ASM Pacific Technology Ltd

HKEX:522

Earnings Call Transcript 2020-Q1

[Leonard Lee, executive]

Good morning, good afternoon and good evening, ladies and gentlemen. Welcome to the ASM Pacific Technology 2020 First Quarter Results Announcement Investor Conference Call.

Before we proceed, I would like to note that during the 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.

For your reference, the IR presentation related to our 2020 first quarter results can be downloaded from our website, www.asmpacific.com.

With us this morning are Mr. WK Lee, CEO of ASM Pacific Technology; and Mr. Robin Ng, CFO of ASM Pacific Technology. Our CFO, Robin, who is also our CEO indefinite, will start with a brief discussion about our 2020 first quarter results followed by a Q&A session.

Without further ado, let me hand this over to Robin, please.

[Cher Ng, executive]

Thank you, Leonard, and good morning, good afternoon, ladies and gentlemen.

Despite a challenging quarter with the COVID-19 outbreak, the group managed to register a very strong double-digit percentage year-on-year and quarter-on-quarter growth in bookings. In fact, the bookings for this quarter was the second highest first quarter bookings after the record booking performance in Q1 2018. All 3 business segments registered double-digit percentage booking growth Q-on-Q and year-on-year.

The group started the year with very strong bookings in January. The momentum was disrupted in February due to the COVID-19 outbreak in China. However, bookings in March returned to normal, with immaterial amount of order cancellation. The group achieved strong double-digit percentage year-on-year booking growth in Q1 this year led by customers in China, Taiwan and Korea. Multiple factors drove the strong booking performance of the group, including the 5G infrastructure build-out, localization of the China semiconductor supply chain, recovery of the optoelectronic market and the group's strong position in Advanced Packaging.

The group achieved a revenue of USD 434.2 million, which was at the higher end of our guidance and a net profit of HKD 25.4 million, which was better than our guidance of a loss for this quarter. Q1 2020 group gross margin at 33.5% was lower year-on-year and Q-on-Q, mainly attributed to the SMT Solutions Segment's geographical mix.

In terms of end-application market, the Mobility, Communications and IT segment remains the largest by revenue in Q1 2020, underpinned by the continued momentum in China and 5G infrastructure demand. A surge in demand for general lighting tools drove the Optoelectronics segment to register the largest growth, both year-on-year and Q-on-Q, in percentage terms to form the third largest revenue contributor after the Automotive segment, which retained the second spot despite the slowdown of the automotive industry.

Since the outbreak of COVID-19, we have taken every effort to protect the safety and health of employees, which is the utmost priority. The group has implemented various measures like work-from-home arrangement for certain employees and enhanced social distancing measures at our workplace. These prevention-control procedures have worked well so far with minimal disruption to operations. Besides focusing on employee safety and business continuity, our focus is also to ensure compliance with local authorities guidelines and restrictions and helping the community to fight the outbreak as a responsible corporate citizen.

As at the date of this announcement, close to 100% of our employees in China manufacturing plants had returned back to work. We lost some production capacity during the extended Chinese New Year holiday period and subsequent travel disruptions. The group manufacturing team in China demonstrated

great resilience when our plants were reopened after the prolonged shutdown due to the COVID-19 outbreak. The group is also grateful to our suppliers who had supported us. We are working towards recovering a big portion of the lost capacity over next few months through productivity improvement and working overtime.

The other 2 primary production facilities in Malaysia and Singapore are also affected. Malaysia government has imposed a Movement Control Order closing all factories from 18th of March 2020 until 28th April 2020. Our factory, as part of essential supply chain, has been granted approval to run production with a reduced workforce. On 3rd of April 2020, Singapore government has also announced a set of tightened measures effective from 7th April 2020 until 4th of May 2020. And this, by the way, has been extended to 1st of June based on last night announcement by the Singapore government, including suspending all nonessential workplace.

Our business is classified as a key economic sector and allowed to remain open, but with certain restrictions. While it is inevitable that such restrictions would have an impact on our production capacities and efficiencies, we are able to cushion some of these adverse impacts because of our diversified manufacturing base.

At the start of this year, we have renamed Back-end Equipment Segment to Semiconductor Solutions Segment, in short, SEMI, to reflect the contribution by ASM NEXX for the mid-end deposition tools as well as the group's transition to an integrated hardware and software solutions provider in the semiconductor packaging market.

Demand for traditional tools like Wire and Die Bonders and tools for Advanced Packaging contributed to the strong booking performance for this quarter. China semiconductor supply chain localization effect, 5G infrastructure and general lighting demand contributed to the increase in bookings for IC/Discrete and Optoelectronics businesses. On the other hand, we registered relatively weaker-than-expected orders for CIS tools due to anticipated softness in software -- in smartphone demand brought about by the COVID-19 outbreak.

For Q1 2020, the SEMI Segment contributed to 44.7% of the group's revenue. Revenue from Advanced Packaging tools continued to be strong, exceeding that of CIS this quarter. Collectively, both AP, Advanced Packaging, and CIS contributed close to half of SEMI Segment's billing.

Gross margin increased by 202 bps year-on-year and 45 bps Q-on-Q to 41.3%, mainly due to product mix and positive results from our productivity drive in manufacturing activities.

This quarter bookings of USD 88.9 million was a record high and this is also the fifth consecutive Q-on-Q growth that the Materials Segment has registered. Traditionally serving as a leading indicator to the semiconductor market, this trend would have overwhelmingly suggested a recovery of the market if not for the current uncertainty introduced by the COVID-19 outbreak.

For Q1 2020, billings of the Materials Segment declined 22.3% Q-on-Q, but expanded slightly 1.3% year-on-year, respectively, to USD 51.6 million. The prolonged plants shutdown in China limited the delivery performance of the segment. This segment contributed to 11.9% of the group's revenue.

Gross margin declined by 188 bps year-on-year due to an increase in cost of precious metals, but improved 7 bps Q-on-Q to 8.5%. Profit for the segment improved by 51.3% year-on-year and 61.4% Q-on-Q in the absence of Molded Interconnect Substrate business, which was discontinued in early 2020.

Strong demand for 5G infrastructure and SiP packages contributed to the high booking similar to the level recorded in the first quarter of 2018 for the SMT Solutions Segment. Billing of the SMT Solutions Segment amounted to USD 188.3 million, representing a contraction of 15.1% year-on-year and 23.1% Q-on-Q. SMT Solutions Segment contributed to 43.4% of the group's revenue.

Gross margin declined by 214 bps year-on-year and 312 bps Q-on-Q to 32.4%, largely due to volume as well as geographical mix where there were a greater proportion of customers from China with lower margin sales. Segment profit declined by 40.8% year-on-year and 54.6% Q-on-Q.

The pickup in demand from Chinese manufacturers to localize their supply chains and the accelerated deployment of 5G infrastructure and the progress of the group is making and capturing new market opportunities such as Advanced Packaging, Silicon Photonics, Industrial Internet of Things, mini and micro LED solutions, Power semiconductors and Industry 4.0 solutions underpin the group's confidence to deliver long-term sustainable value to our shareholders.

Second quarter booking tend to trend higher than the first quarter in the past. However, we are of the view that the booking for Q2 2020 would decline double-digit percentage Q-on-Q due to the adverse impact caused by the unprecedented COVID-19 pandemic. While we continue to experience strong booking momentum for our Materials Segment in month of April to date, demand momentum for traditional tools in the SEMI Segment was not as strong.

In terms of billing, we expect the demand from information technology and data center-related applications to continue due to increased telecommuting and home-based working activities as a result of COVID-19 containment measures worldwide. However, customers are generally more cautious than before as evidenced by some push out of deliveries to Q3 this year. While the group ended Q1 2020 with a high backlog, some orders would take more than 1 quarter to be fulfilled due to production lead time and revenue recognition policy. In light of the above, we anticipate revenue in Q2 2020 to be in the range of USD 500 million to USD 580 million. We also expect the group's gross margin to be in the range of 34.5% to 36.5% for Q2 2020.

With that, we would like to proceed with the Q&A session now. Thank you.

[Operator]

[Operator Instructions] Our first question comes from Mr. Donnie Teng from Nomura Taiwan.

[Donnie Teng, analyst]

My first question is regarding to your second quarter booking guidance. So wondering if you can give us some more colors on what business segments may see your booking declining into the second quarter? And what are going to perform relatively well into the second quarter? And considering that, do you think that the second quarter booking will be lower than what happened in fourth quarter 2019?

And my second question is regarding to the inventory correction risk across the semiconductor supply chain into the second half. Because ASM Pacific provides both equipment for upstream and downstream tech companies generally, so I'm just wondering if you can give us some direction or some outlook on whether the upstream customers will see some more conservative outlook into the second half. And on the upper side, downstream may be turning a little bit better into the second half due to downstream companies or downstream customers have earlier impact from COVID-19.

[Cher Ng, executive]

I'll answer your first question first. So in terms of some color in terms of our booking guidance for Q2, we are guiding double-digit Q-on-Q decline. So I think based on just pure simple mathematics, even if you take -- it could be lower in Q4.

Now, some color. Customers, in general, indicate that the loading is okay in Q2, but they are uncertain as what can happen in Q3. Basically, we believe they have yet to receive also forecast from their end customers. Generally, we feel customers start to show concern even due to the pandemic, but at this moment, and also partly to answer your question about Q3, is really, I think, at this moment, nobody can really give a very clear picture yet so far down the road.

Now given this backdrop, we expect customers to start to slow down or even pull back their CapEx expansion program. However, we believe Advanced Packaging tool, CapEx continue because these are, in opinion, more of a technology buy rather than a capacity buy. No, you're probably aware, we have a -- looking at the numbers, Q1 booking was a high base. So coming off from a high base, we expect -- especially also if you look at our bookings in Q1, Materials, we recorded a record booking, and that was a consecutive 5 quarters of increase. So we expect, in terms of segment, Materials momentum may not be able to continue. And SMT also high base in Q1. So -- while SEMI, there's a chance that it could be stable or slightly higher. So in terms of SEMI, a little bit more color. We expect Optoelectronics and the Advanced Packaging momentum to continue.

[Operator]

Our next question comes from Kyna Wong from Credit Suisse.

[Kyna Wong, analyst]

I wanted to ask about the backlog and first quarter because I think we can't find the numbers, and this is a first time that we can't find it in the IR press release. And how high is actually -- the backlog actually hike in the first quarter? And that's the first question.

And then we also understand that there's certain push out on the delivery that we're going into third quarter. And so that -- I wanted to ask is in terms of back to the booking trend, if we should expect that second quarter is declining, but the third quarter for the seasonality this year will also change. What would you expect if like the -- when there customer concern is like stabilizing or, I would say, change when the COVID-19 situation is actually stabilizing later this year.

I mean the second question is about we found some -- we wanted to know about the outlook this year because last time, I think, given the certain visibility, but now we have already got like 2 quarters booking. And we also expect that you have like commencing with customers on the full year capacity expectation utilization. What would be the outlook for ASM Pacific this year by each segment?

[Cher Ng, executive]

Yes. Kyna, I think -- let me answer your first question first. The backlog number -- sorry, this time around, we realized that we did not put the group backlog in the slide. So to give you the number, we ended up with a record backlog of USD 883 million for quarter 1.

Now in terms of your second question, let me get your question right first. You say -- you're asking about push-out of the delivery to Q3 and then what kind of booking trends we are looking at maybe in Q3 and in Q4? Is that your question, Kyna, as opposed to...

[Kyna Wong, analyst]

Yes, yes, yes.

[Cher Ng, executive]

Yes. Let me address on the push-out first. As I mentioned earlier, similarly, we see for billings, the -- we begin to see that customers are a little bit more cautious already. So they are starting to push out some of shipment to Q3. So I think that's just expected in view of the current climate.

Now in terms of Q3 and Q4, honestly, I mentioned earlier, it's really too far for us to predict how these were developed because it all depends on how the COVID-19 situation will pan out. Now looking at the situation right now, in certain countries, like even in Singapore where the situation is actually getting more serious. So it all depends how this COVID-19 situation pan out.

Now if I may refer you to -- I think, you're guessing all the data right now. Look at the forecast recently done by IMF. They are projecting that the world economy will actually contract this year, provided -- even provided that if the COVID-19 situation can be contained by the end of the first half. So they are projecting a worldwide economic contraction of minus 3%. So looking at such a forecast, I think we have to be a little bit more conservative and prudent in terms of how we look at the future -- in the immediate future in the next Q3 and Q4.

Now your third question is account-related, I think. To be honest, we only have 3 weeks of visibility into April. So as we have stated in the announcement, we see Materials booking are still very strong. It's very, very strong, whereas the traditional tools in the SEMI Segment not as strong. So that's what we are seeing at this point in time after 3 weeks into the month of April.

[Operator]

Our next question comes from Leping Huang from CICC.

[Leping Huang, analyst]

The first question is about your full year or the second half visibility. So if you look at your customers by geographical distribution -- by different regions, what -- do you see any difference on the order visibility since you have a very strong first quarter and then second quarter, you have double-digit declines, so I mean, if you're looking forward. So do you have any big difference in the order visibility, order preference on the order on these by region? This is the first question.

The second question, I just want to -- a little more. So why you -- first quarter is so strong and -- but -- so which is driving the first quarter strong order? Is it because of the technology upgrade or it's because we are -- we were already in the COVID-19 situation, but why the first quarter is so strong?

[Cher Ng, executive]

Now the first question is whether we see any differences or a difference of customer by region, no? So...

[Leping Huang, analyst]

By region or by different times, yes.

[Cher Ng, executive]

Yes, in terms of bookings, right? So when you look at

the -- yes, bookings. I think the China -- I mean, the main drivers are still very much intact in terms of bookings. So China localization of supply chain; 5G infrastructure; Advanced Packaging, especially for high-performance computing, so those Advanced Packaging like SiP as well; and also Optoelectronics, general lighting, in particular; and a little bit less in terms of photonics, but now all these are still driving, we believe, the near-term booking trend. The only trend -- the only thing that we see depart this trend is really the CIS. So the booking in CIS in Q1 this year declined on a year-on-year basis. So in terms of region, I think, so far, we don't see any significant deviation so far in the 3 weeks of the booking compared to Q1 this year.

Now your second question is, why so strong in June? What's really driving the orders? I think I mentioned earlier just now. I think those factors, China supply chain, the 5G, AP, Optoelectronics, the underlying drivers boosting out the performance of the booking in Q1 despite the fact that -- we told you that during the February call, January booking was very strong, but however, February came down because of the China situation primarily, China lockdown and the world are starting to see that the crisis may get a bit more serious in February. But however, after February, March booking came back and returned back to kind of normal level. So customers -- this is what we see in terms of booking for Q1.

[Operator]

Our next question comes from Arthur Lai from Citigroup in Taiwan.

[Arthur Lai, analyst]

This is Arthur Lai from Citi. First of all, I want to congrats you have a strong first quarter result and also demonstrate your management quality across this virus outbreak crisis.

In your -- so I have one question and one feedback. In your presentation, Page 31, you highlight there's strong Q1 booking, but deliver over several quarters due to production lead time as well as some delivery push-out. Can you elaborate more like this is from the Advanced Packaging or this is from the other application? What drives these longer lead time? And is it driven by the supply constraint, some component shortage? Or is it driven by the demand push-out? This is my first question.

And also I have one detail I compared to the previous quarter, I noticed that you changed the category of your revenue. So you changed the name on the Back-end to the SEMI Solution. And I think this is a very big change. Can you elaborate, in the future, will we see more new SEMI Solutions products or service coming to this category?

[Cher Ng, executive]

Arthur, to answer your first question first. What are the factors driving the long lead time? So not so much supply chain kind of constraint, more so of the type of equipment. We have certain type of equipment, like for example, our NEXX tools, the Silicon Photonics tools for example, they take a longer time for production to manufacture them and deliver to customer. So this is usually nothing to do with any of the supply chain constraint that you talk about.

So -- and then in terms of revenue recognition policy, we have talked about this before. Under the new accounting standard, if we deliver a new tool, typically, the accounting standard require us to make sure or to ensure that the customer actually accept our tool before we can book the entire revenue. So we are shipping -- constantly shipping new tools to customers. So as a result, some of these tools, although we have already delivered to the customer, we have to wait for customer acceptance before we can recognize the revenue. So this is just accounting kind of treatment.

Now your second question is changing from Back-end to SEMI. I suppose you probably asked why it changed. We have indicated the reasons in the earlier quarter. I think with the addition of NEXX into our business, as you are aware, NEXX is primarily focusing on the mid-end segment. So once we have NEXX starting to make significant -- material -- or meaningful contribution, I would say, to the revenue base, we thought that it's more appropriate to be rename this to SEMI to reflect the nature of NEXX business, which is really not the Back-end business. And also the fact that I think, going forward, the SEMI Segment, we also make -- we also indicate that we are tying up with a leading software company together -- collaborate together and to offer IoT software solutions to our customers. So I think with these 2 factors in the background, we thought that it was appropriate to change or to rename the Back-end Equipment to SEMI. So I think that's the reason.

[Operator]

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

[William Lu, analyst]

I have 3 quick ones. One is I totally appreciate that visibility right now isn't so good. A lot of things are sort of out of your control. But if I look at that, maybe what you can control in terms of some of the growing areas, can you talk a little bit about, one, the Advanced Packaging business and maybe what -- how much you expect that to grow this year? Second, if you could talk about also the Opto business, maybe specifically mini LED and what that looks like this year?

My second question is on Q2 gross margin. I'm wondering if there are any remaining impacts from the supply disruptions in China?

And then my last question is on Q2 SMT bookings. It looks like that is down in Q2. Can you talk about the trends maybe in consumer versus auto?

[Cher Ng, executive]

Bill, your first question is you're saying that visibility isn't so good. What are the areas that we can control? So your focus is really on Advanced Packaging expected growth this year as far as Opto and mini, right? So I suppose -- right, correct?

[William Lu, analyst]

Yes. Thank you.

[Cher Ng, executive]

So in terms of Advanced Packaging, we see Advanced Packaging momentum continue to be strong since a couple of quarters ago and moving into Q1. And we also see this trend will continue because, as I said earlier, Advanced Packaging tools are more for technology buy. So I think customers are preparing also such tools for the future. So this momentum we see will continue. And also the fact that some of these tools actually go into high-performance computing kind of market. So I think in that particular segment, you probably realize that that segment is still relatively healthy compared to, say, the consumer segment, compared to the automotive segment or even the smartphone segment. So that's the reason why the AP, we are confident that the AP demand will continue to be okay compared to the rest of the segment.

Now in terms of Opto, this time around, we are seeing the Opto demand coming mainly from the general lighting, not so much of the RGB display market. Possibly, there could be a reason. I know with the COVID-19 outbreak, the postponement of the Tokyo Olympics, for example, and all this RGB display, outdoor displays, probably customers are a little bit more cautious in placing a new CapEx, whereas for general lighting is something that is a replacement. So I think that makes the reason why the general lighting market, we see is relatively healthy compared to the RGB for Optoelectronics.

Now in terms of mini and micro LED, as we mentioned before, these are still very much a prototyping space right now. So we will consider this also as a -- more of a technology buy. So technology buy typically are not so much affected by a situation like this because customers are preparing for the future. So they will continue to purchase Advanced Packaging tools, factors I mentioned before.

Now coming back to your second question, is that do we see any impact from China on our gross margin? I mentioned earlier, our workforce in China are close to 100% back at work. In fact, we are also pleased to note that since they came back to work after the long shutdown, we've also been driving a lot of productivity improvement. And that's also the reason why you see our SEMI Segment margin perform quite well this quarter vis-à-vis the other quarters. So in short, we don't see any more impact coming from China.

However, in the other location, we have manufacturing location in Malaysia. So the lockdown in Malaysia is still continuing up to the end of this month, 28th April. So that will have some impact on our operation capacity, but however, with the diversified manufacturing base that we have, we are able to manage the situation quite well. So our China plant are able to take some load from our Malaysian plant. And for equipment, we also have the luxury of outsourcing more during this period to make up for the lost capacity in Malaysia. So I think on the SEMI side, we should be able to manage the capacity effect pretty all right for this particular quarter.

Now of course, when it comes to leadframe materials, a slightly different story because for materials, we can't really outsource. So the impact on material will be relatively a little bit more impactful compared to the SEMI side. As you're aware, Malaysia is still in lockdown. So we only -- at this moment, probably close to 50% of our workforce are able to work in a plant. So our Materials Segment, in terms of the attached leadframe, will be slightly impacted because of this lockdown in Malaysia.

Now the third question is on SMT, the GM down. Now, you're absolutely right. We see consumer market, automotive market, and based on those independent research house as well, the smartphone demand for this year will also come down. So that will impact the SMT. However, we see 5G infrastructure demand, as I mentioned earlier, it is still very strong. And we also see customers also requiring very Advanced Packaging tools from SMT in terms of SiP packages. So that's the situation in SMT.

[Operator]

Our next question from Angus Lin from HSBC.

[S. H. Lin, analyst]

This is Angus Lin from HSBC. I have a couple of technology questions. The first one is you have a very good Q1 and you're getting Q2 to trend up in revenue as well, but you also mentioned that you're going to see some like shipment delivery pushed out maybe later in 3Q. So does that mean that your Q3 is going to head up pretty well as well, with the possible with it in maybe end of this year? Or do you see any difference compared to my comments here?

And the second question is regarding your OpEx. So you have your OpEx pretty well in control in Q1. And I'm wondering if, going into Q2 or further into the year, do you see your OpEx to spike up further or to stay at a relatively stable level as we start to see in Q1? And yes, these are the 2 questions I have right now.

[Cher Ng, executive]

Okay. Let me answer your first question first in terms of Q3 kind of outlook. Now, to be sure, to be very clear, when we talk about push out from Q2 to Q3, we are not talking about a significant number at this point in time. Of course, relatively speaking, compared to Q1, we see more customers pushing out because they are getting a little bit more cautious.

Now, Q3 performance in terms of billing will very much also depend on Q2 booking. So if you have been following us closely, we have been always saying, typically we will fulfill our booking in one quarter typically, so very much dependent on how the booking will pan out in Q2 for Q3 performance. However, having said that, this year is really something exceptional. So it depends on how the COVID-19 outbreak pan out. So that is really an uncertain event that we also cannot control. So if that can be contained fairly quickly, as I've mentioned earlier, now then perhaps second half may not be too bad, but it all depends how this will pan out in the near future.

Now in terms of OpEx, you're right, I think we have controlled our OpEx pretty well. So on a year-on-year basis, we see, I think, OpEx kind of flat. So excluding some of the acquisitions, in fact, the organic -- or the original SEMI business, actually OpEx actually came down slightly, so well controlled in terms of OpEx. Did I answer all your questions?

[S. H. Lin, analyst]

Yes, yes. Thanks a lot.

[Operator]

Our next question comes from Sebastian Hou from CLSA Taiwan.

[Sebastian Hou, analyst]

Some of my questions have been answered by the previous -- by you. Just a few follow up. Where do you see the most interest and the highest momentum of the semiconductor segment in the second quarter? Because I remember you say that, relatively speaking, SEMI seems to be better than Material and SMT. And then particularly in terms of the -- I think you mentioned about Advanced Packaging. And can you elaborate more about in which application, in which region of the Advanced Packaging you've seen the most strength?

[Cher Ng, executive]

Okay. So I suppose you're referring to bookings. So Advanced Packaging, as I mentioned earlier, we see high-performance computing devices going into data center. I suppose this -- if you try to triangulate all this, I suppose it's relating to what is happening to the world right now as well, right? I may be telecommuting more. We are working from home more. School children are also having lessons from home. So all this will place a lot of demand in terms of all these devices. So we believe that probably it's part of the reason we see that sector still relatively resilient compared to the other sector.

Now in terms of Advanced Packaging tool, we actually provide a wide range of Advanced Packaging tools. First and foremost, I think our NEXX deposition tools are still very strong, still doing very well. So we have a good backlog in terms of the NEXX business. So this momentum will continue for a period of time. And then also, SiP packages. We talk a lot also this quarter about SiP packages. We see that also demand going to our SMT. So SiP packages, typically devices like RF MEMS, modules, going into smartphones, going into wearables, smart watches, AirPods. So we see the demand in the last few quarters for this are pretty strong. As a result, we see our SMT also shipping Advanced Packaging tools to customers related to those areas.

Now we also mentioned a little bit more color that in this quarter, we see AP and the Advanced Packaging and the CIS, too, making up close to 40% of our SEMI revenue -- 50% of our SEMI revenue. So -- and in this quarter, AP is actually stronger than CIS because CIS has actually declined on a year-on-year basis.

So what else is your -- did I answer all your questions already?

[Sebastian Hou, analyst]

Yes, yes, yes. That's very helpful, very helpful.

[Operator]

Our next question comes from [ Arthur Chao ] from Hong Kong.

[Unknown Analyst]

Regarding the relocation of the lead frame operations in Singapore and Malaysia you announced last quarter. Can you give me some detail on how these savings are to be achieved, the savings from head count, rent, et cetera? And also an update on how these plans have been affected, if at all, by the virus and the government's response, I guess, both in Malaysia and in Singapore.

[Cher Ng, executive]

Okay. So we mentioned in the last quarter that we have decided to shift our lead frame operation in Singapore to Malaysia after we have completed -- successfully completed the extension to our Malaysian plant. Now obviously, you can -- it's quite intuitive, right? I mean, if you look at the living standard of Singapore compared to Malaysia, obviously, the saving is really coming from the head count. So it's quite obvious. And also in terms of exchange rate, Singapore exchange rate is 1:3 in relation to the ringgit. So obviously, there's a great impetus for us to shift from Singapore to Malaysia. And hence, we expect this savings to kick in once this plan is fully operational.

Now, however, because of this outbreak, of course, as I said earlier, Malaysia went into a lockdown situation. So to a certain extent, that will push back our plan by a couple of months. So once the situation resumes, we will start to true up the Malaysia plant. And then the -- we have to target this by maybe third quarter of next year. The plant in Malaysia will be fully trued up and operational.

[Operator]

Our next question comes from [indiscernible] from China Merchant in U.S.

Okay. We move on to the next question? Our next question comes from Chris Yim from BOCOM.

[Seeching Yim, analyst]

My first question is on, again, the Malaysia/Singapore situation. How much -- is it just lead frame being impacted? Or are there other products being impacted? And how much did it contribute to your overall manufacturing capacity?

Number two is on your gross margin, second quarter gross margin. I see your revenue in the second quarter is expected to rise about maybe 25% to 30%, but your gross margin is only going up by about maybe 2 percentage points. I was wondering what is -- historically, your gross margin trends pretty well with your revenue. So I was wondering if there's any product mix impacted. Or are there any more COVID-19 expenses going to be booked in the second quarter? That's why you've been a little bit more conservative in your gross margin.

The third question is on Advanced Packaging. I was wondering if you can disclose how much ASM NEXX is accounting for your overall revenue. And how much exposure do you have in the data center space?

[Cher Ng, executive]

Let me answer your first question concerning the Malaysian situation, is it just impacting lead frame or the other segment? Now the Malaysian plant is, in fact, the manufacturing center for all 3 segments. So we have the Materials segment there, we have the SEMI as well as the SMT. So all 3 segments are impacted by the lockdown. But however, as I mentioned earlier, for the equipment side, the SEMI and the SMT, we have pretty much a diversified manufacturing base. So I think that helps. So we could -- for example, China could take some load off Malaysia as well as Munich and Weymouth. For the SMT, they can also take some load off the Malaysian plant during this period. So we are managing quite well. So on the equipment side, also we can outsource. So it is a safe avenue to outsource some of this constrained capacity that we are facing in Malaysia to external manufacturing. So equipment side, I think we are able to contain the situation really well.

The only impact we see is lead frame because lead frame is something that we -- or material is something that we cannot easily outsource. And that's why I mentioned earlier that lead frame may see some impact in terms of delivery performance this year. But we still expect the lead frame billing to be better than Q1 because the Q1 situation was a complete lockdown in China for 3 weeks. So that is back to normal already. So China, in terms of lead frame, are contributing more to the top line compared to the Malaysian site.

Now in terms of Q2 GM improvement, given revenue increase in Q2, yes, typically, when volume increase, we typically see an increase in gross margin. That's why we are guiding 1% to 3% better than Q1 2020 as a blended margin. Now -- which I think of all the 3 segments, we foresee -- we still see there's a little bit of weakness in the SMT margin going to Q2. As we mentioned before, we like the fact that we have been doing very well in China, penetrating into China smartphone areas. But however, the trade-off is always on the margin side. So that's probably the reason why we are guiding that kind of margin performance in Q2.

Now in terms of AP, how much NEXX is contributing to the overall revenue? Now I'm sorry, we have not been so granular in this particular area. But let's put it that way. It is -- this is meaningful. If not, we will not go on mentioning that NEXX is playing a part in terms of contributing to our AP revenue.

[Operator]

Our next question comes from Simon from Bank of America Merrill Lynch.

[Simon Woo, analyst]

Congratulations on these great Q1 measures. I have 2 things, very quick check, please. Number one, the Q1 bookings are showing 50% quarter-on-quarter increase for the group. Could you recap the Q1 utilization ratio? And then the -- whether your other second quarter production will be good enough to meet the 50% in potential revenue increase? So in other words, the Q1 bookings means almost second quarter sales this time? And then the -- I have a follow-up question. Yes.

[Cher Ng, executive]

Okay. You're right, Q1 booking was very high. But the booking and the utilization ratio actually are not that correlated. The billing and the utilization ratio is actually more correlated. Now utilization ratio in Q1, as you could expect, February was low because of the shutdown. But as I mentioned earlier, we recovered fairly quickly in March. In fact, March was a very good quarter for us. Looking at the continued strength in terms of booking, we -- our factory were really at full speed in terms of turning up deliveries to meet the demand from our customer. So overall, I think in Q1, the utilization rate for our factory are pretty healthy, maybe in the 80% to 85% range, that kind of range we're talking about in Q1. Now whether Q2 will be -- production will be -- I suppose the question is sufficient to meet the Q1 strong booking. Yes, that's why we are guiding the kind of range $500 million to $580 million, which is still an increase in terms of billing compared to Q1, increase compared to...

[Simon Woo, analyst]

Yes. It's very clear. Yes. Very clear, sir. And then a little bit details regarding the traditional die/wire bonders. Increasingly, what kind of the semiconductor chips are for the die and wire bonders? Because it seems some from very traditional older semiconductor chips. And so why this area, the demand is growing? Because the new chip -- the demand is more and more augmented packaging-related, so whether this kind of trend is sustainable or not? And then the -- also regarding the SMT, what do you mean the 5G infrastructure and the SiP? It sounds that these are some base station-related because the older smartphone demand is quite weak. So could you provide of its details, what kind of the chip components based on your traditional die/wire bonding and the 5G infrastructure and SiP?

[Cher Ng, executive]

No, traditional die and wire bonding are still very cost-effective tools. So typically, a lot of our revenue is still coming from the traditional tools because they're very cost-effective compared to advanced packaging. So if the requirement in terms of precision, in terms of performance of the device is not very high, customers still prefer to employ and use traditional tools because they are, as I say, very cost-effective compared to advanced packaging tools. Advanced packaging tools are only used for very high-end packages. I can give you an example, for example, going into high-performance computing. So that kind of requirement, then customers will be looking at using advanced packaging tools for the packaging process.

Now is this trend sustainable? Now typically, for traditional tools, we'd like to view it this way. They are more for what we call capacity buy. Whereas for advanced packaging, we are viewed really as more of a technology buy. So we're trying to differentiate these 2. So looking -- I mean, it all depends. For capacity buy, it all depends on how the loading of customers. So if their loading reach a certain high level, typically, they will start to buy new tools to meet their increased capacity needs. While -- however, as I say, in light of this current situation, we can't really see beyond Q2 at this point in time. So I can't really answer you whether is this trend sustainable going into Q3 and in Q4.

Now 5G infrastructure, you're asking what kind of -- exactly what kind of end devices are we packaging. So I can give you some idea. So these are typically more high-end chips and more deals that require more precise tools, more advanced tools. So this tool can be supplied both from our SMT as well as from our SEMI side. And we believe for -- when we talk about 5G infrastructure, so these devices actually go into those base stations. So you're probably aware that for 5G compared to 4G, we need much more base station. So that's why the demand for more chips, more modules, more components, semiconductor components are there when it comes to 5G infrastructure.

Now SiP, I think you also talked about SiP. So system-in-package are basically devices whereby customers pack a lot of components into a small package that go ultimately into your AirPods, into your smartphones, into mobile devices like watches. So because of the -- I suppose because of the small real estate, they need a pretty precise tools in order to package those small components into a small estate, a platform. That's why SiP require more advanced packaging tools.

[Operator]

[ Xing Fu ] from Hong Kong.

[Unknown Analyst]

Just a quick question. Can you give us some guidance about tax?

[Cher Ng, executive]

Sure. Now if you've been following us closely, our tax or ETR, we call it estimated tax rate, thereby we just simply take the tax expense over the PBT, typically tend to trend higher on a few factors. One is the business segment mix. When we have higher SMT mix compared to, say, the SEMI mix and the material mix, we tend to have a higher ETR. And that's because our base for SMT is in a high tax jurisdiction area in Germany, in U.K. So as a result, when they contribute more to the top line and the bottom line, we tend to see our ETR tend to trend higher compared to normal quarter.

Now the other factor that we have taken into consideration is, the tax is a very complicated subject. So we -- typically, on a quarter-on-quarter basis, when the profitability is low, the tax for the group tends to be higher because in certain jurisdiction, we have -- we still have to pay tax. [ It's often ] when we make money. And if those jurisdictions happen to be a high-tax area, we still have to account for the tax.

Now if you look at last year, 2019, the first 3 quarters tax rate was also on the high side. However, towards the end of quarter 4, we tend to true up OpEx. And then overall, our ETR on a normalized basis for 2019, if I recall correctly, should be at around 28%, 29%. So I think in terms of how you guys plan for tax, as I always mention, don't plan tax on a quarter-to-quarter basis. Look at tax on more annual basis. So if we happen -- I mean, if our top line -- if you look at last year's top line, around to be -- so our tax is around 28%. That's the tax that you guys should be taking as a guidance.

[Operator]

Our next question comes from Kyna Wong from Crédit Suisse.

[Kyna Wong, analyst]

Robin, just have follow-up questions on -- still about 2 things. One is about the gross margin in second quarter because actually, you reclassified some of the COVID-19 expenses. Does it include extra labor hiring or something? What else -- if like we go back to the normal standard like in COGS or in OpEx, then how much gross margin will be -- really impact that in the first quarter?

And then the second is about -- there's the other income, which is like much higher than historical in the first quarter. So where does it come from? I mean, is this like interest income or something?

The third small question is -- the third question is about the CIS. Because we see the first quarter, it's actually come down a bit in terms of booking. And what kind of expectation you will have this year? Because CIS is actually a multiyear driver for ASM Pacific. Would you see this trend impact this year?

[Cher Ng, executive]

Okay. Let me answer your first question first. Maybe I can give you a little bit of color on how we classify the COVID-19 expenses. Now if you look at, say, in February, so there was a government-mandated shutdown in China for 3 weeks. So we take -- because you see, we have to incur -- we still have to incur the staff salary, when they cannot come back to work during the prolonged downturn. So we thought that maybe to give the investors and shareholders a more accurate view of the finances, we should classify these costs this -- I would say these are all staff costs. Whether they come to work or not, we still have to pay the salary. And because they cannot come to work due to government shutdown, we classify this as COVID-19 expenses under the other expense line. So typically, I mean, if you see in our announcement, we only classified a few key components, staff salary, some associated depreciation of the tools, the equipment in the factory, some space costs. So the -- only these 3 components were actually reclassified up from the cost of sales aligned to the COVID-19 line. And the amount we classified out is not that material. It's only about HKD 47 million. For these expenses in Q1, majority are related or were related to China because China was affected mostly in Q1, a little bit, a smaller proportion coming from Malaysia because Malaysia lockdown started in the second half of March. So we also had to classify on a like-to-like basis somewhat in Malaysia similar some cost into the other expenses, but much smaller compared to China because the base in Malaysia is also much smaller than China.

Now your question is will they ever continue? Yes, for Malaysia, it will continue because Malaysia is still in a lockdown mode. So as far as there's a lockdown, expecting our plan, we will try to reclassify these expenses as accurate as possible so as to give -- to facilitate a more like-to-like comparison with the prior quarters.

Now we also incurred -- in terms of COVID-19 expenses, these are not some costs. A smaller proportion are additional costs or incremental costs that we have to incur to protect the well-being of our employees. So we had to, for example, buy more masks and sanitizers. So we had incurred more expenses cleaning our facility. We also had to arrange additional transportation for our workers in China so that they don't take public transport and get themselves exposed. So all these costs, incremental costs, we also classified as COVID-19 expenses, but this is a smaller portion compared to the earlier ones I mentioned above.

Now as to your second point, other income, basically, other income comes from a government grant. So you probably are aware that because of the COVID-19 situation, governments in China, typically mostly in China are helping businesses like us to defray some of these fixed costs. So they are granting us some savings in terms of, for example, insurance, retirement funds. So all these are classified as other income mainly in the financial statement. So when you see other income, they are mainly coming from government grants.

Now the third question is CIS demand in bookings and expectation this year. Well, we started on a low base for CIS. CIS is a business segment that declined year-on-year. So it depends on how things pan out in quarter 3 and going forward. For sure, CIS, to answer your question, is really a multiyear driver. We see that intact, the trend, the multiyear trend, intact. So could be tempered by this outbreak situation only.

[Operator]

And the following question comes from Arthur Lai.

[Arthur Lai, analyst]

I have a quick question. So I want to confirm one thing. It's that today, we mentioned a lot of new growth drivers from the technology side. Does it imply we can have a better gross margin and pricing? As I understand in the technology migration, actually, we have less and less competitor because most of the development is usually the single-source and co-developed with our key clients. My understanding is right?

[Cher Ng, executive]

Arthur, I can only catch the first part of the question. But let me answer the first part, then you can repeat the second part. So in terms of margin, as we have been saying, generally speaking, we can't be too granular. Generally speaking, advanced packaging tool by nature of the complexity, so they tend to command a better margin compared to traditional tools. So that will help in terms of our gross margin.

Now Arthur, can you repeat your second question because you were kind of muffled, second part?

[Arthur Lai, analyst]

Yes. In this advanced packaging part of your revenue, are we like a sole-source or there are single vendor working with clients?

[Cher Ng, executive]

Typically, client also may not tell you, to be honest. But typically, client would like to also dual-source for advanced packaging tools. But for certain tools, whereby pretty new, so for a period of time, we can certainly be the sole source. So typically, that's the situation.

[Operator]

Another following question comes from Sebastian Hou from CLSA.

[Sebastian Hou, analyst]

Actually, I have 3 small follow-ons, if I may. The first one, I just want to clarify that you already mentioned about the second quarter booking may potentially be below 4Q '19 level. Is that right?

[Cher Ng, executive]

Sorry, Sebastian?

[Sebastian Hou, analyst]

Yes. Can you hear me?

[Cher Ng, executive]

Yes.

[Sebastian Hou, analyst]

So my question is on -- just to clarify whether by theory incorrectly or correctly, that the second quarter this year booking could potentially below 4Q '19 booking level.

[Cher Ng, executive]

No. We don't think -- so at this point in time, we don't think so at this point in time. Yes.

[Sebastian Hou, analyst]

Okay. So it's a double-digit decline but not seeing that going back to 4Q '19 level.

[Cher Ng, executive]

We hope so. We hope so. Yes. At this point in time, I don't suggest, yes.

[Sebastian Hou, analyst]

Okay. Got it. And my second question -- follow-up is that -- it's also a quick follow-up on the tax rate. So what you mentioned is that based on the similar revenue scale we see in 2019 and high 30% of the effective tax rate could be the reasonable assumption. Is that the right way to interpret?

[Cher Ng, executive]

Yes. It very much also depends on how the mix pan out at the end of the year. So I would say that if you base just on 2019 the account mix, the kind of revenue and PBT, that will be the kind of ETR we are looking at.

[Sebastian Hou, analyst]

Okay. Okay. Okay. So the last follow-up for me is the -- what's your experience in the past downturn when there is a significant economic crisis about customers' order behavior? And I wonder, usually, I think the company mentioned that you already see some -- noticed some customers push out from delivery from second to third quarter. And in your past experience, what's the possibility, what's the odds of this push-out turns into a cancellation? And what happened if that turns into a cancellation? Do you charge penalty from customers? Or do you write off those already prepared inventory?

[Cher Ng, executive]

Okay. WK, maybe you want to step in and maybe answer this question, okay, since he's talking about the past?

[Wai Kwong Lee, executive]

Well, I think it's difficult to generalize. Most of the case in the past, cancellations are not most serious. So most probably will vary for sometimes one quarter if the market situation, the economic situation really deteriorate. When they will pay will be more than one quarter. But finally, they will take delivery. So most of the cases are -- is like that. But however, as many people has warned that this time, the pandemic actually also potentially bring in a global recession that has this -- I mean, there's a -- in the past half a century. So how this economic situation will play out, we really don't know. However, as a planned forward path, we talk to customers, customers who are generally significant -- other industry sectors, probably semiconductor sector, and obviously kept in the industry, they offered the least impact, we're cautiously optimistic in the sense of the upturn or the recession in the short term may have some impact. But I think probably once the economy stabilize, once the COVID situation stabilize, probably semiconductor will be the first industry to rebound.

[Sebastian Hou, analyst]

Good. I understand -- I think the reason I'm asking is maybe there's still more of hypothetic questions. But I think the -- I think there's more of a textured instruments in the bellwether of the semiconductor industries with like 60, 70 years of experience, I think they are modeled -- we're using assumption that this downturn could be similar to a global financial crisis. I know a lot of the people are using that assumption as well. I'm just saying that if that were to be the case, if I look back on your revenue or performance back in 2008 and 2009, from 3Q 2008 to 4Q '08 and 1Q '09, the revenue basically declined significantly. I think that's also the case for all the industry, not just for ASM Pacific. So I'm just wondering if that were to be the case, maybe -- back then, can you remind us your experience that then the -- those pushout maybe initially, has it turned into cancellation?

[Wai Kwong Lee, executive]

Even back then, as we moved the orders, I know the customers typically took delivery. I think the actual cancellation, at that point in time, I mean ports already are still full. And we take -- some of them may take a few quarters for the customer to take delivery. But finally, most orders -- this now has taken delivery.

[Operator]

Your next question comes from [ Angus Lin ].

[Unknown Analyst]

So I have just 2. So I think the first one is on, your 5G is actually doing good for both SEMI and SMT. We know that. We all know that. And smartphone weakness is actually -- we have already seen it being happened for your CIS, especially CIS in your SEMI solution. I'm wondering if this smartphone weakness is going to impact your SMT segment as well. Do you see assemblers to slow down their SMT procurement or replacement cycle, especially given that those assemblers, they should be able to use SMT tools for 4G phones, for their 5G ones as well?

And the second one is, you mentioned a lot on China localization being one of the main drivers for you. Can you provide us with some color on maybe China OSAT CapEx trend this year? What does that mean for you guys?

[Cher Ng, executive]

On the -- I think your first question, on the smartphone weakness, whether that will impact SMT, it all depends on really this year, the end customers and customers' demand. I mean if you base on the research of those independent research, I think for smartphones, volumes will come down. And so that means that we -- I don't think we are also immune, okay? So of course, it all depends whether how fast the 5G smartphone will roll out because typically, 5G smartphones require higher end kind of components. So -- and our SMT tools are actually very well suited for that kind of devices. So it all depends really on the end customer, the ultimate customers' demand, their own business outlook. And that will impact the supply chain for the smartphone.

Now in terms of China localization, your question is for OSAT, right? You're talking about any -- yes, a follow on China projection for OSAT this year. Now we -- I think in Q4, the China OSAT was strong. Typically, if you step in -- if you take on the supplement, the China OSAT was -- the bigger boys in China were more -- they were placing more orders compared to the second-tier or the third-tier OSATs. However, we see the second-, third-tier OSATs become a little bit more active in Q1 2020 compared to Q4 last year.

[Operator]

Our next question come from Simon.

[Simon Woo, analyst]

Very quickly for the financial-related operations. So could you explain why your net -- I mean, the gross cash improved by $1 billion quarter-on-quarter even with the lower profit level? And then could you recap your CapEx and dividend target for 2020 versus -- could you recap the 2019 CapEx and dividend again to compare the year-on-year trend? By the way, when we look at our IR material, we cannot find any balance sheet items and the cash flow items. So maybe next time, it will be great if you can add some balance sheet and cash flow items, if you don't mind, because the cash, yes, you said $3 billion, but we don't know the amount of your total debt. So it will have me if you can recap the Q1 end total debt.

[Cher Ng, executive]

I think to answer your last question first, typically, Q1, Q3, we don't provide balance sheet details. Only the half year and the full year results, there we will provide the balance sheet details.

Now back to your question on cash, you're right. I think our cash has increased. I think one reason is -- 2 reasons, I would say: Despite the upward situation in Q1 2020, we see the collections from -- are still very healthy. So we are also -- we continue to be very aggressive in terms of collections from our customer. That's one. And secondly, looking at the situation, we want to be very prudent in the way we manage our cash. So what we did is that we actually drew down some bank facilities, if I recall correctly, to the tune of close to USD 70 million, USD 80 million, just to bolster our liquidity and prepare just in case. This is just in case, just-in-case scenario whereby a pandemic situation play out worse than we expected. At least, we want to be very sure that we have enough liquidity. So in fact, we will not touch those. We will open the site and just -- and open the site for contingency use. So correspondingly, you will see, when we will announce our half year results, you will see our bank loans also increase. Interest, for the matter, our interest expense will also show a slight increase because we have drawn down this loan.

Now dividend, we talk about dividend target for 2020. I think it's too early to really talk about dividend at this point in time. However, I can assure the shareholders and investors that we are still fully committed to meet our policy of a sustainable and gradually increasing policy.

Now in terms of CapEx, I think we should have one page in the investor slide on CapEx. So far, I think in view of the situation in Q1, our spend on CapEx is very, very low. So we are controlling our spend very tightly and very prudently in view of the situation, yes.

[Operator]

[Operator Instructions] Mr. Leonard Lee, there seems to be no further question at this point in time.

[Leonard Lee, executive]

Okay. Thank you. I think we've had a very good discussion this morning, many good questions and also covered a lot of ground. And I think at this point in time, we will conclude our conference call, and thank you again for joining us this time. And please stay safe and healthy in this COVID-19 environment. And we'll talk to you again next time. Thank you very much. Goodbye.

[Cher Ng, executive]

Goodbye.

[Operator]

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