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Edited Transcript of 2408.TW earnings conference call or presentation 26-Apr-17 7:00am GMT

Thomson Reuters StreetEvents

Q1 2017 Nanya Technology Corp Earnings Presentation

Taipei May 3, 2017 (Thomson StreetEvents) -- Edited Transcript of Nanya Technology Corp earnings conference call or presentation Wednesday, April 26, 2017 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Pei-Ing Lee

Nanya Technology Corporation - President and Director

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Conference Call Participants

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* Mark C. Newman

Sanford C. Bernstein & Co., LLC., Research Division - Senior Research Analyst

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Presentation

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Pei-Ing Lee, Nanya Technology Corporation - President and Director [1]

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Okay. Ladies and gentlemen, thank you for coming to Nanya Technology First Quarter Investor Conference Update. I am Pei-Ing Lee.

So, this is difficult, okay? My agenda today, first is the key take away, and then report to you the revenue and results for first quarter, operational guidance, market outlook and business outlook.

For the quarter, our revenue comes to TWD 12.231 billion, a 1.1% increase Q-o-Q. ASP increased by 20.1%, and bit shipment declined by 14.4%. Bit shipment is declined for the reason that we were doing the 20-nanometer conversion, so that we had to shut down some of the 30-nanometer equipment to modify equipment for 20-nanometer. And that task is largely completed. So we expect that from now on that Q-to-Q our base shipment will no longer be declining. Okay, next quarter, we're expecting that bit shipment will be gradually, probably not a lot but gradually increasing, which means Q1 will be our last -- our worst bit shipment for this year.

Gross margin-wise, 40.1%, a 9.1 percentage points increase q-to-q. And this is the -- after 6 quarter, that will fall below 40% but we come back to 40% for almost 1.5 years. And operating margin comes to 31.5%.

Net income of TWD 3.275 billion, net margin, 26.8%. EPS at TWD 1.19 for the quarter. And our 20-nanometer technology conversion is part of schedule, as a matter of fact is ahead of our original plan.

Quarterly result [as collect to you],okay? Very close to last quarter for revenue and the net margin improved to 26.8%. And last quarter, we had our Inotera disposal, so this is the reason, as a result of 1.6 -- 165.9% of the net margin, but it was subject to our disposal, last quarter is 17.4%. So there's a significant improvement on our net business.

And revenue wise, [eyes] are pretty much stable here. For the quarter, revenue result comparative q-to-q, up 1.1% in revenue, shipment down 14.4%, ASP up 20.1% and exchange rate negative impact 1.7%. I will explain more over the next [for you].

Next few points, okay. The gross margin, as I explain to you, comes to 40.1%, almost a 9.1% better than last quarter. Operating income, 31.5%, almost 10% bigger than last quarter.

EBITDA 5.455 billion, 44.6%, also improved. And it comes to net margin, here is TWD 3.275 billion. And last quarter, we had this Inotera disposal income. And so, last quarter EPS 7.34 versus this quarter 1.19.

Our book value per share 35.31 versus 31.13 . All this to include unrecognized gains that we own the Micron share. I'll explain more on in the next table.

Okay, this is --- explanation here is brands are different between these 2, 2 quarters here. This [pross] 1.1% is contributed by ASP increase, bit shipment and the exchange rate impact, okay. And these are very reasonable numbers. If you go through this calculation here.

Gross margin TWD 4.9 billion, okay, up by 9.1%, mainly due to gross margin increase of 11 -- ASP increase of 11.6% whereas the cost per bit increased also 2%. As a result, as I described to you, that we had shut down the 20-nanometer conversion, shutting down some equipment as well as some of the --- our product mix contribute to close up by 2%, okay. And actually this number is quite reasonable. It's very good performance in terms of major technology conversion actually taken.

Operating income, TWD 3.853 billion versus TWD 2.57 billion, up 10.3%. And this is mainly due to gross margin increase. The net income of TWD 3.275 billion and here is 2 numbers, these 2 number, one number is including disposal of Inotera shares. And this is not including the disposal of the Inotera shares.

And also, here, the -- we had a very big exchange loss difference between these two quarters. In Q4 last year, we had a gain of the exchange rate impact of four point --- TWD 480 million and in Q1, we had a negative TWD 575 billion. So this plus and minus is an impact of $1.045 billion.

The net, the EPS 1.19 versus 0.80, this is excluding the disposal of Inotera share. It will have adjust this difference, okay. Because this already has a one --- TWD 575 million here, if we assuming that we don't have exchange rate impact, this number would have been 1.4. And this number would have been 0.62, which means that our EPS has improved, okay.

With the exchange rate included it's 48.8%, without exchange rate impact it's nearly a 100% improvement in EPS.

R&D cost and ST&E cost is pretty much in the lower number around five eight --- $520 million. This chart here describe to you our investment in Micron Private Placement. First of all, the volume is 57.78 million share, okay. And our purchasing price is $17.29 per share, okay. And at the exchange rate of 30 --- exchange rate of

TWD 31.488, okay. The total investment amount, TWD 31 billion, okay, 31.45 billion, shareholding is about 5.26% of Micron's share. Our private placement has a lock-up period of 6 months, which means that by June, the lock-up period will be expire. And this is -- currently is available for sale.

Market price versus at December 31, $21.92 per share, of Micron shares versus first quarter end, 28.9, we have an unrealized gain, okay. Unrealized gain of total of TWD 19.199 billion of unrealized gain by owning the Micron share.

Our cash situation, beginning of the quarter, TWD 9.1 billion and cash from operating income pretty much from a gain, and depreciation, capital expenditure for the equipment and long-term loans, we have issued ECB in first quarter. And we also pay back some of the loan, okay. And investment, this is mostly through the disposal of money-market loans, okay.

So our end balance is at TWD 20.267 billion. And we are at the stage of spending money for the 20-nanometer conversion of equipment, which I will show you in the next [folio] here --- [you folio, again] Our financial highlight here is that we have since Q1, first quarter of 2013, we have become in the positive, and we continue to make money since then. And this quarter here is --- we are back to 40% of the gross margin, for almost more than 6 quarters.

Our sales breakdown by application is pretty much -- it's very similar, except minor, we had more Consumer by 1.1 percentage and more Automotive and Industrial grade by 1%. All the other is added expense of commodity, our Mobile was pretty much similar to our previous quarter.

We state that for 2017, the whole year, Mobile will be around 20% and Automotive and IT will about 8% to 9% seasonal by the revenue, and Consumer will be at around 62%.

Our 20-nanometer conversion status is that we were --- we tried to reach 38k wafer starts per month, okay. And total capacity to 68k, and the volume production scheduled for Q3, okay. Scheduled for Q3, and as I described to you that our preparation [piloting] has been very, very encouraging, okay. And we expect that 38 input --- expect it on at the end of this year, okay. And we expect to see costs cross over Q4 this year, okay, and there's an opportunity that we can even do slightly better than Q4, okay. We worked very hard for that.

And initial product offer including DDR3, DDR4 and also the long-run, low-power DDR4x. DDR4x plans to make production in 2018.

Our CapEx situation, we already spent 23 --- TWD 22.3 billion last year. This year, we plan to spend TWD 34.3 billion. Most -- majority of this is for 30-nanometer conversion, okay. And bit shipment wise, for this year, we have low single-digit bit down due to the conversion, okay. As I described to you, for the first quarter, we were down bit shipment by 14.4%. Even though, the next few quarters will be greater increasing. But overall speaking the whole year, compared to last year's still going to be down single digits. And next year, we then expect a big improvement in bit shipment by 45%, due to the output from 20-nanometer start to realize.

Marketwise, a limited supply growth here is expected, okay, contributed mostly by the technology conversion by all companies, okay. Even though there may be some minor new capacity introduced, but it will not be a major impact at this point. ASP continue to increase in Q2 is expected. Remain stable in Q3 is also expected. And Q4 will be subject to major memory supplier capacity expansion, which means that Q4 this year uncertainty, have to be looking into what is the action taken by major memory supplier, particularly, the 3D NAND situation. If 3D NAND is oversupplied, maybe some of the capital expense may be changing, okay. So it's still unknown, okay.

But based on what is seeing, based on what is heard, what has been announced by the major suppliers as of today, most of major suppliers still don't plan to overinvest in DRAM area, which means that likely, Q4 will still be a stable market, okay.

In demand side, demand in second half of the year is expect to be better than the first half of the year due to seasonality, okay. We continue to see a strong momentum in server market, and also enterprise notebook, desktop is better than original expectation, okay. Mobile device, from mid- to high-end with high-resolution and also dual-lens camera require a higher content per box, okay. From 4 gigabyte to 8 gigabyte, an 8 gigabyte compression model.

And consumer side continue to remain very good demand, okay. That included TV and 4K TV is over 30% penetration. As a result, set-top box also require greater content per box, IP camera also same thing. And the others like automotive, interest in great smart watch, also is seeing some pretty good demand in the consumer class segment.

Our business outlook, we've seen that limited DRAM supply growth in 2017, and we're seeing a favorable market condition expected for the year, okay. We expect to see continued strong demand from consumer, automotive, industrial grade in Q2. Our own Q2 bit shipment forecast is start to increase from Q2 now, okay, by low single digit. And our 20-nanometer target to have 30k wafer start per month by Q4 this year, and 38k by first half of next year. And our Board has approved a cash dividend of TWD 1.5 per share. And this will be submitted for proposal in AGM in May 26 for final approval.

Okay. Thank you for your attention. Now, we'll open up for the questions.

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Questions and Answers

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Unidentified Analyst, [1]

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You have ASPs up second quarter, bits up the second quarter, so is there any reason why margins wouldn't be up significantly in the second quarter? Bits up, ASP up, I mean...

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Pei-Ing Lee, Nanya Technology Corporation - President and Director [2]

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Yes, it will be second quarter likely that we'll have better margin compared to first quarter, okay. Depends on the volume output, depends on ASP. But currently, we expect the ASP increasing versus first quarter. The ASP increase is likely not as the high percentage in the first quarter. But still going to be really, pretty good. And you would probably seen quite a bit of forecast there already, okay. And we seen that the consumer market and commodity market continue to improve. We expect the consumer market also will improve as well.

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Unidentified Analyst, [3]

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And the second question, when you start seeing 20-nanometer output, is there a big change in your R&D policy, because I'm sure Micron was a different contract for 20-nanometer. So are you going to see a significant increase in your R&D cost because of that technology fee, or...

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Pei-Ing Lee, Nanya Technology Corporation - President and Director [4]

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We will continue to develop our 20-nanometer product on our own. And this increasing is pretty much very similar to 30-nanometer product development. Basically design new product, okay. Although we also will be spending a little bit more R&D number to the 20-nanometer in terms of the profit process as well, okay. However, we don't see that increase to be very significant, okay. Our cost structure in those area we will maintain a reasonable range, at the TWD 500 million to TWD 600 million and as you see --- but will increasing probably margin rate [when we get back] ...

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Unidentified Analyst, [5]

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And the last question. The unrealized gain from Micron shares. Obviously that's not the [key now] it's just the --- in the [incremental] balance sheet.

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Pei-Ing Lee, Nanya Technology Corporation - President and Director [6]

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I'm sorry?

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Unidentified Analyst, [7]

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The unrealized gain from the Micron shares?

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Pei-Ing Lee, Nanya Technology Corporation - President and Director [8]

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It's not increasing in the balance sheet but it's recognized as a unrealized gain, which is in the book value. Okay, any further questions?

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Mark C. Newman, Sanford C. Bernstein & Co., LLC., Research Division - Senior Research Analyst [9]

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It's Mark Newman from Bernstein.

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Pei-Ing Lee, Nanya Technology Corporation - President and Director [10]

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Hello.

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Mark C. Newman, Sanford C. Bernstein & Co., LLC., Research Division - Senior Research Analyst [11]

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What is Nanya's strategy for dealing with the China players? You've got [Fuzhen], Tsinghua, they plan to ramp up 60k specialty DRAM, which I think is very similar type of product they are looking to produce, very similar to Nanya's product, maybe they're behind, but it's kind of a specialty product. So I wonder if you have any thoughts on that? And other things that are going on in China, clearly they're trying to hire lots of people from Nanya and Samsung, Hynix and all of the big memory companies and --- lots of things are going on. So any comments you have, be very appreciated.

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Pei-Ing Lee, Nanya Technology Corporation - President and Director [12]

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Okay. You have 2 questions, okay. Let me answer the second question first. Of course we've seen --- you've already seen on the news that quite a bit of recruiting happened where they very attracted, okay? They already tried to attract people from Taiwanese talent that's including Micron Taiwan and Nanya Technology. Of course that --- the salary attraction is not something we can match, they're talking about 3x to 5x salary is not something that we can match. But we will be selectively doing the salary compensation improvement for key person, okay for key people, we will be identify a few hundred people and more, okay? And this is critical, critical, critical people they will be targeted, okay? They certainly would not be hiring operator-type of people. So from that regard it is something that we are doing regarding to the compensation. On top of that, we also have to very careful about information security, okay. When they are doing something like hiring people, they also encourage people to take that information with them, okay. With that regard, we have to improve our company information security, okay. Also we have to take legal action against whatever illegal stealing information, okay. Also all this has been ongoing, and they are topics that I cannot share with you or the public, but we will continue, okay, to improve our information security policy, doing all kind of work around our database, around our people, all kind of different information security in this execution has been ongoing. So that's regarding to the employee salary compensation, hiring and -- on top of that, of course the strategy on that [adcatology] of this matter is that we have to improve our competitiveness as a whole, okay. If we look at back on what we had last year, okay. Last year as I described, but --- last year Q3 and back for 8 quarters, DRAM pricing has been continuing to decline for 8 quarter. Nanya Technology has been keeping profitable for consecutive 8 quarters without any loss one single quarter, okay, which means that we are able to have using our previous 30-nanometer, competing with the key competitor including their 20, 25 or even 18-nanometer. We're able to all speaking about profitability, which means that we have a good, pretty good cost structure, pretty good product portfolio, pretty good overall sales strategy, customer service et cetera, okay. That provide us with pretty reasonable value. And our strategy will be --- safer from 30-nanometer to 20-nanometer as we speak, okay. With that, we should be able to be staying pretty competitive for the next many years to come, okay. And of course, beyond that we have the option for 1x, 1y technology. On top of that is our own improvement et cetera, okay. So this is what we can do on our own. Of course, that --- by looking into DRAM technology, it's really not something that you can separate get a few people, feed in pieces of information here and there and can become very competitive, very quickly, okay. So we expect that even though they may be doing that strategy, without major company license technology to them, it will be time for them to struggle to go up, okay. It will not be that easy. Yes, they may be able to do something over time, but will not be very quick, will not be very competitive, okay. But yes, regarding to --- what we do, we have to be improve our own competitiveness. And Nanya Technology is moving along with our market strategy. We saw product strategy, with all production efficient.

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Unidentified Analyst, [13]

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Pei-Ing Lee, Nanya Technology Corporation - President and Director [14]

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Pei-Ing Lee, Nanya Technology Corporation - President and Director [34]

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Pei-Ing Lee, Nanya Technology Corporation - President and Director [38]

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Pei-Ing Lee, Nanya Technology Corporation - President and Director [40]

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Unidentified Analyst, [41]

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You had pretty good tiebacks going from 30-nanometer to 20-nanometer. Going from 20-nanometer to 1x, 1Y, could it be a much more modest amount that you pay for that conversion or ... ?

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Pei-Ing Lee, Nanya Technology Corporation - President and Director [42]

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Oh, because equipment difference?

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Unidentified Analyst, [43]

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Yes.

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Pei-Ing Lee, Nanya Technology Corporation - President and Director [44]

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I haven't had that data here in front of me yet. We're still doing evaluation on that. But my expectation would not be as major as going from 30 to 20-nanometer. But that number, I still don't have it. Main reason is really that the gap between 30 and 20 is, you've got it's 25, 20 -- 21, 23, et cetera. Intermediate generation.

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Pei-Ing Lee, Nanya Technology Corporation - President and Director [46]

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Pei-Ing Lee, Nanya Technology Corporation - President and Director [48]

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Pei-Ing Lee, Nanya Technology Corporation - President and Director [50]

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Yes.

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Mark C. Newman, Sanford C. Bernstein & Co., LLC., Research Division - Senior Research Analyst [51]

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At the beginning, I joined a few minutes late and you were talking about the 20-nanometer transition and why the bit growth was so poor. Can you just kind of give a little bit more detail about the -- what happened, the bit growth is so low because of the shutting down the 30-nanometer for the transition, I think you were saying. And could you just give a little more clarity about that? And how the yield, or how the 20-nanometer transition is going?

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Pei-Ing Lee, Nanya Technology Corporation - President and Director [52]

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I already describe that but I will repeat that for you, okay. Basically, we convert some of the 30-nanometer equipment into 20-nanometer usage. What I mean is the existing 30-nanometer equipment with a slight modification they will produce internally 20-nanometer, okay. So as a result, when you shut down some of the equipment, your productivity will be lower, okay. And that's the reason why the --- our output will be --- has been reduced for Q1 this year. And we expect that from Q2 on, Q2, Q3, Q4, our Q-to-Q bit shipment, we have an opportunity of gradually increase quarter by quarter, okay. And so 20-nanometer conversion status, we have finished initial piloting and we are currently under qualification stage, which means that we will send out numbers of parts to customers for engineering test run and customer test run and we're also internally doing a rerun to the qualification of all kind, okay. So the overall progress from 20-nanometer has been very smooth. It's better than our expectations.

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Mark C. Newman, Sanford C. Bernstein & Co., LLC., Research Division - Senior Research Analyst [53]

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And the first product is PC DRAM?

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Pei-Ing Lee, Nanya Technology Corporation - President and Director [54]

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The first product is 4-gigabit DDR3, which will be used for both consumer --- mostly consumer --- memory, okay, there is probably some minor commodity memory, which means that there may be some normal usage DRAM in the first product.

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Mark C. Newman, Sanford C. Bernstein & Co., LLC., Research Division - Senior Research Analyst [55]

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I see, okay. To clarify the China question we talked about earlier, you sound like you're not concerned because you think that even though China has a lot of money you think that ultimately the DRAM is too difficult and that they cannot succeed in DRAM. Is that your view?

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Pei-Ing Lee, Nanya Technology Corporation - President and Director [56]

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My view is first of all, if they secure technology transfers licensing, then that will be major impact probably within 2 to 3 years. If they don't secure any technology license, then my expectation is they will be very difficult for them to be competitive for at least 3 to 5 years, okay. If they try to do it on their own, okay, if not longer, okay. So that's not saying that I'm not concerned, okay, with the development in China market, China production there. So that's not saying I'm not concerned. But I'm concerned about the information security, okay. I'm concerned about they are using very unreasonably high salary to attract talent from Taiwan. Basically it's a pretty unfair competition. However, we can do very little about that, okay. So all we can do is first of all, we have to improve our information security and we have to improve our compensation to our key people, okay. And on top of that, we have to improve our overall operation performance, okay. Our profitability, okay. How can we do, make more profit, okay. To make our company more attractive to the talent, okay.

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Mark C. Newman, Sanford C. Bernstein & Co., LLC., Research Division - Senior Research Analyst [57]

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And then there is no consideration for Nanya to do some work, collaborate in any way with some of these Chinese companies?

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Pei-Ing Lee, Nanya Technology Corporation - President and Director [58]

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No way.

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Mark C. Newman, Sanford C. Bernstein & Co., LLC., Research Division - Senior Research Analyst [59]

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I see. Thanks very much for your help.

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Pei-Ing Lee, Nanya Technology Corporation - President and Director [60]

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Pei-Ing Lee, Nanya Technology Corporation - President and Director [70]

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Bye-bye. Thank you.