Airtac International Group

TWSE:1590

Earnings Call Analysis

Airtac anticipates recovery despite weak demand in Q3.

In Q3 2024, Airtac reported a revenue of RMB 1.639 billion, down 5% year-on-year, affected by weakening demand amid China's economic issues. Gross profit also fell by 5%, resulting in a gross margin of 46.33%. Going forward, the company expects Q4 revenues to improve due to upcoming new product launches and increased customer orders, aiming for a better operating margin. The auto and electronics sectors exhibit potential double-digit growth, contrasting with the declines in battery and energy lighting segments. Capital expenditures for 2025 are projected between TWD 2-3 billion, reflecting ongoing investments in productivity improvements.

Navigating Recent Challenges

In the third quarter of 2024, Airtac faced notable challenges, with consolidated revenue dropping to RMB 1.639 billion, reflecting a 5% decrease year-on-year. Gross profit also fell by 5% to RMB 759 million, leading to a gross margin of 46.33%. Factors contributing to this decline included weak demand due to economic adjustments in China, delayed customer orders while awaiting clarification on government incentives, and increased operational costs tied to rising labor wages and tariffs on cross-strait transactions.

Mixed Performance Across Industries

The earnings call revealed a diverse performance across various industries. The electronics sector remains a robust segment, accounting for 28% of total revenue with a remarkable 22% growth year-on-year. Other industries such as automotive and machine tools saw gains of 20% and 28%, respectively. Notably, however, the battery and energy lighting industry faced significant setbacks, with a 40% and 78% decline, respectively. Overall, while traditional sectors are showing some recovery, the company must contend with significant volatility.

Outlook for Recovery and Growth

Airtac's management expressed optimism regarding future growth, anticipating a more favorable fourth quarter driven by anticipated increases in customer orders and new product launches set for early 2025. The management indicated that these factors could lead to a double-digit growth trajectory for 2025. Moreover, the relocation of production from Taiwan to China, expected to be completed by mid-2025, aims to mitigate tariff impacts and improve margins, which had been reduced by approximately 0.5 percentage points due to tariff costs.

Improving Margins and Efficiency

Despite the current pressures on margins, the management team anticipates that operational efficiency will improve as production relocations progress and inventory turnover remains stable at around 151 days. Following a planned salary increase of 3% to 5% for employees, moderate labor efficiencies are expected to gradually return over the next two quarters. Furthermore, a CapEx investment ranging between TWD 2 billion and TWD 3 billion is projected for 2025, earmarked for enhancing equipment productivity.

Dividend Commitment and Stability

Airtac is maintaining a strong commitment to its shareholders with a cash dividend payout ratio raised to 50% for 2024. This reflects the company's confidence in generating free cash flow despite the recent challenges. The management's strategic focus on solidifying its market share, particularly in the pneumatic component sector, alongside exploring growth through new product lines and market penetration, establishes a robust framework for resilience and potential upside.

Conclusion and Strategic Positioning

While Airtac contends with short-term obstacles stemming from macroeconomic factors and sector-specific volatility, the company's strategic initiatives, including production relocations and diversification in product offerings, position it favorably for potential recovery and growth. With a notable market share in the pneumatic sector and expectations for continued improvement across traditional industries, Airtac's focus on operational efficiency and market adaptation will be critical moving forward.

Earnings Call Transcript 2024-Q3

[Angela Xu]

Hi. Good afternoon, good morning, everyone, and thank you for standing by. Sorry for the delay. We ran into some technical issues, and we just solved it. And welcome to the Airtac's Third Quarter 2024 Earnings Call. I'm today's host, Angela Xu from Citi's Taiwan consumer and industrial research. With me today on the call is CFO, Mr. Ivan Tsao. Following the presentation, we will conduct a QA session. And to [indiscernible] more efficiently, during Q&A, if you wish to ask questions, please click raise-hand button. You can unmute yourself and ask questions to the management after we call your name.

With that, I will turn over the call to Ivan. Ivan, the floor is yours now. Thank you.

[Ivan Tsao, executive]

Yes. Thank you, Angela, and good day, everybody. This is Ivan Tsao speaking from Airtac, and welcome to join this conference call. And as usual, let me brief our third quarter results and current market situation. In general, the best demand for pneumatic is driven by the rising labor cost and declining labor population. Especially for the declining labor population, the number of new births has been lower than people death from the year of 2021 in China. And young generation don't want to work or they don't want to work in bad environment. And customers have to improve automation, even they don't want to add additional new capacity, but they still have to improve the automation level of their existing capacity to be better automated. And pneumatic is replacing simple manpower to improve automation and also has CapEx demand and component replacement demand at the same time.

Whenever there are production activities, they need to replace pneumatic components on their existing process. However, the economy declined in China over the past 2 to 3 years as mainly caused by abnormal control from China government and also from late [indiscernible]. And people seems lost confidence to government policies and they just spend money on [ meal ], on traveling, limited on end product consumption, it hurt China coming demand. And even Airtac continue to launch more new items to support more existing customers, approach more new customers and get more shares from the market to dilute such negative impact of the weak demand. But the overall shipment situation is still not as our expected. Especially in this third quarter, we have several factors that lead to a relative lower profit margin.

Firstly, in addition to weak demand, some customers delay their orders or shipment while waiting for the implementation details of the incentive policies issued by local government and the result of the U.S. presidential election shipment lower than our expected and resulting in a low capacity reduction rate and suffer with fixed cost leverage. And we currently expect to increase our reduction rate gradually starting from late November or early of December to improve the fixed cost leverage.

Secondly, as usual, we increased our employees base salary by 3% to 5% in July each year, which usually takes around 2 quarters to dilute such [indiscernible] impact and recover our labor efficiency and also can improve our margins.

Third one, the agreement between China and Taiwan [ EFA ] on tariff has been partially canceled from this third quarter, and we have to bear higher tariff costs between the transaction of China and Taiwan subsidiaries. And this issue reduced our gross margin for the third quarter by about 0.5 bp. And we have begun to relocate some items production site between our China factories and Taiwan factory and start to resolve this issue from fourth quarter of 2024 to first half of 2025, that we can dilute such or decrease or terminate, even terminate such negative impact from the tariff between China and Taiwan.

And next, I will announce the company's third quarter financial results. Our reviewed consolidated revenue for the third quarter of 2024 was RMB 1.639 billion, a 5% decline year-on-year. Gross profit was RMB 759 million, a 5% decline year-on-year. Gross margin was 46.33%. Operating income was RMB 459 million, a 10% decline year-on-year. Operating margin was 28.04%. Net nonoperating income was RMB 24 million, including RMB 21 million of FX gain, RMB 10 million loss on equipment disposal, which comes from the disposal of the replacement of equipment and to improve our production automation and production efficiency. RMB 5 million subsidy from government, another RMB 5 million of interest income and RMB 5 million of interest expenses. Income before income tax was RMB 483 million, a 15% decline year-on-year. Pretax margin was 29.52% and net profit was [indiscernible] decline year-on-year. Net profit was 23.47. EPS for the third quarter of 2024 was TWD 8.66 and TWD 29.11 for the first 3 quarters of 2024. Inventory turnover days was around 151 days and 121 days for the receivable turnover day. Those 2 numbers are still healthy and also have been trend stable for years.

Revenue from top 8 industry for the third quarter of 2024. The biggest one still was electronics, around 28% to our consolidated revenue. It's a 22% growth year-on-year. Second one, packaging, was around 9% to revenue, 4% growth. Auto was 8% to revenue, 20% growth. Battery was around 8% to revenue, 40% decline. General machinery was around 7% to revenue, 3% growth. Machine tool was 7% to revenue, 28% growth. Textile and dressing machinery was 5% to revenue, 29% growth year-on-year. And the energy lighting was 4% to revenue, it's 78% decline. And by the way, the proportion of revenue from the aforementioned industry is only for direct customers revenue, excluding 30% of the monthly revenue from distributors. For current market situation, although there is noise in the market regarding to China economy situation, we believe China government will focus on economic improvement after they resolve most of the political issue. And they also have timely proposed [indiscernible] announcement or sustenance incentive process in the past couple of months. We expect more and more customers will restore their confidence and accelerate their capacity expansion plans.

And as the demand of various industry for pneumatic component in coming quarters, we expect electronics customers demand or electronics industry demand will be stronger than past 3 years, even could be a similar percentage in past -- as they did in the past couple of quarters. And not just only most of our customers' customers have digested most of their inventory and placed more orders to our customers, but also they say they could be more new model launched in first half of 2025. Customers used to build their new production line 3 to 5 months ago or 3 to 5 months before the launching date. Even though we cannot ensure where the electronics industry can maintain a revenue growth rate of 20% to 30%, even higher percentage in coming quarters, there could be a double-digit opportunity to maintain. They still could be a great opportunity to maintain double-digit growth in coming quarters or in 2025. Better revenue growth from auto industry also could be expected in coming quarters or coming years, mostly caused by share gain. And we have built up our brand image in auto customers, and we still can sustain better market share in auto industry in coming quarters and enjoy better revenue growth from auto.

Moreover, some traditional demand like textile, machinery, machine tool and packaging also has been better from that of last year. And China government has reiterated its intention to expand the incentive scale of new equipment to replace old equipment. So we expect those traditional industries to enjoy double-digit growth in coming quarters. However, we still have to suffer weak demand from battery and energy lighting due to high comparison base and some noise on overexpansion or overcapacity. And it will be low base in 2025 from those 2 industries. And the revenue percentage of those 2 industries also has decreased from 28% in 2023 to 12% currently. So even the [indiscernible] of such weak demand from battery and solar but we expect the impact will be lower and lower from those 2 industries. And once we have a better growth from electronics, traditional application and automotive industry and lower impact from battery and solar, it could be not difficult to sustain double-digit growth for 2025 from shipment. Even it's still too early to tell the guidance number of our 2025 operation to the market, but we still expect the shipment of 2025 should be much better than 2024.

Pricing is reasonable for pneumatic and the weak of the Japanese yen won't affect the competition with our domestic peers, mainly caused by the cost material -- cost of material target for around 40% to 50% of cost of goods sold. And most of the material costs are metal materials. So Japan have not produced too much metal and they still have to buy those metal materials from foreign suppliers. Once weaker yen, they have to spend higher raw material cost, even they can benefit from their Japan production's overhead and labor costs. In addition, the production capacity of our main competitors in Japan is around 40% and another 30-plus percent is in China. The currency impact should be similar to Airtac. So basically, whenever the Japanese yen is weaker or stronger, it never impact or affect the competition between Airtac and Japanese peers.

And raw materials pricing still fluctuate in the reasonable range, which will be a little friendly for our profit margin in 2024 compared to 2025. In addition, the company is continuing to improve material application and reduce our production cost. And OP margin still will depend on the revenue scale and capacity utilization rate, even we still can improve our margin by launching more new items and continue to improve our internal production efficiency. Our current [indiscernible] capacity rate is around 85% to 90% for pneumatic and just around 30% for linear guide. The production cycle of pneumatic component is long and most of that are made by natural materials.

So the inventory write-off risk could be very limited. And pneumatic is a short lead time business. And no matter the economy is good or bad, its visibility is just around 1 month. And also whenever the economy is good or bad, this industry don't have to digest inventory in sales channel or customer side because most of the inventory stay on manufacturer warehouse. And we are not sure whether the demand for the next quarter or next year will be good or bad. And we can only predict the shipment or revenue based on our experience, market situation and feedback from our customers.

And we still expect the shipment in Fourth quarter, even in 2025 could be better than past 3 quarters, not just caused by those postponed orders or demand from customers waiting for the local government implement more details of the incentive policy, U.S. President election and the more new models will be launched in first half of 2025. And shipment could be better from November or December of 2024 and also could sustain to 2025. And we also expect China government will release more seamless policies to accelerate demand also could restore people's confidence and spend more money on consumption and more customers will spend their capacity or CapEx aggressively.

And our CapEx in 2024, even 2025, 2026 still could be TWD 2 billion to TWD 3 billion. And we have generated free cash flow and still can improve it. We also have increased our cash dividend payout ratio to 50% in 2024 and also could be higher in coming years. And the company does not have any [indiscernible] plans in the short term. And we also don't have any plan to do any fundraising rights issue. It's my briefing, and we could discuss all your questions. Thank you.

[Angela Xu]

Thank you, Ivan, for the very comprehensive presentation. So again for QA session, if you wish to ask question, please raise hand we will call your name. And from my end, I actually have one follow-up for the third quarter result. So Ivan, you mentioned about [indiscernible] cancellation actually caused a bit of gross profit margin contraction in third quarter. And I just wonder and how much of the total shipment in China is from Taiwan facilities?

[Ivan Tsao, executive]

We have different items produced in different factories. So the amount transaction between the [indiscernible] still depends on customers and demand. And it could be various by each month.

[Angela Xu]

Got it. Okay. Okay.

[Ivan Tsao, executive]

So from this June, we have [indiscernible] to plan remove some production from Taiwan factory to China factory, then we can decrease such tariff between our subsidiary transaction.

[Angela Xu]

Got it. And you mentioned the impact on gross profit margin is about 0.5 percentage point. Is it? Correct?

[Ivan Tsao, executive]

Correct. Yes.

[Angela Xu]

Okay. Just double check. And we expect we are able to move the -- or lower the impact by first half of next year?

[Ivan Tsao, executive]

Yes. Basically, yes. Yes. And the impact will be diluted from fourth quarter depend on various production or various items relocated from Taiwan factory to China factory.

[Angela Xu]

Got it. And also for the forward-looking perspective you just shared with us. Sorry for that. So do we still maintain our view that fourth quarter sales will improve quarter-over-quarter? And in terms of the end industry, which sector would be the key driver for fourth quarter in your view?

[Ivan Tsao, executive]

Yes. Basically, the lead time is short. So we just based on some customers told to Airtac, they have postponed their shipment of demand caused by the [indiscernible] have not implemented their incentive process details. And some customers, they still want to wait the result of the U.S. presidential election, then they will do more capacity expansion plans. And the other reason why we expect fourth quarter revenue will be better than third quarter, it could be some new models launched in first half of 2025. And before their launching date by 3 to 5 months, some customers will put up their production line, then it could support fourth quarter revenue of this year.

[Angela Xu]

Got it. Okay. So, [ Ming ], please, you can ask a question now.

[Unknown Analyst]

And Ivan, yes, I got 2 questions. So the first question, Ivan, could you comment on the current pricing environment for both linear guide and [ both screw ]? And what is our major competitors' pricing strategies for these 2 major products?

[Ivan Tsao, executive]

We don't have both screw product currently. And Linear guide because of weak demand from early '23, most of the peers or their [indiscernible] have increased price aggressively. And it could be high teens even 20% pp -- 20 pp from early '23 to maybe second quarter of 2024. But in third quarter, maybe such pricing could be a little stable in low level. And based on past experience, still have to wait the demand recover, then peers will increase their price. And pricing for pneumatic is still pretty reasonable. We won't say there is no pricing change, but selective items for selected customers still have some pricing competition. But basically, it's pretty reasonable for pneumatic market. Thank you.

[Unknown Analyst]

Okay. And my second question, since you mentioned that the 4Q shipment should be better than third quarter and the impact from [ Acthar ] in 4Q should be milder as well. So for your OP margin, do you expect to improve Q-o-Q in fourth quarter?

[Ivan Tsao, executive]

Basically, once we have a better revenue scale, quarterly revenue scale in fourth quarter, the OP margin should be better than third quarter of the year. And we have relocated our product production site from Taiwan to China factory gradually. Some of the items production line may be a little simple. It could be completed in fourth quarter of this year. But most of the items still have to extend it to first half of next year, and we can complete most of the relocation.

[Unknown Analyst]

And one more question. So since your utilization rate for pneumatic component is above 80% now. So what is your plan to -- for the CapEx for 2025?

[Ivan Tsao, executive]

We have not finalized our forecast or budget for 2025. But basically, we still will spend some CapEx to improve our equipment productivities. And we're still in construction -- constructing some buildings for basically new products. So basically, the CapEx number in 2025 still could be around TWD 2 billion to TWD 3 billion and still depends on the shipment and market situation.

[Angela Xu]

Hello, there. You can ask question now. Thank you.

[Unknown Analyst]

Just one quick question from my side. I just want to check what is the linear guide sales numbers in third quarter. And as the company started to be more flexible on the linear guide promotion, do you see more progress of the clients willing to using our product in recent months? And what do we expect the growth to be next year?

[Ivan Tsao, executive]

Yes. Basically, the overall demand of linear guide in the market is still pretty weak. And our pricing before we change our pricing strategy in mid- to late of July, the gap just around single digit. It's not good enough to convince customers change their [indiscernible] suppliers to Airtac. And after we change our pricing strategy and we still need to take 1 to 2 months to promote to our customers. And customers still have some inventory from their existing [indiscernible] suppliers. So even our order book in this August or September have been a little better than first half of this year. But the additional revenue contribution is still pretty limited because P plus Q, better Q, but lower P. And more and more customers, they tell to Airtac, they will replace or place some orders from other suppliers to Airtac gradually, and they still take time to improve our shipment of linear guide. But basically, once we have a higher pricing gap lower than Taiwanese peers or Japanese peers and also expect the market demand will be a little better in coming quarters. The pricing gap will be increased, then we can convince more customers [indiscernible] bring orders to Airtac in coming quarters. And even our shipment in 2024 of linear guide still will lower than our expectation. And year-to-date, it could be around 30-plus percent growth year-on-year. And we still expect we could have such number growth in 2025. But at the same, we have not financed our forecast or budget for 2025. It's just for roughly projection or expectation for linear guide shipment.

[Angela Xu]

Next question, [ Jeremy ]. Please unmute yourself, please.

[Unknown Analyst]

Yes. Just a quick question. With regards to your comment about some customers delaying their shipments until after the U.S. elections. In your conversations with them, do you think that there's a difference in their decision whether or not Trump is going to win or if Harris wins? I mean, just because there might be a different interpretation on the risk of tariffs, right?

[Ivan Tsao, executive]

Yes. Basically, [indiscernible] who will win this election, it's just the difference between is bad or worse. And even if it's just a difference between the bad or worse, but some customers still will based on different candidate policies to decide or change their expansion plan. So just partial of the customers, they told to Airtac, they want to wait the election. But the essential reason why the demand or shipment is weak in China market, mostly still caused by people don't have too high confidence of government or they limited on end product consumption. So governments still have to -- China government still have to release more incentive policies to restore people's confidence and spend more money on consumption. And election just a very small percentage impact to the shipment in third quarter of the year.

[Unknown Analyst]

I see. Okay. So basically, their view is that, I guess, the China's domestic stimulus is more important than the geopolitics.

[Ivan Tsao, executive]

Yes, basically, yes.

[Angela Xu]

Ivan, I have a follow-up question on your plan to move more order to China facility from Taiwan. So how do we deal with our capacity in Taiwan [indiscernible] if we continue to allocate more orders to China facility? And if it's running at lower utilization in Taiwan facility, would it affect our margins?

[Ivan Tsao, executive]

Basically, we accrue all the direct labor cost and all the depreciation expenses in income statement in China production. So even the utilization rate is lower, it will impact our margin too much because of those related expenses in balance sheet have in income statement items already. But the production efficiency in our China factory still higher than our Taiwan factory. So once we relocate some production from Taiwan factory to China factory, it's good for our consolidated margins.

[Angela Xu]

Got it. Next question comes from [ Derek ], please.

[Unknown Analyst]

I just got one question. Ivan, could you -- not sure if you right now got a new target for your linear guide business revenue for 2024. That's for one. And also, could you give us some color regarding your price gap versus your Taiwanese peers after the price adjustment in 3Q?

[Ivan Tsao, executive]

Yes, [indiscernible] year. So basically, we still expect the shipment from this November or December will be better. So we don't want to talk any numbers for the linear guide revenue for 2025. There's still some uncertainty in next 2 months. And pricing gap depends. I mentioned from mid- to late of this July, we have changed our pricing strategy. And we also divided our potential customers by different level based on their total linear guide demand and give them different kinds of discount. So the pricing gap between [indiscernible] and Japanese or Taiwanese peers based on what kind of customers. The highest one, the gap could be 20% again and lower one still could be single digit or 10% lower than our peers based on their current market price.

[Angela Xu]

Next question comes from [ Kenny ]. Please unmute yourself.

[Unknown Analyst]

I have a couple of questions. The first one is you just mentioned that fourth quarter shipments could be possibly better than third quarter. I'm wondering if that's applied for both pneumatic and linear guide and which products are you seeing better demand for the final quarter of this year?

[Ivan Tsao, executive]

We just based on the overall consumption of [indiscernible] to expect fourth quarter shipment will be better than third quarter shipment. And basically, we don't want to divide it to -- it's coming from pneumatic or linear guide weight. And linear guide, there's still so much addressable market for Airtac, just the market demand is pretty weak and customers can get much cheaper linear guide from their existing suppliers. And they are not urgent to transfer or change their linear guide supplies to Airtac. But once we continue to promote our linear guide product and convince customers we have a higher pricing gap or much lower pricing than their existing suppliers, maybe still can encourage some customers to change their linear guide supplies to Airtac in coming months or coming quarters.

[Unknown Analyst]

Okay. Got it. Understood. And another question is that regarding overseas market situation, could you share a little bit on the shipment growth for situation for this year? And how do you expect them to be in coming quarters? And also, do you consider to disclose the percentage and growth rate going forward in coming quarters if you think the time is right?

[Ivan Tsao, executive]

Yes. Basically, lead time is short, and we don't want to disclose any revenue growth rate from overseas market or China market. We just will support or provide further revenue growth rate in coming quarters, in the coming years. And the issue of our non-China business still could be similar to our China business in 10 to 20 years ago brand image. Pneumatic is a complicated component. So many customers have very deep brand image, Japanese image, European image better than China. So we spend more than [indiscernible] years in China, then we have a better progress in past 10 years. And we still try to extend such progress from China market to our non-China market. And we have recruited more local salespeople and also attend more customer [indiscernible] ratio to improve our brand image in non-China market. Progress has been better in past 3 years. And the revenue growth rate also have been higher than China revenue growth rate. So we still will increase our headcount of sales people in non-China market. And the progress in Europe and North America also could be better than other areas or countries and still could be improved. And basically, all of our non-China sales team have to do is to promote our product aggressively. In addition, pneumatic is a complicated component. Also, it's an industrial component, but it's very small finish to customers' total production cost. So it's not easy to convince customers to change their pneumatic suppliers to made in China. And we have linear guide product already. So we have asked our non-China sales team, not just improve our pneumatic business, they also have to promote our linear guide product aggressively. Maybe some of the customers, they don't want to buy pneumatic from Airtac in past. But linear guide is a higher ASP or higher percentage to customers' total production cost, also could be a little simpler than pneumatic. So we could convince customers buy linear guide from Airtac in the range. And once they buy linear guide from Airtac and also -- they supported Airtac good product quality, good sales service, [indiscernible] and lower pricing, maybe some later, period later, they can buy pneumatic from Airtac, not just buy linear guide from Airtac. So basically, our sales rate in China, we try to apply pneumatic to improve our linear guide business in China. But we try to extend our linear guide business to bring more pneumatic business to Airtac in overseas market in coming years.

[Angela Xu]

Thank you. And next question comes from [ Jodi ]. Please unmute yourself and ask question. Thank you.

[Unknown Analyst]

I have 2 questions. The first one is now it's end of October. So I wonder if you could like comment on the demand trend you see in October, maybe from a high level. Do you see any potential improvement? That's my first question.

[Ivan Tsao, executive]

Yes. Basically, the average day shipment in October still could be higher than November -- sorry, higher than September or third quarter. But plus the national holidays in October, the working days could be 2 to 3 days less than September. So the month revenue of this October still will lower than September, but the average day shipment of October could be higher than September. And the order book or PB ratio has been higher than third quarter in October already. So basically, we still expect the government, the China government, they release more stimulus policies and try to restore people's confidence. Maybe they still have some improvement in past 1 month already. And we still expect such improvement could sustain to next couple of months, even 2025 continuous.

[Unknown Analyst]

That's very helpful. My second question is about GP margin. I think this quarter, the GP margin is about 100 basis points lower than last quarter. I think just now you mentioned the tariff impact about 50 basis points. And for the other 50 basis points, I wonder, is it mainly due to our linear guide price cuts? Or is there any other reason for that?

[Ivan Tsao, executive]

There could be so many reasons. And while you mention the linear guide pricing cut, it still will -- some negative impact in short term unless the new tax rate will be better, better in coming quarters, then they can dilute some pricing cut negative impact. And lower utilization rate in third quarter of '23, even it could be a little low season compared to second quarter, but we still sustain our utilization rate to be around 90-plus to 95%. But the shipment in third quarter of this year could be much weaker than our expected. And in this July or May, we expect third quarter shipment will recover or will improve caused by the third preliminary section of the meetings. And we -- most of the customers, they expect more -- numerous classes will be launched after this meeting. But the conclusion of this meeting, the announcement seems not as high expectation as customers think. So shipment is lower. But we have built up a little higher inventory in July already in late June or early of July already. So utilization rate in third quarter or in August, September just around 90%, even lower than 90%. So [indiscernible] and the utilization rate also is negative to this third quarter's gross margin.

[Angela Xu]

Thank you, Jodi. And next question comes from [ Joe ]. Please unmute yourself and ask questions.

[Unknown Analyst]

Can you comment a little bit more on the competition landscape in pneumatic market, especially our initiatives of launching more SKU to catch up with our competitors. Do we see any market share gain? And how should we expect the contributions from this SKU in the next year?

[Ivan Tsao, executive]

Yes. Basically, we still will based on market demand to launch more new items in coming years. And we just have around 240,000 or 250,000 items currently, still much less than many competitors 700,000 items. And even we have not delivered pretty good results in third quarter or year-to-date. But as we know, the other 2 main competitors, their China business since declined by teens percent year-to-date. So basically, we still gain shares. And our current market share in China of pneumatic could be 28%, 29% by value. But by volume, maybe we have been similar to SMC's China market share. So basically, we still try to achieve our expectation by the year ended 2028 or 2030. We still expect we could have 30-plus to 35% China pneumatic market share. And so far, we still enjoy pretty good market share in China pneumatic market, and we still try to improve it and sustain it.

[Unknown Analyst]

And a very quick follow-up regarding the competition. Since the demand in pneumatic is very sluggish in China, do we see more intensified competition coming, especially from the local brands since they can offer a very large price discount and our customers are more price sensitive now?

[Ivan Tsao, executive]

Yes. Maybe you have heard some [indiscernible] company or listed company in China try to enter in pneumatic market. But basically, it's very difficult for them to compete with SMC, Festo and Airtac. Mostly, the SKUs of pneumatic could be pretty high or so many SKUs, 700,000 items for SMC, Festo, 250,000 items for Airtac, such many SKUs and to support customers very short lead time. Then you have to build enough inventory for each item to support customers' lead time in 1 to 2 weeks. At the same time, you have to keep very high management efficiency for production plan, production product quality, unit production cost, inventory management, so many measurement actually very much higher. So the company [indiscernible] tried to mention, they have announced want to enter in pneumatic market from late of 2021 or 2022, have been 3 to 4 years. And they not set up new capacity. They bought existing pneumatic players in China, but have been 3 to 4 years. But we have not heard so many SKUs of pneumatic that launched to support customers. So basically, we still will observe competitors include international peers or local China players closely and also will react any condition from any peers to sustain market share improvement for Airtac pneumatic business.

[Angela Xu]

Thank you, Joe. And our next question comes from [ Derek ]. Please unmute yourself and you can ask question. Hi, Derek?

[Unknown Analyst]

Sorry, my question has been answered. Sorry about that.

[Angela Xu]

Okay. No worries. Right. And so due to the time constraint, we can take one more -- we can take questions from one more investor. So again, if you wish to ask question, you can press hand and we will call your name. Right. So Ivan, I have one quick follow-up. So for auto industry, you -- earlier you shared in the commentary, you mentioned about share gain. So where does the share gain mostly come from? Is it from local players or foreign players?

[Ivan Tsao, executive]

Maybe both. Basically, we just have second tier or third tier auto customers in the past. But from around 4 years ago because the car sales was not so good for those traditional auto customers, and they also have some production cost pressure, it made a pretty good opportunity for Airtac to support their noncore production process first. And after they applying Airtac product found it is good enough, then we can increase supporting to customers. And we also have some JV, local JV auto customers or limited from international auto customers. So basically, we still can increase our supporting to those auto customers in coming years and also can enjoy pretty good revenue growth from auto business.

[Angela Xu]

Got it. And for electronics, is it possible for us to break into like more semi-related industry?

[Ivan Tsao, executive]

Yes. Basically, we still have some items can support semi customers, but just the percentage could not be as high as SMC did. But basically, we still will launch more items, new items related to semi customers demand gradually.

[Angela Xu]

Got it. Thank you. All right. Final call for questions. Hi, [ Willy ], you can ask questions.

[Unknown Analyst]

So regarding to the semiconductor product you mentioned, I remember previously you talked about we don't have a plan to get into semiconductor because that's SMC's main territory. Are we changing our strategy right now? And then do you have a target that semi will be in our product portfolio or percentage that will be in our portfolio in maybe in 2 to 3 years' time frame?

[Ivan Tsao, executive]

Basically, a single item for so many different application, different customers include semi. And we still don't want to talk too much about this issue. And we say we are a local China company, and we can enjoy the China government local procurement policy. And we have some cooperation with some customers. And so far, I just can tell you to this stage. And we still want to keep some confidential for customers. Sorry about that. Thank you.

[Unknown Analyst]

Are you receiving orders from semi client now already?

[Ivan Tsao, executive]

Maybe we don't want to talk this issue. Sorry about that.

[Unknown Analyst]

Got you. Sorry, one last on the numbers. So for linear guide sales, I just want to confirm that in the first 9 months, it was up about 30%. Is that the correct numbers?

[Ivan Tsao, executive]

You mean linear guide revenue growth rate?

[Unknown Analyst]

Yes, yes.

[Ivan Tsao, executive]

Yes. Year-to-date or year -- the first 9 months of our linear guide revenue could be around RMB 377 million. And the same period last year was around RMB 277 million. So it could be around 30-plus percent growth year-to-date.

[Angela Xu]

All right. It's 5:00 now, and we will have to end the call here. Thank you for dialing in, and thank you, Ivan, for sharing all the helpful information with us. And again, sorry for the delay, and have a great day and stay safe and sound. Thank you, and see you next time. Bye-bye.

[Ivan Tsao, executive]

Thank you, Angela. Thank you, everybody.

[Angela Xu]

Thank you.

[Ivan Tsao, executive]

Thank you. And keep safe.