ASE Technology Holding Co., Ltd. Q3 FY2021 Earnings Call

Hello. I am Ken Hsiang, the Head of Investor Relations for ASE Technology Holdings. Welcome to our Third Quarter 2021 Earnings Release. Thank you for attending our earnings presentation today. Please refer to the safe harbor notice on Page 2. All participants consent to having their voices and questions broadcast via participation in this event. If participants do not consent, please disconnect at this time. I would like to remind everyone that the presentation that follows may contain forward-looking statements. These forward-looking statements are subject to a high degree of risk, and our actual results may differ materially. For the purposes of this presentation, our dollar figures are generally stated in new Taiwan dollars, unless otherwise indicated. As a Taiwan-based company, our financials are presented in accordance with Taiwan IFRS. Results presented using Taiwan IFRS may differ materially from results using other accounting standards, including those presented by our subsidiary using Chinese GAAP. I'm joined today by our CFO, Joseph Tung. For today's presentation, I will make the prepared remarks going over our financial results. And Joseph will be available to answer questions during the Q&A. During the quarter, ASE saw new historical highs in its revenues and profits led by strength within our ATM business. Despite electronic industry challenges with various supply chain shortages, the overall health of our businesses remains relatively strong. During the third quarter, our ATM factory lines remained highly utilized through the entire quarter despite some device order volatility. Supply chain security still appears to be of primary importance to our customers. Even as certain parts of the supply chain appear to be improving in health, various shortages such as wafers and substrates continue to persist. Meanwhile, some of our capital equipment installations for the current season have been completed. And while it's true, lead times on some equipment have come in, others remain in short supply. Our EMS business also completed the quarter with strong year-over-year growth in revenues despite finishing the quarter slightly behind our own expectations. Our EMS factories still faced significant challenges related to component shortages and supply chain issues disrupting product manufacturing. Things continue to be sticky with the various manufacturing limitations, making EMS factories run less smoothly. With that said, let's go over the numbers for the quarter. Please turn to Page 3, where you will find our third quarter consolidated results. Intercompany transactions between our ATM and EMS businesses have been eliminated during consolidation. For the third quarter, we recorded fully diluted EPS of $3.20 and basic EPS of $3.29. Year-to-date, fully diluted and basic EPS is now $7.43 and $7.66, respectively. Consolidated net revenue increased by 19% quarter-over-quarter and by 22% year-over-year. The sequential increase was primarily driven by growth within both our ATM and EMS businesses. We had a gross profit of $30.8 billion with a gross margin of 20.4%. Our gross margin improved by 0.9 percentage points sequentially and by 4.4 percentage points year-over-year. Our gross margin improvement is primarily driven by margin improvement in our ATM business, offset in part by a higher EMS business mix. Our operating expenses increased by $0.8 billion sequentially and $1.8 billion annually to $12.4 billion. Our operating expense percentage declined 1 percentage point sequentially and 0.4 percentage points year-over-year to 8.2%. For the full year, we continue to see an improvement from last year's 9% level. Operating profit was $18.4 billion, up 40% sequentially and 102% year-over-year. Operating margin increased 1.8 percentage points sequentially and 4.8 percentage points year-over-year to 12.2%. During the quarter, our nonoperating income was $0 and contains $0.6 billion of net interest expense, offset entirely by gains related to our foreign exchange hedging activities, investments, and asset sales. Tax expense for the quarter was $3.6 billion. The effective tax rate for the third quarter was 20%, slightly lower than our expectation. As a result of increased profitability, we were able to offset the recognition of our annual undistributed earnings tax with a higher recognition of deferred tax assets during the quarter. Going forward, we continue to believe our ongoing effective tax rate to be about 20%. Net income for the quarter was $14.2 billion, representing an increase of $3.9 billion sequentially and an improvement of $7.5 billion year-over-year. From a foreign exchange perspective, NT dollar per U.S. dollar exchange rate was at 27.8% during the third quarter of 2021, TWD28 during the second quarter of 2021 and TWD29.5 during the third quarter of 2020. We approximate that NT dollar appreciation had a negative 0.3 percentage point impact sequentially and a negative 1.7 percentage point impact year-over-year to both gross and operating margins at the holding company level. On the bottom of the page, we provide key P&L line items without the inclusion of PPA-related expenses. Consolidated gross profit, excluding PPA expenses, would be $31.7 billion with a 21.1% gross margin. Operating profit would be $19.6 billion with an operating margin of 13%. Net profit would be $15.4 billion with a net margin of 10.2%. Basic EPS, excluding PPA expenses, would be $3.56. On Page 4 is our ATM P&L. It is worth noting here that the ATM revenue reported here contains revenue eliminated at the holding company level related to intercompany transactions between our ATM and EMS businesses. Business grew rapidly during the quarter. A strong seasonal uptick in advanced packaging led the way, driven by applications in the computing and communications end markets. Utilization rates across our key equipment were full or near full. For the third quarter of 2021, revenues for our ATM business were $90.1 billion, up $11.1 billion from the previous quarter and up $18.3 billion from the same period last year. This represents a 14.1% increase sequentially and a 25.4% increase year-over-year. On a U.S. dollar basis, our ATM revenues grew by 15% sequentially, which is slightly ahead of our own expectations. Gross profits for our ATM business was $24.7 billion, up $4.5 billion sequentially and $10.2 billion year-over-year. Gross profit margin for our ATM business was 27.4%, up 1.8 percentage points sequentially and 7.2 percentage points year-over-year. Our sequential gross margin improvement was primarily due to higher loading, offset in part by a higher raw material product mix and foreign exchange impact. The year-over-year gross margin improvement was primarily the result of higher loading, improved efficiency, and a friendlier ASP environment, offset somewhat by NT dollar appreciation. During the third quarter, operating expenses were $9.1 billion, up $0.7 billion sequentially and $1.4 billion year-over-year. The sequential and annual operating expense increases were primarily driven by higher employee bonuses, which are based on a profit-sharing model. Our operating expense percentage continued to decline to 10.1%, down 0.5 percentage points sequentially and down 0.7 percentage points year-over-year. During the third quarter, operating profit was $15.6 billion, representing an improvement of $3.8 billion quarter-over-quarter and an improvement of $8.8 billion year-over-year. Operating margin was 17.3%, improving 2.3 percentage points sequentially and 7.8 percentage points year-over-year. From a foreign exchange perspective, we approximate that NT dollar appreciation had a negative 0.4 percentage point impact sequentially and a negative 2.5 percentage point impact year-over-year to both gross and operating margins at the holding company level. Without the impact of PPA-related depreciation and amortization, ATM gross profit margin would be 28.4% and operating profit margin would be 18.6%. On Page 5, you'll find a graphical representation of our ATM P&L. ATM revenue for the quarter represents an all-time high. We believe that the current year's strength has been generated by strong demand across all product lines, including various trailing edge wirebond-based capacities. A revival in use and a reset in terms of profitability and wirebonded product lines have helped boost business for us during 2021. Going forward, we believe that wire-bonded products will continue to grow along with our advanced packaging product lines. From an application of technology perspective, we increasingly see more opportunities for our ATM technologies to proliferate into subsystem and system-level manufacturing. These products serve as a growing market created by increased transistor counts at leading-edge nodes and expanding consumer appetites for smaller, more elegant electronic solutions. We increasingly provide cost-effective manufacturing solutions that make visionary products viable. On Page 6 is our ATM revenue by market segment. You can see here a pickup in our communications and computing market segments with a decline in automotive, consumer, and other products. On an absolute revenue perspective, all segments grew. Of particular interest is that our automotive business grew 68% on a year-over-year basis. We believe that the automotive market segment will be a significant contributor to our own growth during the coming year. On Page 7, you will find our ATM revenue by service type. As we mentioned last quarter, our advanced packaging business picked up in accordance with our expectations, increasing 3 percentage points, becoming 36% of our ATM revenues. Wirebonding as a percentage of revenue came down 3 percentage points. But on an absolute dollar basis, wirebond revenue grew 7% sequentially. On Page 8, you can see the results of our EMS business and a graphical representation of our EMS revenue by application. The information we provide in regards to our EMS business may differ materially from the information directly provided by our subsidiary, as they report independently using Chinese GAAP. The overall environment at the EMS level has been sticky. Mass production continues to be choppy. Component shortages and supply chain deviations made their impacts felt during the quarter. And when we look at the entire situation, we believe we have been adversely impacted by various upstream component shortages and downstream manufacturing issues. This resulted in manufacturing delays for multiple devices and customers. This is why our third quarter EMS revenues came in slightly behind our expectations. Fortunately, we do believe that most of the impacted revenue will get pushed out into later quarters, but overall manufacturing throughput continues to be choppy, limiting production efficiency. During the third quarter, EMS revenues increased by 24% sequentially and 15% year-over-year. Our EMS gross profit was $5.9 billion, increasing $1.4 billion sequentially and $0.8 billion year-over-year. The sequential EMS gross profit increase was the result of the seasonal build. The year-over-year gross profit increase was the result of a higher volume business. Gross profit margin for our EMS business unit came in at 9.6%, which is an improvement of 0.5 percentage points sequentially and a decline of 0.1 percentage points year-over-year. The sequential improvement is primarily the result of cost differences from differing product mix and better utilization. On a year-over-year basis, there is a slight decline in gross margin due to new facility ramp-up costs. Our EMS business unit's third quarter operating expenses were $3.2 billion, flat sequentially, while increasing $0.4 billion year-over-year. Annual operating expenses are up primarily as a result of a larger operating base. Our operating expense percentage declined 1.2 percentage points sequentially to 5.3%, while staying flat year-over-year. The sequential operating expense percentage decline was primarily driven by flat operating costs with higher revenues. Our EMS operating profit improved $1.4 billion sequentially and $0.3 billion year-over-year. Our EMS operating margin was 4.3%, improving 1.7 percentage points sequentially and declining 0.1 percentage points year-over-year. The overall difficult manufacturing environment continues to persist. We were able to exceed our targeted 4% operating margin in the third quarter, and likely will in the fourth quarter. However, for the full year, we believe that we will be unable to reach our EMS operating margin target of 4%. We believe that the operating margin variance is generally attributable to IC shortages and the COVID-19 operating environment. We expect some improvement in the operating environment next year, and as such, we believe a 4% operating margin target continues to be applicable for future years. On the bottom half of the page, you will find a graphical representation of our EMS revenue by application. Consumer product revenues as a percentage of total increased by 5 percentage points, in line with its seasonality, while our Industrial segment came down 4 percentage points. On Page 9, you will find key line items from our balance sheet. Total unused credit lines amounted to $261.5 billion. After payment of our dividend in the third quarter, our net debt-to-equity ratio temporarily increased to 71%. On Page 10, you'll find our equipment capital expenditures. Amounts on this slide are denoted in U.S. dollars. Machinery and equipment capital expenditures for the third quarter totaled $468 million, of which $294 million were used in packaging, $101 million in testing, $60 million in EMS operations and $13 million in interconnect materials and others. And at this time, we see a slight uptick in our capital expenditures now up 25% from last year. This pickup in expected capital spending relates to additional opportunities in advanced packaging and test business generated by our turnkey strategy. Financially speaking, our equipment capital expenditures expand factory capacity and utilization of that factory capacity generates EBITDA. Each equipment capital investment scales out facilities to generate additional revenue and EBITDA. This chart represents the ongoing EBITDA-generating capability of the company. EBITDA for the most recent 4 quarters was USD 3.9 billion, significantly ahead of our CapEx even in a high CapEx timeframe. USD 3.9 billion of EBITDA, stated in another way, represents TWD25.8 of EBITDA per share. As of the end of the third quarter, capital equipment availability for certain product lines appears to be normalizing. However, this situation was not across the board for us. There are still extended lead times for certain pieces of capital equipment. For many product lines, we are still running at capacity constraints and still in need of capacity expansion. We have noticed, especially recently, that much is being made about the timing of our capital equipment decisions. We understand this, from a simplified perspective, may serve as a predictive indicator, but this indicator can easily be misinterpreted as it means different things during different times of the season and in different contexts. Spending on capital equipment fundamentally indicates that we believe there is an additional production capacity needed for sustained new business. But what does our capital expenditures leveling off during a record year mean? And here is where some of the confusion seems to exist. It means that, for this season, after a period of rapid expansion, factory capacity is finally aligned with near-term expansion needs and goals. We have historically had the luxury of being able to judge our capital expenditures with a relatively short lead time, meaning we traditionally finalize our equipment orders about 3 to 6 months ahead of delivery. This allows for a final level of precision and granularity as well as better alignment with incoming business. Because of these short lead times and the annual seasonality of electronics, this intersection of capacity and expansion goals happens every single year. In fact, this intersection is actually happening substantially later in the year than in previous years. Our wirebonding CapEx leveling off this late in the manufacturing season actually means there was strong demand this year, and capacity took a long time to catch up. In short, we are having a really good year. What it doesn't mean from our perspective is that a near-term correction is coming. Quite the contrary, we still see growth in our business next year. We usually do not make detailed comments on next year's outlook this early. But given the level of volatility driven by what would seem to be a focus on noise versus the actual signal, we feel it prudent to express a more extensive view. We are, again, in a position much like we were last year at this time in which the company's outlook signaled strength amongst generally cautious sentiment. The overall manufacturing environment remains positive for us. But admittedly, some of the data is a bit difficult to interpret. And while we do not presume to have the definitive answer on the semiconductor cycle, we do wish to express that we continue to have strong order flow from the vast majority of our customers with orders extending well into 2022 and some as far out as 2023, well beyond normal booking times. From a more macro perspective, our data points taken along with the understanding that global wafer supply remains in severe shortage. This shortage is at a grand scale, causing design products unable to find manufacturing slots across the semiconductor manufacturing supply chain. Products with high promise relating to 5G, AI, IoT, and ADAS are being delayed, if not outright canceled in this environment. Despite noise of double booking, product and end market softness, we believe there still exists substantial pent-up demand. Barring a significant industry-wide correction, we expect whatever future slack in wafer demand to be quickly taken up by other customers and products looking for production slots during this shortage environment. As such, we believe it's reasonable to continue to expect a somewhat full and linearized delivery pattern of wafers, leaving relatively little room for seasonal softness. With that said, we expect our own manufacturing linearization to continue, resulting in a better-than-seasonal first quarter outlook and extending into healthy but moderated growth during 2022. This seems to be in line with much of the industry. We would like to defer to Dr. Wu's year-end presentation for more detail. But given this macro environment, we see full-year sales and earnings growth based upon simple annualization of our recent quarter's results. And using that same logic, we expect full-year margins should also continue to expand. This is all before we even consider new high-end wafer capacity entering the system, efficiency gains, market share gains, and additional outsourcing from IDMs. From a pricing perspective, even though we may not see as many expedite fees this coming year, we believe the ASP environment will continue to be friendly. Pulling things back to the fourth quarter immediately in front of us, we expect for our product lines to remain loaded with business most likely staying steady. There are potential issues with substrate and downstream shortages, but we do believe things are manageable at this point. With that, we would like to provide our fourth quarter business outlook as follows: In U.S. dollar terms, our ATM fourth quarter 2021 business level should be similar to our third quarter 2021 business level. Our ATM fourth quarter 2021 gross margin should be similar to our third quarter 2021 gross margin. For our EMS business in U.S. dollar terms, our EMS fourth quarter 2021 business level should come close to our fourth quarter 2020 levels. Our EMS fourth quarter 2021 operating margin should come close to our third quarter 2021 operating margin. This concludes our prepared remarks. I'd like to open the floor for Q&A. If you have a question, please raise your hand in the WebEx interface in front of you. Thank you.

We have a question from Mr. Gokul Hariharan of JPMorgan. We have another question from Mr. Szeho Ng of China Renaissance.

Hello. Hi. Can you hear me? My first question is regarding the China power rationing. I'm not sure if there's any impact on your Q4 business guidance.

Szeho, are you asking about the power rationing?

Yes, the power shortage in China. Any impacts to the business outlook in Q4?

It has very, very limited impact on us. I think the shortage through some of the logistics arrangements that we can have and also the support of the local government, I think, the impact, there could be some minor disruptions in operation, but the impact is very, very minimal. It's almost negligible.

Okay. Good. And my second question is about the long-term agreements you have with many of your customers. I want to know if these arrangements are structured more as take-or-pay contracts or if there will be flexibility in scheduling during times of wafer or component shortages.

I believe the long-term agreement is mainly a response from customers seeking supply security, especially during a time of capacity, material, and wafer shortages. Many customers are concerned about the current situation and are looking for a more stable supply. This need is the primary reason for these long-term agreements, which provide stability for both our customers and us.

That is true. But what about if they are not able to get the wafers then, would you impose a penalty if they are not able to load up to our capacity or will you basically allow them to reschedule and lower the capacity at a later time?

This is really the arrangement to have a better visibility or stability for our customers in terms of supply. I think there's no way it's being regarded as a tool for penalizing our customers because of the difficulties they are facing.

Sure, sure. Okay. All right. And my last question regarding the CapEx spending this year, is it all right to have a breakdown by location, a very rough breakdown would be fine.

Okay. In terms of...

Let's say, how much in Taiwan, how much in China, Korea, for example. Yes.

I would say about 85% is still in Taiwan and, well, 15% in China and other places.

Next question is from Mr. Randy Abrams of Crédit Suisse. Next question is from Mr. Rick Hsu of Daiwa.

Okay. Yes, I just want to make sure because there seems to be some system issue. Okay. So my first question, again, is a housekeeping. What's your utilization rate across the board wirebond testing and free ship in Q3 and in Q4, please?

Overall, I think packaging-wise, we are still running at full capacity basically above 85%. And that will continue into Q4. And the test is, as we mentioned, above 80% and also continuing into Q4.

Okay. Great. The second question is, it appears to be some disconnect between the sell-in and sell-through demand, meaning that when we look at the sell-in, right, they order from customers and still very, very full and also some customers still fighting for capacity, not only at your end, but also in the foundry space. So still very strong sell-in demand. However, sell-through, I think you guys must have heard some noises recently from Android smartphone sell-through, not so good. And EV, also weak. Chromebook is coming down. So I'm just wondering, how do you guys see this mismatch between the sell-in and sell-through? And do you worry about any snowball effect going forward into Q1 next year for the inventory correction risk?

No, I think what we're observing is some localized demand softness in certain segments, but this only affects a small part of the overall market. Generally, the industry continues to experience rapid growth due to increasing integrated circuit content and the emergence of new applications like AI, 5G, IoT, EV, and autonomous driving. The units are still growing because of pricing, content, and these new applications. We are not seeing a widespread correction; in fact, we are still trying to catch up with demand. As Ken mentioned earlier, there is significant pent-up demand, and we are still in catch-up mode. I don't believe there's a disconnect; it's simply due to shortages in wafers, substrates, and various operational disruptions caused by the pandemic. Currently, the supply is still short, and we are actively working to increase capacity to meet our customers' needs.

Okay. Great. Yes, that’s good news to hear. But my last question is about your pricing power or your friendly pricing. Can you talk about this? Do you still see a friendly pricing trend going forward into Q4 and Q1 this year?

Yes, I believe the current pricing environment remains favorable, and we anticipate this trend will continue into next year. By pricing-friendly, we mean the overall price levels that can help us better protect our margins and even improve our returns moving forward.

Our next question is from Mr. Gokul Hariharan of JPMorgan.

Many of your peers and customers have mentioned an inventory mismatch in the supply chain, where there is excess inventory of certain components but a shortage of others. Is this in line with what you are experiencing? Based on your expertise, how do you think this situation will resolve itself over the next three to six months? It seems that while there isn’t a complete shortage of every component, some are readily available while others are in critical short supply. I would like to get your perspective on this. That's my first question.

Yes, there are still significant mismatches occurring. This is one reason our EMS business isn't growing as expected. The situation is expected to persist, as various areas continue to experience shortages of wafers, packaging equipment, and test equipment. Material shortages are also a concern. Looking at the overall supply situation, the capacity increase for the year, particularly in the OSAT segment, suggests that the capital expenditure to sales ratio is being kept below 20%. This indicates we might be adding only 10% to 15% of our capacity to meet rising demand. Unfortunately, the additional capacity has been outpaced by the growing demand. Expanding capacity is challenging, and this mismatch is likely to continue for quite some time, with no real solutions expected in the next 6 to 12 months.

Okay. I think last time we talked about 2021 growth being 2x of logic semis, and it seems like we are pretty much on track to that. Are we going to keep that kind of momentum going into next year also? Or do you think that there will be a little bit more normalization in terms of growth as we look at next year?

Yes. I think 2x logic semi growth is still our goal, and we are very confident that we will continue to reach that goal because the overall demand is strong. And on top of the unit growth that we mentioned in the industry, we're also seeing increasing outsourcing. We're expecting to continue to gain market share. A lot of this really pushes for growth coming into next year. So we're very, very confident that we will continue to reach that goal.

Understood. Let's consider a scenario where we experience a downturn and utilization rates drop to 70% or 75% from the high 80% levels that we have seen in many parts of the supply chain. What impact do you think this would have on long-term loading agreements and price increases? Are there any provisions in your contracts with customers that could potentially lead to price increases being rolled back? I would like to understand how the next downturn might differ from past downturns.

The long-term agreement means we can expect more predictable volume and pricing over a longer period. It also provides an additional buffer for us and our customers. I don't anticipate any significant downturn in the near future because, as I mentioned, new applications are still in their early stages, and we see great opportunities for unit growth. Additionally, with our strong position, we expect to capture a significant portion of the outsourcing trend, which is not only continuing but also accelerating. We believe we will keep gaining market share, which strongly supports our ongoing growth.

Got it. Last question from my side. How should we think about capital expenditures for next year? It looks like capital expenditures are likely to decrease. Your EBITDA has also significantly improved over the past several quarters. Can you provide any insights on how you plan to use that increased EBITDA? Will we see a notable increase in dividends, or is it mainly for debt repayment? I just wanted to understand both the capital expenditures and the use of EBITDA as we move into next year.

I believe it's still a bit early to discuss our capital expenditures for next year, but I can assure you that we will continue making the necessary investments at the right levels to meet our customers' needs. Currently, our cash flow situation is improving, and we expect it to continue to enhance next year. We don't have a fixed plan for how we intend to use this cash flow, as it really depends on available opportunities. When they arise, we will utilize this cash in the most effective way possible.

We have a question from Mr. Randy Abrams of Crédit Suisse.

I would like to request some clarifications regarding your remarks. You mentioned that in the fourth quarter you're still trying to catch up to demand for IC ATM and you expect the quarter to be flat. Is this due to supply constraints affecting your ability to ship more, or is it related to a capacity mismatch? I understand this year has been strong so far, but if you are catching up to demand, shouldn't we be seeing growth moving into the fourth quarter?

I believe the fourth quarter is fairly typical for us, especially following a stronger-than-expected third quarter. At this time, I don't see anything out of the ordinary. The shortage is causing some challenges in our ability to increase shipments. So, it's a mix of coming off a strong third quarter while also facing material and wafer shortages.

To follow up on the CapEx question, should we consider a bit of moderation in overall spending this year, even though there is still a healthy growth cycle? Is the view that this might be a high point for what you need to invest or will there be some moderation? Additionally, will there be a shift in focus, given the significant catch-up, especially since your bonders have increased by about 20%? Should we expect a shift towards advanced packaging and testing, or will it remain relatively similar?

Yes. For next year, I believe more emphasis will be placed on advanced packaging and testing. We'll continue to make progress in increasing our turnkey ratio, indicating good potential for growth in our test business moving forward. Starting from the third quarter, we have observed advanced packaging gaining momentum compared to wirebonding, although both areas are still experiencing growth. Next year, I anticipate a shift in spending; this year we significantly increased our capital expenditures for wirebonding, but next year I expect the focus to shift more towards advanced packaging and testing.

I'm not sure if I missed it, but with the level of spending direction, it seems like after a good amount of growth this year, it might be a bit down next year.

I believe we're still in the budgeting process, and we're evaluating how the business will perform as we work on establishing the appropriate CapEx budget for the year. At this moment, it's a bit early to determine whether we will see an increase or decrease in CapEx for the next year. However, one thing is certain: we will keep investing. Additionally, there remains significant pent-up demand that we need to address.

And to follow up, two parts. One, you mentioned share gains, is there a certain part is a view generally across the business? Or is there a certain area you're seeing particular market share strength?

I believe that, given our current position, we are observing an increase in outsourcing. This growth is driven by changes in market share and shifts in our customers' business models. As a result, some of the new products being developed will be outsourced instead of handled in-house, and we expect to capture a significant portion of that. Moving forward, I anticipate that we will continue to gain market share.

Okay. I guess I'm just trying to think about the products, like is there a way to consider if these are more related to high-performance computing?

I believe it's happening across the board. In the automotive sector, we are making very strong progress and will continue to increase our share in communication and high-performance computing. As the industry moves toward more advanced nodes, we expect to capture most of the available business opportunities.

For automotive, your sales are up, and it's reported at 68%. What is your perspective on your business catching up on supply, considering there have been significant limitations affecting vehicle production and the potential for a slowdown? There is a compelling content story, but how do you view your progress in catching up and the prospects for ongoing growth in the automotive sector?

I think the industry is really scrambled to increase the, I believe, wafer supply for automotive. And on our end, we are very, very aggressive in terms of further automating our factories to which are more suitable for automotive parts. And I think from both directions, I think the target was a very, very good opportunity to continue to expand our automotive part of the business.

Great. And just a couple, the demand softness in some segments, are there particular areas you're seeing a bit of that softness show up?

Well, I think everybody is talking about the PC, talking about the Android-based cellphones. The sell-through in China is not as strong as we're expecting. But I think, overall, in terms of units, both cell phone and PC are still growing. I mean, it's not that it's collapsing now. So we're seeing that continuing at a healthy level. And also, even with these products that seem to have some weakness in demand. Bear in mind, the IC content of these devices continues to grow. So this will still be a very strong demand segment for us.

Okay. And the last question is regarding the EMS business and the manufacturing constraints. Should we expect this to continue? You mentioned that IC ATM is performing better than usual. Are you observing a potential shift where some production might be delayed until the first quarter?

Yes, there is some push-out to the first quarter, and so we're expecting a better-than-seasonal quarter for EMS as well.

We have a question from Mr. Charlie Chan of Morgan Stanley.

So my question is about the share gain, right? I mean, apparently, starting from June, there was some lockdown for South Asia's biggest facility, in particular in Malaysia. Does the company see kind of order transfer from customers there? And now it seems like in Malaysia, the fab is recovering. Do you think that you can retain those transferred orders?

All our factories are running pretty full. So it's a bit difficult to move the volume around for us. Yes, there was a bit of a disruption in the Southeast Asia side of ours, but I think the situation is under control now. And I think they're back to normal. I think the overall impact is quite small for us.

Okay. And then now we start to hear, as you said, the substrate is kind of a big constraint. And it seems like ASE also have your own substrate supply, right? So how soon do you think those lead frame supplies can stabilize and catch up with customers' demand?

You are referring to lead frames?

Lead frame or substrates.

We have substrates, which provide a solid buffer for managing our overall substrate supply. Currently, about 20% of our internal use is sourced from our own production. Our substrate factories are operating at full capacity right now, and they are actively working to increase capacity to help address the situation.

Okay. So, you need to obtain the frame from a third party, right? Several IC and IDM companies are indicating that there is a significant shortage at the moment. Can you provide any insight on this? Specifically, regarding the various supplies and whether they will be able to meet the demand.

I hear from some of our sites that the difference in IC supply seems to be a bit inconsistent. However, overall, I believe the situation is being managed well. I don't see any significant improvement in lead frame supply.

Okay. Lastly, I know the company maintained capital expenditures for work under installation, but I'm not sure why. There has been some industry talk about wirebond facing pushback. If you look at the Asia Pacific situation, their PB ratio dropped to 0.9 for the third quarter. It appears that bookings for wirebond are decreasing. Can you help us understand what is happening here? Do you really need to delay some work?

I believe we are progressing well with our foundry installation for the year. As mentioned earlier, we anticipate some deliveries by October, and we are on schedule. We plan to continue our investments. Currently, the line balancing is more balanced, although the line balancing equipment is still behind schedule. In the fourth quarter, we will keep adding capacity for line balancing purposes. Looking ahead to next year, there is still considerable demand, especially for wire bonding, particularly as we expect growth in the automotive segment, which signals further demand from us.

Great. And yes, so it would be super helpful if you can provide that were on the lead time as it did over the past 3 quarters for those to get a sense.

Lead time, I think it's maybe 3 to 6 months.

Okay. Yes, it seems there's a tight sway. Okay, okay. How about those flip-chip equipment? Do you feel like it's still very, very difficult to get flip-chip related capacity? Or is it quite available, meaning the first year for cases?

The overall situation is that the lead time for equipment remains lengthy due to various mismatches in the entire value chain. As a result, it's challenging to predict how long it will take for this lead time issue to sort itself out.

We have a question from Mr. Bruce Lu of Goldman Sachs. Kenneth Hsiang: I think we're having some technical issues with this. Bruce, can you hear me? Please unmute your microphone from your side. We have questions from Mr. Jeff Ohlweiler. Mr. Jeff Ohlweiler, please unmute your microphone.

I think we're experiencing some technical issues with the conferencing system. I apologize for that. Unfortunately, we are unable to receive these questions, and I believe we will need to conclude the call at this point. Thank you very much for joining us, and we look forward to speaking with you soon. Thank you.