U.S. Markets open in 1 hr 23 mins

Edited Transcript of 522.HK earnings conference call or presentation 21-Apr-17 12:30am GMT

Thomson Reuters StreetEvents

Q1 2017 ASM Pacific Technology Ltd Earnings Call

Hong Kong May 5, 2017 (Thomson StreetEvents) -- Edited Transcript of ASM Pacific Technology Ltd earnings conference call or presentation Friday, April 21, 2017 at 12:30:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Cher Tat Ng

ASM Pacific Technology Limited - CFO and Executive Director

* Leonard Lee

* Wai Kwong Lee

ASM Pacific Technology Limited - CEO and Executive Director

================================================================================

Conference Call Participants

================================================================================

* Arthur Lai

Citigroup Inc, Research Division - VP and Analyst

* Charlie Chan

Morgan Stanley, Research Division - Technology Analyst

* Dong-je Woo

BofA Merrill Lynch, Research Division - MD and Tech Analyst

* Kyna Wong

Crédit Suisse AG, Research Division - Associate

* Michael Chou

Deutsche Bank AG, Research Division - Semiconductor Analyst

* Seeching Yim

BOCOM International Securities Limited, Research Division - Research Analyst

* Steven C. Pelayo

HSBC, Research Division - Regional Head of Technology Research, Asia-Pacific

* William Lu

UBS Investment Bank, Research Division - MD and Asia Semiconductors Analyst

* Zhi Qiang Xu

Huatai Financial Holdings (Hong Kong) Limited, Research Division - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, good afternoon, good evening, ladies and gentlemen. Welcome to the conference call.

Leonard, please begin the call and I'll be standing by. Thank you.

--------------------------------------------------------------------------------

Leonard Lee, [2]

--------------------------------------------------------------------------------

Good morning, ladies and gentlemen. Welcome to the ASM Pacific Technology 2017 First Quarter Results Investor Conference Call.

Before we proceed, I would like to note that during this conference call, there may be certain forward-looking statements with respect to ASM Pacific Technology's business and financial conditions. Such forward-looking statements may involve known and unknown uncertainties and risks, which could cause actual results, performance and events to differ materially from those expressed or implied during this conference call.

With us this morning are Mr. WK Lee, CEO of ASM Pacific Technology; and Mr. Robin Ng, CFO of ASM Pacific Technology. We will start with a brief discussion about our 2017 first quarter results, followed by a Q&A session.

Without further ado, let me hand this over to Mr. WK Lee. Mr. Lee, please?

--------------------------------------------------------------------------------

Wai Kwong Lee, ASM Pacific Technology Limited - CEO and Executive Director [3]

--------------------------------------------------------------------------------

Thank you, Leonard. Good morning, ladies and gentlemen. Thank you for joining us this morning. I will first provide you with the summary of our first quarter results and followed by a Q&A session.

We are very pleased to announce the strong financial results achieved by the group for the first quarter of 2017, with many new records set. Our strong performance was driven by the robust demand from the mobility, communication and IT market as well as the automotive market. We believe the group has the right product offerings to ride on the growth potentials brought about by these markets.

Group bookings reached a new high of USD 608.4 million, which was 29.2% higher than the previous quarter and 48.6% higher than the same period last year.

Group billings of USD 484.7 million rose 31.4% and 6.8% against the same period last year and the preceding quarter, respectively.

Group net profit surged 470% year-on-year and 92.9% quarter-on-quarter, respectively. The improvement was due to higher revenue, improved gross margin and a noncash gain related to the adjustment of the liability component of the convertible bonds issued by the group in March 2014.

Gross margin was -- group gross margin was at 39.9%, representing improvement of 686 basis points and 233 basis points over the same period last year and the preceding quarter, respectively.

Book-to-bill ratio for the group was 1.26 and backlog as of end of Q1 increased to USD 551.5 million, representing an increase of 30.2% from the end of last year.

By geographical distribution, China, Europe, Korea, Malaysia and Americas were the top 5 markets for ASMPT in Q1 2017. CIS equipment was the main contributor for the significant increase in sales to Korea.

I will proceed to share the performance of our 3 business segments, starting with the Back-end Equipment Segment. The group's Back-end Equipment Segment attained a new high in group bookings and billings in the first quarter of the year, underpinned by the demand for CIS, IC/discrete and LED equipment. Bookings rose 63.3% year-on-year and 37.1% quarter-on-quarter, respectively.

Q1 billings for the Back-end Equipment grew 56.1% year-on-year and 15.5% quarter-on-quarter. Gross margin of the Back-end Equipment Segment was at 46.6%, a new high since Q2 2011. We improved 673 basis points year-on-year and 385 basis points quarter-on-quarter, respectively. Segment profits surged 213.7% year-on-year and 46.4% quarter-on-quarter.

Bookings for the Materials Segment set a new quarterly record in Q1 this year. It grew 35.4% year-on-year and 19% quarter-on-quarter.

Billings also reached a new high for the first quarter of the year. We increased 16.2% year-on-year and 5.8% quarter-on-quarter, respectively.

Segment profit was flat year-on-year but declined 4.9% quarter-on-quarter.

Gross margin was flat compared to the preceding quarter but contracted 210 basis points year-on-year.

Billings for the SMT Solutions segment also attained a new record for the first quarter of the year. It increased 9.6% year-on-year but declined 4.2% quarter-on-quarter.

Bookings rose 34.6% year-on-year and 22.4% quarter-on-quarter, respectively.

Gross margin of the SMT Solutions Segment made significant improvement of 775 basis points year-on-year and 33 basis points quarter-on-quarter to 39.4%, while the segment profit increased 217% year-on-year and 11.3% quarter-on-quarter.

Now for the outlook of this year, we expect group billings to achieve a year-on-year strong double-digit percentage growth. We also expect bookings in Q2 to remain at a similar level as Q1 this year. Lastly, as we anticipate high turnover from all 3 of our business segments, we expect gross margin of the group to continue to improve during the second quarter of this year.

With this, I thank you for your attention in our results announcement. We are now ready to take your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from Steven Pelayo from HSBC.

--------------------------------------------------------------------------------

Steven C. Pelayo, HSBC, Research Division - Regional Head of Technology Research, Asia-Pacific [2]

--------------------------------------------------------------------------------

Maybe we could start with a little bit of a -- some detail. I'm curious in your guidance for the second quarter. It's a bit vague, suggesting strong double-digit growth year-on-year. Could you maybe help us understand a little bit more what you're thinking sequentially maybe? And maybe you could talk a little bit about do you expect all 3 segments to grow sequentially as well?

--------------------------------------------------------------------------------

Wai Kwong Lee, ASM Pacific Technology Limited - CEO and Executive Director [3]

--------------------------------------------------------------------------------

Yes, we do expect all 3 segments to grow sequentially. Of course, Q1 already very high signs. I'd say we expect a stronger year-on-year growth compared to Q-on-Q. But based on the very strong bookings received by all the 3 segments in Q1, we do expect continuous sequential strength for the billings of the group as well as for all the 3 segments.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

Our next question comes from Mr. Bill Lu from UBS.

--------------------------------------------------------------------------------

William Lu, UBS Investment Bank, Research Division - MD and Asia Semiconductors Analyst [5]

--------------------------------------------------------------------------------

I have 2 questions. One is, you said that 2Q bookings will be at a similar level as 1Q. Can you talk about the composition? Does it look very different in terms of the segment?

--------------------------------------------------------------------------------

Wai Kwong Lee, ASM Pacific Technology Limited - CEO and Executive Director [6]

--------------------------------------------------------------------------------

Okay. Well, I think, for the Q2 booking, we expect strong booking momentum from the SMT segment. Probably, the Back-end Equipment Segment still will remain at a relatively high level. However, since the Back-end Equipment booking normally increase so much Q-on-Q -- in Q1, so we at this point in time, we are not 100% sure there will be a continuously sequential improvement in the Back-end Equipment booking. But however, we are confident that overall, the equipment -- Back-end Equipment booking will remain at a high level on absolute terms and similarly for the Materials Segment. However, we do expect that even if there are continuous sequential growth in this -- in bookings for these 2 segments, the growth should come down significantly after such a strong growth performance in Q1. But however, we do expect a strong booking momentum for SMT business in the Q2.

--------------------------------------------------------------------------------

William Lu, UBS Investment Bank, Research Division - MD and Asia Semiconductors Analyst [7]

--------------------------------------------------------------------------------

Great. My second question is on gross margin. It's very good margin in Q1. Can you talk about the pieces to that in terms of just the scale versus mix versus the cost improvement? The incremental margin in 1Q was, by my calculation, 73%. Can you talk about how we should look at incremental margins going forward?

--------------------------------------------------------------------------------

Wai Kwong Lee, ASM Pacific Technology Limited - CEO and Executive Director [8]

--------------------------------------------------------------------------------

For the group cost margin in Q1 this year, I think obviously, it's first because of the strong performance of the Back-end Equipment business. It delivered a 46.6% gross margin. This improvement was a combination of a higher revenue and also product mix. We have been shipping a lot more back-end equipment to customers in the CIS as well as the IC/discrete market. So relatively, these are having a better margin compared to other applications like LED. So I think this product mix affected our revenue and other factors. And at the same time, we also will continue to enjoy the cost reduction -- the benefit of the cost reduction effort for the past few years. As we have been sharing, with the restructuring of our manufacturing strategy, engaging a lot more external partners for manufacturing, that really translated into a good result for us. On the other hand, our SMT business also delivered good gross margin during Q1 this year. In Q1 this year actually, there has been exceptionally high contribution from the European customers comparatively. So that actually is a geographical and product mix -- customer mix contributor to strong gross margin performance of the SMT. Going into Q2, while we expect continuous improvement, but we do expect the magnitude of improvements should come down compared to the previous quarter.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

Our next question comes from Mr. Michael Chou from Deutsche.

--------------------------------------------------------------------------------

Michael Chou, Deutsche Bank AG, Research Division - Semiconductor Analyst [10]

--------------------------------------------------------------------------------

Two questions. The first question is do you think the booking should pick up in Q2 this year or it may still stay at the same level in Q3 and Q4 this year?

--------------------------------------------------------------------------------

Wai Kwong Lee, ASM Pacific Technology Limited - CEO and Executive Director [11]

--------------------------------------------------------------------------------

Well, this is a difficult question because our booking level in Q1 are already very high. One, we're anticipating the booking level in Q2 should be very similar to Q1. So then, we are already forecasting 2 quarters of very strong booking. Now at this point, it's difficult for us to really predict what would be the case for the second half of the year. The customers are also not able to give us good guidance at this point in time. Well, something I would say very positive about the customers' expectation that when we chat with customers, how they look at the second half of the year, generally, we do not -- we see our customers continue to tell us second half will be another performing period, that they will be placing even more order to us. They don't say that. But at the same time, we do not come across any negative sentiment at this point in time, nobody indicating they're expecting a significant come down in the second half of this year. By now knowing this industry for such a long time, knowing the psychological behavior of our customers, when they do not indicate such a negative sentiment for the second half, if we (inaudible) they are cautiously optimistic for the second half. So at this point in time, I will say we will also take a more cautious approach. We do not expect the second half to continue to go up. We hope to see that will be the upside potential for us. But from a business timing point of view, we do not assume that.

--------------------------------------------------------------------------------

Michael Chou, Deutsche Bank AG, Research Division - Semiconductor Analyst [12]

--------------------------------------------------------------------------------

Okay. But so do you have some idea about the split for the first half, second half in terms of revenue apportion?

--------------------------------------------------------------------------------

Wai Kwong Lee, ASM Pacific Technology Limited - CEO and Executive Director [13]

--------------------------------------------------------------------------------

The split for the second half?

--------------------------------------------------------------------------------

Michael Chou, Deutsche Bank AG, Research Division - Semiconductor Analyst [14]

--------------------------------------------------------------------------------

Yes, the split such as being 40-60 or 50-50.

--------------------------------------------------------------------------------

Leonard Lee, [15]

--------------------------------------------------------------------------------

Michael, can you speak up -- yes, just take the mic?

--------------------------------------------------------------------------------

Michael Chou, Deutsche Bank AG, Research Division - Semiconductor Analyst [16]

--------------------------------------------------------------------------------

I'm sorry. So do you have any idea for the split regarding the first and second half sales proportion?

--------------------------------------------------------------------------------

Wai Kwong Lee, ASM Pacific Technology Limited - CEO and Executive Director [17]

--------------------------------------------------------------------------------

From a billing point of view, we actually expect this year probably, there's no significant difference in terms of billing between second half and first half because we are still expecting group booking for the second quarter of this year to be at a similar level of Q1. So that means, as you know, it will translate into the billing for ASMPT in Q3. So that means we are still expecting Q3 will be having a strong billing momentum. Probably, it will be very similar to Q2 if our forecast turns out to be accurate. So overall, we do not expect from a billing point of view there's a significant difference between first half and second half of this year.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

Our next question comes from Charlie Chan from Morgan Stanley.

--------------------------------------------------------------------------------

Charlie Chan, Morgan Stanley, Research Division - Technology Analyst [19]

--------------------------------------------------------------------------------

So my first question is really regarding the very high (inaudible) ratio. As you can see, the leading foundry like TSMC, their first quarter and second quarter revenues have dropped around almost 10% each quarter. And for back-end customers, their CapEx doesn't seem to grow year-on-year. So can you explain what is the discount connection here? And if you have any monthly share gain, can you identify which segment you are gaining share?

--------------------------------------------------------------------------------

Wai Kwong Lee, ASM Pacific Technology Limited - CEO and Executive Director [20]

--------------------------------------------------------------------------------

Well, I probably -- we will not be able to really answer your first question. We also notice announcement from TSMC talking about inventory deleveraging of their smartphone market. They're expecting Q2 will be a lesser shipment Q-on-Q. But however, judging from what we have seen from our -- the customer base we've had, actually ASMPT has four customer base. I would say overall we see from a back-end space point of view, this is really, really busy. Whenever we talk to everybody, we also monitor their capacity utilization and partly also judging from the market momentum of new trends, so because new trend is a consumable in the semiconductor industry. So all these give us a very good billing. But in terms of application, we still see smartphone and automotive are the 2 largest drivers for Q1, at least for Q1 this year. This also partly related to typically LED will have a seasonal pattern. First quarter of the year is not a strong quarter for LED. So overall, we really cannot explain why on one hand the foundries see less wafer shipment. On the other hand, such a good and strong business in the back-end. Regarding your question on whether we have market share gain, certainly, I think, we have the right products enjoying the growth potential of the 2 strong -- or 3 strong market segments. CIS, we have a very unique product offering in this active alignment machine for new cameras, for 3D sensing. So I think we continue to enjoy this, as I have been sharing in the past. This will not depend so much on the absolute level of a smartphone shipment because it's still more related to the penetration rate of the dual camera. So even the absolute number of shipment of smartphones is not going to increase but if the penetration rate of new cameras continually increase, the demand for active alignment machine will be there, okay? And also looking for the fact that more and more phone makers are introducing even more advanced features for camera. For example, 3D sensing and, for example, we noticed people are talking about importing the augmented reality technology into the smartphone. So this will actually increase the demand for all this. So ASM is enjoying this particular segment. On the automotive side, we're also enjoying this growth from a multiple front. From one end, our SMT business have been traditionally enjoying a very strong position in the automotive market. And on the other hand, ASM Back-End Equipment is also having a stronger position with IDMs in general. And IDMs have been actively participating in the automotive growth for the past few years. So ASM is enjoying this. And furthermore, in the power management area for this automotive, ASM also have very unique product in the market. So that's why we're also seeing this. And when we expect the LED market will take a seasonal bounce back in second quarter of this year, we're also going to enjoy our strong position in the LED market. So overall, we believe, ASM is in a good position to enjoy these market opportunities in 2017.

--------------------------------------------------------------------------------

Charlie Chan, Morgan Stanley, Research Division - Technology Analyst [21]

--------------------------------------------------------------------------------

It's very clear. And my second question is regarding industry and the theme now with the label package. May I know how ASM Pacific is involved? And do you have any solution to capitalize on from this new market?

--------------------------------------------------------------------------------

Wai Kwong Lee, ASM Pacific Technology Limited - CEO and Executive Director [22]

--------------------------------------------------------------------------------

Yes, we do. Actually, we have been engaging with various customers in the fan-out solution, in both the wafer level as well as the panel level fan-out. I think -- I can't disclose the name of those customers at this point in time. And I believe the market is closely monitoring them. By the time they go into a high-level volume production in the later part of this year, probably everybody in the industry will be aware of and they will be aware of what solutions that these people are using. However, on an absolute basis, the advancement in [steel] contribute to a smaller part of our revenue at this point in time. Certainly, it's growing fast. We also notice people like TSMC talking about their CapEx will go up to 1 billion this year. But unfortunately, if I look at -- if the 1 billion CapEx probably not totally to -- I would say, addressable by typical back-end equipment players like -- as in our competitors. I think, probably also, certain part will be going in back-end equipment area.

--------------------------------------------------------------------------------

Operator [23]

--------------------------------------------------------------------------------

Our next question comes from Mr. Arthur Lai from Citigroup.

--------------------------------------------------------------------------------

Arthur Lai, Citigroup Inc, Research Division - VP and Analyst [24]

--------------------------------------------------------------------------------

This is Arthur Lai from Citi Research. Our house recognize the premium smartphone to grow rapidly and the more features in the next 2 years. And so my question is, do you think your product portfolio in the 3D sensing for the premium smartphone to be materialized in this year? And from the technology side, investors wonder naturally what's the extra investment for you to do the dual camera sensing and also the 3D sensor active alignment? It's an almost fungible technology or actually you need to invest more on the 3D sensor active alignment?

--------------------------------------------------------------------------------

Wai Kwong Lee, ASM Pacific Technology Limited - CEO and Executive Director [25]

--------------------------------------------------------------------------------

Thank you. Well, we believe the 3D sensing, (inaudible) more 3D functions will be imported into smartphones. Of course, this is a very initial stage. That's what we believe. And we believe actually, there will be more innovation in the next 2 years on how to make use of these 3D functions, 3D capabilities. So the potential of it, we're not 100% sure at this point in time. We have developed good solutions, and then our solution is going to be imported by our customers this year. So we are expecting a higher contribution from this 3D sensing business to our overall Back-end Equipment business. In terms of the technology development, as I mentioned, because we expect this application and the technology continuity will roll, so we believe that actually the equipment technology to not stand still but continue to roll. So I would say today we have the solution for the market. But with the application continuing to develop, I think we have to catch up with this one. But that means opportunity for equipment suppliers like us. That means customers will continue to be looking for newer capability, not only for new capacity.

--------------------------------------------------------------------------------

Arthur Lai, Citigroup Inc, Research Division - VP and Analyst [26]

--------------------------------------------------------------------------------

Yes. So in the next 2 to 3 years, can we continue to expect higher output of the active alignment? And then also potentially, we can also increase the price of the active alignment machine?

--------------------------------------------------------------------------------

Wai Kwong Lee, ASM Pacific Technology Limited - CEO and Executive Director [27]

--------------------------------------------------------------------------------

Well, in this particular market, I think, you can't simply increase the price. We must grow together with the customer, give them better value. Sometimes it's price performance. Sometimes it's maybe better capability. We can align those cameras in higher-quality operated view. So it will be a combination of this. Certainly, this industry is an industry always looking at lower cost, high productivities. So I think, that should be the direction to go.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

Our next question comes from Kyna Wong from Crédit Suisse.

--------------------------------------------------------------------------------

Kyna Wong, Crédit Suisse AG, Research Division - Associate [29]

--------------------------------------------------------------------------------

I have a question to ask about the -- actually follow-up questions regarding the advanced packaging, especially the product set now. Because with the already current bookings, which is quite strong in the Back-end for the first half. But does this actually already include the potential upside for the internal demand in this year? Or more potential will be from the second half because some customer may decide to ramp up production probably later this year?

--------------------------------------------------------------------------------

Wai Kwong Lee, ASM Pacific Technology Limited - CEO and Executive Director [30]

--------------------------------------------------------------------------------

In the booking for our first quarter of this year, it does include certain booking for advanced packaging. But as I mentioned, the device packaging space do contribute to a smaller portion of our overall Back-end Equipment business. So we do expect customers ramp up the second of this year. But as I have been sharing in the past, we don't expect it will become something very big in 2017. Probably, the importance, the contribution from the advanced packaging will be increase starting 2018.

--------------------------------------------------------------------------------

Kyna Wong, Crédit Suisse AG, Research Division - Associate [31]

--------------------------------------------------------------------------------

Okay. Another one is about the 3D sensing. Do you see like a trend from the Chinese smartphone makers? They're actually in preparation for these 3D functions, probably maybe sometime in the second half, in order to catch the advanced features from the major U.S. smartphone makers.

--------------------------------------------------------------------------------

Wai Kwong Lee, ASM Pacific Technology Limited - CEO and Executive Director [32]

--------------------------------------------------------------------------------

Well, certainly, I will say, you see the technology gap, the innovation gap actually in the smartphone area become -- getting closer and closer. We do notice that customers in -- those smartphone makers in China actually are catching up very fast, in particular, in these camera technologies, CIS imaging center technology. So we do expect the pace of closing the gap will be getting faster and faster.

--------------------------------------------------------------------------------

Operator [33]

--------------------------------------------------------------------------------

Our next question comes from Chris Yim from BOCOM.

--------------------------------------------------------------------------------

Seeching Yim, BOCOM International Securities Limited, Research Division - Research Analyst [34]

--------------------------------------------------------------------------------

I have a question on the -- a follow-up question on your bookings on the Back-end side. Can you talk about the booking momentum you're seeing in different (inaudible) such as LED, CIS, automotive, IC/discrete?

--------------------------------------------------------------------------------

Wai Kwong Lee, ASM Pacific Technology Limited - CEO and Executive Director [35]

--------------------------------------------------------------------------------

Okay. Well, I think well, the booking momentum for the Back-end Equipment, as I mentioned, CIS was very strong. Actually in our first -- full year results announcement last month, we already mentioned that entering to the new year, customers in the CIS market already start to place orders. So we do receive strong order from these customers because -- partly also because they were aware of our limitation on this [premium] space to produce this equipment. So these customers actually really aggressively book our capacity for this. But we -- at the same time, we see very strong booking for IC/discrete market. Overall, we see the IC/discrete market was strong, we believe, partly due to the smartphone application and partly due to the automotive applications. Comparatively, the LED, the LED market, entering a normal seasonal pattern in Q1 this year, does not show exceptional high growth and neither it contracted year-on-year. However, we do not see the LED market momentum slow down. Actually, as I mentioned, this is normal seasonal pattern. And we do expect the LED booking to have a seasonal bounce back in Q2. So because we see our customers in the LED market also enjoying a good profitability intensively because of the strong investment they make. So with this one, we are confident they will continue their investment in 2017.

--------------------------------------------------------------------------------

Operator [36]

--------------------------------------------------------------------------------

Our next question comes from Mr. Ken Hui from Huatai.

--------------------------------------------------------------------------------

Zhi Qiang Xu, Huatai Financial Holdings (Hong Kong) Limited, Research Division - Analyst [37]

--------------------------------------------------------------------------------

My first question is regarding the booking for SMT for this quarter. You mentioned that the momentum will pick up in this quarter. If you compare the momentum against the last cycle, which was 2014, do you see any difference in terms of the strength between this year and previous -- 3 years ago?

--------------------------------------------------------------------------------

Wai Kwong Lee, ASM Pacific Technology Limited - CEO and Executive Director [38]

--------------------------------------------------------------------------------

Well, it's difficult to simply say yes. From our point of view, we -- of course, we expect with the kind of effort we have done over the past 3 years, we're definitely expecting to enjoy a larger market share at this one, okay? But however, until we get the order, we can't be 100% sure. So I would say we are anticipating -- expecting to have a larger market share at this time.

--------------------------------------------------------------------------------

Zhi Qiang Xu, Huatai Financial Holdings (Hong Kong) Limited, Research Division - Analyst [39]

--------------------------------------------------------------------------------

Okay. My second question is, I think, many of the investors including (inaudible) are very interested in looking at your factory, particularly for the production of the [AM] machine. Would you consider doing some U.S. road show in the near term?

--------------------------------------------------------------------------------

Operator [40]

--------------------------------------------------------------------------------

Our next question comes from Simon Woo from Merrill Lynch in Hong Kong.

--------------------------------------------------------------------------------

Dong-je Woo, BofA Merrill Lynch, Research Division - MD and Tech Analyst [41]

--------------------------------------------------------------------------------

Maybe a couple of questions, but first, just a little bit of longer-term business outlook focusing on the China. So which part do you think -- hope for better momentum for your long-term growth, say SMT business like back end Q1, because and everybody now be optimistic on the (inaudible) kind of moving on, but could also seem for China could we maybe see it looks now, the CapEx investment and also the back-end companies may try to expand the (inaudible) catching solution in the production facilities, expecting the newcomers CapEx increase for the memory or even the foundries. So maybe it would be really great if you can provide some color for the China growth opportunities for back-end equipment versus the SMT solutions.

--------------------------------------------------------------------------------

Wai Kwong Lee, ASM Pacific Technology Limited - CEO and Executive Director [42]

--------------------------------------------------------------------------------

Well, I think, China certainly is a very important market, important growth opportunity for the industry, and particularly for the semiconductor back-end business, as we mentioned about the memory initiative by the government and also the government's effort of boosting up the overall semiconductor industry in China. ASM has an advantage in this particular market. As you know, China always contributing the largest market to ASMPT and also contributing to more than 50% of our business. So we continue to grow in this particular area, cultivating solutions for them. We believe, China will continue to make themselves more efficient. We believe customers in China has to build with the increasing wages in China. This has become challenging for many of them. So even high-level automation, smart factory, industry for (inaudible) or manufacturing [2025,] these are the directions. Customers are looking for solutions, so ASM are participating into this, working together with customers to go beyond existing level of simply supplying them of these, I would say, islands of automations, so we are moving to also total automated solutions. So we also see customers in China are also addressing -- or moving towards solutions for advanced packaging. Customer -- China customers' participation in this area is still small on a worldwide basis but we do expect this to increase. So that is our opportunity for ASMPT to work together with them. We also expect in the longer term, the memory segment will grow significantly in China. However, as I have shared in the past, overall ASMPT smart industry in the memory market are not as strong as the other segments, but we are thinking backwards to improve our positioning in this area. So hopefully, in the latter part of this year and next year, we start to build up a most solid foundation in this memory market with some major players -- international players in this area. Then if we are successful, that will help us to continue to tack on, wire on the growth opportunity of the memory market in China.

--------------------------------------------------------------------------------

Dong-je Woo, BofA Merrill Lynch, Research Division - MD and Tech Analyst [43]

--------------------------------------------------------------------------------

Okay. Just last question regarding the convertible bonds. So the -- going forward, you are fully diluted. The EPS number will be based on the -- around the 440 million shares versus previously about 400 million. It's fair to assume like this?

--------------------------------------------------------------------------------

Cher Tat Ng, ASM Pacific Technology Limited - CFO and Executive Director [44]

--------------------------------------------------------------------------------

[430 million]

--------------------------------------------------------------------------------

Wai Kwong Lee, ASM Pacific Technology Limited - CEO and Executive Director [45]

--------------------------------------------------------------------------------

Full conversion? How much...

--------------------------------------------------------------------------------

Cher Tat Ng, ASM Pacific Technology Limited - CFO and Executive Director [46]

--------------------------------------------------------------------------------

The full conversion is based on -- the conversion price right now is [9 5,] so is that roughly [23,000] -- something million shares. Yes. So around -- if based on today, the outstanding shares are roughly around [20 million], so you add the [23 million], so about [430-something million].

--------------------------------------------------------------------------------

Operator [47]

--------------------------------------------------------------------------------

We have a following question coming from Steven Pelayo.

--------------------------------------------------------------------------------

Steven C. Pelayo, HSBC, Research Division - Regional Head of Technology Research, Asia-Pacific [48]

--------------------------------------------------------------------------------

Two things I'd like to explore. The first on margins. Your OpEx was actually down sequentially on higher revenues. I'm curious about your outlook for OpEx into the second quarter. Next question on margins that I have is relative to SMT. The segment profitability in SMT was actually up. I think, it was up almost 200 basis points quarter-on-quarter on a decline in revenues. Maybe talk a little about SMT profitability. And then, finally on margins, if you could talk about the SMT gross margins in the second half of the year as you maybe start shipping more to Asia versus Europe. Those are my 3 margin-related questions.

--------------------------------------------------------------------------------

Wai Kwong Lee, ASM Pacific Technology Limited - CEO and Executive Director [49]

--------------------------------------------------------------------------------

Well, I think, for OpEx, you mentioned about sequential return. Typically, that is the pattern for us. Typically, in the first quarter of the year because of lack of the industry-related expenses, so we typically report a lower OpEx in the first quarter of the year. So nothing special. However, we do expect a higher OpEx in the second quarter of this year and the second half of this year partly because of the -- we start to book the incentive share expenses into the OpEx and at this time also a higher share price. And also, typically, the group has set a review in the middle of the year, so that will also translate into a higher OpEx expenses. But in terms of SMT segment profit particular improvement mainly due to the gross margin improvement and also very good control on the OpEx. So with these 2 are also high revenue. So with all these factors combined, so it’s turned the leveraging effect -- so translating into a very significant segment profit improvement. Gross margin, as I mentioned, mainly due to a high contribution from Europe until the first quarter of this year. As -- you are right to point out that typically, starting second quarter of the year, we start to increase our shipment to customers in Asia, and particularly in China, and that has some (inaudible) gross margin. But we expect this time it will be offset by the strong growth in billing in the second and third quarter of this year. On the other hand, whereas, if we are able to secure the order we have been looking forward to relating to smartphone, because those are very high-end production of smartphone, it does require a very high-end machine. So those machines, typically we are able to enjoy a better margin comparatively into the complexity of those machines. So overall, I would say, we are hopeful to see -- to expect our gross margin in the SMT segment will not come down due to a higher shipment to China due to SMT.

--------------------------------------------------------------------------------

Steven C. Pelayo, HSBC, Research Division - Regional Head of Technology Research, Asia-Pacific [50]

--------------------------------------------------------------------------------

If I could just follow-up a little bit. On the OpEx ratio, do you think that can get as low as high teens, 17%, 18% of revenues in kind of 2Q, 3Q timeframe? Can I narrow you down to some numbers?

--------------------------------------------------------------------------------

Wai Kwong Lee, ASM Pacific Technology Limited - CEO and Executive Director [51]

--------------------------------------------------------------------------------

Probably, not yet, I would say. That will incur -- there is a little bit decrease in the revenue. I think, probably still above the 20% (inaudible) in my opinion, so plus or minus, very close to that level, yes.

--------------------------------------------------------------------------------

Steven C. Pelayo, HSBC, Research Division - Regional Head of Technology Research, Asia-Pacific [52]

--------------------------------------------------------------------------------

Okay. One last final question on product. You talked about CIS strength really in Korea. I'm curious about if this is just spreading out the CIS strength. I understand there's some competition in Germany and Japan, and even U.S. players have some active alignment tools out there. I'm curious, is the concentration of CIS, is it fairly highly concentrated primarily in Korea? Or talk about the breadth of customers or regions that you have in that area.

--------------------------------------------------------------------------------

Wai Kwong Lee, ASM Pacific Technology Limited - CEO and Executive Director [53]

--------------------------------------------------------------------------------

Well, actually, we have very widespread of customer base. I would say, we are strong in all customer supply chain in the CIS area. Despite it, as you mentioned about those competition from different parts of the world, (inaudible) those competition, but we still enjoy a very strong position in the area. But Korean supply chain actually has been our customer for a long time, but they -- this [renewed] investment for them is something exciting. We are happy to see it.

--------------------------------------------------------------------------------

Steven C. Pelayo, HSBC, Research Division - Regional Head of Technology Research, Asia-Pacific [54]

--------------------------------------------------------------------------------

I was actually speaking specifically to active alignment. Is that concentrated in just a handful of customers? Or how much breadth to you have in terms of active alignment adoption?

--------------------------------------------------------------------------------

Wai Kwong Lee, ASM Pacific Technology Limited - CEO and Executive Director [55]

--------------------------------------------------------------------------------

Active alignment definitely have a smaller number of customers. It's really high-end kind of camera modules. So a few big customers are fighting the market share among by themselves, but we do expect an increasing number of participants in this particular area.

--------------------------------------------------------------------------------

Steven C. Pelayo, HSBC, Research Division - Regional Head of Technology Research, Asia-Pacific [56]

--------------------------------------------------------------------------------

Okay. And since I have you, I'm going to sneak in one more, which is, what is your memory exposure in back-end equipment? And are you benefiting from some of the increased CapEx going on for DRAM and NAND?

--------------------------------------------------------------------------------

Wai Kwong Lee, ASM Pacific Technology Limited - CEO and Executive Director [57]

--------------------------------------------------------------------------------

Not immediately, as I mentioned. We do have memory customers, but as I have been sharing of -- strengths this area are not as strong as in the other segment, so we are taking a -- let's just say actions to strengthen our position over there. So hopefully, I will be able to share with you in -- maybe next year or second half of this year, we have been -- we have increased our presence in this particular area. So we are not directly benefiting at this moment.

--------------------------------------------------------------------------------

Operator [58]

--------------------------------------------------------------------------------

Our next question comes from Michael Chou from Deutsche.

--------------------------------------------------------------------------------

Michael Chou, Deutsche Bank AG, Research Division - Semiconductor Analyst [59]

--------------------------------------------------------------------------------

Two follow-up questions. Regarding your (inaudible) fan-out. From the industry's point of view, what is the yearly comparison between (inaudible) fan-out and the wafer-level fan-out? So do you think the high-end smartphone solution will be probably shipped to wafer-level fan-out for some customers in the future?

--------------------------------------------------------------------------------

Wai Kwong Lee, ASM Pacific Technology Limited - CEO and Executive Director [60]

--------------------------------------------------------------------------------

Well, difficult to tell at this point of time. It really depends also on the technology developed by [even] customers. In general, we, the industry, expect -- wafer level fan-out are able to have a 5-level dimensions. It has a lot to do with the tie of a middle-end equipment. Those are the equipment people use. So with wafer-level fan-out, the (inaudible) equipment are more -- they're in, I would say, linked -- lean to those wafer (inaudible) equipment, closer to that. So then you typically should be able to provide a finer geometry. However, the downside of it is the cost is high. Just as much, you want to develop the panel-level packaging. Other than the scale, you pick a panel, you have the scale of the economy, and after that, they are also advocating a less, I will say, critical dimensions in those -- the out trays, the trace operation. Of course, in exchange will be a lower cost of production. Now we do expect -- we do see they customers -- they are actually -- for the customer who develop their panel-level solutions, we see customer are fairly ambitious. They are trying to address different applications from application processor to power management, IC, memory. So I will say, today, this is an emerging application area, the word is yet to be out. Finally, even the technology will be suitable – most suitable which kind of application I will say only after people really go into the real production, then we come to the -- to sort of conclusion. At this point in time, it's a little bit too early to predict.

--------------------------------------------------------------------------------

Michael Chou, Deutsche Bank AG, Research Division - Semiconductor Analyst [61]

--------------------------------------------------------------------------------

So that means the array still need to be watched, too, in China?

--------------------------------------------------------------------------------

Wai Kwong Lee, ASM Pacific Technology Limited - CEO and Executive Director [62]

--------------------------------------------------------------------------------

Certainly. The [view] is a big issue in this particular area.

--------------------------------------------------------------------------------

Michael Chou, Deutsche Bank AG, Research Division - Semiconductor Analyst [63]

--------------------------------------------------------------------------------

Sure. My second question regarding the 3D sensing. The imaging for 3D sensing should be hard possibly for your company, but do you think the Chinese market means that it will become -- the software issue of 3D sensing compared to the leading company in the future? So what is the implication for the image outlook in 2018?

--------------------------------------------------------------------------------

Wai Kwong Lee, ASM Pacific Technology Limited - CEO and Executive Director [64]

--------------------------------------------------------------------------------

Well, I think the demand for still camera, the demand for 3D sensing continue to go up, especially when we read about those reports talking about introducing the AR technology into smartphones. So it all lead us to believe the demand for all these type of advanced camera sensor continue to increase. Now we -- the China-brand smartphone is the a big part of the smartphone market, and we expect this group of customer, as I mentioned earlier, will catch up really fast. So we totally don't go out they will be very fast adopters of all those latest technologies. And actually, in general, the way of innovation -- or the way of change can be pretty fast, so we will benefit on that. Actually, we have been benefiting and we are going to benefit more from this. With -- for the competition for our AI machine, they're bound to be there, and not only competitors from the local Chinese market, also competitors from Korea, from Japan, from Europe, from U.S.A. Today, we still have -- enjoying a strong position, but we don't take for granted I think, we respect our peers a lot, and we believe, they also have good technology, so I think, in order to defend our position we need to drive our own innovation.

--------------------------------------------------------------------------------

Michael Chou, Deutsche Bank AG, Research Division - Semiconductor Analyst [65]

--------------------------------------------------------------------------------

Does that means your AI machine made for 3D sensing solution help you -- even increased your dominance in AI machines in the long term?

--------------------------------------------------------------------------------

Wai Kwong Lee, ASM Pacific Technology Limited - CEO and Executive Director [66]

--------------------------------------------------------------------------------

Yes and no, as I mentioned. This is an evolving technology. It could change very fast as a customer may come up with new idea how to use the 3D sensing, how to use the new camera. There could be a new way of constructing the new camera. So that can suddenly change the game. So I will say, yes, we enjoy very good position at this point in time, and I think, our particular strong -- strength is customer typically look for ASM to develop new-generation solutions, so we could be ahead of the others still in time. But that -- that's no guarantee we will continue to enjoy the market. We have to take the others seriously. Although, I think by saying this, I'm not indicating we are going to lose market share to anyone out there in (inaudible) in market position.

--------------------------------------------------------------------------------

Operator [67]

--------------------------------------------------------------------------------

We have another phone question come from Ken Ho from Huatai.

--------------------------------------------------------------------------------

Zhi Qiang Xu, Huatai Financial Holdings (Hong Kong) Limited, Research Division - Analyst [68]

--------------------------------------------------------------------------------

My follow-up question is regarding the 2Q booking. Based on some of your comments, you said SMT should see improved demand while the other segment you are not so sure. So can I say your guidance for sequential flattish booking is kind of conservative given that we are still early in the quarter?

--------------------------------------------------------------------------------

Wai Kwong Lee, ASM Pacific Technology Limited - CEO and Executive Director [69]

--------------------------------------------------------------------------------

Well, certainly, certainly. I think, we are currently so sure what we developed in the last 2 past months, and also we are a little bit cautious also because of we of -- we already enjoy such a strong booking in Q1. So otherwise, typically, from Q1 to Q2, we should be forecasting a strong bookings growth momentum, but this year, we tend to be more cautious, the moving of Q1 to Q2.

--------------------------------------------------------------------------------

Zhi Qiang Xu, Huatai Financial Holdings (Hong Kong) Limited, Research Division - Analyst [70]

--------------------------------------------------------------------------------

Okay. And then regarding the fan-out, you mentioned that there may be some revenue contribution this year. Would you be able to tell if that would mainly coming from OSAT foundry or IDM? Or in general, do you think, from your perspective, which group of customer will likely create, provide more contribution in this initial stage to ASM?

--------------------------------------------------------------------------------

Wai Kwong Lee, ASM Pacific Technology Limited - CEO and Executive Director [71]

--------------------------------------------------------------------------------

The wafer -- the fan out -- the metal wafer-level or this panel-level fan-out is really a different kind of game. It requires significant CapEx investment, so it's not the typical OSAT. We'll be able to make such a huge investment. So it's a different set of customer. So I'm not able to really tell it too specific, otherwise everybody can tell who's this and I'm in trouble. But well, I also read a lot of reports from you guys. You guys actually are able to follow these closely. So some of you already are aware of those customers we are working together with, so I think -- while I cannot name it explicitly, but actually, the information is available in the market.

--------------------------------------------------------------------------------

Operator [72]

--------------------------------------------------------------------------------

Our following question comes from Charlie Chan from Morgan Stanley.

--------------------------------------------------------------------------------

Charlie Chan, Morgan Stanley, Research Division - Technology Analyst [73]

--------------------------------------------------------------------------------

So also a question on fan-out. So your company has very good, clear record in gaining market share in the new technologies. Can I know what is the main indiscernible] for you in the (inaudible) in the wafer-level stable packaging market?

--------------------------------------------------------------------------------

Wai Kwong Lee, ASM Pacific Technology Limited - CEO and Executive Director [74]

--------------------------------------------------------------------------------

I think, if you're looking back at why ASM has been successful in gaining market share in those gold area, actually, it lies on (inaudible) in essence typically to do work together with those customers to come out with solutions. Actually, we are seeing there's going to be peak in the wafer-level fan-out, so -- or panel-level fan-out. And the customer engage isn't to do this, actually. We don't have 100% [redistribution] also. The customer assess our technology. They believe we are able to do the job they are looking for, so -- and they are willing to give ASM time to develop the solutions according to their requirement. So actually, this kind of working together really put ASMPT ahead of our competition. So I would say, we are looking forward to repeating this success with this formula in the panel-level packaging.

--------------------------------------------------------------------------------

Charlie Chan, Morgan Stanley, Research Division - Technology Analyst [75]

--------------------------------------------------------------------------------

Yes. Because you have a very strong execution, can you describe the technology difference between fan-out equipments versus the traditional back-end equipments? Because from a manufacturing perspective, fan-out is more to close front-end, whereas those work (inaudible) being more close to back-end, right? I believe, from equipment, that technology is typically a bit different.

--------------------------------------------------------------------------------

Wai Kwong Lee, ASM Pacific Technology Limited - CEO and Executive Director [76]

--------------------------------------------------------------------------------

Yes. We are not in the business of those [LTO]equipment. Those are more closer to either the front-end or the LCD manufacturing. We are -- we still (inaudible) in those -- more close to the back-end, for example in the panel packaging. One of the equipment people need to be -- we call the wafer or the panel construction machine. These are high-precision interface machine, so ASM have a multiple solution coming from both our back-end equipment business ourselves by SMT business segment. So this is one of the important area. ASM solution is accurate, fast and also able to handle a large bonding area. So talking about panel size, over 600-millimeter by 600-millimeter. So this is one of them, but ASM also have a solutions for this wafer-level encapsulation. So this is also another area our customer rely over to ASM. We also have this laser [dicing], laser-separation capability. So this is another area ASMPT participating. Also another application will be the -- this -- after you assemble the chip, you still have to do the pick-and-paste pass, inspect and pack. So ASM also have solution for this area. So these are other stream for ASMPT. So we -- compared to the others, we have more comprehensive solution, and because ASMPT has been a stockpile of (inaudible) equipment, so it makes ASMPT much ready to enter this market. And furthermore, we also see in the advanced packaging the size of fan-out also at the high end, this (inaudible) bonding, in particular, of the TCB. So this, altogether, put ASM in a very good position to work with customers in this area. For example, take the TCB, I think, our solutions are getting accepted by more customers, especially for the high-performance computing market. So these are other, I will say, unique strength for ASMPT in this advanced packaging market.

--------------------------------------------------------------------------------

Operator [77]

--------------------------------------------------------------------------------

Our next question comes from Simon Woo from Merrill Lynch.

--------------------------------------------------------------------------------

Dong-je Woo, BofA Merrill Lynch, Research Division - MD and Tech Analyst [78]

--------------------------------------------------------------------------------

Very quickly, regarding your radio grooving and dicing technology and machine. So when do you expect a meaningful amount of the sales for the laser cutting equipment? And also, how you can be different versus competitors like [Disko] Japan or maybe even [Neotechnic] Korea?

--------------------------------------------------------------------------------

Wai Kwong Lee, ASM Pacific Technology Limited - CEO and Executive Director [79]

--------------------------------------------------------------------------------

Well, I think, [Neotechnic] Korea is probably a bigger kind of equipment. I think, we are the elite, but they are not. I think, we are a competitor only the Japanese supplier you have mentioned above. Of course, they have the advantage of having a much larger installation base, so that's their strength, but ASM's solution technologically are much more superior, better in quality, smaller -- we call the [solid] and also much faster speed because of our multi-beam -- multi-link technologies. This is a patented technology. So that put ASMPT in a good position. We enjoy very good growth year-on-year last year. Actually, the business of this particular area grew more than double. And actually, last year was a very good year for this particular business, including the time before they were part of ASMPT. Of course, it's still small. We start from a very small base. So we are eagerly expecting it to become a significantly larger contribution. Probably, it will still take us maybe another 2 to 3 years, I would say. But looking from the technology trend in the industry, we are very confident this will become a significant business for us. We do expect this year we will continue to see a year-on-year growth for this business. We just need to cross over the critical momentum. Once we cross over the critical mass, then, [after] the critical mass, I think, it will become interesting business for us.

--------------------------------------------------------------------------------

Operator [80]

--------------------------------------------------------------------------------

Our next question comes from Steven Pelayo.

--------------------------------------------------------------------------------

Steven C. Pelayo, HSBC, Research Division - Regional Head of Technology Research, Asia-Pacific [81]

--------------------------------------------------------------------------------

Yes. Just one more follow-up on the SMT segment. I know we're all focused on kind of the smartphone opportunities here, but auto, industrial. I think you guys called power as well, 25% or so the company, overall, and I think, a lot of that's just strengthens SMT. I'm just curious for auto, industrial and SMT, do see nothing but kind of sequential growth rates from those segments for SMT throughout this year or an outlook for maybe the full year for non-smartphone-related SMT?

--------------------------------------------------------------------------------

Wai Kwong Lee, ASM Pacific Technology Limited - CEO and Executive Director [82]

--------------------------------------------------------------------------------

Certainly. It actually has already been reflected in our Q1. So as I mentioned, Q1, we have exceptionally high contribution from Europe. So Europe is not really the smartphone application market. It's mainly automotive and industrial electronics. We do see good growth momentum in this area, but of course, the automotive markets and neither smartphone market, you won't see exponential kind of growth. It will be more gradual but more sustainable growth, with a high electronic content in the cars. We call -- we expect this area of continued grow.

--------------------------------------------------------------------------------

Steven C. Pelayo, HSBC, Research Division - Regional Head of Technology Research, Asia-Pacific [83]

--------------------------------------------------------------------------------

And I noticed the [WK], you guys -- you took out that slide from your presentation where you estimated the SMT market. Is there some changes on your kinds of thoughts on how you're sizing it this year now or...

--------------------------------------------------------------------------------

Wai Kwong Lee, ASM Pacific Technology Limited - CEO and Executive Director [84]

--------------------------------------------------------------------------------

We -- actually, using the past review, investors also asked a question about why we are still (inaudible) fact. So we, ourselves, also we (inaudible) the accuracy of this forecast, so until we can -- we are able to give our more accurate forecast so we can (inaudible) to take out slide at (inaudible) time. That's not -- we, in fact -- we have [editing] significant change about -- but it does lead us to also think that slide really be effective reality of the market.

--------------------------------------------------------------------------------

Operator [85]

--------------------------------------------------------------------------------

There seems to be no further questions at this point in time, sir.

--------------------------------------------------------------------------------

Leonard Lee, [86]

--------------------------------------------------------------------------------

Okay. If there are no further questions, I think we have had a very good discussion today with very good questions, so let's conclude the conference call now, in the interest of time.

Thank you very much for joining us today, and we'll talk to you again next time. Thank you.

--------------------------------------------------------------------------------

Wai Kwong Lee, ASM Pacific Technology Limited - CEO and Executive Director [87]

--------------------------------------------------------------------------------

Thank you. Bye-bye.

--------------------------------------------------------------------------------

Operator [88]

--------------------------------------------------------------------------------

Thank you for your participation. This concludes your conference. Thank you.