Au Optronics' (AUO) CEO Paul Peng on Q1 2016 Results - Earnings Call Transcript

| About: AU Optronics (AUO)

Au Optronics (NYSE:AUO)

Q1 2016 Earnings Conference Call

April 28, 2016 02:00 AM ET

Executives

Pearl Lin - Investor Relations

Paul Peng - Chairman and CEO

Michael Tsai - President and Chief Operating Officer

Wei-Lung Liau - GM Video Solutions Business Group

Sean Chen - GM, Mobile Solutions Bu Group

Benjamin Tseng - Chief Financial Officer

Analysts

Samson Hung - UBS

Jerry Tsai - HSBC

Gill Yin - Morgan Stanley

Brad Lin - Merrill Lynch

Pearl Lin

Ladies and gentlemen, good afternoon. My name is Pearl Lin, AUO’s IR Officer. On behalf of the company, I would like to welcome you to participate in our 2016 First Quarter Results Conference Call. Joined me here are five executives. Mr. Paul Peng, Chairman and CEO of AUO; Mr. Michael Tsai, President and Chief Operating Officer; Mr. Wei-Lung Liau, General Manager of Video Solutions Business Group; Mr. Sean Chen, General Manager of Mobile Solutions Business Group; and Mr. Benjamin Tseng, Chief Financial Officer.

The agenda of today is as follows. Firstly, Ben will recap the key points of our Q1 results and provide you with dissertations of Q2 outlook. Then, Paul will give you our opening remark then we’ll move into the Q&A session.

We have collected questions from analysts. In the first part of the Q&A, our speakers will first address these previously collected questions. Then, if we still have time, we’ll move into the second part of the Q&A session for you to call in. Before I hand over the call to Benjamin, I’d like to first remind you that all forward-looking statements contain risks and uncertainties. Please spend a minute to read the Safe Harbor notice on slide number 2. Ben, please.

Benjamin Tseng

Good afternoon. This is Ben. In the first quarter of 2016, due to slow seasonality and the efforts by brands to digest the inventories Q-o-Q, we had a Q-o-Q drop in panel ASPs. Net sales came in at NT$17.1 billion. We had operating loss of NT$5.1 billion and net loss of NT$5.6 billion. The EBITDA margin of first quarter was 6.8%.

Next slide balance sheet. At the end of first quarter cash and cash equivalent came in at NT$73.7 billion, a drop by NT$5.2 billion Q-o-Q. Total debt went down by roughly NT$900 million. Net debt to equity ratio stayed at a very low level which was 17.6%. Inventory turnover days were similar to that of the fourth quarter of last year, which was 41 days.

Cash flow highlights. We generated NT$7.2 billion from operating activities for Q1. CapEx was NT$10.4 billion. Net change in cash was NT$5.2 billion cash outflow.

Next slide revenue breakdown by application. In the first quarter, we had a big change in the TV share. The share of TV went down from 49% to 44%, owing to a drop in area shipment and ASP. However, the commercial and other segment had growth Q-o-Q in terms of shares from 14% to 18%. In this segment, we had a particularly strong growth Q-o-Q for card displays.

Next slide revenue breakdown by size. Larger than 50 inch and 39 inch, between 39 inch and 50 inch segment, both had their shares drop by 2%, owing to TV sales decline in the first quarter. Smaller sizes saw their shares rise due to the drop of shares of the larger sizes.

Next slide shipments and ASP by area. Again, because of the TV sales decline in the first quarter area shipment went down by 9%. ASP per square meter went down by 9.4%. But, the extent of slide was already smaller than that of the fourth quarter of last year.

Next slide small & medium-sized products. Area shipment went up by 18%, thanks to our efforts to adjust our product mix to adapt to the slow season and our efforts to maintain our loading rates. As a result, revenue of small & medium sized products when down by less than 2%.

Moving on to our guidance for the next quarter, starting from March, business momentum started to recover. We saw signs of recovery. So we expect that this momentum is expected to continue for the remainder of the year. For large-sized panels shipments, we expect to be up by mid single-digit percentage Q-o-Q.

On a product mix adjusted basis, blended ASP is expected to be up by mid-single-digit percentage Q-o-Q. We also expect that small and medium size panel shipments to be flat or up slightly Q-o-Q. Overall loading rates will be higher than the previous quarter, thanks to stronger demand.

So that is my recap of the first quarter results. Now, I would like to hand over the call to Paul. Paul will provide you with our business updates.

Paul Peng

Good afternoon, ladies and gentlemen. This is Paul. The panel industry experienced a downturn starting from the second half of last year, what we’re seeing is that the demand has decreased, channels have their inventory levels rising. However, starting from March, there is a new momentum arising. There are signs of a recovery and we expect that this business momentum will likely to continue into the second quarter.

So what we’re saying is that Q1 was the trough of the year. But, things were starting to turn more favorable in the second quarter. Q1 is the bottom, but things are getting better.

After all, Q1 is the traditional slow season. During Q1, we conducted annual maintenance and we were preparing for launching new products. We have been aggressively preparing for the arrival of strong seasons.

In Q1, channels were aggressively digesting their excess inventories. As a result, the amount of shipments went down. However, we started to see signs of recovery in March. And the China’s May 1 sales season and upcoming sports events will likely boost demand.

We’re seeing that the downward pressure on panel prices have eased a lot and there are signs of the recovery for specific products. AUO had net loss in the first quarter. However, we maintained a very healthy balance sheet. Our net debt to equity ratio was as low as 17.6%, which is lower than 20% and is a very healthy level. Inventory turnover only went up by one day at 41 days. Again, this is a very healthy level.

Looking ahead at the second quarter, macroeconomic conditions are relatively stable. Sports events, which include European Championship, Olympic Games, in addition to May 1 Labor Day demand, we are seeing demand to return.

On the other hand, the supply and demand of panels will become more complex to pursue growth. Customers are also pursuing differentiation so that we have some new channels, new market segments. Take TV, for example, the sizes are getting more diverse and the specifications are also more complex as demand varies supplies, difficulties will also increase.

Overall, we believe the supply and demand situation will become more balanced in the second quarter, but not every size, every specification will see more favorable conditions. For example, mainstream commodity price products, especially low-end and mid-end products, demand will likely be smaller than supply. However, for high-end, high value-added products, for example, high-end TV panels with curved designs, bezel-less designs or high-definition notebook panels, integrated products, etcetera.

Supply will be more on the type-side. The demand for commercial models, are also more stable. Products that are more differentiated, that have more values, will likely see supply trending to the tight side. It is also proof that we are on the right track because we have been focusing on curved TV panel displays, bezel-less.

For notebooks, we have high-resolution notebook panels, gaming displays. We also have notebook panels with integrated touch functions. In addition, we also have public information displays, car displays and very strong demand from the commercial products that we offer. This again proves that we are on the right track in terms of increasing our values. We believe we will have a stronger market positioning going forward.

In the second quarter, we are expecting to see our loading rates to further increase. Q3 will be the traditional high season, and we are expecting Q2’s momentum to continue into Q3. At AUO, we will continue to increase our ability to dynamically adjust to market conditions because right now, the market is changing really rapidly, and we are facing a more complex market dynamics.

We really need to step up our responsiveness and our ability to adjust to market changes. While we’re hoping this, we can tender better performance sequentially this year.

I would like to take this opportunity to thank you all for your long-term support. Thank you.

Pearl Lin

Thank you, Paul. Now, we would like to move into our Q&A session.

Question-and-Answer Session

A - Pearl Lin

For the first part of the session, we will first address the questions that we previously collected. The first group of questions are relating to our market update and outlook. First question is about 2016 worldwide TV monitor, notebook supply and demand. Michael, could you please?

Michael Tsai

Good afternoon, this is Michael. I would like to first talk about worldwide TV monitor and notebook supply and demand, first up, about TV. In 2016, we expect that the end demand for LCD TV sets will be stable in developed markets.

As for emerging markets, Eastern Europe, Latin America, are affected by macro conditions and currency fluctuations, however, emerging Asia has relatively stronger performance. So we expect that for full-year, worldwide TV set demand will be flat.

But average size of TVs will be up by 1.5 inches or even more than 2 inches. This will be in line with our strategy to develop large-sized TV panels. Because of the average growth in average sizes, area growth will be more than 5%.

Secondly, on PC, which includes monitor, notebook and tablets, the replacement cycle of PCs is being extended. However, PC brands will launch new models in the second half of this year, including 2-in-1 notebooks. We expect that in 2016, PC sales decline will be smaller. PC sales decline will be within 5%.

Thirdly, on smartphones, this year, the developed markets are getting saturated. Everyone has a smartphone in these markets. Large-screen smartphones and full HD have become the standard configuration for mainstream models.

In the second half of this year, new models will be launched which will boost the demand for large-screen and high-definition smartphones. On a global scale, shipment growth momentum will shift to emerging markets, including India, Asia-Pacific, South America and Africa. We expect that worldwide smartphones sets sales will be up by 7% this year.

In summary, this year, area demand for panels will be up by 5% to 7%. In light of the capacity loss of our peer in the first quarter owing to changes in manufacturing process and earthquakes that struck Taiwan, supply growth will be equivalent to the ranch of area demand, which is 5% to 7%.

However, the performances of panel makers will not be decided by capacities. Panel makers’ technological capabilities, product mix management and management capabilities will be the key deciding factors of panel makers’ performances in the future. So that is my update about the 2016 supply and demand of TV monitors and notebooks.

Pearl Lin

The next question is relating to Q1 TV sell-through and demand outlooks in major regions. There is also a question relating to our expectations for the inventory levels. Michael, could you, please?

Michael Tsai

In the first quarter, the sell-through in major regions, are as follows. Firstly, in the U.S. market. The first quarter sales performance was rather good. During January and February the Super Bowl season, TV unit growth Y-o-Y was 4%. In Europe, overall sales, was weaker. The first quarter sales, was down by 5% from last year.

Starting from the second quarter, there will be promotions for Euro Cup and launches of new products. We expect that in the second quarter, overall demand in Western Europe will return. Demand will likely be up by double-digit percentage points.

For China, channels in China are launching new promotions every month. After a series of promotions, first quarter saw TV set sales up by 3%. However, as the frequency of promotions becomes higher, some brands started to launch their promotions in advance of festivals. So sales are becoming more distributed. As a result, we expect that May 1 TV set sales will be flat or down slightly.

For emerging markets, firstly, in Latin America, the bidding project in Mexico has concluded. In Brazil, there was instability in its economic and political situations and the FOREX fluctuations also pose some challenges. As a result, first quarter sales went down by double-digit percentage, but the replacement cycle for CRT monitors will continue in emerging Asia.

First quarter sales, was really strong and we will continue to maintain positive growth. Overall, first quarter worldwide TV set sales went into the negative ranch, but the average size went up by 1.6 inches compared to last year.

In China, in particular, the average size went up by 2 inches. In Latin America, that number was even higher than 2 inches. In the second quarter, there will be Euro Cup and the momentum from emerging Asia. TV set sales will likely shift into the positive ranch.

Now, I would like to provide you an update of the inventory levels, firstly, for TV. In China, channels are stocking for upcoming festivals. And channels are promoting new products every month. Inventory levels, was one week higher than normal, but in other regions, inventory levels are rather normal. For monitors, inventory levels are normal, about three to four weeks.

Notebooks have gone through the digestion of inventories in the first quarter. So, inventory levels have resumed to the normal level, resting at about five to six weeks.

Benjamin Tseng

Thank you, Michael. Now, I would like to take the questions relating to financial questions. First question is relating to our loading rate. The loading rate in the first quarter was 90%. We expect that the loading rates into Q2 will be higher than that in Q1. As for component cost reduction, in Q1, the reduction was 3%. For Q2, we expect the number to be 2.5%. For D&A in 2016, the amount will be NT$40 billion. And the amount will be evenly distributed across the four quarters of the year.

For 2017, the amount of D&A will depend on the speed that new capacity can be added into the mix for mass production. But, right now, we are expecting the amount to be less than NT$40 billion. For CapEx, last year, some of the spending will be extended into this year. So the CapEx that we expect is around NT$45 billion to NT$50 billion this year. For 2017, this may be too early to give you an actual number, because we’re still planning for the CapEx right now.

There are questions relating to our 8.5 Gen capacity in Houli. This fab can produce 27K sheets per month and in the first quarter, we have started to produce volumes and ship them. We expect that we can fully ramp up in the second quarter. This will help us increase our overall capacity by 5 percentage points.

For this Gen 6 capacity in Kunshan, we still expect to launch it into mass production in the second half of the year and the capacity will be used to produce high-end and mid-end products.

The last financial question is about our fundraising plans. Because we submitted a fundraising proposal to be discussed in our shareholder meetings in June this year, we actually have submitted as such for the past few shareholder meetings what we do is we evaluate our investment requirements and the capital market conditions to decide whether or not we will really raise funds. Right now, we are just preparing for the possibility, but we may not actually raise funds eventually.

Pearl Lin

Now, we’d like to move on to the last group of our previously collected questions. They are related to our key products and technologies. First question is on TV products updates. Wei-Lung, would you please?

Wei-Lung Liau

Good afternoon, this is Wei-Lung. I would like to provide you with our updates on our TV technologies and products. There has been a lot of curiosity around our high-end TV products, including bezel-less and curved TVs. So, I’ll provide you with our view points.

Firstly, on bezel-less products, AUO led the market in providing a full-lineup of bezel-less TV panels. This technology has been well received by customers. Since we successfully mass produced these products in Q1, it has been on very tight supply. Currently, we are working to increase the volumes. We want to increase our first-mover advantage to boost our market share in the high-end TV panel segment.

There is a very high entry barrier to the high-end bezel-less products because it requires GOA technology and bezel-less production method. Currently, there are only three panel makers capable of making 4K plus GOA technologies. 4K curved plus GOA is even more difficult. Right now, there are only two companies in the entire world that can mass produce 4K curved plus GOA technologies.

This year marks the very first year that AUO mass produces bezel-less TV panels because we are seeing very strong demand from clients. So, we set high targets. Our goal is to increase our bezel-less TV panel penetration rate to 30%, boosting our total shipment volume to more than 1.5 million units.

So that was an update on bezel-less products.

Moving on to our curved TV panels, this year, on the market, a lot of brands are pursuing their differentiation. So they are more willing to adding curved TVs into their product mixes. As a result, the sales of curved TVs reached new highs continuously.

In the first quarter, the curved TV and sales already achieved more than 1.2 million units. Year-on-year, the growth rate has been more than two times. The penetration rate of curved TV has also increased in large size TVs. In the 55-inch TV segment, curved now has more than 10% of the share.

In the 50, 65-inch segment, curved TV now has more than 20% of the share. So it is very obvious that curved has become a mainstream in the large-sized high-end TVs. This year, curved TVs are gaining popularity. We expect that curved as a feature will also extend into 40-plus inch models.

In the curved TV panel market, AU has been a worldwide top two. This year, we expect to extend our curve design to cover 43-inch all the way to 85-inch products. Our expectation for the full year curved TV panel shipment is for it triple from last year. Our aim is to make curved TV panels to take up more than 30% of the worldwide curved TV panel shipments.

Pearl Lin

Thank you, Wei-Lung. There are questions relating to notebook panels, especially the mid-to high-end products. We have Sean to take these questions.

Sean Chen

Hi, this is Sean. I would like to address questions relating to notebook two-in-one market and our product strategies. Targeting this product segment, we have three leading products. Last year, we started to produce volumes for Touch Total Solution. Our OTP integrate touch panels have set a very high entry barrier. We are basically the only company in the industry having OTP touch panels. We are seeing very good reception from the market and we expect that notebook plus touch total solution panel shipment will likely to increase 30% from last year.

Secondly, high-end, especially commercial notebook, we are seeing steady growth in shipments. We are using high-resolution narrow-bezel plus power-saving features. We will start produce volumes in the third quarter. This will help us to boost our product positions.

The third leading product is for gaming market. We are developing products with leading chipmakers. We have two products, 15.6-inch and 17.3 inch products. These are the leading panels in the market that can provide a 5 millisecond response time and leading 112 [indiscernible] frame rate.

Pearl Lin

The last group of questions is relating to industrial control products. These types of products are in smaller volumes while they require higher level of customization. We still have Sean to address these questions.

Sean Chen

AUO has been developing industrial products for more than 10 years. This segment requires steady shipment and a strong track of record of delivery. We have been working with our customers and we are receiving good responses from them.

In this segment, we have OGS glass sensor and OTP technologies. We are leveraging these advanced technologies to address industrial market. As a result, we are able to provide higher values to our customers.

Secondly, this, types of products require higher customization and AUO is able to provide a full line-up of a more diverse capacity so we can work with our customers to develop products that meet their demands. At AUO, we provide POS, ATM, kiosk panels and these products now account for more than 50% of the market share. We expect that they will help us to further increase our entry barrier and enhance our leadership on the market.

Pearl Lin

Ladies and gentlemen, we now open the floor for questions. To give equal opportunity for every participant, please be reminded to limit the number of questions to three per call. Thank you.

Operator

[Operator Instructions]. The first caller is Samson Hung from UBS. Please go ahead.

Samson Hung

Good afternoon, management team. I have two questions. First, your Korean peers are increasing their OLED production for smartphones. I’m wondering if you can share with us your view relating to the OLED market and your strategies. If you are sticking with LCD technology, how are you going to counter these arising challenges?

Second question, could you perhaps let us know whether you expect that your gross profit or operating margin profit to return to the black in the second quarter? Thank you.

Michael Tsai

This is Michael. I would like to take your first question. Recently, there have been quite a lot of media reports on the investment activities of Korean peers in the OLED segment. Currently, the OLED technology is being applied to certain cellphone brands. So we’re seeing great improvement space still for LCD technology.

At AUO, we are placing most focus on wearables and VR products. These two market segments are gaining momentum. Demand is also likely to increase sequentially. AUO has been developing these two market segments aggressively and we have mass production experience in 3.5 and 4.5 generation fabs. Our goal is to adopt a different strategy to cope with market demand.

As for how LCD can deal with the demand for smartphone panels, the specifications of LTPS and the power consumption profile has all improved in recent years. In terms of specs or cost effectiveness, we believe LTPS can really compare against OLED. AUO will speed up our strategy road map for low temp. As you know, we have a capacity expansion plan for Gen 65 fab in Kunshan.

So in terms of our product specs designs or our technological capabilities, we hope to catch up with or even exceed the level of performance that OLED can provide. Currently, in terms of smartphone market, the demand is really varied and OLED only accounts for a small portion of the entire market.

As for your second question, based on our observations of the second quarter demand and as we mentioned previously, in the first quarter, we have been preparing for new products, including plans to increase the volumes that we provide. Our hope is to boost the ratio of commercial products and increase our capacity. In addition, we want to focus on notebook high resolution and improve our shipments of certain TV panel products so as to improve our profit portfolio in Q2 and Q3. So the overall goal is to speed our plan to achieve profitability.

Samson Hung

Thank you.

Operator

Our second caller is Jerry Tsai from HSBC.

Jerry Tsai

Good afternoon. I have three questions. First, could you talk about the currency’s impact in Q1 on your gross margin? Secondly, discussions relating to size migration of TVs, I agree that size migration has been the growth driver of LCD panels. In China, the SaaS migration has been more than two inches per year. Looks like in the fourth quarter, display research said the average size has in China was, 44-inch. How much room do you expect that TV size can further go up to? When will be the ceiling?

Third question, you are applying LTPS technology to produce notebook panels. We’re seeing that your peers are using advanced technologies such as oxide LCD and OLED to produce notebook or all-in-one PC panels. Could you maybe let us know the pros and cons for IT products using these three types of manufacturing processes?

Benjamin Tseng

Thank you, Jerry. This is Ben. I would like to address your first question. First question is relating to the currency’s impact on our gross profit in the first quarter. Compared with the fourth quarter of last year, Taiwanese dollar went down by 1.6% against USD and went down by 5.6% against Japanese Yen. All things combined, currency’s impact had a 0.3% positive contribution to our gross margin quarter-on-quarter.

Michael Tsai

This is Michael. I’d like to take the second question relating to TV size migration. TV size upgrade trend is a definite trend. As for how long this upgrade trend will go, whether or not this pace will continue to be this fast, I think we will need to observe closely.

But I believe the demand for large-sized panels will be there. This is because the demand for large-sized panels, are really visible and popular. And we’re seeing an upward trend. Moreover, when customers are changing for a new model, they tend to get a bigger size of screens.

Thirdly, in the mid-to high-end market, especially the high-end market segment, the demand for large-sized TV is especially very obvious. Narrow-bezel 4K or even 8K down the road, bezel-less panels, these specifications require really high technological capability and the demand is really obvious.

Going forward, the panel industry will have similar viewpoints relating to large-sized TV panels. But whether or not a panel maker can produce large-sized panels across all lines of their fabs, whether or not they have enough production capability and technological capability, I think different panel makers may have different performances. But the demand for large-sized TV panels is there and we expect the growth will continue in the next two to three years. And mid-to high-end market will help boost the growth of average TV panel size.

Sean Chen

This is Sean. I would like to address your question relating to the high-end notebook, 2-in-1 panels and technologies associated with producing this kind of new models.

Consumers of 2-in-1 notebooks would ask for long battery power, long battery life and high resolution, as well as narrow bezels because when you have narrow bezel, you get a bigger viewing area. So the notebook you get will be thinner and more compact. To accommodate all these three requirements, we think low temp is the best technology to deliver these advantages.

We have been showcasing a high-resolution 13.3 inch 4K, 2K panel. In addition to 4K, 2K, you can also use low temp technology to produce QHD and above panels. When it comes to three by two, aspect ratio the resolution can also be as high as 2080x1920.

When you are using a commercial notebook, you are mostly working with documents you are using white-disk [ph]. The display will be showing in white colors. To do that, low temp provides the best power-saving capability. OLED may be really efficient in display moving scenes.

But when it comes to our wide screen, it consumes more power. So when we compare all things relating to the technology aspect, low temp is the best technology. Moreover, after we start mass producing in our Kunshan fab, we expect that we can boost the low temp’s contribution to our capacity as well as the financial performance.

Jerry Tsai

Thank you.

Operator

Our third call is Gill Yin from Morgan Stanley.

Gill Yin

Thank for taking my call. My first question is about your auto displays, you mentioned that the growth for car displays was rather strong in the fourth quarter. Could you talk about whether you expect more opportunities in this area? Second question, you talked about the pricing being more stabilized in certain sizes. Could you talk about 43-inch or some other products that you are expecting more opportunities?

Sean Chen

This is Sean. I would like to first talk about the car display market outlook in 2016. At the moment, the worldwide market including Chinese market has strong and stable demand for car displays partly owing to the cheap oil price. So people are more willing to drive cars. As a result, the demand for car displays has been really stable.

Last year at the year-end, there were some news reports relating to some carmakers, but that didn’t affect our customers and we are expecting the demand to be rather steady this year.

Michael Tsai

This is Michael I’d like to take your second question. We mentioned some sizes. Actually, that would not be limited to certain sizes of products. The mainstream sizes, for example, our 43 inch or 50 inch products. We also are leveraging our curve technology. Right now, we have a full line-up of curved products, starting from 43, 50, 55 and 65-inch and above. We are leveraging curved design to really enhance 4K bezel-less TV panels and 4K bezel-less plus curved designs. These are our product that we are seeing good opportunities.

We are seeing that they are really special because they are having really good performance. So that is my update on the large size panels.

Pearl Lin

Ladies and gentlemen, in the interest of time, we are now opening the floor for one last question. Thank you.

Operator

Thank you. Our last caller is Brad Lin from Merrill Lynch.

Brad Lin

Good afternoon, management team. I’m Brad from Merrill Lynch. I have three questions. Firstly, regarding OLED, you mentioned that your CapEx will be NT$45 billion to NT$50 billion this year at your Kunshan fab. As we know, OLED production requires very specific infrastructure such as a higher and more advanced clean room for this plant is your plan to start with the LCD and then move on to OLED production or are your attempting to start with OLED directly? Will you start with rigid or flexible OLED production? That is the first question.

Second question is relating to Oxide. We are hearing that some major customers will adopt Oxide on IT products to reduce power consumption. Could you give us some color on your plan for oxide, any timeline for mass production?

Third question, I think a lot of people are very curious about this one. That is sharpened idea. Could you give us some color on your viewpoints and your projection of any impact on new operations?

Sean Chen

This is Sean. I would like to take your first question on OLED, and also the second question on Oxide. At Kunshan plant, we will work on LCD production, because the low temp technology that this fab employs will be different from what is using to produce OLED panels. As Michael said, we believe LCD still has a big room for growth. We will put a sharp focus on low temp technology, applying to smartphone, large size 2-in-1 panel production.

Secondly, relating to your question on OLED and rigid and flexible, within these, are two different platforms. We will continue to focus on the trend of the market. We have been developing flexible OLED products as well because in terms of performance and form factors, we think flexible can bring disruptive changes.

As for upside, I think every platform has its advantages, as we said, low temp offers far more advantages than oxide. After we have finished some studies, we decided to focus on low-temp technology. We want to provide better products to our customers. For upside, we are still observing the trend closely.

Michael Tsai

This is Michael. I would like to answer your third question about the M&A, activity in the industry. Based on media reports, we think to AUO, the Hon Hai, Sharp deals means that these two individual competitors will become one. This also shows that our focused strategy such as placing a sharper focus on commercial models will be more critical going forward. In the future, we must be smarter and faster.

In terms of technological development, we will need to speed up when we develop new technological platforms. From products to customer to end-market applications strategies, we aim to enhance our competitiveness continuously. More importantly, management capabilities would also need to advance more quickly.

When we can do that, we will be able to meet industry changes more dynamically. Whatever happens with our peers, competition will continue to intensify. What we hope is to, based on our focused strategy, we want to run faster and aim higher to address market demand.

To meet the competition on the market, or to meet the challenges from Chinese competitors, we will uphold these strategies.

Pearl Lin

Thank you, ladies and gentlemen. In the interest of time, this concludes our conference call. If you have any further questions, please feel free to contact us. Thank you.

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