ASM Pacific Technology Ltd

HKEX:522

Earnings Call Transcript 2021-Q3

[Unknown Executive]

Thank you. Good morning and good evening, ladies and gentlemen. My name is [ Rommel ]. I'm the IR consultant for the company, and I will be the moderator for today's call. On behalf of the management of ASM Pacific Technology, I would like to welcome all of you to the company's Third Quarter FY 2021 Investor Conference Call. We would like to thank you all for your interest and continued support in ASM Pacific Technology.

Before we begin with the presentation, let me highlight some housekeeping rules. [Operator Instructions] We will start the Q&A only after the management has gone through the entire presentation. We endeavor to answer all questions during the Q&A session. But due to time constraints, priority will be given to the covering analysts. In case we are unable to answer your question during the call, we will follow up with you through e-mails later. Or if you have more questions, then please feel free to e-mail us with your questions, and we will attend to those.

Please do note that during this conference call, there may be forward-looking statements with respect to ASM Pacific Technology's business and financial conditions. Such forward-looking statements could involve known and unknown uncertainties and risks that could cause actual results, performance and events to differ materially from those expressed or implied during this conference call. For your reference, the Investor Relations presentation related to our recent results can be downloaded from our website, www.asmpacific.com.

With us this morning are Mr. Robin Ng, the group Chief Executive Officer; and Ms. Patricia Chou, the group Chief Financial Officer. Robin will begin with a brief discussion and key highlights about our latest results with Patricia giving some color to the financial performance. This will be followed by an update from Robin on the prospects and outlook, and then we will open the floor for Q&A.

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

[Cher Ng, executive]

Thank you, [ Rommel ]. Good morning, everyone. First, let me wish you all health and safety as we continue to grapple with the effect of the COVID situation across the world.

On the whole, we had a very good third quarter with robust results for both the quarter and the 9-month period of 2021. We are executing well, and customers have continued to place their trust in our ability as the world's largest provider of innovative solutions for the manufacture of semiconductors and electronics. I'm especially encouraged by our strong group performance across the first 9 months of 2021, which place us in a good position for a very good full year performance and, more importantly, set the stage for a continued growth and innovation for years to come.

Let me now share some highlights from the third quarter. Firstly, we demonstrated excellent execution in the face of supply chain challenges. We continued to experience increased customer demand, led by the strategic needs to build more resilient supply chains or to become more self-sufficient. At the same time, the global environment of COVID-induced constraints, industry-wide semiconductor shortages and both supply chain and logistical bottlenecks make us focus on addressing these crucial challenges.

We calibrated our highly flexible global capacity allocation capabilities to tap a significantly higher proportion of external manufacturing capacity to support internal manufacturing. We also maintained strategic inventory levels for key components while making spot purchases for some critical ones. I must, at this juncture, acknowledge and thank the various ASMPT teams for the hard work, commitment and perseverance to enable us to continue executing well for our customers.

Next, our Advanced Packaging customer base is broadening. We have a comprehensive range of Advanced Packaging or AP solutions that support a whole range of customer needs. Over the first 9 months of this year, we witnessed a broad customer base making strong capital investment in our AP tools across both SEMI and SMT segments. These include Tier 1 high-density interconnect substrate manufacturers, advanced logic integrated device manufacturers, outsourced semiconductor assembly and test and fabless and foundry companies. Broadly, these customers seek to meet increasing demands for high-performance computing applications in our data-centric era. Bearing this in mind, we expect our addressable market for AP tools to expand from USD 1.6 billion in 2021 to USD 2.7 billion by 2026, which is a strong compounded annual growth rate of 11%.

Next, we are also experiencing strong demand from the automotive end market. Demand from automotive customers serving both conventional and electric vehicle markets drove significant year-on-year booking growth over the first 9 months of 2021. Buoyed by this industry shift, we estimate our addressable market in automotive to expand from USD 1.9 billion in 2021 to USD 2.9 billion in 2026, representing a healthy compounded annual growth rate of 9%.

Finally, our announcement of the strategic acquisition of AEi on 30th September 2021 represented an agreement between us and Mycronic Group signed to acquire a subsidiary of Automation and Engineering, Inc. or AEi. I will share more about this later.

Let me now pass the time to our group CFO, Patricia Chou, to run through the financials.

[Peifen Chou, executive]

Thank you, Robin. Good morning, everyone. Let me give some highlights of our financial performance.

Our 9-month 2021 financial results achieved a number of records: Record 9-month revenue performance of USD 2.03 billion, which is a robust year-on-year growth of 51.5%; record 9-month bookings of USD 2.69 billion, representing year-on-year growth of 80.3%. Net profits were driven by our overall strong gross margin performance of 40.3% to a record of HKD 2.6 billion, which represents a significant year-on-year improvement of 333.9%.

As I've mentioned, we had record bookings, revenue and net profit for our 9-month performance. Our bookings momentum also drove a substantial backlog of USD 1.41 billion with our book-to-bill ratio at 1.33. Overall, bookings remained elevated, and we enjoyed a sharp year-on-year gross margin improvement to 40.3%, which is an increase of 362 bps on the first 9 months of 2020.

Our strong revenue performance was due mainly to these factors. First, customers seeking self-sufficiency and supply chain resilience; second, long-term secular growth trend still driving a step-up demand for silicon; third, the global economic recovery driving broad-based end market demand growth; and last but not least, some underinvestment in semiconductor capital equipment in previous years. As mentioned, net profit was a record 334% increase year-on-year to HKD 2.26 billion. We also had a record 9-month EPS of HKD 5.49.

For the quarter, we also had record revenue that exceeded our guidance. Bookings were still elevated relative to historical Q3 performance, although moderated from Q2 with a very high base. Year-on-year, gross margins were greatly improved, representing an increase of 543 bps. This was largely due to volume effect, a relatively higher revenue contribution from our SEMI segment, stronger gross margins from the SMT segment and some positive margin accretive effects from our strategic initiatives. However, these positive margin developments were partially offset by a substantially higher product mix from our mainstream tools, a relatively higher proportion of external manufacturing deployed and costs related to strengthening semiconductor supply chain resilience. Net profit was a record, hitting slightly over HKD 1 billion and representing a huge 481% year-on-year increase.

Now let's look briefly at our segment performance for the quarter. The Semiconductor Solutions Segment achieved a strong revenue growth with a sharp year-on-year profit improvement to the tune of HKD 799 million, which is a significant 349% year-on-year increase. Bookings were still strong, although moderated off Q2 with a very high base. Revenue was driven by mainstream wire bonders and die bonders with the advanced placement flip-chip tools showing strong year-on-year growth. For the Opto BU, we also saw good growth year-on-year and Q-on-Q on whole with the improvement in contribution from the mini and micro LED business that covers advanced displays.

The CIS unit has also continued to see consecutive Q-on-Q growth due to our broad customer base that includes leading Tier 1 customers. This has been achieved despite the global semiconductor supply constraints and COVID-related restrictions that have continued to broadly impact the smartphone manufacturing value chain.

Year-on-year gross margin improvement of 359 bps was due to factors such as greater operating leverage based on higher volumes in 2021 and effects from our ongoing strategic initiatives. However, these positive effects were partially offset by product mix effects and costs from using more external manufacturing and other measures to make our supply chain resilient.

The SMT segment reported a strong revenue performance with a sharp gross margin improvement with a segment profit of HKD 572 million, representing a strong 233% year-on-year increase. Bookings momentum came from automotive and industrial applications, in particular, which continued to register strong momentum. Notably, computing applications also registered strong Q-on-Q growth. Segment revenue performance was driven by strong Q-on-Q growth from its mainstream high-end placement tools, and its advanced packaging tools for SIP experienced a strong year-on-year growth, driven by wearables and connectivity devices. The segment's mainstream printing tools also achieved a strong year-on-year growth.

The segment's sharp 675 bps year-on-year gross margin improvement was due to a combination of greater operating leverage arising from increased volume and manufacturing utilization, favorable product mix in automotive and industrial end applications and effects from our ongoing strategic initiatives. However, these positive effects were partially offset by higher costs associated with keeping our supply chain resilient.

With that, let me hand the time back to Robin. Thank you.

[Cher Ng, executive]

Thank you, Patricia. We are a key partner to industry-leading customers who are the semiconductor and electronics manufacturers across the world. Our 9-month revenue breakdown shows that the top 5 markets that contributed to our revenue were China, which includes Hong Kong; Europe; the Americas; Taiwan; and Korea. Our customers span the breadth of the semiconductor and electronics manufacturing ecosystem, and you can see the various customer groups here. In fact, a majority of the top semiconductor companies in the world by revenue are our customers. Our customers include key customers from OEM, fabless and foundry companies, OSATs, EMS, IDM, LED manufacturers, CIS camera module manufacturers and high-density substrate manufacturers as well.

Let me share a quick summary of our notable awards thus far in 2021. Earlier this year, we achieved an Intel Supplier Achievement Award for 2020, 1 of only 36 in the global Intel supply chain to receive an award that year. This was an acknowledgment of our COVID-19 response as an Intel supplier supporting their needs during the extended pandemic season in 2020.

We also achieved our fifth triple crown in the VLSIresearch Customer Satisfaction Survey for 2021. This prestigious and comprehensive industry survey saw us being nominated by a diverse global customer interview base as among the 10 best large semiconductor equipment suppliers for 2020, the top assembly equipment manufacturer for the fifth year running and among the base suppliers in the world. This is truly a significant honor for us.

And last but not least, we were a winner in Clarivate South and Southeast Asia Innovation Award 2021. The awards recognize the most influential innovators in South and Southeast Asia. ASMPT was 1 of the 27 organizations out of the 276 receiving an award, placing us among the top innovators in Singapore for the corporations category.

Now let me present the outlook for our business. We believe that we are well positioned to benefit from the structural shift in the macroeconomic and industry environment that will drive our growth over time. We see excellent opportunities for us to strengthen our focus on delivering consistent and sustainable long-term profitability to our stakeholders. We continue to invest consistently in technology and innovation, and we are encouraged by some of the awards and recognition which we have received, which I have shared earlier, that bears testimony to these efforts.

Bearing all this in mind and given the strong state of our quarterly and 9-month performance and supported by a strong backlog, we expect Q4 revenue to range from USD 720 million to USD 770 million. For our full year revenue outlook, we estimate this in the region of USD 2.8 billion, taking the midpoint Q4 guidance. This will be a record revenue achievement for us, representing a year-on-year growth of 46% for fiscal year 2021.

We believe we have a strong competitive advantage with our unique, broad-based product portfolio. The evidence can be seen here in terms of a through-cycle revenue growth performance. Basically, our 3-year average revenue levels have consistently been increasing, demonstrating this point clearly. With the various initiatives we have begun putting in place, we are well positioned for sustainable, long-term structural growth.

We believe our unique and broad portfolio put us in a good state to achieve this long-term structural growth. First, there are strong industrial tailwinds coming from key elements such as global digital transformation sweeping across entire economies. Together with long-term secular trends such as 5G, automotive electrification, autonomous driving, AI and advanced display, this will collectively drive significantly higher nondiscretionary silicon consumption across the world. We expect our customers to undertake new rounds of capacity and capability investments in semiconductor capital equipment in order to meet these new but sustained waves of nondiscretionary silicon consumption. This growth is in tandem with what we see as an increase in the total number of semiconductor devices to 1.4 trillion units by 2025, a compounded annual growth rate of around 7.2%.

I've mentioned our unique, broad-based portfolio earlier. We believe this is our strong competitive advantage. Within this portfolio, our mainstream tools and applicative packaging tools deliver volume leverage to our financial performance, while our comprehensive range of advanced packaging tools deliver high growth. We are devoting resources into key high-growth areas such as advanced packaging and automotive in order to outpace the growth of the overall semiconductor assembly market. In addition, our AIoT solutions for smart manufacturing are at a nascent stage of development and are expected to augment our longer-term growth story.

Some key elements not in this slide are worth mentioning. First, in terms of R&D, we've continued to sustain our commitment of about 10% of equipment revenue in order to continue deepening our R&D talent pool and fostering innovation. Second, our approach to inorganic growth, both acquisitions and partnership, distinctively complements our strong in-house capabilities. We always seek to invest ahead of curve in order to capture opportunities in growth area, and we have a strong record of successful integration. Third, our implementation of key strategic initiative continues to gather pace. We have alluded to this at various points in this presentation, and we see margin accretive effects continue to filter in into our performance as we leverage and deepen our strong organizational foundations to create even more significant value for our stakeholders.

Taken as a whole, the confluence of a favorable macro economy with strong industrial tier wins is coming together with our unique, broad-based product portfolio, R&D commitment, inorganic growth approach and strategic initiatives. These make us very confident on supporting consistent and sustainable long-term performance to deliver structural growth and lower cyclicality in revenue and earnings over the longer term.

Let me now briefly highlight our latest inorganic growth activity. On 30th September 2021, we signed an agreement with Mycronic Group to acquire their subsidiary Automation Engineering, Inc. in an all-cash transaction. AEi is recognized as the de facto leader in the automotive camera active alignment market. This acquisition is consistent with our strategy of pursuing sustained, profitable growth with expansion plans in the existing and new adjacent market. The closing of this transaction is subject to customary closing conditions and regulatory approvals.

Just to give you some perspective here. The addressable market is presently at USD 60 million just for the automotive camera active alignment alone. This will expand to USD 460 million in a few years' time as the acquisition will enable the pursuit of new adjacent market opportunities in security surveillance, drones and LIDAR.

In conclusion, we will continue to deepen and expand our overall solutions, leadership across mainstream, advanced packaging and Industry 4.0 domains. Moving forward, we see the combination of a positive longer-term outlook, revenue growth strategies and strategic initiatives solidifying our business fundamentals. Coupled with our unique and broad-based portfolio and customer base, which differentiate us quite distinctly from our competition, our competitors, we will continue to grow larger, more efficient, more innovative and even more competitive.

Let me now pass the time back to the moderator for Q&A. Thank you.

[Operator]

[Operator Instructions] To start the Q&A session, can I request Donnie from Nomura to unmute yourself and ask your question?

[Donnie Teng, analyst]

My first question is regarding to the booking outlook. So wondering if you could give us some colors on your booking outlook maybe in the next 1 to 2 quarters in terms of different product lines. And also, some colors on your equipment delivery lead time as well as whether customers have intention to push out some of the equipment procurement in the next 1 to 2 quarters. So this is the first question.

And second question is regarding to an update, wondering that -- if the management team could give us an idea what kind of CapEx preference that your customers would like to spend into 2022, as we heard some of the OSAT companies mentioned about that next year, they will focus more on maybe flip chip or advanced packaging rather than conventional packaging. So could be a little bit different in terms of the CapEx mix. So wondering if you could kindly give us some color on customers' CapEx or industry trend to 2022 after a very strong 2021 booking?

[Unknown Executive]

Thank you, Donnie. Your first question is more in terms of giving color on our booking outlook for the next 1 or 2 quarters?

[Donnie Teng, analyst]

Yes. And the equipment delivery lead time as well as customers' procurement behavior.

[Unknown Executive]

Noted. We will answer your first sort of 2 questions initially.

[Cher Ng, executive]

Thank you, [ Rommel ]. Now as a holding statement, we -- as you know, we don't give Q4 booking guidance. We only give revenue guidance. But of course, we can try to give you some color, right? Now we believe Q4 bookings will also continue to moderate from Q3. As you guys know, we have been booking very high -- we have very high booking orders for the first 9 months of this year, starting from Q1 record and then followed by Q2, moderated but still a very high number. And even in Q3, we booked also a very high number compared to prior years. So I think being an equipment supplier, our customers also -- at their end, they need time also to digest some of these bookings. So it's very common. And also, we see Q4 typically is a seasonally low quarter for booking.

Now we believe this year is really an exceptional year for bookings. The -- first, we believe that the -- this year pattern is that most of the bookings are front-loaded. And -- but even though Q4 may come down from Q3, but we still believe that the Q4 bookings will still be kind of at a high level compared to prior years before 2021.

Now in terms of maybe a little bit more color, what kind of tools we are expecting in Q4, basically, I think demand coming from advanced packaging, especially the mid-end tools, deposition tools, automotive, industrial end market application, I think this momentum will also continue into Q4, the way we look at it. And we also see probably wire bond bookings will also continue to be a big part of the SEMI segment bookings. This is probably the color that we can give to you at this point of time.

[ Rommel ], what's the second question, the lead time?

[Unknown Executive]

Yes. So second question is basically on equipment delivery lead time. So can you provide some color on it and also some details on the procurement behavior?

[Cher Ng, executive]

Yes. I think with our high backlog, we closed September quarter with a USD 1.4 billion backlog. We believe that the -- we will probably take around -- certain tools will probably take around, say, 5 to 6 months. Those tools, they are still in high demand. And certain tools like, for example, SMT will probably take a little bit shorter. So on average, probably 4 to 5 months before we can clear most of the backlog.

[Unknown Executive]

Thank you, Robin. I think the second question is a bit on the CapEx side. Donnie asked on the CapEx, particularly from your customers, is there any CapEx preference? And what can you see for 2022 and onwards? And he specifically mentioned on the OSATs part that for the OSATs next year, CapEx is largely focusing on flip chips and advanced packaging. So can you provide your sense on the industry and what you get in terms of the feel from the customers?

[Cher Ng, executive]

Of course, I think that is a little bit too early at this point to really give a very insightful view of 2022 to come. But -- however, as I say, we certainly have -- we can provide some color for you guys. Now at a broader level, we also have to refer to independent research houses like VLSI, for example, to provide some kind of view for the 2022, the market outlook. Now VLSI so far came up and forecast that the packaging and the assembly equipment market will grow around 4.4% year-on-year for 2022 to around a market size of around USD 5.7 billion. Now take note, this is already on the back of a record year in 2021, which they have forecasted so far that for 2021, it will grow around 51% year-on-year.

Now we see -- as I've mentioned earlier in our opening remark, we see there are really some key macroeconomic tailwinds really supporting the entire industry. First, the long-term secular growth trend in 5G, AI, advanced display, automotive and IoT, they will continue to drive significantly higher silicon consumption. And for us, in particular, we have very deep and broad engagement in terms of AP and automotive market, which are expected to grow at a faster pace than the broader market. Third, I would say that the number of devices to be consumed by the world will continue to grow and then expect it to grow at a very healthy rate of around 7% from now to maybe 2025. So as you're aware, equipment suppliers like us, our business is really dependent on the number of chips that are produced and need to be packaged, in example.

So on the whole, we believe 2022 at this point in time and beyond, based on all these statistics provided by independent houses, still look healthy for the whole semiconductor industry. So I think really being the biggest player in the back end and also in the SMT side, we will definitely benefit from this trend.

Now as to your question, whether is it more of the mainstream tools and also whether it's AP, we continue to see AP gaining strength in the years to come, and that's why we are quite unique. We are participating in both the mainstream as well as the advanced packaging arena. So whichever are more dominant in any particular year, we will not lose out, and we will stand to benefit from the particular trend. Thank you.

[Unknown Executive]

Thank you, Robin. Next, can I request Gokul from JPMorgan to please unmute yourself and ask your questions?

[Gokul Hariharan, analyst]

My first question is on the mini LED tools within your Opto BU. Our current understanding is that one of ASMPT's competitor is the current market leader, but you are catching up. Could the management talk a little bit about the competitive position for ASM in the mini LED tools market and any time lines on where we expect to become the market leader? That is my first question.

Second question, congrats on this AEi, automotive AA tool acquisition. Could we talk a little bit more about how much market share they have in the market currently? And you characterized the AA market for automotive to grow quite nicely into 2025. Could you give us a little bit of comparison just to compare with the smartphone AA market, $460 million for automotive and adjacencies? How does it compare to the addressable market for smartphone AA?

[Unknown Executive]

Thank you. So your first question is more on the mini LED under our Opto business. And you would want to know that -- how is the competitive landscape and how are we sort of growing and catching up to the market leader in this segment and just a bit more color on the competitive landscape. I will request Robin to answer this.

[Cher Ng, executive]

Thank you, [ Rommel ]. Now for -- our strategy has always been serving a very broad-based customer in terms of the segment that we are targeting. So likewise, even for mini and micro LED, we believe we have a very broad-based customers. And we have mentioned before, actually in the mini and micro LED space, we have been engaging key customers across countries like China, Taiwan, Korea, Japan for a very long time. It's just that the market has not really taken off in a very big way yet, but we expect that to come very soon, in fact.

So for our mini/micro -- in fact, for more of the mini LED tool, we did see and receive very, very encouraging booking as well as billing trends compared to the prior year. And we are very optimistic that in time to come, this will be a meaningful contributor to the Optos BU, semiconductor segment. Because of our tools' performance, we believe we probably have one of the best-in-class tools to serve the mini and the micro LED market. So yes, I think this is an exciting market that we are participating and has already started to show very encouraging pickup in terms of demand, and the momentum will continue.

What's the second question, please?

[Unknown Executive]

Thanks, Robin. The second question is on the AEi acquisition. The question is more in terms of understanding how much is the market share and how is it growing. And also, the comparison of that with the smartphone AA market.

[Cher Ng, executive]

Now we are -- as I say, we are pleased to be able to sign up an agreement to acquire this technology and a market leader in terms of active -- automotive active alignment market player, AEi. They have been doing this for a long time, more than 10 years already. And they have clearly built up a very clear market leadership position, especially in the U.S. and the EU market segment. In fact, when people talk about active alignment tool for automotive, I think the first name they call up will be actually AEi. And for that reason, we pursued this particular acquisition.

Now in terms of market -- in terms of the competition, we believe they are clearly the leader out there. There are competitors coming from America and also -- maybe also from China at this point in time and also ourselves before we acquired them. So you also mentioned the addressable market. Let me just maybe do a slight correction. Now the -- when we talk about the expansion of the addressable market from $60 million to $460 million in 2025, the $460 million are not all automotive, okay? We are going to address -- besides the automotive market, we're also going to address the camera surveillance market, the drones and the LIDAR market. So don't have that misconception that it's strictly only for the automotive market. So for the automotive market, it would not be $460 million. It would be less than that.

[Unknown Executive]

Thank you, Robin. Next, can I request Kyna to unmute yourself and ask your questions?

[Kyna Wong, analyst]

Congratulation for the strong results. And I would like to ask about the long-term structural growth that Robin, you have highlight on Page 16 and 17. So because you have actually addressed the addressable market for [indiscernible]. And looking at the Page 16, we see that you have -- I mean, ASM Pacific has like gone through a sort of cycle. And what's your expectation for this cycle that we have already experienced in 2 years, I mean, including 2020 and 2021? And should we expect that should be -- stay high level or like should be like in the -- you still have another cycle coming after this one. I mean, I think 3 years, we shall expect some kind of like growth momentum driven by your addressable -- the highlighted addressable market, including mini LED as well. So this is the first question, wanted to get your insight for the positions of ASM Pacific in the cycle that -- on the -- your business.

And the second question is about the update on the hybrid bonder because we see that Besi also report the day before, and then we see that they're talking about the growth in the orders in the third quarter that is actually driven by increased booking for hybrid bonder -- bonding. So I just wanted to check if that is the same stuff and -- or what's the status that ASM Pacific is working on the hybrid bonders?

[Unknown Executive]

Thank you, Kyna. So your first question is more in terms of the long-term structural growth. You want to know a bit more color on the addressable market. And based on that, what is our expectation of the cycles in the coming years? And under that cycle, what is the expectation of the growth momentum and those details? Maybe I will request Robin to answer this.

[Cher Ng, executive]

Yes. Thanks, Kyna, for the question. Let me clear that we have given you some color as to how we see the 2 segments that we are deeply engaged in, AP and the automotive market. And of course, these are based on management estimate, how this addressable market will pan out in the next 4 to 5 years, right? So it's very exciting, indeed. So for AP, it's going to grow around 9%; for automotive, probably around 11% in the next 5 years. And they are sizable market size. So the way we look at it in the next longer term, 5 to 10 years, we also take reference from what the other semiconductor companies are doing. I think in the recent times, there have been a lot of news in the market that the front-end companies are really expanding their capacity. Now this is indeed a sign of faith and a sign of confidence in the semiconductor industry in the longer term.

Now this bodes well for our business also in the SEMI side as well on the SMT side because there's definitely some correlation between the front end, the back end and, of course, the SMT because ultimately, when more chips are produced in the world and more people that you and me want to consume more and more and more chips and semicon content, I think the back end and the SMT will also stand to benefit. So from that perspective, we are optimistic that in the next 5 to 10 years, if we execute our strategies well, we will also continue also to benefit from this separate trend that is providing a very strong tailwind to the whole industry.

Now we see advanced packaging will be a key area because as the front end continue to stream, the die size and go into more and more advanced nodes, it's inevitable that more and more devices or packages will need advanced packaging tool because the bonding piece will be very, very -- getting smaller and smaller. So the traditional mainstream tools will not be able to perform the function. But however, as we have said many times, the mainstreams tool will continue to have its play in the whole industry because simply looking at this year, just simply look at this year, because of this huge ramp, what is really driving the majority of the ramp this year as far as semiconductor is concerned is really the traditional tools, the traditional wire bond and die bond. So no matter what, as long as these current tools, the mainstream tools continue to be very cost effective in relation to advanced packaging tools, these tools will still have its place in the whole industry.

So we see as the industry continues to grow, I think both the mainstream and the advanced packaging will probably grow. But the AP side, the advanced packaging tool will probably grow at a higher rate, and that's precisely the reason why we are participating in both this market of mainstream and both the AP. And this really put us in a very unique position to benefit from this trend.

[Unknown Executive]

Thank you, Robin. The next question is more of an update on the hybrid bonding side. Kyna noted that Besi reported Q3 growth orders, which was primarily because of the hybrid bonding side. So she wants to know what is the status of our hybrid bonding solutions. I'll request Robin to answer.

[Cher Ng, executive]

Thank you, [ Rommel ]. I think progressing well. As I said, we believe we have found the right partner to go into the hybrid bonding space, which is EVG. So the partnership is doing well. We also have been progressing very well in terms of engaging key customers in this particular area. We're on track -- as I say, we're on track to deliver a tool. And also, we believe -- as we said before, we believe that for hybrid bonding, the high-volume manufacturing state will probably start around 2023 or even 2024.

So meanwhile, the way we see it is that TCB will still be a dominant tool before hybrid bonding actually takes off in a big way because the whole industry is always very cost conscious. So if TCB, which has been around, say, for the last 8 or 9 years, if the TCB tool can perform the job in terms of assembly, customers typically will pick a better cost performance tool than the expensive tool do the packaging or the assembly. So from that perspective, we've been a very strong in the TCB market. I think before hybrid bonding takes off in a big way, I think TCB will also continue to benefit from this trend.

[Unknown Executive]

Thank you, Robin. Next, can I request Arthur to unmute yourself and ask your questions?

[Arthur Lai, analyst]

Yes. Robin, Patricia, congrats on a strong result again. And also, I find your presentation is clean and informative. I have 2 question. Number one is on the SMT. Quarter 3 margin was 21% and up 6% Q-o-Q, rounding it. Given the weakening smartphone demand, can we assume this margin is sustainable?

[Unknown Executive]

Arthur, let me repeat the question, and then I will request Patricia to answer it. So Arthur wants to know more on the SMT's Q3 margin. And given that weakening smartphone demand, will this margin be sustainable? Maybe Patricia can give some more color on this.

[Peifen Chou, executive]

Sure. Arthur, thank you so much for the question. I believe you know the reasons why SMT's Q3 gross margin jumped up significantly very well. It's basically -- reflects the higher operating leverage with the revenue increase, the favorable product mix, particularly in automotive and the industrial end applications, and some margin accretive effect derived from the strategic initiatives. So in fact, the product mix in the SMT side played a big role in this gross margin. So in Q4 and later on, if we can continue getting a higher product mix in SMT side in the automotive and industrial end applications, which -- it will bring us a higher margin. And so I believe that can answer your question.

[Cher Ng, executive]

Maybe to -- maybe, Arthur, just to supplement a little bit. So for SMT, our customer base or end market application now is pretty wide. I mean, we -- there's not a sector that really dominate our SMT tools. So of course, we serve the smartphone, we serve the automotive, we serve the industrial. But what we see going forward at this point in time, at least because of the softer smartphone value chain at this point in time, we see the momentum for automotive and industrial are pretty strong. So I think that bodes well for our SMT business because as you guys are aware from following us for a long time, our SMT is very dominant in these 2 particular area, which is automotive and industrial.

[Arthur Lai, analyst]

Perfect. And second question is on the Page 16. So I think this is a very good slide. It looks like the 3 years cycle in the past, and then both the trough and peak are getting higher and higher. So if we think the $2.8 billion would be a new average plateau revenue, how do we -- how many years do you think you can reach that plateau revenue?

[Cher Ng, executive]

Wow, Arthur, you pose me a very difficult question. I hope I have the crystal ball in front of me. But I mean, what we can hope for, as I say, looking at the longer term, the supply of more wafers coming on stream, as I say, this will benefit not just the wafer side but also the back end and the SMT side. So of course, we -- as a company -- so providing equipment to the world in terms of the semiconductor space, we definitely hope that this 3-year cycle will continue to be uplifted as per the historical trend. But it's really hard to tell, of course, Arthur, you know this, although it will come up and down. But hopefully, on average, we will continue to grow in the years to come.

[Arthur Lai, analyst]

And lastly, to Patricia, we will miss you.

[Peifen Chou, executive]

Thank you, Arthur.

[Arthur Lai, analyst]

No more question.

[Cher Ng, executive]

Thank you, Arthur.

[Unknown Executive]

Thanks, Arthur. Can we now request Leping to unmute yourself and ask your questions?

[Leping Huang, analyst]

Okay. Can you hear me?

[Unknown Executive]

Yes.

[Cher Ng, executive]

Yes, we can.

[Leping Huang, analyst]

Yes. So I have 2 questions. So first, if you look your -- the customers' orders by regions, do you see any difference? So -- and I think you mentioned that the self-sufficiency and the supply chain resilience is one important driver for very strong result this year. So where is the development? How well is our customers to achieve this self-sufficiency? So this is the first question.

And the second question, I think very important for operations like when we enter in a down cycle of the business. So how you manage the risks, operational risk? I think -- I guess some customer will cancel the order or you may have some -- adjust inventory or component or capability. What's the action you have taken to prepare for this down cycle?

[Unknown Executive]

All right. Thank you. So let me highlight the first question. I think you want to know a bit more color on the customer orders by region and whether there's any difference and can we give more details? Also, highlight as an important driver, self-sufficiency, especially in these times and whether this is seen in terms of the different regions. So maybe let me request Robin to answer this question.

[Cher Ng, executive]

Thank you, [ Rommel ]. If you refer to this year, I would say this is a very high cycle. So in a very high cycle, we will see almost all regions will perform better than the year before. which is probably at a low cycle kind of period. Now China, of course, being the biggest market for us, we continue to see China very strong, not just for the traditional tools, I would say, because of our broad-based customers, as always, I've been always mentioning our broad-based portfolio, broad-based customers. I don't mean for really repeating all this all the time, but it's important probably to get this message across to the investment community. Precisely because we are so broad-based, we participate a lot in the various regions. Now for China, besides mainstream tool, we're beginning to see China is a major region for us also for advanced packaging tools as well as automotive tools. So very interesting. China is very strong in both the mainstream as well as the advanced packaging side.

Now in terms of other region, if you look at our top 5, we have China. We have Europe. We have Taiwan, Korea and America. Now China, of course, will form the bulk of the semi tools. For America, Europe, typically, these are contributed by our SMT side because our SMT side -- for SMT, typically, a substantial portion of the manufacturing are still done outside China, in areas like Europe and America. And that's where our strength is also in those regions. So you see those contribution in those 2 regions are coming from our SMT side. For Korea and Taiwan this year, mainly because -- also because advanced packaging, I would say, so very strong region for advanced packaging tools.

Now in terms of self-sufficiency, we don't see -- we can't really tell because customers don't really tell us very much in what they're doing. But we can only observe that areas outside China are becoming more active. So that's one observation we can share.

[Unknown Executive]

Thank you, Robin. Let me highlight the second question. For the second question, you would want to know on how do we handle and prepare for the down cycle, especially in terms of how the down cycle is managed in terms of reducing operational risk and how do we go around it.

[Cher Ng, executive]

Yes. Let me try to answer you from this angle to see whether it serves our purpose. Now the -- if you look at our manufacturing area, we are big in China. We have also quite a substantial operation in Malaysia. Other than that, we have basically assembly centers in Singapore, in Munich and in Weymouth in the U.K. Now we have been controlling our costs, manufacturing costs, fixed costs extremely well over the last, say, 3 to 4 years or 4 to 5 years.

When you look at output that we delivered this year, it's a record high for the SEMI side. We managed to use the same -- almost the same -- in fact, for fixed costs -- in fact, our fixed costs have actually been kind of very stable or even come down a little bit compared to 2017 and '18 as far as manufacturing is concerned. But of course, we have to supplement this with outsourced workers as well as external manufacturing. So our model has been very clear for some years now. We will continue to supplement our internal manufacturing with external manufacturing so as to maintain a stable kind of fixed cost, manufacturing fixed costs going forward. I think this will help us to manage the volatility in terms of our gross margin going forward.

So because the more outsource we use, we are a little bit more flexible in terms of how we want to deploy them in a low cycle, in a high cycle. So in a low cycle, we can scale down our outsourced worker as well external manufacturing while keeping the internal. So -- and then when we hit a high cycle, we can boost that up. So we are a little bit -- we are much more flexible from that perspective, having both internal manufacturing and external manufacturing operating together and efficiently.

Now I think your question is also how do we manage a downturn if it were to come. We've already been managing it very carefully even during the up cycle. As you probably recall, as far as orders are concerned from customers, we will try to get help from customers to place more deposits during this up cycle. So deposits will certainly help us not only from the working capital angle, but it's also a sign of commitment that the customers are committed to that degree when the time comes. So we have always been managing this already. So we don't wait for a down cycle to happen before we start to manage the risks from all this. Thank you.

[Unknown Executive]

Thank you, Robin. Thanks, Leping. Next, can I request Nicolas from UBS to unmute yourself and ask your questions?

[Nicolas Gaudois, analyst]

Yes. First question is regarding the situation for IC supply constraints. Last week, we have comments from your peers in front-end manufacturing, ASML and Lam Research. But actually, they have been impacted in their ability to assemble tools by IC shortages. And that's the first time both of them have actually mentioned about it. Is that something you're actually facing as well? And if so, how are you managing this? And then I have a follow-up.

[Unknown Executive]

Let me repeat that question. So your question is, you would want more details and color from us on the situation of the IC supply constraints, noting that how is the ability to assemble tools and more details around that. Let me request Robin to answer that.

[Cher Ng, executive]

Thanks, [ Rommel ]. Indeed, as I say, one of the highlights in our opening remark and also our announcement is that we are still facing very challenging supply chain condition, which will -- which has impacted somewhat and also will continue to impact our manufacturing going forward. Now basically, electronic components with certain chips in there, with certain kind of chips in there are still facing very, very tight supply chain condition. So thankfully, we have a very able procurement team who work tirelessly day and night, 24/7, to help us secure these crucial components. Without their effort, we will not be able to deliver such a good performance despite the supply chain constraint.

So we have various ways to handle it. So for example, good relationship with suppliers. Some of these suppliers are, in fact, our customers. So sometimes we have to seek help from our customers to deliver chips to us in order for us to make the equipment and deliver it back to them. So it's a kind of circular kind of relationship. So they help us, we help them. So because of this good relationship, we are able to secure some very critical components. Of course, there are still some components that are really short, and there are a few ways we do it. So far, we have to go out to the market to buy from the spot market. And of course, that will mean that we have to pay much higher prices to secure those components.

And we also started to look into certain key components if we continue to face shortages like this. What can we do from an R&D standpoint? So we probably have to resort to redesigning some of our modules, for example, to use further more easily available components. So these challenges have been facing and confronting us for the last 9 months or so. So it is challenging. But I think at this point in time, we are hoping the best we could. So this -- we believe this situation will not subside anytime soon. It will probably continue into 2022.

[Nicolas Gaudois, analyst]

That's very useful. And a very quick follow-up. You -- when you talked about China now becoming important for advanced packaging for you as well, is that coming from the OSAT side or from the foundry side or both?

[Cher Ng, executive]

In general, I think we serve a broad base. So I would say a broad-based customer from the China side.

[Unknown Executive]

Thank you, Nicolas. Can I now request Laura to unmute yourself and ask your questions?

[Laura Chen, analyst]

Just a very quick one on advanced packaging. Can you share with us your current revenue contribution from advanced packaging? And what's the growth for this year or maybe next year? And also, I'm wondering that among various customer, our current advanced packaging is more from the IDM foundry or the OSAT.

[Unknown Executive]

Thank you, Laura. Let me repeat the question. You would want to know more on the Advanced Packaging side and what is the current revenue contribution. Then you would also want to know a bit on the growth about this year and next year on the AP side. And where is the demand and growth coming from? Is it more from the IDM foundry or OSAT?

[Cher Ng, executive]

Thanks, [ Rommel ]. Let me put it that way. For advanced packaging, we have given you some indication in our first half conference call that we had delivered USD 1 billion for over a 36-month period. So this is not a small number. And we believe, because of those reasons cited earlier by me and the various Q&A juncture, we believe that the -- this space will continue to grow. And we've been -- we probably have the most comprehensive, I would say, product portfolio coming from the mid-end tools to the SEMI tools and to the SMT tools. Both -- all these are contributing to advanced packaging space. I think we are in a good position to enjoy this uptrend in many years to come.

Now as I mentioned before, we would not like to give to -- information on a quarterly basis because such information are not very meaningful from our point of view. Because Advanced Packaging is still a -- although it's growing, but it's still quite a niche market. The players at this point in time are still relatively small compared to the midstream side. So the business is a little bit more volatile compared to the mainstream side. So we prefer to give Advanced Packaging color on a longer-term basis.

So on this note, we certainly can give you a little bit more by the time we get it together for our Q4 reporting sometime in February next year. But however, I can certainly give you some color on how we are performing. So over a 9-month basis, without any numbers, of course, we see very encouraging trend for AP tools, both on the booking side as well as on the billing side. I would say double digit of growth pattern we see on the advanced packaging side. Now where are they coming from, OSAT, IDM and foundry? I would say all of this, all of this. We are serving a broad spectrum of advanced packaging customers as well in terms of customer base.

[Unknown Executive]

Thanks, Robin. Laura, do you have another question?

[Laura Chen, analyst]

Yes. Can I assume that we now have more shipment or more progress on TCB since we already -- the early movement of players in this space and we are seeing that hybrid bonding to come later?

[Cher Ng, executive]

Yes. I think the short answer to you is yes. As I said earlier, we are a very dominant player in the TCB space. We probably are one of the first mover, I would say, 8 -- 7, 8 years ago. So very dominant position, very anchored position in certain key customer base. We see TCB will be a tool used by some of these key customers for a long time to come. As I alluded earlier, you look at wire bond, wire bond has been existing for 60 years. But look at the growth in wire bond this year, when it's a high revenue year. Wire bond still plays a very dominant -- we still have a very dominant position in the assembly world.

So with the event of hybrid bonding, we are of the view that it will not, for sure, for sure, it will not eradicate the importance of TCB. In fact, TCB will exist very nicely with hybrid bonding in years to come. So from that perspective, we are playing in both areas. So we are really well positioned in a trend -- in such a trend in years to come.

[Unknown Executive]

Thank you, Laura. Next, can I request Frank to unmute yourself and ask your questions?

[Frank Lee, analyst]

Sure. Just wanted to ask -- sorry, can you guys hear me?

[Unknown Executive]

Yes.

[Frank Lee, analyst]

Okay. So just wanted to ask a bit about the booking trend. So I think if we see the SEMI booking ratio, it seems to have peaked in the first quarter. And it's been kind of declining ever since then. But we continue to see, I guess, the overall semi industry is tight and particularly the -- some of the mature foundry guys have started to renew their CapEx spend. So I'm just trying to understand, I guess, a bit in terms of why, I guess, there's been kind of a divergence in your trend as far as booking continues to trend lower while the overall CapEx for some of your -- on the foundry side has continued to rise. I just want to see if you guys have any particular thoughts you could share on there.

[Cher Ng, executive]

Sure, Frank. Thanks. I would say, just as I said before, because the first 9 months bookings are really strong, and to be honest, we don't expect customers to continue the kind of momentum because whatever capacity that they have seen factored in is an industry phenomenon that it would take time to digest those capacity. And typically, customers will not order new equipment, okay, if their utilizations are below, say, 80% or 85%. I mean, this is just a general guide.

So you can imagine with so much capacity already installed in the beginning of this year, customer need time to digest them. So it's, in fact, normal and healthy for this pattern. And -- but whatever it is, Frank, you look at the -- I mean, some kind of color that I have given you for Q4, the bookings, at this point in time, we don't see that really dropping off the cliff at this point in time. We still continue to see that bookings, although will come down for those reasons I mentioned earlier, but we still think -- of course, this is not guidance, as I always say. We don't give guidance for bookings. It's really difficult. But we still see that bookings in quarters to come, in the next few quarters will continue to be a reasonable level.

[Frank Lee, analyst]

Okay. And then I guess the second question I have is, we have seen, I think, some of the talks about the geopolitical issues and how there is subsidies being granted to foundry players or potentially foundry players in the U.S. or Europe. And I think even some of their mature foundry players such as GlobalFoundry have talked about expanding in the U.S. and potentially getting subsidies. How -- I'm just trying to understand like overall on the back-end side, is there any potential of getting some benefit from this as well as people look to expand in the overseas markets?

[Cher Ng, executive]

I don't have a lot of information to share with you on this. But certainly, we are aware that there are subsidies in the U.S. But however, at the end of the day, it's really whether doing manufacturing in those locations makes sense. It's not just subsidy alone. I think the overall business dynamics has to make sense. So subsidy is just one aspect of it, yes.

[Unknown Executive]

Thank you, Frank. [Operator Instructions] In the meantime, let me read one question from the chat. This question is from [ James ] from [ Overlook ]. "Utilization rate appears to be high. What capacity expansion plans do you have? And how will these impact operational leverage?"

[Cher Ng, executive]

Yes. Thank you for the question. Now as we have mentioned a few times since probably the beginning of this year, we look -- when we looked at the beginning of this year, when we looked at the signals, we started to increase some internal capacity in order to cope with the demand. But at this point, we would like more and more going forward to be supplemented with external manufacturing because it makes more sense to do that from a cost management perspective and also in terms of managing the cycle of the semiconductor industry.

So when we are -- when we do more outsourcing, we are definitely much more flexible in the way we manage our cost structure. So this is -- I think this is a model that we have practiced for some years really, and it has been proven to be a good model. So we will continue to employ this dual internal manufacturing model supplemented by external manufacturing resources. Thank you.

[Unknown Executive]

Thank you, Robin. Is there any more questions? We will wait another minute. [Operator Instructions] [ David ] from HSBC, can you please unmute yourself and ask your question?

[Unknown Analyst]

This is [ David ] from HSBC [indiscernible] Mutual Fund. And I'm wondering how you guys predict future operating margins CAGR, saying your CAGR of 9%? And could you please share a little bit?

[Unknown Executive]

[ David ], can you please repeat your question a bit slowly? Because the voice was not very clear.

[Unknown Analyst]

On. So you guys predict the total automotive addressable market in the next 5 years has a CAGR of 9%. And I'm wondering how you guys predict this number and could you please share a bit?

[Cher Ng, executive]

Sure. I must say, these are really internal estimates. We obviously have to triangulate many data points together because simply, there's no such data from independent house. So we -- I mean, we hope there is such independent data we can quote. But unfortunately, we don't find any of these data available in the market. So being a substantial player in the advanced packaging and also in the automotive market, it leaves us no choice but also to really make some internal estimates from a lot of data points that we have. We have been in this market for quite some time. So one of the tools that we look at is, of course, making reference also to the overall end market, for example, how automotive will grow and how HPC and AI will grow. So based on this data point, we triangulate and come up with an addressable market that's purely based on internal management estimate.

[Unknown Executive]

David, do you have another question?

[Unknown Analyst]

No.

[Unknown Executive]

Thank you. Are there any more questions? [Operator Instructions]

If there are no more questions, then we would officially end this call. We would like to thank all of you for attending today's investor conference call, and we hope to see you during the next quarter's call. Take care and stay safe. Thank you, everyone.

[Cher Ng, executive]

Thank you.

[Peifen Chou, executive]

Thank you.