Airtac International Group

TWSE:1590

Earnings Call Analysis

AirTAC Reports Positive Q4 Results Amid Market Challenges

AirTAC, despite macroeconomic headwinds, reported a robust fourth quarter with an 18% year-on-year revenue growth achieving RMB 1.072 billion, outperforming traditional low-season expectations. Gross and operating incomes also saw an 19% and 18% increase respectively, signaling substantial demand for automating pneumatics, supported by labor decline and the need for improved automation. Net profit surged by 27%, reaching RMB 386 million with a net margin of 23.1%, and an EPS of RMB 5.5 for the quarter, totaling RMB 34.83 for the year. The electronics sector contributed notably with 30% growth, counterbalancing the battery industry's 30% decline. Future prospects look optimistic with anticipated regulatory easing and recovery in consumer confidence, especially with projected stronger demand from the electronics segment in 2024. Challenges in the Linear Guide segment are being addressed carefully to prevent price wars and to seize growth opportunities in the upcoming year.

Continued Growth Amid Economic Uncertainty

Despite a pervasive economic downturn, the company reported a resilient performance, with the fourth quarter of 2023 displaying steady revenue growth. As traditional sectors grapple with challenges, the pneumatic industry sees single-digit growth, spurred by automation and replacement demand. The fourth quarter's revenues were RMB 1.072 billion, showing an 18% year-on-year increase, while net profits soared to RMB 386 million, 27% year-on-year, bringing an earnings per share (EPS) of RMB 5.5 in Q4 and an annual EPS of RMB 34.83.

Industry-Specific Revenue Streams

Different sectors contributed variably to the revenue mix, with the electronics industry leading at a 24% share. Remarkably, the textile industry saw a phenomenal 94% growth, albeit contributing a smaller 2% to the overall revenue. Some industries, like batteries, experienced downturns with a 30% decline.

Electronics and Automotive Sectors Showing Promise

The company anticipates a bounce back in the electronics and automotive segments, expecting more robust demand in 2024 than the preceding three years. Although the battery and energy lighting equipment industries are recovering from overcapacity, the management projects a sunny outlook, especially for the battery segment, estimating positive growth in 2024.

Market Position and Pricing Stability

With a pricing landscape that remains stable, AirTAC contends with limited commission cuts and is positioned well against domestic and overseas competition, such as Japanese peers. The company has developed around 60% of the market product portfolio from their Linear Guide business, setting a firm foundation for future competitiveness.

Linear Guide Business and Market Penetration

Although the Linear Guide business did not meet sales expectations due to weak demand and aggressive pricing by competitors, the sales trajectory is improving. With the anticipation of better shipments and execution on contracts in 2024, this segment is poised for a turnaround.

Conservative but Optimistic Guidance for 2024

For the year ahead, management has taken a conservative stance, predicting a pneumatics industry growth rate of 0% to 5%. However, AirTAC is projecting more than 10% revenue growth in their pneumatics business, supplemented by an expected RMB 800 million from Linear Guide, leading to an estimated overall revenue growth rate of 6%. This growth is anticipated to elevate the operating margin to over 30%, with capital expenditures expected to be between RMB 2 billion and RMB 3 billion.

Financial Health and Strategic Allocation

The company is generating free cash flow and envisions further improvements. It aims to reach a 50% operating ratio in 2024, indicating efficiency gains and financial strength. There are no large-scale acquisitions planned in the short term, allowing for a focus on internal growth and efficiency enhancement.

Earnings Call Transcript 2023-Q4

[Hui-Chao Hsu, analyst]

Okay. Hello, everyone. This is Angela Hsu from Citi [indiscernible] Research. Thank you for joining us today to discuss AirTAC's fourth quarter results. We are pleased to have Ivan, CFO of AirTAC with us to fourth quarter results and share recent update with us.

So without further ado, I will now turn the call over to Ivan. Ivan, the floor is yours now.

[Ivan Tsao, executive]

Thank you, Angela and good day, everybody. This is Ivan Tsao from AirTAC and welcome to join this conference call. Now let me brief our fourth quarter results and current market situation.

First of all, even though overall economic situation is not good, the revenue in the fourth quarter is still is in line as always predicted, even it is better in such traditional low season. The order receipts can continue to be higher than the shipment numbers indicating that there is still a certain demand for pneumatic in the market. And in general, the best demand for pneumatic is driven by reasonable cost and decline in labor operation. Especially for the decline of labor operation, the number of new births has been lower than people death for years in China and young generation don't want to come back to work in the Bay government, even they don't want to work.

Customers have to improve automation. Pneumatic industry still can sustain single-digit growth annually once there is no too severe long term issues. In addition, pneumatic is replacing simple manpower to improve automation and also has capacity demand and component replacement demand at the same time. Whenever there are production activities, they need to replace pneumatic component on their existing processes. Moreover, AirTAC continue to launch new items to support existing customers, approach new customers and enjoy multiplying effect.

Even the specific industry overall demand is not good. We still can have additional revenue growth from the market share gain and sustain higher revenue growth than peers. And unreviewed consolidated revenue for the fourth quarter of 2023 was RMB 1.072 billion, 18% growth year-on-year. Gross profit was RMB 787 million, a 19% growth year-on-year. Gross margin was 47.1%. Operating income was RMB 490 million, 18% growth year-on-year. Operating margin was 29.7%. Net nonoperating income was RMB 5 million, including RMB 37 million of subsidy from government, RMB 34 million of FX loss. RMB 12 million of interest income and RMB 11 million of interest expenses.

Income before income tax was RMB 495 million, a 24% growth year-on-year. Pretax margin was 29.6%. Net profit was RMB 386 million and 27% growth year-on-year. Net margin was 23.1%. EPS for the fourth quarter of 2023 was RMB 5.5. And EPS for the whole year of 2023 was RMB 34.83. Revenue from top 8 industries for the fourth quarter of 2023, the biggest one still was electronics, around 24% to our consolidated revenue. It's 30% growth year-on-year. Second one, battery was around 11% to revenue, 30% decline. Energy Lighting was 9% to revenue, 17% growth, packaging was around 9% revenue, 31% growth. Auto was 7% to revenue, 23% growth. General machinery was around 6% to revenue, 9% growth. Machine tool was 5% revenue, 18% growth and textile was around 2% to revenue, is 94% growth year-on-year.

By the way, the proportion of revenue from the aforementioned industries is only for direct consolidated revenue, is excluding nearly around 30% of the monthly revenue from distributors. For current market situation, although there is some noise in the market regarding China worsening economic situation, China government has firmly proposed robust announcement or substantive incentive process in the past couple of months. We expect there could be continuously loosening monetary policies. Additional local special bond quota, more bank financing process and property process with less [indiscernible].

The economic situation should be able to improve quarter-over-quarter. Necessary consumption has been improved currently and selective consumption can be repaired. We expect more and more customers will restore their confidence and accelerate their capacity expansion. As for the demand of various industries of pneumatic component in coming quarters, we expect electronics industry demand was stronger than past 3 years, not only because of receiving more orders for new spend in the initial stage of the -- at the moment but also because China is just seeing transition in -- or changing its mobile device operating system in the past couple of months.

Basically, pneumatic supports customers' production process, not in their end product. When the brand customers reduce the sales volume, it won't affect pneumatic demand too much. However, if there is limited spend upgrade or model change, customers can use existing process to produce product and it won't -- and it don't have to spend new capacity, which will harm the pneumatic demand. And limited spend upgrade and model change for electronics devices has led to poor demand in past couple of years. And we expect there could be more new spec upgrade in 2024 increase for more demand, stronger demand from electronics in 2024.

And there has been around 3% growth year-on-year from electronics in fourth quarter of 2023. And we expect it could be better in 2024. Better revenue growth from automotive industry also could be expected in coming years. We have approached conventional auto customers aggressively for more than 10 years and the progress was limited by 3 or 4 years ago. Car sales was not so good from 4 years ago and the conventional auto customers also had the pressure of production cost. It made a pretty good opportunity for AirTAC to support their demand and enjoy better share gain from auto customers. Even the overall auto industry has not recovered significantly, we still have pretty good revenue growth in the past 3 years.

Furthermore due to the higher comparison base and some noise over expansion situation, battery industry and energy lighting equipment industry revenue growth rate will be lower in near term. In the past, the common situation in China could be when the government provided high subsidies to specific industry, usually checked many existing company and new companies entering this industry and expand production capacities aggressively. After a period of strong demand and followed by overcapacity issue and strong competition and competitive players exit asset the market and survives, continue to expand their capacity to support demand.

Again, the battery industry and the energy lighting industry currently is still stage of digesting overcapacity. And we still believe even current demand was not as strong as seen in past couple of years but it still got stronger again. We expect battery demand will be better than 2023 in 2024 and enjoy positive growth in 2024. However, the energy lighting equipment have to suffer negative growth in 2024 caused by government control over capacity expansion intentionally.

And current pricing is stable in pneumatic industry and commission still is limited. The width of the capacity will not affect the competition between AirTAC and domestic peers, mainly because the cost of materials accounted for about 40% to 50% of the cost of goods sold. And most of the pneumatic material costs are major materials. Japan suppose have not produced much major materials and they have to spend more to buy major materials from foreign suppliers. When the domestic is weaker, they have to spend higher material cost, even they can benefit from the cheaper production, labor cost and overhead. And in addition, the production capacity of our main competitors in Japan, just around 40-plus percent. But another 30-plus percent is in China. The currency impact should be similar to AirTAC. So whenever the Japanese yen is weaker or stronger it won't affect the competition between AirTAC and Japanese peers.

The competition of -- the condition of Linear Guide could be much clear in [indiscernible] because the way demand of Linear Guide and so many peers. They used to decrease their surplus when the demand is weak or from the end of the year. And our revenue to third party of Linear Guide was around RMB 441 million in 2023 and RMB 880 million in 2022. The sales progress is still improving, even the shipment was lower than our expectation in 2023 and 2022, mostly caused by weak demand and peers aggressively pricing. The sales model of Linear Guide is different from pneumatic component. Most pneumatic manufacturers have their account sales, also have distributors' business. But most of the Linear Guide peers sell products through distributors and most distributors need to purchase a certain quantity each year to become qualified distributors for the following years.

When the demand is weak or in the end of the year, many distributors are used to lower their pricing to digest the inventory in order to decrease their inventory level or obtain working capital to purchase additional inventory for the following years. And customers can obtain much cheaper inventory without the need to change their suppliers to AirTAC and which will undoubtedly affect our sales progress. And we don't want to lower our pricing to get limited additional orders in the weak demand environment or in fourth quarter of 2023. Because we still don't realize selling price after we cut the selling price.

Moreover, so many customers had signed annual contract with their existing suppliers in 2023 and they also have promised to transfer us some of their orders to AirTAC from 2024. So we expect we could have much better shipment in 2024 from Linear Guide business. And we have developed around 60% of market product portfolio, including mini size and large types from top 5 to top 60. And our current annual cost of Linear Guide is around RMB 2 billion and will not increase by mid of 2025. And current utilization rate of Linear Guide is around 40% to 50% and we'll improve it according to our sales progress.

The gross margin will be around 40% where we have 60% to 70% utilization rate under RMB 2 billion capacity. And gross margin will be around 50% but we have 80% to 90% utilization rate. Even 40% gross margin is lower than our existing pneumatic business and we use the self-sustain to do cross selling pneumatic and Linear Guide and don't have to spend too much additional OpEx. We still can improve our consolidated OP margin when we continue to improve our utilization rate and the gross margin still can be improved.

And pneumatic is [indiscernible] time business. And no matter the economy is good or bad, its visibility is only around 1 month because the probability of order deliver within 1 month is higher. We cannot ensure whether the demand for the next quarter will be good or bad. And we can only predict the annual shipment based on our experience, market situation and feedback from our customers.

The fourth quarter revenue of 2023 met our expectation and also which confirm our previous prediction that demand will gradually went up from depth of 2023. Moreover, the shipment in January of 2024 are much higher or much higher than our expectation, further strengthen our confidence in the full year of 2024.

Our current view, market demand in 2023 is more optimistic than before. But after all, the visibility of pneumatic is still pretty short. And we give a very conservative guidance for the whole year of 2024. We expect the overall pneumatic industry could have a growth rate around 0% to 5% in 2024. And AirTAC expect, we could have more than 10% revenue growth from pneumatic in 2024. Coupled with the revenue contribution, RMB 800 million from Linear Guide rate, we provided -- we provide guidance for the whole year 2024 as revenue growth rate could be 6% growth. And if we have 6% revenue growth, our op margin would be more than 30%. CapEx will be around RMB 2 billion to RMB 3 billion in 2024. And we have generated free cash flow and still can improve it. We will increase our operating ratio to 50% in 2024 and also could be better in coming years. And we also don't have any planned to do acquisition in the short term.

This Is my briefing. And should you have any further questions, we can discuss it. Thank you.

[Hui-Chao Hsu, analyst]

Thank you very much for the presentation, Ivan. So now we will start the Q&A section. [Operator Instructions] We've got a question from Hank from KGI.

[Unknown Analyst]

This is Hank from KGI Life. And my first question is that how do we achieve gross margin expansion in the fourth quarter, even we see a bit more serious price competition in Linear Guide sector?

[Ivan Tsao, executive]

Linear Guide, just low single digit to our revenue. And most of our [indiscernible] deal came from pneumatic. We continue to improve our [indiscernible] mix but we still, we increased our high-margin new items and we [indiscernible] we can improve our margin. And we also continue to improve our replacement potential efficiency. So basically, we still can sustain specific higher gross margin in fourth quarter of 2023, even it still could be higher in 2024. Thank you.

[Hui-Chao Hsu, analyst]

Okay. So if Hank has no more questions. Can I add a few from my end, Ivan?

[Ivan Tsao, executive]

Yes, please.

[Hui-Chao Hsu, analyst]

On the OpEx for fourth quarter, it still look a bit higher versus like prior quarters. And I recall in the last earnings call, you noted third quarter OpEx was higher because of the salary increase. So I wonder if the higher OpEx in fourth quarter is also associated with the salary increase like it was in third quarter?

[Ivan Tsao, executive]

Was based on renminbi currency, the OpEx in third quarter and fourth quarter could be similar. And we spend a little higher on this business in fourth quarter than third quarter. So basically, disregarding the FX result, our OpEx in the third quarter and fourth quarter have not changed too much.

[Hui-Chao Hsu, analyst]

Got it. So the higher is mainly because of the FX volatility.

[Ivan Tsao, executive]

Yes, basically, yes.

[Hui-Chao Hsu, analyst]

I see. Okay. And for the energy lighting, it looks a bit concerning to us because of the sharp deceleration in fourth quarter. So possible to share with us based on your observation, what caused that? And also how do you think the outlook of the industry in 2024?

[Ivan Tsao, executive]

Yes. Firstly, China had suffered overcapacity and battery industry in 2023. And as we know, some of the government have asked banks cannot support all the energy lighting industry expansion in past 2 to 3 months. Maybe it's not good for me for short to midterm but it's good for mid- to long term because they can spend their energy lighting capacity smoothly or [indiscernible] and maybe the risk to suffer the overcapacity in energy lighting won't be too high capacity as it in battery industry.

So basically, maybe the revenue growth of energy lighting industry will be negative maybe by 10% or [ 20% ] in the whole year 2024 and it won't be battery decreased 30% in 2023, in coming years. So we still will find some demand or find some demand from other industries to support our revenue growth in the whole year of 2024 and dilute the impact from weak demand of the energy lighting industry.

[Hui-Chao Hsu, analyst]

Got it. And our next question comes from the Yuichiro Isayama from Goldman Sachs.

[Yuichiro Isayama, analyst]

This is Yuichiro Isayama from GS. Two quick question. It's a bit repetitive one on Q4 GPM and also '24 GPM. Can you elaborate once again the margin improvement into Q4 is attributed to the [ ETR ] or is it more simply cost reduction measure or better pricing? I was wondering if that could be sustainable into 2024 as well. I appreciate if you could elaborate your impression that where the margin improvement into '24 can come from?

[Ivan Tsao, executive]

Yes. Firstly we mentioned earlier, we continue to launch more new items. All of those new items could be higher margin items. And we launched more, still more can improve our same product mix and improve our gross margin. And the utilization rate of Linear Guide maybe it's a little lower in fourth quarter than third quarter. But we expect -- we still could have doubled, we could double our [indiscernible] in 2024. And the utilization rate could be much better in 2024 than 2023 also can improve our gross margin. And once we have a better utilization rate, also have better shipment for the whole year 2024, the Leverage of OpEx still could be better than to support our op margin to recover to be more than 3% in 2024.

[Yuichiro Isayama, analyst]

Ivan, I'm sorry, can you comment the same thing about pneumatics utilization nimble? Is that continuing to get better from Q3 to Q4? And do you expect further improvement into Q1 and through 2024?

[Ivan Tsao, executive]

Utilization rate still depends on the shipment and Q4 used to be a little lower than Q3 by pneumatic product. Utilization rate in Q4 could be lower than Q3 from pneumatic. And Linear Guide, it could be similar or a little lower in Q4 than Q3 but it could improve our gross margin in Q4 of 2023, mostly because the selling product mix improvement and we also improved our production efficiency.

[Yuichiro Isayama, analyst]

Got it. The last question I have is regarding 2024 pricing outlook. Yes, I totally understand what you mentioned regarding how the pricing has been stable in pneumatics market. But given the overcapacity in China generally and intensifying competition, I think a lot of people are starting to get concerned about the pricing outlook. So can you elaborate on your impression about the pricing outlook? And if there is any risk, how would you reduce the downside risk from that? I appreciate if you can elaborate your pricing strategy for 2024.

[Ivan Tsao, executive]

Yes basically, we still get strong pricing because in past, whenever the demand stronger or weaker and the potential cost matters is the cost is raised. We always keep stable pricing. So basically, we are not as other peers to change their pricing frequently. And we still expect pricing for pneumatic still could be rebound in 2024 and pricing for Linear Guide still depends on the overall demand.

Even in fourth quarter, so many peers, they decreased their selling price but we still keep stable pricing because when the demand is weak, even players decreasing price and they just can get limited additional orders from the market. And once we decrease our selling price, it will affect our pneumatic business in coming 10 years, even 1 to 2 decades. So we have not decreased selling price in fourth quarter, we also have lower overall shipment in [indiscernible] 2 months. And we expect the overall demand not just will improve from pneumatic industry. The pneumatic industry still can be better in 2024 than 2023. Peers, maybe they will rise some price but AirTAC still will keep stable pricing. And we expect we could have much better shipment from Linear Guide in 2024 that can improve our utilization rate, also can improve our margins.

[Hui-Chao Hsu, analyst]

We have next question from Ming Lee from [indiscernible].

[Ming-Hsun Lee, analyst]

Ivan, so my question is for your industry exposure. So in your guidance, you expect your largest sector, consumer electronics is expected to post a stronger growth. I want to understand, is this more because of the replacement demand because the sector has been weak since 2021. So because pneumatic component is a consumable product. So you expect stronger replacement demand or you are seeing some new applications in certain industry. Yes, this is my first question.

[Ivan Tsao, executive]

Yes. I mean, firstly, not just for new applications demand and we still expect -- there could be more new spec launched in 2024. And from October or November of 2023, we had received more initial development orders and maybe it could, Ming, those initial spec or specs could enter in miss production in 2024 will be higher than 2023. And once customers that have more new spec, they had to expand their capacity aggressively. So basically, not just for replacement demand from electronics, also could be more new spec upgrade on new spec launched internally for -- to support electronics beta demand.

[Ming-Hsun Lee, analyst]

And my second question is related to battery industry. So in the past quarter, batteries demand is still relatively weak. But your outlook for battery industry in 2024, you still expect some low growth. So in what area do we expect the growth? For example, is it more like a restocking demand? Or you still see some clients are expanding their battery capacity?

[Ivan Tsao, executive]

Yes basically, we have around 30% decline in battery industry in 2023. And as we know, some customers, they totally AirTAC, maybe they will increase little new capacity expansion in 2024 and such demand will be higher than 2023. In addition, the replacement cycle in battery customers would be a little shorter than other industries and we still expect more replacement demand from basically in 2024 can support the industry growth. And we still try to get more share from the market. So basically, we suffered pretty high revenue decline in battery industry in 2023 and we expect it could be [indiscernible] single-digit growth in 2024. It could be better than 2023.

[Hui-Chao Hsu, analyst]

And next, we have Kenny Chen.

[Chin-Wun Chen, analyst]

I just have 2 questions. The first one is regarding the 2 new products to be launched going forward. I'm wondering, could you please elaborate more about how they will contribute to sales in 2024 or 2025? Or if it's too early, could you share if their margins or entry barriers are higher than your existing products?

[Ivan Tsao, executive]

Basically, pneumatic is the mature industry, mature product for more than 100 years. And there's still so many items, AirTAC have not developed and launched. So basically, SMC [indiscernible], they have more than 600 -- sorry, less than 700,000 items. AirTAC currency just has around 220,000 - 230,000 items. Most of items AirTAC now develop could be high-margin items. So we still will continue to launch to launch high-margin items in coming years. And the high-margin items, gross margin could be more than 60%, 70%. And we still can improve our sales product mix. But it's very difficult to identify which item can enjoy what gross margin because the pricing depends on different customers, different items. And we just can say the new items we're going to launch, most of them could be more than 60%, 70% gross margin items, so we can improve our sales product mix in coming years.

[Chin-Wun Chen, analyst]

That's very helpful. And the other one is regarding the sales by region. You talked about raising the non-China sales contribution in coming years. So I'm wondering if you have any year-on-year growth rate target for this or next year?

[Ivan Tsao, executive]

Basically, we have divided our system to charging and non-charging teams, the team leaders are all different. Each of them have to do their best and they also have different expectation from our headquarters. And noncash is still, they still have to improve their revenue percentage to be around 20% of our consolidated revenue. And even it's a very hard task because our China is still do a pretty good job. But chargers still have to improve it. And it also could be very difficult to state the percentage.

But in past 3 years, the revenue growth rate from non-China business had been higher than China revenue growth rate. The percentage to our revenue still can be improved from non-China business. And the solution for Europe and North America, we still have pretty huge addressable market and we still will continue to recruit more local salespeople to approach more customers. So basically, the revenue growth rate from those 2 areas could be more than 20-plus percent in 2023 and it still could be higher than this number in 2024 because we have recruited more salespeople in 2023. And after they -- for many to our operations or our product, the contribution could be better and better in coming years.

[Hui-Chao Hsu, analyst]

Ivan, I have a quick follow-up. For the high-margin product you mentioned. And do you have like a rough idea for the end market exposure for those high-margin products? Are they like mostly associated with certain industry such as like electronics or other industries?

[Ivan Tsao, executive]

Firstly, a single spec or SKU maybe not just can support the industry. It can support so many industries. So mostly it could be electronics application, battery, auto demand. But we -- just based on what kind of items AirTAC had not produced and sell, the market see bigger demand is urgent and we used to pass those items and develop them in first priority.

[Hui-Chao Hsu, analyst]

Got it. Okay. All right. And then next, we have a question from Hank at KGI.

[Unknown Analyst]

And my first question is that as already mentioned that we had RMB 440 million Linear Guide in revenue in 2023. And do we expect this to double to like RMB 880 million in 2024?

[Ivan Tsao, executive]

We --the number of RMB 800 million for the whole year 2024, maybe not RMB 880 million but we still can improve it. But basically, we just give numbers, RMB 800 million of the full year in 2024 from Linear Guide shipment.

[Unknown Analyst]

Understood. Very clear. My second question is that given the current circumstances, do we see better or you can say, high GPM sector that further contribute to the GPM expansion in this year, like you mentioned in auto and electronics, we will see more new product launch and new spec launch. So is it safe to assume that in these 2 sectors, if we see higher growth, the gross margin will be more positive this week?

[Ivan Tsao, executive]

I just say the best SKU or items, not just can support, surpass the industry. It could be support so many industry from the best SKU. And we also ask our sales team or marketing team to find what kind of items that they have not developed or produced, the market size is big, demand is urgent. And we will test those items and develop them in first priority. And we not just focus on electronics or auto industry. Any other applications still can be developed by AirTAC, just depends on the market size is big or not, demand is urgent or not.

[Hui-Chao Hsu, analyst]

I have a quick follow-up. So for the Linear Guide, RMB 800 million for '24, what's the target utilization of Linear Guide for '24. Can you like elaborate maybe in the first half and second half, what's our target ETA that? And what would be the potential gross margin for this product?

[Ivan Tsao, executive]

Utilization rate still depends on the shipment. So basically, once we had RMB 800 million revenue to third party and we still expect our internal demand to support high-end [indiscernible] center still could be RMB 200 million to RMB 300 million. And once we have RMB 800 million to third party, we still have to improve or increase our inventory level of Linear Guide. So basically, we expect we could have around 60% utilization rate average for the whole year of 2024, then we could have high 30% to 40% gross margin from Linear Guide in 2024.

[Hui-Chao Hsu, analyst]

Next, we have a question from Sheng-Yuan Cheng.

[Sheng-Yuan Cheng, analyst]

This is Shane from Daiwa Capital Market. First of all, congrats on good results, especially when the industry is actually in a down cycle. I have really quick questions on the first quarter. I know the lead time was really short but when I look at for those when the demand starts picking up, for the most of the first quarter, the seasonalities actually will see the sequential growth rate. I wonder if you could provide us some color if you may.

[Ivan Tsao, executive]

Firstly, we still don't give the quarterly numbers to the market because the [indiscernible]. And we're just going to say, we heard from the market or government, they want to push the [ GP ] number of the first quarter of 2024. And such information can be confirmed by the shipment in January of 2024 because the [indiscernible] could be pretty strong month-to-date, even much better, much higher than our expectation. And the order book still had a [indiscernible] even the [indiscernible] strong. So basically, we could be pretty optimistic of the demand in first quarter of 2024 and it's 31st today and we can say we have pretty good monthly revenue of this January. And we will release it in next -- or we will release it on next Monday.

[Hui-Chao Hsu, analyst]

Ivan, I have a quick follow-up. So when you say monthly January sales looks very pretty good. Can you share a bit more color on like how the daily shipment in January look like? Is it improving from December? Or it's just being like stable.

[Ivan Tsao, executive]

It's much better than fourth quarter of 2024 (sic) [ 2023 ].

[Hui-Chao Hsu, analyst]

Got it.

[Ivan Tsao, executive]

Not just better than December -- November of 2024. Sorry, not just better than December or November of 2023.

[Hui-Chao Hsu, analyst]

I see. And do you see any like specific driver from like any industry?

[Ivan Tsao, executive]

I have not calculate the revenue growth rate for each industry.

[Hui-Chao Hsu, analyst]

Okay. That's fine. And next, see if, Ming Lee, do you to have questions. I still see you have the raised hand button. Okay, no.

[Ming-Hsun Lee, analyst]

No, I don't have questions. Thank you.

[Hui-Chao Hsu, analyst]

And Chen do you still have questions? No -- oh, no worries. and next, we have [ Jody ].

[Unknown Analyst]

Ivan, can you hear me?

[Ivan Tsao, executive]

Yes, please.

[Unknown Analyst]

Just a quick question regarding the January goods daily shipment we see, do you think that's relevant to the Chinese New Year timing this year? Or even if you have considered that, it's still better than your expectation?

[Ivan Tsao, executive]

Yes, in past experience, once the order demand was weak, even there is Chinese holidays in February, because don't have to ask [indiscernible] in January. So basically, we did most of the shipment in this January could be the real demand for our market.

[Unknown Analyst]

That's helpful. My second question is regarding Linear Guide. So we have the target of RMB 800 million. And given it seems that at least in fourth quarter, the demand is still quite low. How do you think we can like almost double the revenue this year? Can you just elaborate a bit more about your strategy?

[Ivan Tsao, executive]

Yes. Firstly our sales progress was limited or strict in 2022 because of strict COVID control. And from February or March of 2023, some of the customers just allow AirTAC to visit them gradually. So real sales activities to customers, maybe just around take 6, 7 months in 2023 and we continue to convince more customers AirTAC's Linear Guide is good enough, even when missed their expectation in 2020.

So basically, we still could be cheaper pricing than peers and good product quality, even better product quality. We also had short lead time than the peers in a massive scale [indiscernible]. So basically, even we have missed our expectation in 2023 but we still expect we could double our shipment in 2024.

[Unknown Analyst]

That's great. My last question is regarding energy lighting. So I think based on previous communication, I understand that this segment would, has like LED and maybe some solar inside. I just wonder if it's possible to let us know the rough breakdown maybe between LED and solar within energy lighting.

[Ivan Tsao, executive]

Maybe 50-50 but some customers today manufactured both of those 2 products. And we sell them to x customers to provide information, they -- for example, they buy 100 pieces pneumatic [indiscernible], how many pieces they spend on LED lighting or what's the pieces they apply on the solar-related.

[Unknown Analyst]

I see. So it's selling like similar products to same clients.

[Ivan Tsao, executive]

Yes, basically. It's pretty similar to battery customers. So in battery customers they're basically trained, EV battery [indiscernible] battery in the same time.

[Hui-Chao Hsu, analyst]

We have a follow-up question from Jeremy.

[Unknown Analyst]

Ivan, this is Jeremy from SMBC. Just wanted your quick opinion about something. So I understand that your daily average shipments in January seems quite robust. And we also did hear that China is trying to encourage the manufacturing sector to, I guess, have a good start to the year. So there were a lot of front-loading of government bonds in the last quarter of last year, et cetera. And I think when you look at the efforts by the local government, it seems very -- they seem very busy. But if you look at China's PMI data today, actually, the numbers were not that strong, right? So I just wanted to understand your perspective from a manufacturer standpoint. How do you read this thing? I mean is this just front loading? And then you have to wait and see how the economy responds? Or is this really -- do you think that it's going to be a start of a very strong fiscal stimulus in China this year? Appreciate your thoughts.

[Ivan Tsao, executive]

No problem. Firstly, pneumatic just replace a human interaction. So even customers they don't want to increase additional capacity but they still have to improve existing capacity to be better automatic because the [indiscernible] decline in population and young people don't want to work. So PMI GDP, it never been a very good index to pneumatic demand. In addition, AirTAC still continue to get shares, enjoying share gain from the market. [indiscernible] best industry demand is not good, we still can go through share gain to support AirTAC revenue growth from specific industry.

So basically, it's still abnormal strong demand in first half of 2021 (sic) [ 2024]. It could be more than 15%, even around 20% for the industry growth in 2021 (sic) [ 2024 ] [indiscernible]. Maybe most of the customers [indiscernible] had been down in first half 2021 (sic) [ 2023 ]. So it dilute the demand in front 2 to 3 years. And we expect, even we believe such dilution has been completed. Customers still have to improve automation, have to replace every component and their existing process, such really can support the better demand in 2024 than past 2 years.

[Unknown Analyst]

I see. Sorry, just 1 small question. Are you planning any capacity increases this year for the pneumatic side of the business?

[Ivan Tsao, executive]

Pneumatic still will increase a little capacity internally for and we will not increase any capacity of [indiscernible] in 2024. So our CapEx number internally still could be RMB 2 billion to RMB 3 billion, mostly could be improving our internal automation efficiency.

[Hui-Chao Hsu, analyst]

And due to the time constraint, we will have the final question from Kenny.

[Chin-Wun Chen, analyst]

I just want to confirm what's the fourth quarter utilization rate for pneumatic? And how do you -- what's your thought for first quarter, except for Chinese New Year? Do you see any necessary to work OT? And what's the DOI for fourth quarter ended? What's your plan for 2024?

[Ivan Tsao, executive]

Okay. Basically, pneumatic production rate, is just -- it's just around 90% in October or November, and we have improved from mid-December of 2023 and current utilization rate could be around 100% for pneumatic. And the shipment of Linear Guide still not very good. So the utilization rate in fourth quarter of 2023, just around 40-plus percent.

And utilization rate still depends on the shipment and market situation what we predict. So basically, in January, the utilization rate of pneumatic still can be improved to be a little higher than 100%. But Linear Guide still will be kept on 40% to 50%. And I mentioned, once we have RMB 800 million revenue of Linear Guide in 2024 and RMB 200 million to RMB 300 million for internal demand increase a little inventory level of Linear Guide, the average utilization rate in 2024 could be around 60%. Then we could have around high 30% to 40% gross margin from Linear Guide business.

Pneumatic, the peak season used to be in second quarter. So after Chinese New Year holidays, the utilization rate could be around 110% and can sustain it to July. And after July, depends on the shipment monetization, decrease a little to be around 100% or 90% in late of third quarter and from every December, we still will increase utilization rate to be around 90% plus, 100% to build up Linear inventory, to support peak season demand in next year.

So this February or Chinese New Year holidays, currently, we don't have any plan to ask our operator to overtime in holidays because our inventory level is still pretty healthy, even on pneumatic business or Linear Guide business. So basically, we have 11 days holidays in this Chinese New Year holiday in China and 7 days in Taiwan factories.

[Hui-Chao Hsu, analyst]

All right. And thank you, Ivan and thank you, Kenny, for the question. So this concludes today's conference call. So thank you for your participation and you may disconnect now. Thank you, Ivan.

[Ivan Tsao, executive]

Thank you, Angela and thank you, everybody. Have a good day.