TECO Electric Machinery Co Ltd

TWSE:1504

Earnings Call Analysis

Company Projects Steady Growth and Margin Improvements

The company's large motors are performing well, with a BB ratio above 1, and the order stream for high-voltage products remains steady. However, low-voltage product demand is weaker in Taiwan and China, potentially impacting momentum. New factories in Mexico and India create opportunities through geographic proximity, boosting business prospects. Q4 forecasts indicate better gross margins than Q3, contrary to prior misunderstandings. Engineering projects, while lower-margin, are carefully selected to maintain profitability, incorporating strict cost control and risk management. Material shortages or delays in power grid construction could challenge the shipment goals for E-Skid, another company product, but revenue from it and other product lines are expected to grow in the second half of the next year.

Company Performance and Market Trends

The company reported net sales of TWD 15.065 billion, a figure consistent with the previous quarter and showing a 1.7% year-over-year (Y-o-Y) increase, signaling stability and moderate growth despite challenges in specific markets. This overall performance was bolstered by successful projects within the Green Mechatronic Solutions sector, particularly in North America, and engineered projects within Intelligence Energy.

Margins and Profitability

Gross margin in Q3 saw a decline from Q2 by 1.2% quarter-over-quarter (Q-o-Q), sitting at 24.6%. However, it reflected a 2.1% increase Y-o-Y due to several factors such as a higher proportion of high-voltage products, the appreciation of the US dollar, and reduced costs for raw materials and freight. Operation (OP) margin also experienced a slight dip Q-o-Q but showed significant improvement Y-o-Y, marking a 2.2% increase due to enhanced gross margins. Looking forward, the company is optimistic that Q4's gross margin could be better than Q3, which might result in a potential improvement in OP as well.

Product and Segment Performance

The revenue for high-efficiency and EV-related products grew by nearly 28% in the first 3 quarters, contributing to 14% of total group revenue. Intelligence Energy, which focuses on green energy-related products and services, constituted about 35.4%, while Air and Intelligent Life, encompassing inverters and ACs among other projects, accounted for 45.7%. Even though demand in Taiwan and China has dampened the growth, the momentum in North America keeps pushing the Green Mechatronic Solutions forward.

Global Expansion and Local Impact

The company's strategic expansion through the opening of its factories in Mexico and India prepares it for greater local engagement and potential business opportunities. The Mexican factory, with a highly automated line capable of producing 150,000 units that comply with North American and IEC standards, is expected to catalyze growth in North and Central as well as South American markets. Similarly, having a local presence in India also promotes trust and strengthens relationships with OEM customers and distributors since 'seeing is believing.' Such new factories can also be pivotal in addressing lower-voltage sector demands.

Risk Management and Strategic Planning

Systematic and conservative risk management is a cornerstone of the company's strategy, as it factors in material costs and foreign exchange variations while engaging with business owners. The BB ratio, which indicates order book strength, is above 1 for big motors, reflecting a steady flow of high-voltage product orders. While the company acknowledges potential challenges with its new facilities, it remains upbeat on capitalizing on these assets in the forthcoming year.

Future Outlook

The company remains hopeful that the actual shipment volume of products like E-Skids will surpass its target of 40 units next year. This is contingent upon alleviating material shortages and advancing power grid construction; if such issues persist, management is committed to finding solutions. Furthermore, with improvement in gross margin anticipated for Q4, investors can look forward to potentially better performance in the upcoming quarter compared to Q3.

Earnings Call Transcript 2023-Q3

[Andy Chien, executive]

Ladies and gentlemen, good afternoon. Welcome to TECO Electric & Machinery 2023 Third Quarter Earnings Conference. I'm Andy Chien TECO spokesperson. I'd like to introduce to you our executives attending the conference today, Chairman Sophia Chiu. President, Thomas Fan and Victor Hsu, Assistant Vice President of Finance and Management Center.

In today's meeting, I'll first go over TECO's Q3 results then President Fann will talk about the performance of our 3 main business groups and provide a recap of our recent major events. After the presentation and Thomas Fann's remark, we will proceed with questions and answers, which will be chaired by Chairman Chiu. The presentation materials have been uploaded to the MLPS site in the IR section of our website. You may go there and download them now. Here are our Q3 results.

First of all, Q3 financial highlights. Net sales came in at TWD 15.065 billion, on par with Q2 and up 1.7% Y-o-Y due to reasons similar with previous quarters, namely the growth of Green Mechatronic Solutions in North America as well as the engineered projects of Intelligence Energy. Q3 gross margin was 24.6%, down by 1.2% Q-o-Q, mainly due to product mix changes which I'll explain later. Meanwhile, the gross margin increased 2.1% Y-o-Y due to several reasons. First, the increase in the proportion of high-voltage products; second, US appreciation; and third, the decrease in raw material prices and freight charges, which have lifted the gross margin of our low-voltage products.

OP margin was 11.1%, down slightly 0.7% Q-o-Q mainly due to a difference in the gross margin. However, Y-o-Y wise, the OP margin increased by 2.2%, mainly due to the increase in gross margin. EPS in Q3 was TWD 4.7, down by TWD 0.54 Q-o-Q, mainly due to dividend distribution, most of which was conducted in Q2, plus ForEx variations. It was down by TWD 0.04 from TWD 0.51 from a year ago. However, we continue to post growth for pretax income with the income tax amount higher than the same period last year.

Next slide. Net sales in the first 9 months of 2023 was TWD 45.029 billion, up 4.1% Y-o-Y for similar reasons explained before. Gross margin in the first 3 quarters was 24.9%, up 2.4% Y-o-Y. OP margin was 11.5%, up 2.8% Y-o-Y. EPS in the first 3 quarters was 2.25% doubling from a year ago, mainly due to the higher OP profit and financial asset evaluation in the same period last year. This resulted in a relatively high EPS growth compared with last year. Gross margin as mentioned earlier, declined Q-o-Q, but still maintain the upward trend. The higher gross profit margin last quarter was attributable to the product mix, which we'll explain in detail later.

The same goes for OP margin because the gross margin was slightly higher last quarter, it declined slightly Q-on-Q in Q3 this year, but in fact, increased Y-o-Y. Next, performance of the 3 business groups, President Fann will take over the floor. President Fann, please.

[Thomas Fann, executive]

Good afternoon, ladies and gentlemen. I'm Thomas Fann, TECO's General Manager. I'd like to go over the performance of our business groups. It is quite clear on this slide, except for Air and Intelligent Life, we maintained the growth trend. Despite some structural adjustments, for example, Green Mechatronics Solutions posted solid growth in North America, but the performance was dragged down by a sluggish demand in Taiwan and China. Therefore, relatively speaking, while it was still growing, the growth rate was not as high as previous quarters. A large part of Intelligence Energy's performance depends on when the engineering project revenue is recognized.

Today, the engineering projects are on large scale and the timing of revenue recognition drive affects the revenue. Although the revenue continues to rise in the long run, the recognition timing now has a relatively big impact. If you recall, we stated last quarter that Air and Intelligent Life mainly conduct its business in Taiwan, including home appliances, AC, logistics all in Taiwan. Taiwan's economic conditions, therefore, have a bigger bearing on the group's performance and seasonality also plays a role here. Green Mechatronic Solutions still grew Y-o-Y, although with less pronounced growth Q-on-Q, as the growth in North America was offset by that in China and Taiwan.

Intelligence Energy's revenue recognition timing has a considerable impact. Air and Intelligent Life's revenue has been on the right since Q4 last year I will update you on that in our Q outlook in a moment later. Revenue breakdown. Here, we saw a bigger change. Intelligence Energy only accounted for 15.9% in the first 3 quarters of the year -- of last year. But this year, it has reached nearly 20% because we have more large-scale offshore wind power substation or other green energy engineering projects. Similarly, compared with Q2 the revenue breakdown has also changed. In the first 3 quarters of last year, Intelligence Energy was 19.3%, reaching 21.5% in Q3. Last quarter, it was only 18%.

As the projects get bigger and bigger, the timing of revenue recognition will immediately affect the revenue of the current quarter. Green Mechatronics Solutions revenue share range between 51% and 52%. Now progress of green energy-related businesses. Green Mechatronic Solutions is focused on high-efficiency products including EV products. Overall, the revenue of high-efficiency and EV-related products grew by nearly 28% in the first 3 quarters accounting for about 14% of the entire group. Intelligence Energy has more green energy-related products and services. Its proportion is about 35.4% and Air and Intelligent Life, including inverters, ACs and other green energy-related projects currently account for 45.7%.

Overall, we've seen pretty good growth, in particular, inverters and commercial ACs have been the bright spots of the group this year. Next, our Q4 outlook. Green Mechatronic Solutions revenue is expected to be flat Y-o-Y and up slightly Q-o-Q. Intelligence Energy, due to the recognition of large project revenue will likely register decline both Q-o-Q and Y-o-Y. Air and Intelligent Life is expected to post revenue growth Y-o-Y and declined Q-o-Q, mainly due to seasonality as in particular, AC revenue generally declined at the end of the year. Hence, the Q-o-Q drop despite growth Y-o-Y. Company-wide gross margin is projected to go up Y-o-Y, while being flat Q-o-Q.

Next slide, recap of recent major events. We participated in Automation Taipei 2023 in August, where we unveiled the concept of green factory providing a more comprehensive solution to our customers. At the same time, we are also promoting many high-efficiency products, such as [ i.e. ] performance motors, the highest performance motor product in the world launched by a Taiwanese company. We are also talking with the government and many customers about how to use the products to help speed up the operation of their factories and improve efficiency.

In the future, it could benefit both our partners, while our customers and the industry in Taiwan. In addition, we are very honored to be named as the most outstanding Taiwanese company in the industrial category in Asia Money survey. This award recognizes TECO's outstanding achievements in financial performance, management team, Investor Relations and so on, highlighting TECO's performance in these aspects. It is an honor for us as a company to receive such an honor and we'd like to share with you here. Moreover, on September 19, our factory in Mexico was officially launched and is now ramping up its capacity. A very important point is that this is our supply chain was too long before. So we couldn't do many things that we should have done.

Now the factory has been inaugurated there. On the day of the inauguration, in fact, many major OEM customers directly approach our Chairman and ask how to do business with us. So we expect this factor to bring us more business opportunities in the small motor category in North America. The factory is a highly automated factory. So in addition to producing [indiscernible] related motors and motors with North American specifications. It can also produce motors that comply with IEC standards. In other words, as it operation reaches maturity, it will not only support the North America and domestical market, but will also allow us to tap Central and South American market.

Therefore, this factory is a great strategic significance to us. We also hope that you will ramp smoothly and make greater contributions to the company next year. I'd also like to share with you that our new factory in Bangalore is near completion, we participated in a local exhibition in India in October. In addition to exhibiting industrial motors, we also showcased our products that are used in EVs. We aim to manufacture in this factory, industrial motors and EV products in the future. Currently, we are also making contacts with some local carmakers. This concludes my business update. Thank you very much.

[Andy Chien, executive]

Okay. This wraps up our presentation session. Now we will proceed with questions and answers. We now start the questions and answers. As our executives are seated, please allow me to remind you that if you wish to ask a question, please raise your hand so that our colleague can hand you a mic. We will have analysts who pose questions first. Before you start to speak, please provide your name and your affiliation. Thank you.

[Unknown Analyst]

I'm Hank from China Life. Your Q3 revenue was on par with that of Q2. However, your Q3 gross margin went down slightly. Could you tell us why? Was the decline driven by the decline of the gross margin of your Intelligence Energy business projects?

[Unknown Executive]

Both of our speakers earlier mentioned gross margin Actually in Q3, our Intelligence Energy's revenue accounted for 23% to 25% of the total. And in Q2, it was less than 20%. So from our business group mix, our high-margin Green Mechatronic Solutions revenue share went down, whereas Intelligence Energy's [ main ] business is engineering projects, the gross margin is lower as this business group has a higher revenue share, our gross margin may seem to go down. However, if you look at the individual business groups gross margin, our Air and Intelligent Life's gross margin increased. As for Green Mechatronic Solutions, both high voltage and low voltage product lines posted some other gross margin with Q2. So individually, each business group didn't experience big changes but there were some changes in the revenue breakdown.

[Unknown Analyst]

Could you tell us your targets for debt ratio and financial costs next year? I'd like to provide our perspectives on the debt ratio.

[Unknown Executive]

As engineering revenue increased. There will be some changes in the debt ratio. But the changes to our company may be quite small, they won't cause big impact. At the same time, we will examine our cash flow and either ask for better management of inventory or for acceleration of cash flows. So despite the higher needs for cash for engineering projects, our debt ratio won't be affected significantly. So this is our answer. Thank you.

[Unknown Analyst]

I'm [indiscernible] from SinoPac Securities. I think everybody is very interested in next year's outlook. Could you give us some kind of direction. Your expectations for the performance of your 3 major business groups. What is the outlook?

[Unknown Executive]

I think everybody is very interested in knowing the condition -- market conditions for next year, especially when this year, the economic conditions are quite sluggish. Next year, I think everybody is looking for a strong recovery. For TECO, and in fact, as 1 of our investors have mentioned earlier, in terms of financial costs, we will have some kind of control of our engineering costs to avoid that it being running too high because engineering projects require earlier financial investment and the payback time is no longer usually up to 1 or 2 years. So the purchase cycle per loans and the financial cost has increased in the preliminary stage. So we will have some more control there.

Generally speaking, in Taiwan because of the policy support during energy transition, I think Intelligence Energy, Green Mechatronic Solutions, engineering projects could have some potential to grow. That is something that we can expect but it all depends on how we pursue growth, how we manage our growth. And we need to run in their growth financially. I think in terms of Air and Intelligent Life, it may have already hit the bottom this year because the entities of Air Intelligent Life have shown some potential to grow in revenue.

So internally, domestically, I think things are a bit simpler. And however, for Green Mechatronic Solution, it is addressing the global market things have been less visible, that's clear, because conditions in Europe, China and North America may still be quite uncertain. Our performance in North America has been very strong this year. However, next year, we are not sure whether the policy support will be sustained. And moreover, because of the elections are coming in America, there could be some adjustments or a slowdown. This is something that we're paying attention to.

However, in terms of our order volume on hand, at least in America, we are not expecting a recession, while a slowdown may arise. With the support of our very aggressive policies and our initiatives, of course. So while the macro economic environment may not be that optimistic, it's all up to individual companies initiatives to spur growth and to maintain growth. As for Mainland China, we are a bit more conservative. With that, we are still pursuing for other opportunities such as leveraging the products or solutions that we developed in Taiwan, to apply them in Mainland China, so as to spur growth momentum. These are the efforts that we are working on amid a less optimistic market environment.

[Unknown Analyst]

I'm Julie Lee from Home Sin Investment. My question is about your outlook for Q4. Your intelligence Energy was guided to have revenue go down Q-o-Q and Y-o-Y. However, in terms of engineering projects, shouldn't Q4 be the traditional high season, as most of the engineering projects would have to rush up to meet the schedule. So the projection that you provided for IE, was it because of any delay in the project time line? Or just because the contract timing was happen to be the shipment timing.

[Unknown Executive]

Actually, only a small portion of our engineering projects are government projects. Governments engineering projects may have some kind of time line arrangements for things to be completed by the end of the year. However, most of our engineering projects are related to energy. They may need to take 1 to 3 years of project cycle. So we just do our work as scheduled. As for the timing of recognition of revenue it is something that has a big impact on the revenue that we recognized for the current quarter. So we are not going into a recession for the business group. It just happens to be recognizing a bit more -- a bit less revenue in Q4. But actually, in the long run, it is still registering an upward trend.

[Unknown Analyst]

What is your dividend policy next year?

[Unknown Executive]

Actually, for the past few years, our dividend policy has been quite stable, about 70% to 80%. So without any black swan or any big risk on the external market, I think the policy will be maintained.

[Unknown Analyst]

I'm [indiscernible] Nomura Securities. My first question is that in your revenue breakdown, you mentioned that in Q3, because your Intelligence Energy gain share and that business group is a lower-margin group. Company-wide gross margin was negatively affected. However, your intelligence Energy's Q3 segment and profits and losses also went down by 1.3%. Could you tell us why?

[Unknown Executive]

This is actually quite a simple question. The revenue of each of our projects could vary and sometimes it takes -- most of the projects take a longer time. For example, a project that we have in the [ Taiwan ] Airport. One of our core contractors, which was a civil engineering company pulled away from the project due to financial problems. So TECO took over the project. It was actually quite a [ tridental ] to us. And unfortunately, in Q3, we had a lot of revenue to be recognized so it has a relatively negative impact on our profit. Actually, each engineered project has its own time line and gross margin as well. The only difference is when the revenue will be recognized. And therefore, it could also have an impact on the gross margin.

[Unknown Analyst]

Do you expect the [ Taiwan ] Airport project to have any lasting impact? Or how long do you expect the impact to last? Or [indiscernible] wise, how much would you have to pair in terms of the negative impact.

[Unknown Executive]

Actually, we have recognized most of the things that we already knew. So it doesn't -- it will have a big impact on us when we recognize our revenue, that quarter, we feel like we will have done some voluntary work. So it was really very difficult for us.

[Unknown Analyst]

President Fann, you share with us some of your next year's outlook but they feel like that you talked about the market conditions in China, in America than in Taiwan. Could you tell us in more specific terms, whether you expect each of your business group to grow or decline next year and how much the range will be.

[Thomas Fann, executive]

I think we may have to provide you more details in the end of the year because we're still making budget as we speak now. So what we were able to tell you earlier was individual market and the target that we have set if the market conditions were bad, of course, we're still very active and aggressive internally. We still have to be very realistic, and we have to set more conservative or realistic growth plans, but perhaps in December after the Board of Directors meeting, we will be able to tell you more.

[Unknown Analyst]

This question I would like to ask is about your Green Mechatronic Solutions. I think you told us that the growth prospects in North America were very good. Could you tell us what was the ratio of the business from North America and also from China and Taiwan in Q3. Also, we know that [indiscernible] was a bit high schedule in North America in Q3 which was partly because of the progress of the power electric grid development in America. Could you elaborate? Also, could you tell us more about the visibility and the supply and demand and whether it has any impact on your product shipment.

[Unknown Executive]

I think we have several main markets with North America being an outperformer, relatively speaking, China and Taiwan have been negatively affected by a weaker market condition. So quite obviously, the revenue share of North America would go up. Currently speaking, actually, it is accounting for about 40% of the Green Mechatronic Solutions business group. For the past 2 years, North America has been growing quite nicely, maintaining double-digit growth. It happens to be in line with the policy of the U.S. government, and we happen to align very well with the policy currently speaking, we continue to just fit the contacts, fee the policy direction.

As Chairman Chiu told you earlier, while the growth seems to be slowing down but the overall market conditions in America will still be supported by the government. As for non-policy support, we have observed that some industrial companies seeing some slowdown in their order momentum. So this is a bigger trend. However, overall, in America -- in North America, in particular, with the support of industrial electrification and initiatives for carbon emissions reduction and green energy projects, the growth momentum remains to be quite strong. However, there may be some different bottlenecks materializing, for example, the power grid program that you mentioned.

Because the power grids in America are not centrally managed or implemented rather they are run by each stage, hence, leading to many problems because each stage and state government has a big role in executing and making the policies. All our gas producing states such as Texas or New Mexico, for example, may have different approaches. And this has given rise to different limitations. For example, in places where there are no power grid lines, we won't be able to sell our products and grids are the only limitations sometimes the lack or the shortage of some key components may also cause some constraints.

So we see the market potential. But because of these restrictions, we may have some delay in when the demand will arise. However, with the policy support and in America with the government support, I think the central government may pick up the pace. For example, the central government has already announced some grant to help each state government to upgrade their power grids with the support of new acts or new regulations, we hope that these acts will help to remove the bottlenecks.

[Unknown Analyst]

What was the act or deregulation that you talked about was it launched or not?

[Unknown Executive]

Well, it was already launched. It was for the support of power grid.

[Unknown Analyst]

Could you provide us with more details?

[Unknown Executive]

Yes. Actually, the program was launched to accelerate the speed of power grid construction of the states. The central government doesn't provide full subsidy to the construction work. However, federal state government each have their own obligations and rights. Currently, the federal government is taking the initiative to help the states to initiate some projects. I think we can provide you with details later.

[Unknown Analyst]

One more question from me. Your OP margin didn't grow sequentially. What about your OP margin in Q4 Will it go up? While you have guided your gross margin to be flat Q-o-Q. But in generally speaking, is it possible for your OP margin to be a bit better?

[Unknown Executive]

Actually, we have another version internally. We think it will be flattish Q-o-Q. With that, gross margin will be better than that of Q3. And our expense was estimated a bit higher. So I think we need to reexamine it that is why I just sent a message to our financial manager. And as if that number was correct. Therefore, in terms of OP, I think we may have some possibility to be better than Q3.

[Barry Huang, analyst]

I'm Barry from KGI. This question is about your E-Skid in Q4. Do you expect to ship what numbers of E-Skid do you expect to ship and also the number that you expect to ship next year.

[Unknown Executive]

This year, we have shipped 27 E-Skid so far. Of course, the timing of shipment depends on when the fields are well prepared. As for the number next year, we are still making some estimates. I may be able to tell you more in December.

[Barry Huang, analyst]

You originally projected the shipment number to be 30 to 40 units. Will that be the target next year? Or do you have to adjust it downward because of the delay of power grid construction?

[Unknown Executive]

I don't know for sure because right now, we really have to work with each of the client 1 of another because these are oil and gas fields. We can be quite certain when the power grid will be deployed. So we have to negotiate and talk to each of the clients and that may take some time.

[Barry Huang, analyst]

I have another question you are going to inaugurate your Indian factory this by the end of this year. Can you tell us the capacity this year. Do you expect there should be 150,000 units this year? How much would it take to ramp?

[Unknown Executive]

Actually, 150,000 units is the capacity of the Mexican plant. The Indian plant is a small motor plant. And aside from that, it would also provide e-powertrain. And we are actually working with the clients from both sectors and actually, there may be some changes when we completed the talk, and we will have to adjust the mix a little bit by then.

[Barry Huang, analyst]

So will make revenue contribution since it's going to be inaugurated this month?

[Unknown Executive]

Because it's inaugurated in November, it will have very limited contribution this year. However, before the inauguration, we've already developing the local markets through various means. Based on our current results, the OEM vendors or our distributors all told me that I told us that what they will believe what they see. So this tells us that you really have to start production locally before you can receive orders. This is why all the inauguration ceremonies become so important for us because these kind of occasions allow us to invite all our OEM customers and the distributors to come in so that they can witness that we actually make such kind of investment so as to start to engage the local customers and potential distributors.

This is why we are going to start this B line production line there. I think if you take our Mexican experience, for example, we are building a very margin, very highly automated line and our suppliers and OEM vendors and distributors, when they see what we do there, they become quite convinced, they start to believe that we are able to produce high-quality products there. This is why our potential in vendors and distributors will feel very confident that is why we are going to be quite covenant in our performance next year. As for this year, we think it has been very difficult for us because we have been developing the local market through trading. I think after we start operating the factory, we will have some more visible resource that we can tell you.

[Unknown Analyst]

I'm [indiscernible] from Fuma Securities. About your factory operations in India and Mexico. You talked about small motor and powertrain production. Could you tell us how long it take before -- from the time that you receive the order to design to production to shipments. Did you refer to EV or the industrial motors EV?

[Unknown Executive]

In terms of EV powertrain with traditional OEM vendors, usually, it takes more than 1.5 years. That's the point that we will start to discuss with the customer because the OEM inventory, we have to go through all kinds of reviews and they have to check our sample on site, and it would take a couple of stages before we can really sign an agreement and when we start mass production, it will usually be 1.5 or even 2 years later.

[Unknown Analyst]

So do you mean that the factory would not make revenue contribution until 2024 and 2025?

[Unknown Executive]

Well, actually, there's another part of it because the EPS business is developing locally. So the development progress is relatively faster because we already have some existing products, and they have been validated in Taiwan. So in terms of the before market segment, if they can just do the preliminary qualification, then they will be able to start manufacturing very quickly. Although those products aren't going to be manufactured there, we will have to sell them to the market.

[Unknown Analyst]

Understood. So with the factory there, are you going to be able to approach the carmakers from Europe or only carmakers in India?

[Unknown Executive]

Most of them will be the car manufacturers locally in India.

[Andy Chien, executive]

Ladies and gentlemen, do we have any other questions?

[Unknown Analyst]

I'm [indiscernible] from China Life. Could you give us some color around your BB ratio for your small and large motors in Q3. In terms of your capacity of your new factories, do you expect the numbers to go up in Q2 or Q1 next year?

[Unknown Executive]

The BB ratio of our big motors has been above 1. It has been quite good. The order stream for our high-voltage products is relatively steady. As for the low-voltage products, demand has been weaker in Taiwan and China. So auto momentum could be affected by market and economic conditions. As for our new factories as Chairman Chiu told you earlier, we may have some challenges next year. However, there are still many opportunities, for example, in Mexico before we have the factory in Mexico, customers generally do not approach us for business with the factory in Mexico.

As we just told you, on the day of the inauguration, large customers directly approach Chairman Chiu and ask if we are able to support them going forward. So because of the proximity, opportunities will present themselves. That is something we weren't able to do before. We have the same expectations for the factory in India. Previously, it was very difficult to sell products into India with the local factory as Chairman Chiu told you, seeing is believing, customers would be much more willing to place orders. So these are the benefits that we expect to generate from having new factories there. It's going to benefit our business.

[Unknown Analyst]

Are you going to run those large and small motor sale or just a bit manufactured a bit more small motors locally? Because these 2 factories will mainly manufacture low-voltage products, they will benefit the low voltage sectors more. In your Q4 outlook, you guided your Intelligence Energy revenue to go down next quarter. However, if we look at the revenue breakdown, your lower margin product would actually go down quarter-over-quarter, whereas your high-margin Green Mechatronic Solutions revenue will increase then why would you expect your company-wide gross margin to be flat Q-o-Q?

[Unknown Executive]

I think there was a bit of misunderstanding. Actually, in Q4, we project that the gross margin will be better, better than Q3. So that was in line with your thinking.

[Unknown Analyst]

Management team, I have a follow-up. Earlier, you said that your engineering order would be valued at about TWD 30 billion or so. However, engineering projects our lower-margin items. If you look at your orders on hand, given the labor shortage and material shortage problems is actually very challenging for EPC projects. And you could run into problems like the ones that you encountered in the airport project. And I think some of your peers have experienced similar situations before as well. In terms of your future strategy, could you maybe share with us, whether you're going to do business, some what differently than before? And what would be the future direction. For example, maybe would insist that your TECO products will have to account for a certain ratio or you would have to fetch a certain margin before you would decide to engage in your project? Otherwise, I think it will be very difficult and very sad for you to do all the voluntary work.

[Unknown Executive]

Actually, we normally didn't do [ voluntary ] work. Such extreme situations only happen very, very rarely. If we look at our orders on hand, mainly they are engineering projects from the projects for Tai Power or the [indiscernible] project or substations. In fact, we have been very prudent in the way we select partners and business owners of projects are also very important. And secondly, like every company in the engineering field, we all want to improve our gross margin. However, engineering projects are very competitive. It's very difficult to increase gross margins.

Actually, we have done some comparison between ours and the other companies in the market in terms of OP margin or gross margin, we are very, very strong. That is why -- that is because of our relentless control of our cost. So we have to look at all the gross margin considerations and the cost, we have to look at them in a hole to seek to maintain a good OP margin. However, engineering projects per loan, they can be very long in terms of time line. And considering all the interest rate, export rate and material costs the grid can be very high. So when we do our cost calculation, we would take into consideration all the factors such as the cost of the material cost.

So usually, we'll be more conservative in the way we estimate our cost then we would decide to take on the project. We will also make sure that there will be some legal room for us. More in terms of the risk control, we always have very rigorous approach in how we manage them. In terms of the contracting projects in the EPC or joint projects, we at TECO is an electric machinery company. We have many projects. And going forward, if we are going to have joint projects where we have to engage civil engineering companies, we will have to be more cautious. The principle that we are upholding now is not -- is to really stay away from such risky joint projects.

[Unknown Analyst]

So what you are seeing is like Taiwan Power [ steam ] project, the project can go as long as 2 to 3 years, and you may not be able to complete it by Q4, given the longer project cycle curve today, it will be very difficult for you to estimate the revenue recognition time?

[Unknown Executive]

Yes, that's correct.

[Unknown Analyst]

What was EPC as a share of your Intelligence Energy revenue?

[Unknown Executive]

Currently, EPC accounts for approximately 60% of the Intelligence Energy's revenue but actually, besides EPC, we also have many products that account for quite a big chunk of Intelligence Energy's revenue.

[Unknown Analyst]

Currently, EPC accounts for 60% to 70% of Intelligence Energy's business. When [indiscernible] enters the peak of revenue recognition, will that make any change to your revenue mix?

[Unknown Executive]

Currently, I think the rent will be still the same because overall, our products are also growing. There may be some changes in the mix, but it won't be very big.

[Unknown Analyst]

When would you expect your [ Second ] business to recognize more revenue going forward?

[Unknown Executive]

I think we'll have to look into more numbers maybe the second half of next year.

[Unknown Analyst]

How much revenue have you recognized for [ Satcom ] business?

[Unknown Executive]

We just started with the [ Satcom ] business.

[Unknown Analyst]

So are you going to sign price adjustment agreements with your clients.

[Unknown Executive]

We are very much about risk control and management, things like cost of materials and ForEx changes, we would all take into consideration and discuss them with the business owners.

[Unknown Analyst]

If the material shortage can be relieved next year and the progress of the power grid construction can pick up, how many units of E-Skid do you expect to ship for next year?

[Unknown Executive]

We also hope that the actual shipment volume could surpass our original estimate of 40 units. However, if we run into material shortages or things like a delay in power grid construction, we will have to find a way to work around them.

[Andy Chien, executive]

We don't have any other questions on the floor. So we will conclude today's conference. We will upload the video and audio to our website and also the MLPS site. If you have any other questions, please feel free to contact us at the IR team of TECO. Thank you very much for your participation. We wish you a good day.