of first 3 quarters revenues. Besides not only the first 3 quarters' record high revenue, GlobalWafers also reached 8 consecutive quarters of revenue growth regardless of headwinds in 2019 and 2020. Gross margin. Company generated 3 consecutive quarters gross margin growth, significant improvement in Q3, up to 39.1%. This high gross margins were mainly driven by higher capacity utilization, better product mixing and improved AFE in Q3. EPS. Q3 '21 EPS, TWD 7.13. And the first 3 quarters '21 EPS, TWD 22.4 was with Y-o-Y TWD 0.19 increase. Page 22 Q-o-Q financial highlights. In Q-o-Q comparison table, GlobalWafers reached revenue plus 1% given faced Malaysian lockdown in Q3. Gross profit margin percentage plus 2.4%. This significant improvement from Q2, 36.7% into Q3, 39.1%, again, was attributed by full capacity utilization, data product mixing and the improved the ASP in Q3. Operating profits percentage dropped 2.3%. It was huge, improved from 28% into 30.4%. Given we are continuously spending expenses in Siltronic acquisition, regulatory approval process. Net profit, minus 21.5% and EPS minus TWD 1.96. Given we had significantly improved Q3 gross profit margin percentage and operating profit percentage. However, as mentioned by Doris right now impacted by on hand acquired Siltronic stock mark to market price re-evaluation. From Q to end, EUR 142.2 to Q3 end EUR 137, we had more than TWD 800 million financial asset loss from this holding stock. That is more than TWD 1.9 EPS loss in Q3 because of this stock re-evaluation. That was also the reason why the negative Q-o-Q result in EBITDA, minus 22%, ROE minus 8.3% and ROA minus 4.6% in this page. That's because of the same reason of Siltronic holding stock mark to market price re-evaluation loss. Page 23, Y-o-Y financial highlights. For Y-o-Y comparison table, revenue plus 9.7%. Gross margin percentage, plus 1.9%. Operating profit percent, plus 1.2%. That is showing that Q3 2021 pure operating performance were completely recovering over Q3 2020 over the full 2020 year. Regarding those Y-o-Y negative items, net profit, EBITDA, ROE, ROA, as explained at the previous page, it was because of Q3 2021, carrying huge financial asset loss from the Siltronic stock mark to market price re-evaluation. Page 24, financial highlights for first 3 quarter 2021 versus first 3 quarter 2020. For the first 3 quarters' comparison, the Q -- the first 3 quarters '21 was with better revenue, operating profit, net profit, EPS and the EBITDA. This recovery results firmly demonstrated that the leading industry growth -- growing demand has walked out from the COVID-19 impact since 2020. Page 25, revenue and the gross margin. Even market is still impacted by COVID-19 and the higher logistic costs, increasing material prices, unfavorable weaker USD -- U.S. dollar headwinds and unexpected countries' lockdown, GlobalWafers is still generating 8 consecutive quarter revenue growth. Q3 '21 gross margin strongly rebound 2.4% from 36.7% in Q2, up to 39.1% in Q3. That is the third highest gross margin percentage just next to the historical peak period in first half 2019. Page 26, EBITDA and EPS. Q3 '21 EBITDA to revenue percentage was continuously maintained at the same high level of 38.4% since 2018. EPS TWD 22.4 was the third highest 3 quarters' EPS in company history. Page 27, income statement. In Q3 '21 income statement, just recap. Revenue continuously exceeds TWD 15 billion with Q-o-Q 1% growth and Y-o-Y 9.7% growth. Gross profit percentage significantly increased to 39.1% as the third highest in company history. Operating profit percentage also improved in to 30.4%, continuously recovering from COVID-19 impacting. EBITDA net profit percentage and EPS dropping were caused by Siltronic share evaluation at fair price. Page 28, balance sheet. In Q3 '21, balance sheet just highlight. Cash and cash equivalents, huge increasing was because of ECB and CB issuing in Q2 and Q3. Same as long term loan increasing was driven up by ECB and the CB issuing. Shareholder equity was continuously increasing to TWD 47.4 billion. Inventory was maintained at the same level of TWD 7 billion. Above is my presentation. Thank you. And next, I would like to hand over to Doris for Q&A session. Doris, please.

Okay. Thank you very much, William. Yes, same as all -- same as like what we always do, that before we open the Q&A session line to all the audience, we will, first of all -- I will reply some questions we have received in the past several days and prior to the call today. So I will start from my answers to those questions first. Basically, those questions will be categorized to 3 groups. The first group is Siltronic project related and the second group is financial -- our financial report -- financial result related. And the third group is our business outlook related. So let me start from the first group. Siltronic -- the question we received about Siltronic -- this deal-related questions. The first question we see that -- which we see from many investors in general is that, what is the [ status ]of the deal -- of that deal? And what if you do not get all approvals by the deadline? What will happen to the deal? The deadline to fulfill this completion condition is on 31st January 2022. And I think this is not easy to be extended. Project -- this project remains our top priority, we continue to actively work towards satisfying the regulatory conditions. Despite the complex regulatory process, Siltronic and GlobalWafer teams are working very closely together, making constructive progress towards the acquisition of -- the acquisition deal with the objective of closing before the end of 2021. This is the most frequently asked question in the past 1 week. So this is the first question. And the second question is that, what's the status on antitrust approval process from China as we are approaching year-end? Any chance of the approval gets delayed into 2022? And our question for this -- our answer for this question is that the regulatory approval in China remains on track. We continue to actively work towards satisfying the regulatory positions. So we are working together with Siltronic, we try to -- we are making quite a lot of progress toward this -- for this project. So we -- our target is still to close the deal by end of the year. The third question is that, why will the acquisition progress into the end of 2021 or January next year and which regulator was driving the delay? Also, we received a lot of parties asking this question. And our answer to this is that, it is not our company's policy to comment on individual jurisdictions. So we are -- we keep working on this project, and we will try our best to close the transaction before the end of the year. And the next question is that, why did GlobalWafers and Siltronic have different expectation on timing of the closing? I think both parties are largely aligned in our individual assessment of this situation as we continue to work very closely together to get the outstanding approvals by end of the year. So not so big difference. And next question says, why did Siltronic make the acquisition delay announcement at that moment? Our answer for this one is that we cannot comment on any actions by -- taken by the other party. Despite the compliance process, I think we are still working very closely. We are trying to close the deal by this year. Next question is that -- just a second. Next question is that, what do you do in case of the transaction fails to go through? Our answer to this question is that, this project remains our top priority. We continue to working -- doing all whatever possible to communicate with the jurisdiction and try to satisfy the regulatory conditions. So that's our answer to this one. And next question is that, if this deal is successful, does GlobalWafers have any plans for further expansion? I think -- one of the key deal objectives for this deal in plans -- after closing of the transaction is to leverage the greater scale of the combined business and to accelerate the growth. So, so far, we don't have any solid plans for further expansion after this -- after the merger, the combination. And next question is that, does GlobalWafers plan to increase its shareholding in Siltronic? I think our answer is then -- our answer to this question is that, no, we do not plan to increase our shareholding prior to settlement of the transaction. So we will wait for regulatory clearance, and post settlement, we will review our shareholding in Siltronic at the appropriate timing. So for now, no plan to increase the shareholding in Siltronic. This is all the questions we received about Siltronic project. The second part -- second group of our question is the net -- the financial results -- financial report related. The first question for financial report is for net income. The first question says, 2021, Q3, our net income -- GWC net income was TWD 3.1 billion, decreased by TWD 850 million from Q2 this year. Why -- so they want to know that why the net income is lower. Because our revenue, gross margin and operating income are all much better than Q2 but why the net income is lower than Q2? So the reason is that, mainly -- this gap is mainly due to non operation -- non operating and non cash losses from valuation of financial assets which was caused mainly by the mark to market loss on Siltronic shares held by GlobalWafers. However, all of these non operating losses were non cash for accounting purpose only. That's our question for this one. And the next question is about our ECB interest expense. We closed our ECB on Jan -- June 1. So Q3, we had a much higher ECB interest expense. So our answer for this, question is that 2021, Q3, the interest expense was TWD 108 million, increased by TWD 56 million from Q2. And this is mainly due to the amortization of the discounted value of ECB. Based on IFRS accounting policy, the amount is discounted to present value using effective interest rate method and amortized over time during the life of the ECB. Therefore, this ECB interest expense will be recognized in each quarter going forward during the life of the ECB. This is also, again, a non cash, non operating accounting items. Okay. So this is the second question of this group. And the third question is that, why was 2021, GWC Q3 EBITDA margin down by 10.4% from Q2? And the answer for this one is, this is mainly due to the decrease in net income before tax. Just like what I explained that because of those non cash mark to market and also some ECB related expenses. I think if we exclude -- excluding those non cash mark to market valuation of Siltronic shares held, the EBITDA margin will increase from 38.9% in Q2 to 46% in Q3. So actually, if we exclude the factor mark to market, our Q3 EBITDA was higher than Q2. Next question is about gross margin. Our gross margin -- Q3 gross margin increased a lot to 35.1%. So the question is that, why did GlobalWafers 2021 Q3 gross margin increase by 2.4% to 39.1% from Q2? And this -- the answer to this is mainly -- this is mainly due to higher ASP and better product mix. These are the main reasons. Next question is our foreign exchange gain and loss result. So the question was, what was the foreign exchange gain and loss for this quarter? And what's the accumulated for -- accumulated for the first 3 quarters in 2021? Our answer is that, in 2021 Q3, the foreign exchange gain was TWD 45 million net of hedging costs and losses is TWD 9 million resulting in a net foreign exchange gain of TWD 35.7 million. This is our Q3 foreign exchange gain, the result of our foreign exchange. And for the first 3 quarters in 2021, the accumulated foreign exchange gain was TWD 547 million, net of hedging costs and losses, TWD 434 million, resulting in a net foreign exchange gain of TWD 112 million. This is our accumulated first 3 quarters' foreign exchange earnings in the first 3 quarters. So this is the financial results -- the last question of our financial results related questions. And next, the third group of the questions are our business outlook related questions. Okay. The first question is that, how will China power cut affect the economy as a whole in the semiconductor industry? Our view is that the outages could have an impact on the global computer chip shortage. Throughout Kunshan and electronic manufacturing hub has been impacted by the energy shortages. But its revenue contribution is rather small for GWC, the consolidated group. So with our very flexible location and some adjustments with the other sites, I think the impact to us in Q3 was quite minimum. But we are monitoring the power supply in China very closely. And the second question is that, how about the capacity in demand outlook in 2021 and 2022? I think from our market insight, there are major segments where the demand already exceeds supply. For example, 300 millimeter fab is the [ starting ] material. And looking at the overall market, the demand signal has been unique from the previous hot market in that, that it has affected all diameters and all products, driving all wafers from our line to be fully utilized now. We can also confirm that the spot pricing is also quite healthy. And our view is that the demand and ASP will remain strong in 2022. This is our view. Okay. Next question is that, what are GlobalWafers' view towards 2024 and beyond? Will there be oversupply being so many greenfield and a lot of expansion from silicon wafer suppliers? And our view is that the 300-millimeter worldwide silicon supply is unable to satisfy the current demand. So in the period of 2022 to 2020 -- 2020 to 2022, 30 new 300-millimeter fabs are expected to start. That's what also we have presented that chart as well. I also believe that even if the announced new 300-millimeter silicon wafer production capacity will be made available, I think that demand will not be completely satisfied. So we are confident that even beyond 2 -- 2024 and beyond, I think there will be no oversupply. The whole supply demand will be still healthy. That's our view. And next question is that, is GWC seeing the supply tightness easing now? I think GWC, up to now, we haven't -- we are not seeing any softening as order rates are still accelerating. If the 200 millimeter, 300 millimeter product are maintaining the same traction and saturation level in Q4 relative to Q3. A small diameter, I mean, 150 millimeter and below dipped a little bit in Q3. That was mainly because the Malaysia COVID issue. But Q4 is now showing a very strong recovery, again, even for small diameter. So as a clear example, our largest -- one of our largest smaller diameter customer has just confirmed a demand for the full year of 2022, at the maximum allocation level. So we are quite confident like the whole demand is still strong, and we are not seeing any tightness easing now. So next question is that, do we -- does GlobalWafers have any concerns over the recent noise on the end demand in TV, PC and China smartphones? Will this alter the supply demand dynamic of silicon wafer for 2022? This is the question. And our answer to this is that there is no significant increasing for the silicon wafer supply in 2022. So, regarding the worldwide demand, I think accumulating from all industry -- industrial and applications, there will be a very healthy Y-o-Y demand growth to fill up existing macro capacities -- all the capacity, especially stronger demand from advanced node applications. So we don't have any concern over the recent -- some noise of the China smartphones and some other TV, PC related demand. And next question is regarding to our LTA prepayment. The question was that, how much prepayment we have already received this year for new -- from new LTA? The answer for this is that our total prepayment balance as of end of September was about USD 800 million. But if we are talking about new LTA find this year, new LTA only, actually, we already have received over TWD 6 billion that -- I'm talking about new LTA only. Actually more prepayments are on the way for the new LTAs. We have already signed and -- the new LTAs we already signed. So LTA prepayments are increasing. Next question about our LTA is that, your total -- the question to us is that, your total prepayment has stabilized from 2021. And recently, we have announced some long-term agreement with some strategic products, such as global foundries. So the question is that, could you discuss the progress of the new contracts and the existing LTA renewals? Are the customers in general more willing to negotiate the contract with better pricing and longer duration? The answer to this is that, yes, most of our customers now have been very open and even requesting to renew or expand the new LTA or sign a new LTA with adjusted terms, in order to secure their -- the supply they need in the next 3 to 8 years. So we feel that we see some difference, unlike the 2017 and 2018 upturn. Most of GWC's customers now have now seen the benefit of our LTA strategy in providing stable supply at very reasonable pricing. So in this current market environment, our customers have been very willing to continue this model and expand to future years even longer-term than last term, 2017, 2018's LTAs. So these are the questions we received in the past several days prior to the call today. Thank you very much for your time. So now it's open call for LTA -- for Q&A, sorry.

[Operator Instructions] And our first question is coming from Donnie Teng from Nomura.

I have 2 short questions. The first one is still regarding to gross margin, because as you can see that actually there has been lots of negative impact on our manufacturing during third quarter, but we still delivered very strong gross margin. Of course, you have mentioned about that mainly due to price hike and the product mix improvement. I'm just curious if you could elaborate more on, if there was any kind of a significant lift up of the semi wafer price in the third quarter, mainly driven by maybe new LTA or any other reasons? And what kind of gross margin we should expect into the next couple of quarters? And second question is regarding to the material cost hike. So we have seen that the polysilicon price to increase a lot in the past few months, in terms of both solar and semi grade polysilicon. So wondering how can we -- how should we manage this kind of rising material costs going forward? And also, could you tell us about something about like Sino- -- is there any impact to Sino-American's solar business?

Okay. Thank you very much, Donnie, for your question. The first question, gross margin. That's a very good question. I think that product mix, ASP are the main reasons, but let me elaborate a little bit more detail. As what we explained earlier, Q3, we had some headwinds and those headwinds are mainly in Malaysia and China. That means that most of the product we got affected are small diameters that -- in Malaysia, that's our 6-inch fab and in China because of the power control -- power rationing and our Kunshan -- our China fab is 100% for small diameter as well. So that means that in Q3, our small diameter fab got big hit than all the other bigger diameters. And as everyone knows that the gross margin-wise -- small diameters gross margin is way lower than 8 and 12 inch. And in Q3, if you look into -- of course, we didn't disclose this detailed pie chart to the market. But actually, our Q2 shipment revenue -- our small diameter -- the width of our small diameter is much lower than before, lower than our average. So that is the main reason, in addition to the ASP improvement and new LTA kicking, I think much smaller -- much lower weight of our small diameter. That is one of the main reasons for better gross margin as well. And how about the gross margin in the future, I think that we have positive factor for our gross margin such as ASP improvement, new LTAs, better ASP and better product mix. But also, we have negative factors as well. Like what you said that we are seeing price hike policy, again and quite a lot of material costs and also transportation cost is extremely tight as well. I think the whole infrastructure system, especially the transportation, it's not only much higher rate but also a longer time. So we've got a lot of impact from those -- negative impact on our gross margin as well. So we are trying to minimize the impact from those negative factors, and we try to obtain our positive one. I would say that the gross margin in the future will be somewhere about like what we are seeing today, 39%. I think this is -- 39% to 40% should be a reasonable target for our team. Of course, there are still something very unpredictable. For example, foreign exchange. We don't know the currency -- how strong the currency will be. You know that most of our orders are in U.S. dollars. So if U.S. dollar remains very weak, then maybe we will -- it will be more difficult for us. And also another factor is that we are still negotiating with our material suppliers. We try to minimize the impact on the material cost hiking. But we are still working on this. So I would say that our internal goal is to keep the gross margin always very stable, close to or slightly better than our Q3 gross margin. That's my answer to your first question. And the second question about polysilicon. Yes, that is extremely very true that because of the metal grade silicon price the raw material polysilicon increase 4x in the past several weeks. So that is definitely a big impact to polysilicon price. Fortunately, for GlobalWafers, we order -- we already we placed the order of our polysilicon for the whole year already in last year. So we always place polysilicon appeal once every year. So we already secured the price of our polysilicon price. But next year, definitely, the cost will be higher than this year. We are still working with our customer, negotiating with our strategic partners. So far, I think it's unavoidable that we will suffer some polysilicon price increase. And not only polysilicon, some chemical price increase and a lot of material price increase. I think we will suffer this, but we try to manage to control the price increase to a lower percent. So I apologize I cannot disclose that what would be the final number. We are still in the final stage of the negotiation for 2022 its material cost. So that's a heavy one. SAS is a solar company, SAD has -- of course SAS uses a lot of polysilicon. That's a good thing for us as well because we always -- whenever we negotiate polysilicon, we always bundle our semiconductor grade and the solar grade polysilicon, try to increase our bargaining chips to negotiate with our supplier. And that does help. So I think our polysilicon price impact -- the percentage of our price increase should be a little bit lower than the average in the market. So that benefits both GlobalWafers and Sino-American. So that's my short reply to your question. Thank you very much, Donnie.

Our next question is coming from William Yang from JPMorgan.

Doris and William, I have just one follow-up about the deal still, sorry. Just curious, is it possible to share with us -- from a specific [indiscernible] make all concerned from China and Japan regulatories? Why do they not approve this deal yet versus the other countries?

Thank you very much, but I want to know the answer as well. But we keep working with them. I think let me -- for Japan, I think, basically, we have already answered all the questions, prepared all the documents. I think it's very, very close to the final clearance, but it's very -- we cannot comment anything before we get the clearance. And for China as well, we have very constructive communication with China [ Xamarin ] and all the related government offices as well. So yes, they are very slow. We keep pushing, but so far, they -- all the questions are constructive. All the inter communications are constructive, but they are just very slow. Yes. In Germany -- Germany, also we're waiting for -- Germany also, we have quite a lot of communication with Germany. So these are the final 3 countries we are waiting for the clearance. But it's very hard for us to -- it's not -- according to our company's policy, I cannot share too much details of the individual jurisdiction. Sorry about that.

In the interest of time, perhaps we can take one last question before we conclude the call.

Our next question in that case is going to be from Haas Liu.

Doris, William, congratulations on the results. My first question is regarding our long-term agreement in pricing. I think the LTA you have now is at the highest level in the past 2 years and also grew by 40% since the drop in first quarter this year. Does that mean the percentage of your capacity credited by LTA is higher compared with the previous cycle? And also could you let us know if the apple-to-apple pricing for new LTA is better than the LTAs you signed a few years ago? And my second question is about the capacity expansion plan -- or your own capacity expansion plan. With your peers building a new fab for ramp in '24, could you update how much capacity you expect to extend from 2021 to 2023? And do you expect to have a plan to build out new fabs for ramp in '24?

Thank you very much for your question. Right. For the -- first of all, for the expansion, I think we have several expansions in many countries. I mean, in GWC -- first of all, we don't have any greenfield. We have no plan to have greenfield expansion. Up to now, no greenfield expansion, but we have brownfield expansion development in Korea, Taiwan, Japan and also Europe. So we -- and U.S.A., that's a very big one as well. So we have expansion in these 5 countries, and we keep working on the expansion very aggressively. And most of the capacity will be available from -- part of the capacity will be available from Q4 2023 or Q1 or Q1 first half. It's very hard to say the percentage because we made the expansion on various -- on different products. For example, in U.S., we expand our SOI capacity. And that is a brand new and the percentage -- the capacity expansion is huge because we didn't have too much 300 millimeter SOI capacity, but now we are going to have a big one. So -- but in general -- I can put it this way that, in general, most of our expansion is in 300 millimeter, either 300-millimeter wavering or 300 millimeter APO, 300 millimeter SOI. So most of our expansion is from 300 millimeter. This is the #1 biggest expansion. And the second expansion -- the second important expansion is compound. We are doing a lot of expansion on compound, including silicon carbide and also gallium nitride. Both of these 2, we will have big expansion next year as well. And this is my question to your second -- my answer to the second question. And for your first question, our LTA coverage. I think our LTA coverage is same or slightly higher than previous terms -- I mean, 2017 and 2018. In 2017 '18, we had a very high LTA coverage as well. But this time, for some diameter samples -- for some other diameters and product application lines, we -- our coverage even a little bit higher than 2017, 2018's LTA status. What increase -- what's more different than previous cycle is that this time, our LTA cover basically all diameters. We have quite some LTA for small diameter, I mean 6 inch as well. Because quite a lot of our 6-inch wafers are for specific power application or automotive applications, so those applications, we receive a lot of LTAs to cover -- procure those applications, even they are small diameters. If we compare apple-to-apple, I think all of the new LTA price are higher than previous LTA, apple-to-apple. So the LTA improvement is not only the product mix improvement, even apple-to-apple, new LTA prices are higher than previous ones. And there are several reasons for this price adjustment either for apple-to-apple, new LTA prices are higher, several main reasons. The most important reason is foreign exchange rate. Because in 2017, 2018, when we signed LTA, at that time, U.S. dollar was much stronger than today's U.S. dollar. So as I said earlier that most of our orders are in U.S. dollar -- most of our sales in U.S. dollars. So with U.S. dollar make our costs much higher than last cycle. So this is the first reason why apple-to-apple cost -- our new LTA price is higher. And the second reason is that the material cost is much higher than previous cycle. At that time, if we compare with last cycle, I think polysilicon prices so much -- now, it's so much higher. And actually, we are talking about not only polysilicon price but almost everything, transportation cost at least 2.5x and a lot of chemical and material consumables are much higher as well. So we are suffering much higher material cost and weak U.S. dollars, so that is why our new LTA prices are higher. And of course, the tightness of the supply, that is, of course, certainly another reason for this strong demand. So to sum up -- the summary is that our new LTA -- this size of our LTA coverage is slightly higher than previous ones, but we covered all diameters, not like previous cycle, not every products are covered. And price-wise, even we compare apple by apple, I think -- apple-to-apple new LTA price is still higher than previous one due to a lot of cost increase. Thank you very much for your question. That's my answer.

Okay. Just a quick follow-up. How much material cost is percentage of your total cost?

Total coverage of our LTA? Was that your question?

No, no. How much material cost is percentage of your total cost?

The polysilicon cost or what?

Including like chemical and polysilicon.

Yes. Sorry, our cost breakdown is confidential information. According to our company policy, sorry, we cannot comment on this one.

Sorry about that. Thank you very much for your question, again. Thank you.

Okay. Thank you, everyone, for participating. Thank you, Doris, and William, for your time. I think we're up to over 1 hour on this call. So if it's okay, perhaps we will conclude our call here. Is that okay?

Yes.

Thank you very much, everyone. Thank you. Have a very good day. Thank you very much.

Thank you.

Thank you. Bye-bye.

Thank you. And everyone, that does conclude our conference call for today. You may now disconnect. Thank you so much for joining and enjoy the rest of your day.