ASM Pacific Technology Ltd

HKEX:522

Earnings Call Transcript 2022-Q4

[Romil Singh, executive]

Good morning, and good evening, ladies and gentlemen. My name is Romil, the Group's Head of Investor Relations, and I will be the moderator for today's call. On behalf of ASMPT Limited, I would like to welcome all of you to the Group's Fourth Quarter and Full Year 2022 Investor Conference Call. And I would like to thank you for your interest and your continued support in the company.

Please note that all participants will be on listen-only mode when the management is presenting. 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 constraint, priority will be given to the covering analysts. I will highlight the instructions for asking questions just before the Q&A session.

Before we start, let me quickly go through the disclaimer. Please do note that during this conference call, there may be forward-looking statements with respect to the company'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.

For the call, we have our Group CEO, Robin; and our group CFO, Katie on this call. Robin will begin with a brief discussion and group key highlights, and then Katie will provide color on the financial performance. This will be followed by an update on the guidance and outlook, and then we will open the floor for Q&A.

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

[Cher Ng, executive]

Thank you, Rob. Good morning and good evening, everyone. Let me thank all of you for joining our earnings conference call for the fourth quarter and financial year of 2022. I trust that all of you are keeping safe and well.

Before I give an update on our performance of 2022, let me share some reflections on this past year from our perspective. We had an industry super cycle the previous year in 2021. And thus, we began 2022 optimistically, buoyed by an unusually strong post-pandemic sentiment with most of the world seeming to return towards normalcy. However, this optimism quickly faded away as developments arose that impacted the entire world.

The Russian-Ukraine conflict, coupled with the ongoing trade tensions, persistent inflation and lingering effects from the pandemic created challenges for global economies, but their collective consequence was far reaching for an industry as consumer sentiment weakened, our industry also entered a semiconductor down-cycle. We are still gapping with the collective effects of these developments. Nevertheless, I'm pleased to share that the group delivered a resilient performance for the fourth quarter and the whole year in 2022. These results are no mean feat. In fact, the group's performance for 2022 has surpassed pre-pandemic levels, recording its second highest annual revenue and bookings.

This performance also comes right on the heels of the super-cycle year of 2021 with this record revenue and bookings. In this result, the Board and the management team and I are deeply indebted to the collective efforts of our more than 12,000 staffs worldwide. Let me share that part of the success in navigating a challenging 2022 was our ability to effectively tap the competitive advantages of our unique and broad-based portfolio of semiconductor and electronics manufacturing solutions. This span mainstream, applicative and advanced packaging tools and serve various end market applications across a global pool of customers. We truly believe our solutions portfolio continues to be a differentiator for us and help underpin our performance in various ways. I will touch on key elements of this during this call.

Let me now take you through today's presentations. Our first highlight is that the group performed better than the guidance we gave last quarter. For the fourth quarter of 2022, revenue exceeded the top-end of our guidance and also delivered gross margin above 40% for 7 consecutive quarters, even through a down-cycle. Let me give you some color on how our unique and broad-based portfolio came into place for our overall 2022 performance. Basically, even though 2022 was a semiconductor down-cycle year, the group's SMT segment delivered record revenue in 2022, fueled by strong demand from the automotive and industrial end markets. The SMT segment also recorded its higher average share of contribution to group bookings in 2022. These developments clearly reflect the resilience of our business model even in the semiconductor down-cycle.

Let me now mention briefly our end markets. With the macroeconomic uncertainties and dampened consumer sentiments, our consumer, communication and computers end market of what we call the CCC end markets were weak in 2022. However, our automotive and advanced passaging end markets helped underpin our performance for 2022. Both automotive and advanced packaging combined delivered about 40% of the group revenue for 2022. I will provide more color on these end markets later.

Before going deeper into the business on next slide. I want to make the board statement regarding our ESG efforts. I'm proud to highlight that the group has dedicated itself to becoming an ESG leader in the semiconductor industry. We have crafted a comprehensive ESG framework and action plan has been implemented throughout our global operations. An immediate key environmental focus is on eliminating our immense footprint. And in this regard, ASMPT has committed to reducing its scope 1 and 2 emissions to net zero by 2035.

We know that this is an aggressive target, but we are fully dedicated towards achieving this. We are also privileged to become a leadership level founding member of the inaugural semiconductor climate consortium that was launched in late 2022. With fellow consortium members, ASMPT will jointly address climate change issues across the entire semiconductor value chain and help accelerate solutions to address climate problems through the pooling of industry resources. For more details about ESG efforts, please refer to our upcoming ESG 2022 report, which will be released along with our 2022 annual report in about a month's time.

This slide gives a quick summary of some of the group's key financial metrics for 2022. Again, the positive effect of our unique broad-based portfolio was apparent as the 11.8% year-on-year decline in group revenue, mainly due to the SEMI segment was partially dedicated by revenue growth from the SMT segment. As our 2 segments follow different business cycles, while the group witnessed a 25.2% year-on-year decline in SEMI segment revenue, there was a growth of 9.8% in SMT revenues. Group bookings declined 29.4% year-on-year in 2022 due to a record base effect for 2021. SEMI registered a sharp decline of 44.4% year-on-year due to the semiconductor down-cycle and weak consumer sentiment. However, our SMT segment was relatively less affected and experienced only 5.9% year-on-year reduction in bookings due to strength in its industrial and automotive end markets. Overall, our advanced packaging, automotive and industrial end markets combined make up the majority of group bookings for 2022.

The group ended 2022 with a strong backlog of USD 1.15 billion. Our backlog has remained at a reasonably high level with a higher proportion of automotive and advanced packaging tools in the mix. The book-to-bill ratio was 0.95 for 2022. Group gross margin improved year-on-year even in the down-cycle year as both segments contributed to overall margin enhancement. The group delivered net profit of HKD 2.62 billion for 2022, and earnings per share was HKD 6.36 for the same period.

I mentioned the stellar performance of our SMT business earlier. So let me just add a couple of more points here. The segment's automotive and industrial end markets contributed close to half of the segment revenue for 2022. This was due to strong demand for its high-end placement and printing tools, mostly coming from Europe and Americas. This steady performance gives us confidence that our SMT business gained market share and surpass its competitors in 2022.

Let me now share about the automotive end market, which has experienced strong growth, delivering a record performance for the year in tandem with intensifying automotive electrification trains. This end market enjoyed 20% year-on-year growth in revenue, achieving its highest level of about USD 515 million. Automotive also had the highest applications group revenue at about 21%. The group has a comprehensive range of automotive solutions, and those are highlighted on the right side of this slide. Looking in particular, at the group's laser singulation, sintering and SMT placement solutions, this witnessed demand growth with the addition of more top-tier customers globally.

It is worth also noting that our laser singulation and sintering solutions are the processor record of fast-growing silicon carbide-related applications. Furthermore, in addition to customers for conventional and hybrid vehicles, our solutions have also been increasingly serving pure electric vehicle or EV players, including fast-growing Chinese EV players. Based on these points, the group's estimated addressable market for automotive end market will grow from approximately USD 2 billion in 2023 to USD 2.9 billion in 2027 at a compounded annual growth rate of about 10%. The group is confident of having the industry's most comprehensive suite of advanced packaging solutions across our SEMI and SMT segments. The range of tools are shown at the bottom of this slide.

The group's advanced packaging solutions contributed roughly USD 500 million in revenue for 2022 or above 20% of the total group revenue. Advanced packaging weightage in terms of percentage of footprint revenue has also remained stable year-on-year. The addressable market for advanced packaging solution is estimated to progressively expand from approximately USD 1.5 billion in 2023 to USD 2.5 billion in 2027 at a compounded annual growth rate of about 13%. The group is confident of gradually growing its market share here. Amongst our advanced packaging solutions, some have dominant market shares while others are primed for growth. Let me touch on this in the next few slides.

These are market leading advanced packaging solutions. First, Thermo-Compression Bonding or TCB. We are an established market leader with the largest in-stock tool base. Backlog for TCB tool is over USD 100 million, and a significant portion of this will be delivered in 2023. We have also received repeat TCB orders for high bandwidth memory and the demand forecast remains healthy. There is also a good progress on the next generation of TCB tools with environmentally friendlier, ultra-fine pitch chip-to-wafer capabilities. We expect these advanced TCB tools to be delivered starting from the first quarter of 2023 for our customers' qualification. These advanced TCB tools will overlap the domain being served by the nascent hybrid bonding technology, and they have a better total cost of ownership at hybrid bonding in many niche applications. In terms of competitive age, the group's TCB solution can achieve high placement accuracy below 1 micron.

Let me give a quick update on our hybrid bonding or HB side as well. Based on the industry's application and process lending so far, the market demand and requirements for HB tools are still evolving with more stringent requirements for higher yields, throughput and placement accuracy. The group's HB development road-map is factoring this involving dynamics to develop and deliver leading-edge solutions that are aligned with our customers' high-volume manufacturing ramp-up. Bearing this in mind, the group's HB tools remain on-track to deliver qualification tools to leading customers in Asia and US for logic and other types of applications.

Next, for panel electrochemical deposition of panel ECD tools, the group has a dominant market share with worldwide deployment of multiple tools in several high-volume manufacturing sites, driven primarily by high-performance computing needs. These solutions are also well placed to meet the growing need for panel level packaging and panel plating for heterogenous integration packaging as these tools have below 10 micron line or space capabilities. To be closer to its customers in Asia, the group's Malaysian operations have also started shipping modules for panel ECD tools and this reflects our supply chain resiliency. SMT's market-leading system package or SIP placement tools experienced robust demand fueled by proliferation of 5G, smartphones and high-end wearables. Taking into account customer requirements for high speed and high accuracy die-placement solutions, the new chip assembly solution will be introduced in 2023.

This slide showcases our advanced packaging solutions that are prime for growth. For advanced space, as demand grows for seamless large-size display, the potential for mini and macro LED is evident. We believe that our mini LED solutions have helped speed up mass market penetration for advanced display while our micro LED solutions are aged closer to eventual mass market adoption. Promising new areas of opportunity, including AR, VR and near IV space also bode well for solutions. And on the whole, we believe we are well positioned to gain market share in advanced display.

For laser single agent, the group has been gaining market share, fueled by accelerating demand for more complex chip architectures with challenging requirements. The group's product and technology road-map for laser singulation is also closely aligned with leading IDMs and we believe our next-generation laser singulation tools will deliver long-term revenue contribution of 100 million annually. Also, in line with strong market demand stickiness, we have ramped up production capacity to deliver tools from our Singapore operations, helping bring production closer to many of our key customers.

Silicon Photonics is another area of building traction. Silicon Photonic solutions enable high data rate and power effectiveness for cloud computing using laser optical fibers. For such applications, the group's AMICRA tools are the market-leading system with very high accuracy of 0.2 micron placement capability. These advanced tools cater to all high-end messaging needs for both silicon photonics and co-packaged optic devices and are utilized by leading Tier 1 players for optical communication.

Let me now hand over the time to Katie, our Group CFO, who will share our financial performance. Katie?

[Yifan Xu, executive]

Thank you, Robin. Good morning and good evening, everyone. This slide shows our key financial metrics for financial year 2022. As Robin has shared, the group delivered a resilient performance in 2022 following the super-cycle year of 2021, with revenue and bookings for 2022, the second highest ever despite industry down-cycle and a weak consumer sentiment. The group delivered revenue of USD 2.47 billion, a year-on-year decline of 11.8%. Our SEMI and SMT segments followed the different business cycles, and that showed our revenue performance as revenue decline in SEMI was partially offset by growth from SMT. In terms of contribution from end markets, automotive and industrial drove strong year-on-year revenue growth of 20% and 32%, respectively.

Our CCC end markets combined witnessed a slowdown due to a weak market sentiment. Bookings for the group declined 29.4% year-on-year to USD 2.36 billion, mainly due to a high base effect in 2021. The effect of the group's unique broad-based portfolio was seen here, as the SEMI segment registered a sharp decline of 44.4% year-on-year, while the SMT segment declined only 5.9%. It is worth noteworthy that from an end market perspective, advanced packaging, automotive and industrial combined contributed about 60% of group bookings. The group was able to deliver gross margin expansion during the down cycle year as our gross margin improved by 55 basis points to 41.1%. Both SEMI and SMT segments drove this due to a favorable product mix, targeted pricing adjustments and effect of ongoing strategic initiatives.

For the fourth quarter of 2022, the group exceeded the top end of the revenue guidance of between USD 455 million to USD 525 million. Fourth quarter revenue was USD 553.1 million, which was a decline of just 5.1% quarter-on-quarter. Robust performance from the SMT segment contributed 56.5% of group's revenue, which helped to mitigate the decline in revenue from SEMI. Group bookings came in at USD 398.0 million, a decline of 40.6% year-on-year due to a high base effect in 2021. Bookings declined 14% quarter-on-quarter, mainly due to seasonality. The group has held its gross margin consistently over 40% for 7 straight quarters, right through the super-cycle year and an industry down cycle. The group's gross margin was 41.4% in the fourth quarter, an improvement of 55 basis points quarter-on-quarter, coming mostly from the SMT segment.

SEMI registered a decline in revenue for the fourth quarter due to semiconductor down cycle and weak consumer sentiment. Revenue was at USD 240.6 million, a decline of 14.7% quarter-on-quarter. The IC discrete business unit continued to experience weak demand for its mainstream tools, but it's too serving the automotive and advanced packaging markets largely witnessed growth. Revenue for the Optoelectronics business unit was driven by demand for more advanced tools, serving ultra-fine pitch mini LED displays and silicone photonics applications.

Lastly, while the CIS business unit continued to be impacted by ongoing softness in the global smartphone market, the group won some orders for its active alignment solution for high-end smartphone applications. Segment bookings were at USD 143.6 million, a decline of 59.6% year-on-year due to a high base effect. Bookings were down 24.4% quarter-on-quarter due to the ongoing down-cycle and seasonality. On a year-on-year basis, the segment registered an increase of 74 basis points in gross margin to 44.4% due to both increased revenue contributions from automotive and advanced packaging end markets and the effect of ongoing cost control measures.

The SMT segment continued its stellar performance and contributed the majority of group revenue for a second consecutive quarter. Fourth quarter revenue of USD 312.5 million was an increase of 16.4% year-on-year and 4.0% quarter-on-quarter. Revenue grew due to strong contributions from the segment's high-end placement and printing tools for mainly industrial and automotive applications. Industrial and automotive end markets combined contributed more than half of the segment's revenue.

Though bookings from industrial and automotive end markets continued a strong contribution to the segment, SMT's overall bookings of USD 254.4 million declined 19.1% year-on-year and 6.8% quarter-on-quarter. This was mainly due to seasonality and continued weakness in the CCC end markets. Segment's gross margin for the fourth quarter came in strong at 39.1%. This was an increase of 235 basis points year-on-year and 171 basis points quarter-on-quarter. The gross margin improvement was mainly due to a favorable product mix.

This slide shows another aspect of our broad-based portfolio. We serve diverse end market applications and then provides the necessary resilience to our business. This was evident in 2022 as we witnessed a slowdown in the CCC end markets, partly mitigated by strong year-on-year growth in the automotive and industrial end markets. Another dimension of our unique broad-based portfolio is that we serve a global base of industry-leading semiconductor and electronic manufacturers. Our diverse customer base includes IDMs, OSATs, fabless foundries, high-density substrate manufacturers, EMS players and others. This has enabled the group to continue experiencing a low degree of customer revenue concentration with the group's top 5 customers accounting for only about 12.8% of its total revenue in 2022.

With our customer base truly global, the group also enjoys resilience when it comes to revenue contribution by geography. Mainland China, including Hong Kong, witnessed a decline in revenue year-on-year and its shares of group revenue reduced from 52% to 42% year-on-year. However, this was compensated by revenue growth from Europe, the Americas and in Malaysia.

The existing dividend policy is to maintain payouts of about 50% of group's profit on an annual basis. For 2022, the Board proposed a final dividend of HKD 1.9 per share, including an interim dividend of HKD 1.3 per share. The total payout for 2022 is HKD 3.2 per share.

With that, I will hand the time back to Robin for Q1 revenue guidance and 2023 prospects.

[Cher Ng, executive]

Thank you, Katie. Let me provide some color on the 2023 outlook before touching on our first quarter guidance. Based on feedback from our customers and insights from industry watchers, indications sync to point towards the beginning of a recovery in the second half for the semiconductor sector.

Analyzing internally, we see some encouraging factors.

Our backlog remains sizable at USD 1.15 billion as of end December 2022. We expect the majority of this backlog to be delivered in 2023. As we highlighted earlier, the automotive, industrial and advanced packaging end markets combined made a robust contribution to the Group's 2022 bookings, and we continue to see strength in these end markets that are supported by long-term secular trends. Lastly, our unique broad-based portfolio continues to provide the group with a strong foundation and competitive edge. These factors combined should help drive the group performance in 2023.

Now looking at the current quarter, we continue to face the semiconductor down cycle and macroeconomic uncertainties. Thus, the group expects revenue for the first quarter of 2023 to be between USD 455 million to USD 525 million. At the midpoint of this guidance, this will be a decline of 11.4% quarter-on-quarter.

We have highlighted this slide before in previous earnings call. It comprehensively sums up our unique broad-based portfolio that provides the group with competitive advantage and resilience to industry cycles. We have explained the [indiscernible] of a unique broad-based portfolio throughout today's presentation. So let me just highlight here that our unique broad-based portfolio is not only defensive during turbulent and uncertain times, but also position us well for growth when the opportunity arise.

For this last slide, I just want to highlight that the group's ability to scale-up its revenue through industry cycles. You will see from the [ columns ] the group's average revenue for the last 3 years is more than 20% above the average of the preceding 3-year period.

With this, let me conclude our presentation. Thank you, and we are now ready for Q&A. Let me pass back the time to Romil to facilitate.

[Romil Singh, executive]

Thank you Robin and Katie for taking us through the presentation. For asking questions, please either use the raise hand function or type your questions in the chat to ASMPT Q&A. Please ask your questions one by one and limit them to 2 questions at each. You feel free to join the queue again if you have more questions. With that, can I request Gokul from JPMorgan to unmute yourself and ask your questions.

[Gokul Hariharan, analyst]

My first question, Robin, is on the semiconductor solutions. Are you starting to see any kind of recovery in terms of bookings in the current quarter for the semiconductor solutions. We have seen the bookings declined substantially over the last several quarters. Could you talk a little bit about what you're seeing in terms of bookings. Is Q4 or Q1 going to be the bottom? Are you seeing some encouraging signs from the customers that Q1 is likely to be the bottom for the semiconductor solutions business.

And also maybe related to the SEMIs business itself, could you also talk a little bit about any pricing dynamics? I think you had seen some increasing pricing dynamics in 2021 during the super-cycle. Are we seeing any of that getting reversed right now given you've been able to hold your gross margins pretty steady even bookings and revenues have declined more than 50% the peak level? So that's my first question.

[Romil Singh, executive]

Maybe I will request Robin to answer your first question. And in terms of the breakdown, I'll request Robin to maybe give a bit of color on when he expects the down cycle or rather the bottom to be in terms of the bookings. And part 2 of that question will be guidance of Q1 2023 bookings. With that, Robert, can you help with that answer?

[Cher Ng, executive]

I think your question is very long. So let me try to recap. I can answer all your questions in one call. Now I think your first part probably refers to some kind of color for Q1 bookings. Let me start with maybe some color first. Now as usual, we don't provide a quantitative guidance for next quarter bookings. We can certainly give you some color that we received. Now we expect the group Q-on-Q bookings to increase by maybe between 10% to 20%. So Q1 will be higher than Q4 by 10% to 20%. And we believe this is largely in line with seasonality trade. Q1 bookings tend to be higher than Q4, right?

We see strength still in certain segments that automotive. I think automotive will continue to be strong. And likewise, I think for industrial segment and the advanced packaging, I think the momentum are also pretty stable over for industrial as well as advanced packaging. Now I think the whole industry is hopeful that China will start to recover after lifting COVID-19 restriction. Now we do see some pockets of buying interest in Q1 from certain China customer base. [ Let me color ] for high end applications and also automotive, but we would say that this is not a sign of a broad-based China recovery. As I say, we have just seen some pockets of buying interest from the Chinese customer base.

I think the other part of your question is relating to when do we see the semiconductor down cycle. Now we of course do a lot of channel checking with our customer base and also looking at how the industrial watches or independent research house look at where the semiconductor industry go from here. Now feedback from our customers and generally industry view is that the recovery could begin in the second half of 2023. And many customers of ours who have announced the result also cited the one possible [indiscernible] for this to happen is that the positive effect of the Chinese economy from the lifting of the COVID-19 restrictions. So I think this is so far my answer for your question.

[Romil Singh, executive]

Gokul, the last part of your question, I will request Katie to answer. So basically, you talked about any pricing dynamics in 2021 that are being reversed now since our GM has held steady despite the revenue decline. Can I request Katie to comment on that?

[Yifan Xu, executive]

Yes. As we have communicated in previous quarters and as you pointed out, that we have increased our price during the super-cycle years in a very sensible way in a very targeted way. And so far, by and large, we are able to sustain that pricing level. Now of course, it's a competitive market and especially for our orders that have been quoted in US dollars because of the US dollar strengthening last year, we had some headwind on the FX side. But for equipment sale, pricing is determined by manufacturers, right? And customers do consider our solutions, our strong relationship, our leading technology and our aftersales services, right, in a combined way. So just the short answer to your question is that from the gross margin performance, you can tell that we have been able to sustain the pricing level.

[Gokul Hariharan, analyst]

So my next question is just reference to the SMT solutions given it has been very resilient. The auto and industrial mix being greater than 50% in Q4, could you talk a little bit about the history of that? Is that a very recent thing or it's something that has evolved over a period of time? And also, people are expecting a major smartphone model upgrade cycle in second half. There is also some supply chain relocation happening for some of your key SMT customers. How do you expect these to also affect? Is that a positive tailwind that you're already seeing into some of the bookings and revenues coming through for SMT?

[Romil Singh, executive]

So Gokul, for your first part of this question, maybe let me request Katie to just give a brief on our recent SMT's performance in relation to auto and industrial. And then a bit more color on that, I will request Robin to take over from there.

[Yifan Xu, executive]

Yes. Gokul, just from a historical perspective, in terms of auto, industrial, definitely the percentage of its contribution to the overall business has grown significantly. The automotive portion of the business has historically the percentage of its wage is probably in teens and now it's actually growing up either with very high teens. And the same thing for industrial, it's actually more than double or tripled in different quarters for industrial. So it's a pretty steady increase for both end markets for SMT. I'll pass it to Robin.

[Cher Ng, executive]

Yes. I'll just add a little bit more color to what Katie said. I think all along our SMT solution has been always very strong in terms of the automotive -- catering to the automotive and industrial segment because of our solutions in comparison to our peers. So as we all know, for 2022, these 2 segments, market-wise, are very strong. So we benefited from the market -- a very strong market demand in these 2 particular areas. So because of the tools capability, we really benefited from that 2 segments in 2022. So I think hopefully, that will give you some color why SMT performed so well in 2022. And I believe -- and we also believe that these 2 segments will continue to be -- the momentum will continue to be strong going forward because of electrification trends in automotive, ADAS, demand, sample. And for industrial, we believe a lot of these devices actually go into active automation, smart solutions, green infrastructure, and also a lot of demand are coming from that kind of applications for industrial.

Next, please.

[Romil Singh, executive]

Next, can I request Donnie from Nomura to unmute yourself and ask your questions?

[Donnie Teng, analyst]

Can you hear me?

[Romil Singh, executive]

Yes. Donnie, go ahead.

[Donnie Teng, analyst]

So I think my first question just to follow Gokul's first question. So you mentioned about first quarter booking may sequentially in the first quarter and it looks like semiconductor solution is improving. But wondering if you could give us some more detail about like IC/Discrete, CIS, LED and SMT separately for the booking momentum in the first quarter. And also, in terms of the IC/Discrete, I think OSAT companies are still conservative on their CapEx outlook this year. But looks like automotive electronics, particularly driven by IDM companies are like, as you just mentioned, is like still very strong. So wondering if you could also comment on that, like some -- how much bookings are like driven by the IDM companies or their capacity reallocation in the Southeast Asia?

[Romil Singh, executive]

Okay. So Gokul, you have 2 parts of the question. Sorry, Donnie, you have 2 parts of the question. The first is on 1Q bookings in relation to some color, if broken down from perspective of ICD or SMT. I think, I'll request Robin to answer that question first.

[Cher Ng, executive]

Yes. So I think as far as Q1 bookings is concerned, we believe the SMT will continue to be at a high level. We also expect SEMI to recover from a low level in 2020 -- Q4 2022. Now in terms of a little bit more color, we see advanced packaging, automotive, industrial, I think the momentum will continue, as I said earlier. Now you mentioned whether the split between IDM and OSAT. I think so far, we still see IDMs are still more active on the SEMI side compared to the OSAT side.

You also asked, whether you see any kind of expansion in Southeast Asia? I think the answer is yes. I think if you recall, Donnie, in the last couple of earnings calls, we have already started to see this trend. So especially the IDMs, they are expanding more in Southeast Asia. So when we discuss customers in this part of the world, we can literally see new buildings being built for expansion. So I think this capacity will probably come on stream in later part of this year or towards the beginning of next year. So certainly, IDMs are definitely more active during this down cycle compared to the OSATs. And typically, that's a trend during the downside buildings, the IDMs are more active than the OSATs because the IDMs are not just buying for capacity needs, but they're also buying for capability. They are preparing for the [ open ] to come.

Next question, please.

[Romil Singh, executive]

Donnie, do you have a follow-up question?

[Donnie Teng, analyst]

Yes. So to -- my second question is to have a follow-up on my first question. So for IDM's order outlook, how sustainable do you think it would be? Because IDM looks like to be -- react to cycle correction normally later than OSAT companies. So I'm not sure how sustainable you are seeing the momentum would be into the second half.

And another one is like you mentioned about TCB, right, and some like high bandwidth memory progress. If I recall correctly, we used to have quite low sales exposure to memory. Wondering what kind of sales exposure we will have in the memory market going forward in the future. Would that be a very long-tail market for us?

[Cher Ng, executive]

Yes. I think in general, Donnie, I think your first question is the -- basically alluding to the outlook, right? So yes, I mean, we'll be checking with customers, whether they are IDMs or OSATs. I think the general view is that, they are more optimistic about the second half compared to the first half, right? So we hope we are all right. Then I think the semiconductor industry will look bright in the second half of this year compared to the first half.

Now a good question on memory. I think we have been very upfront, very transparent that ASMPT is not strong in memory market historically. But I think we see the things are starting to change. So because of a strong suite of solutions quite suited actually for the memory market. Take TCB for one. I think in the announcement, we also said that our tools have been used by a leading memory maker, the TCB tool for a spectrum of memory die or HBM, right? So this is a significant breakthrough for ASMPT into the memory market. And looking at that customer, I think the forecast so far looks healthy. So I think for the memory [ market ], we have made a significant [ retro ] in terms of advanced packaging.

Now if you think about it, we have been talking about how TCB being used or heterogeneous integration. Let's not forget that, when it comes to heterogeneous integration, we are also talking about a placement, very high precision placement of both logic and memory die onto a wafer. So from that perspective, since we won a big order in the beginning of last year for TCB, we won about USD 100 million, we recall. That order is being used for heterogeneous integration. So from that perspective, we are also participating in terms of memory packaging from the advanced packaging arena.

So I think in short, and also let's not also forget about our lasers integration as well. We are also -- [ outsource ] are being in qualification phase with key memory makers as well because the -- our laser singulation tools are pretty suited for memory packages because of our laser processability. And also memory has stacks of memory, layers of memory stacked together. So our laser is very well suited to dice memory wafer from that perspective. So from the -- so in terms of memory market, I think we are in quite good inroads into the memory market for more of the advanced packaging arena at this point in time.

Next question, please.

[Romil Singh, executive]

Next, can I request Kyna to unmute yourself and ask your questions?

[Kyna Wong, analyst]

Yes. I have 2 questions. One is actually a follow-up on the advanced packaging question that Donnie had just asked. So first, I wanted to check like -- we see the company has received the repeat order for the high bandwidth memory. So I understood that the company actually has a continuous program with the leading memory customer. But also I wanted to hit on more progress from the other customers, any like indication actually from the previous [ heterogeneous integration ] that we see? And/or do you believe that there will be more opportunity going forward in the second half from other customers after the -- [ a lot of ] like where activity in the first half?

So -- and then we also see some progress in the other advanced packaging, including the panel level by ECD and -- because that is for the heterogeneous integration. So I wanted to know more about the progress and also your different customer like both IDM or foundry?

And one more is about the SiP that you have adjusting new chips and new tools to be introduced in 2023. So can we know more about application and also when should be the solution to ship likely in second half or others, that is time thing? So that's for the advanced packaging.

[Romil Singh, executive]

Okay, Kyna. So I think your question on advanced packaging is basically on some detailed color and outlook on 3 different arenas, starting with TCB, panel level ECD and also for the SiP.

[Kyna Wong, analyst]

Yes.

[Romil Singh, executive]

So okay. Maybe let me request Robin to touch more on TCB first because you did mention on the repeated orders for HBM. But you want to know also outlook on other customers, especially going into second half of 2023.

[Kyna Wong, analyst]

Yes.

[Cher Ng, executive]

Kyna, I think if you refer to Page 11 and 12 of our presentation this morning, we gave a little bit more color as to our advanced packaging solutions. So I probably made some reference to that, so I'll try to answer your question. Now in terms of advanced packaging, we laid out 2 parts. One part is, we are already a market leader. And the other part is, we think that we are gaining traction and because it's also a high-growth area. Now the first part, where are we in terms of leadership for advanced packaging? Certainly, TCB, we believe we have a leadership position because of a very large installed base at this point in time, close to [ 286 ] maybe, right? Now -- and our TCB has also been making a very good progress in terms of, not just logic application, but also as alluded earlier also for memory applications. We are also enlarging our customer base. We don't just have 1 logic customer. We have a foundry, we have OSATs, as well as IDMs.

Now we believe also -- we, together with our customers, key customers are really pushing the boundary of TCB towards the arena of the hybrid bonding. Now without pushing out a next-generation of green, ultra-fine pitch, chip-to-wafer, TCB, that can address a pitch requirement of slightly above maybe 10 to 20 micron pitch. This is a very -- yes, 10 micron to 20 micron pitch capability. So these 2 is very precise, very precise. And we believe that the -- in terms of accuracy we can going on to below 1 micron. So we are very confident that our TCB will continue to do well in the years to come because also driven by HPC requirement, high-performance computing requirement.

Now similarly for also our panel ECD tools. These tools -- the next tools are also useful are also enabled for heterogeneous integration. These tools are used differently. They're being used to lay connecting layers or [ IDR ] onto a panel substrate. And eventually, this panel substrate will be populated with device chips using our TCB. So both TCB and net really enables for high-performance completing. So in this -- and we believe high-performance computing will continue to grow in the future. So I think we are pretty well positioned from this 2.

Now on Page 11, you can also see SiP, right? This is our SMT placement tools. We had a good year in 2021, as well as in 2022. And these are mainly driven by 5G and in future, 6G, RX front-end modules packaging for smartphones and high-end wearables. These tools are not only fast. They can -- the [ UPH ] can go out to 70,000, 80,000 per hour, depending also on the package configuration. But they can also handle very, very fine -- very small passive devices. So you can imagine in the real estate of 5x5 mm TCB, that goes into phones or into the earpods, these tools can pack many, many components inside the small real estate. So these tools are not only fast but very, very precise.

Now Page 12 of our advanced packaging with [ arsenal ] of tools, also -- we also lay out 3 tools, which we believe will gain traction in the years to come. One is our mini LED tools, as well as the micro LED tools. These tools are being used for -- especially for mini LED tools are being used for advanced displays right now. So in terms of demand, we have number of demand from year 2022 compared to year to 2021. So I think in the last quarter or 2, we mentioned that mini LED solution has reached an inflection point. So we are clearly seeing that right now. Now for micro LED, it's still a little bit early days, but we are seeing micro LED inching closer towards high-volume manufacturing. So we are also confident that these tools will also do well for us in the years to come.

Now lasers integration is also a success story for ASMPT in terms of advance packaging. As I mentioned earlier, lasers integration -- our lasers integration tool has good capability and is well suited for memory, as well as silicon carbide applications because of our laser process capability. So these tools are also highly accurate down to about 1.5 micron kind of accuracy. And last but not least, I don't want to take up too much time over here. For silicon photonics, we also have a solution for that. As you know, this were demanding more bandwidth and faster transfer rate between chips and between data centers. So our tools are pretty well suited also for the current application. So I'll stop here for the question relating to Kyna.

[Kyna Wong, analyst]

Just one more follow-up on the advanced packaging is the hybrid bond, we see -- seeing time line for [ March ] high-volume adoption pushing out. When do you see it can -- and also how fast ASMPT expect to transition from the qualification stage into the production ramp?

And the last question, I mean, the second is actually about gross margin because you have mentioned the auto, industrial and also the advanced packaging momentum continue to stay steady, strong, especially in the auto. So can we also see the gross margin kind of sustain like 40% above [indiscernible] this year?

[Cher Ng, executive]

Let me answer the first part and Katie can give you a little bit of color on the gross margin.

Now in terms of hybrid bonding, this is our opinion, of course. The technology we believe will take some time to mature. If you look at our TCB experience, right, TCB, the [indiscernible] with TCB is 7, 8 years ago. So it takes the market 7, 8 years to fully mature the TCB solution. We see a big jump in order in 2020 after 7 or 8 years. So this is really purely based on our experience with -- first of all, [indiscernible] at a point was TCB now. First of all, [indiscernible]. I think it will take some time. But meanwhile, the expected market demand in terms of capability from the TCB solution is constantly evolving with more and more stringent requirements for higher yields, higher throughput and higher placement accuracy. So we are factoring all these changing marketing dynamics from our customer base. And we are in determent to provide leading solution to a customer base that is more aligned with the high-volume manufacturing road map.

Now certainly for ASMPT this year, it's not a year where we see a high-volume for HP, right? So we are going through a qualification phase with leading customers in this arena. So it probably takes some time before -- we see some contribution from HP for ASMPT. Now our customer base are not just in U.S. but also in Asia, and the application is not just [indiscernible]. We are also seeing interest in other application area also for hybrid bonding. But meanwhile, I must stress that customer base is also pushing, as I earlier mentioned, pushing the boundary for TCB solutions while waiting for HP solution to mature. So since we are a strong contender for TCB, I think meanwhile, TCB will continue to do well in the years to come.

[Romil Singh, executive]

Thanks, Robin. I think last part of the question is more on the longer term 2023 GM outlook. You did mention that auto, industrial AP momentum has continued to stay strong. So how will be the outlook and whether ASMPT can maintain the gross margin at current levels?

[Yifan Xu, executive]

Yes. So let me put a little bit of color to it. So the group delivered another very solid gross margin quarter, making the seventh consecutive quarter of margin of above 40%. And just putting into perspective, in the last down cycle, the group gross margin level was hovering around 35% to 38%. So we consider that we believe there is a step change. Now in terms of the sustainability of gross margin, I'd like to kind of look at the drivers of the solid performance so far. There are 3 layers. One is the -- if you look at our segment, both SEMI and SMT gross margins have improved year-over-year. Second, the product mix, like you mentioned, the auto, industrial and AP momentum have contributed -- the debt revenue have contributed to -- the revenue has become very sizable to the group revenue and margins from those end markets and solutions are relatively accretive to the gross margin of the company.

And then also, I want to point out, as we will come into the downturn, the group has reacted quite timely in terms of cost control measures. So the cost measures included, especially on the SEMI side, the sensible hiring only for very critical positions, flexible workforce reduction, T&E control in some of prioritization of strategic investment, et cetera, all that we believe will be sustainable. Now having said that, I want to put a pretty large caveat out there that as you're aware, the group's margin is influenced definitely by volume and also the segment mix between SMT and SEMI, and lastly, product mix if the mainstream products rebounding in a big way. So I hope I'll give you enough color on the gross margin going forward.

[Romil Singh, executive]

Next, can I request [ Freddie ] to unmute yourself and ask your questions?

[Unknown Analyst]

Can you hear me?

[Romil Singh, executive]

Yes, go ahead.

[Unknown Analyst]

I want to ask a question about developments in India. So late last year, Digital India Corporation has set up a business division and you won named India Semiconductor Mission, which is mandated to capitalize the India's semiconductor ecosystem to cover manufacturing, packaging and design. And at the same time, we are seeing over the past like 1 or 2 years, there are more and more electronic goods manufacturers moving operations to India. So what's ASMPT's views over such a development?

[Cher Ng, executive]

I think, in general, Freddie, whether it's in India or other parts of the world, in general, if we see activities popping up in locations like this, I think, in general, not only us, but I think the whole semiconductor supply chain will benefit because it means that if India is starting out semiconductor industry over there, they will need capacity. They will need tools. And certainly, we are the biggest player, right, in terms of SEMI, as well as SMT. We are very confident that we will benefit from this trend of countries really growing their semiconductor industry. So I think this is a general questions -- [indiscernible] answered to your question, not just in India but in any other location.

[Romil Singh, executive]

Freddie, do you have a second question?

[Unknown Analyst]

Yes. If I remember correctly on the presentation, Page #19 and the time being, ASMPT's dealing with India is on the low side, if perhaps hiding in others. So how is ASMPT going to tap these opportunities going forward?

[Cher Ng, executive]

No, as -- I mean, we are not -- that we are not in India. I think especially ASMPT will be India for quite some time. So it's a matter of setting up our own infrastructure in India to handle Indian customers. So we don't think it's a big hurdle, right? So we are fully aware of the opportunities that will come in India.

[Romil Singh, executive]

Next, can I request Nicolas to unmute yourself and ask your question?

[Nicolas Guy Gabriel Baratte, analyst]

Yes. Hello. A question on the margin side for the SEMI solutions. So gross margin has done very well, I read change in the mix and so forth. So this I understand. But the operating margin or the segment margin for SEMI solutions has declined quite a bit. So how do we understand beyond the volume aspect or beyond the fixed cost aspect? Is there something else that can explain why SEMI solutions segment margin has declined to 6%?

[Romil Singh, executive]

Okay. Noted on this. Let me request Katie to answer the question related to the segment margin for SEMI.

[Yifan Xu, executive]

Nicolas, I think you're referring to the fact that the -- our OpEx, right, is impacting -- the OpEx spend is impacting the operating margin. So if you look at overall from grand scheme of things for the group, right, OpEx actually has been held relatively steady. In 2022, we did experience certain inflationary pressure, what is from the material side or the labor market side. And also at the same time, on the OpEx front, we have made a conscious decision to continue the investment, especially in R&D, for example, in technologies like advanced packaging, therefore, the OpEx as a fixed cost was relatively steady and -- while the volume is coming down. And I think if you look at the percentage, right, that's where really the issue is.

[Nicolas Guy Gabriel Baratte, analyst]

So it is [Technical Difficulty] development in R&D? Yes.

[Yifan Xu, executive]

Yes, that's correct.

[Nicolas Guy Gabriel Baratte, analyst]

Okay. Within your guidance -- your USD guidance basically for 1Q '23 is the same as 4Q '22, right? So your -- in terms of guidance, it looks like you're expecting a flat [indiscernible], but then, of course, you beat your guidance by a big margin in 4Q, right? So does it mean 1Q '23 revenue decline Q-on-Q?

[Romil Singh, executive]

Let me request Robin to answer that.

[Cher Ng, executive]

Yes, if you look at our guidance, we are guiding USD 455 million to USD 525 million. So you hit the midpoint, yes, you would decline on a Q-on-Q basis. Now this is really -- if you look at seasonality, again, Q1 tends to be lower in Q4. And because of certain factor, we are pretty substantial in terms of revenue, in terms of -- from the China-based customer base. So typically in Q1, we have this Chinese New Year effect. So that typically affect the sales in China. So that's why we are guiding that kind of range for Q1.

[Romil Singh, executive]

Next, can I request [ Arthur ] to unmute yourself and ask your question?

[Unknown Analyst]

Arthur [indiscernible] here from the [indiscernible] Global. Thanks, Robin, and company give us better visibility. There's 2 questions from my end. Number one, we understand there is maybe strong like ChatGPT trend right now in the SEMI industry. Can Robin share with us how the company sense from the client side and how the TCB and HBM, SiP, Silicon Photonics to benefit this trend? This is my first question.

And second question, I want to ask maybe Katie about the gross margin side. On Page 19, we see the increase from the Malaysia, U.S. more than offset China. Do you envision this gross margin outside of China is higher than China? That's my 2 questions.

[Romil Singh, executive]

Thanks, Arthur. I think on your first question, I'll request Robin to answer. So basically, your question is on the popularity of ChatGPT and the bandwagon effect when it goes to the AI side and how can our TCB and other advanced solutions benefit from that?

[Cher Ng, executive]

Thanks, Arthur. I think this ChatGPT trend is really hot right now, right? So I think in that also have what we call the AI chips. And AI chips are -- need, not just scaling in terms of wafer, but also advanced packaging solutions. So I think that, that will play well into our arena. As you know, Arthur, we are -- we have a strong suite of AP solutions, ranging from TCB to what you see even for new silicon photonics, [ core of ] packages. So I think all these development in terms of AI will help the industry as a whole. And in terms of advanced packaging, definitely because we can't -- advanced packaging definitely will have to be employed in order to package these chips to make it more effective. So we're really looking forward that this kind of AI trend will continue into the future. Now back to the GM question.

[Romil Singh, executive]

Yes. Thanks, Robin. I think for the GM question, I'll request Katie to answer. So basically, you mentioned about increase in contribution from EU, Malaysia and Americas. So does that help on the GM side if the revenue is higher from these markets compared to decline from China?

[Yifan Xu, executive]

Yes. So from fact perspective, your observation is right. However, our gross margin is not -- we don't sell based on the country. It's more actually about the product and solutions that we provide to our customers, the value add and the complex or the leading technology we have by product. So again, it's also the advanced packaging, auto and industrial solutions that actually are more margin accretive, and it's not specific because of China.

I hope my answer is clear.

[Romil Singh, executive]

For last one question, can I request Gokul to ask your questions?

[Gokul Hariharan, analyst]

I just had one question. I think this is the first time we are hearing you talk a little bit more positively about the CIS segment in the smartphone market for a while in terms of new active alignment demand. Could you talk a little bit about what you're seeing here in more detail? Is that something that you're picking up, which is a more sustainable trend that smartphone vendors are starting to start focusing more back on the camera side of things? It feels like we've seen a lot of teeth picking on camera for the last couple of years. So just wanted to understand what you're seeing on the CIS trend and the sustainability of it.

[Cher Ng, executive]

Yes. Gokul, very good question. I think, to a certain extent, yes, we see -- within the recent days and weeks, we see more interest in terms of the active alignment machine. And you know that we are a leading market player in the space. So naturally, when our customer base needs that kind of solution, we will [indiscernible] to provide the kind of solution. So I think that we -- looking at [indiscernible] develop, I think there will be new innovations coming on stream for camera in this year, maybe even next year. So we are doing a lot of, not just capacities buy from a customer, but also capability. So when we talk about capability, it's a little bit longer term, right? So this camera models may not come on stream this year, but maybe the year or 2 after. But we're also seeing some capacity by recently. But don't get me wrong, these are not high volume, right, these are not high volume yet compared to previous years. But at least, we are seeing some interest in the active alignment tools from this customer base.

[Romil Singh, executive]

Thank you, Robin. With that, we will officially end this earnings call. Let me thank all of you again for attending today's call, and we hope to see you during the next quarter's call. Take care and stay safe. Thank you.

[Cher Ng, executive]

Thank you.

[Yifan Xu, executive]

Thank you.