Innolux Corp

TWSE:3481

Earnings Call Transcript 2020-Q4

[Operator]

Good afternoon to all investors and media. Welcome to Innolux Corporation's First Half of 2021 Investor Conference and Live Audio Webcast. Presentation materials is available on Innolux website, please download it from the website. The speakers of today's investor conference are Jin Hung, Chairman and CEO; James Yang, the President of Innolux; and Jinglong Ding, the Executive Vice President of Innolux.

Before we start, please read the disclaimer first. Innolux statements of expectations and projections of this presentation are forward-looking statements. Actual results may differ from those contained or implied by the statements as a result of known or unknown risks, uncertainties and other factors. These statements are not guarantees of future performances of Innolux, and therefore, you should not rely on these statements. Unless it is required by law, Innolux undertakes no obligation to update or correct any statements, whether as a result of new information, future events or otherwise.

Let's welcome Jin Hung, Chairman and CEO of Innolux, to give his opening remarks.

[Jin-Yang Hung, executive]

Thank you. First of all, on behalf of Innolux, I would like to welcome all the investors, corporations, media and friends online to take part in this 2021 Investor Conference and Live Audio Webcast.

Before we officially start, I would like to mention one thing. Investor conference is a very direct and effective way for a company to communicate with its investors, shareholders and media. Therefore, start from this year, Innolux will host similar conferences every 6 months and at the end of the year when the annual report is announced. We also hope that this investor conference will go beyond announcing and reading figures on the financial report, but to provide investors a more complete and comprehensive explanation instead, including Innolux future technologies and our outlook. These are the goals we'd like to achieve, but we may not post such a large conference every quarter. We will use press release and other methods to communicate with our investors. This is what I'd like to report to everyone at the beginning.

Today's conference, as we can see on the screen, because of the development of COVID-19 pandemic, we are all very familiar with terms like work from home or education from home. And we also hold expectations from the age of 5G and self-driving cars. What does this mean? We think most importantly, it means the structural change of the industry. Panel industry may not be what it used to be. A cyclical sector varies with the up and down fluctuations of the economy.

Next, I think James Yang will talk about more details and share some points that Innolux has already observed. After that, in terms of technology, in the panel display field, we have mentioned many times in different occasions that we have made many achievements in the automotive market or in different markets with the miniLED technology. For the non-display applications, including what you can see here, the LCD antenna and X-ray sensor detector, all of them have very good results. And Mr. Ding, our Executive Vice President, will explain it further.

Lastly, I'll talk about Innolux position on dual transformation, including explaining our future strategic directions and our financial figures. I think we all know that Innolux has attained a positive net income last year, and our 2020 annual net profit amounted to TWD 1.6 billion. We will talk about our financial report in the end of our presentation.

The above-mentioned are the key points of today. And now I'll hand over to James.

[Chu-Hsiang Yang, executive]

Investors, shareholders, members of the press, online viewers, good afternoon. Thank you for joining us at the first earnings call in 3 years. I'm sure you're all curious about the business update of the panel industry.

As we see on the slide, last year, panels were in short supply. The reasons are as follows. I have a slide here. Although it appears that the capacity is enough to meet existing demand, components are in short supply. For example, polarizers, integrated circuits of all kinds, such as TCOM (sic) [ TCON ], power IC and driver IC were all in short supply. Also, there's water shortage. In Taiwan, we are experiencing once in many years drought. Water is also necessary for production, and we need more glass. The investment at the earlier stage couldn't be fully reflected on the latter part of the process, which resulted in the supply and demand imbalance at this moment. We expect this to continue until the end of this year. Thank you.

[Unknown Executive]

COVID-19 has changed how we live. ICD products support the work from home and education online. To boost productivity and support online conferences, small-sized TVs were in high demand. As a result, rigid demand remained strong. We are positive about demand in the first half of this year and cautiously optimistic about total demand for the year. This is because 5G operators, electric vehicle makers and the traditional car makers are all competing for chips. All of this add uncertainty to the already tight IC supply. Meeting the demands of existing customers is our priority.

With our product mix, we strive for reinvention and value upgrade. We offer a diverse product mix to meet customers' needs. Our Chairman mentioned that we were subject to cyclical changes, and we now transitioned into a healthier structure. I want to share with you a blue ocean we have identified. Everybody recognized the importance of education. Therefore, governments across the world have all prioritized education online in their stimulus packages. This drove demand for Chromebooks, notebooks and tablets. Last year, we observed that only 30% of the rigid demand was met. The remaining 70% will have to be met this year. In Japan, there is the GIGA project. In the populous nation of India, there's the kindergarten to K-12 education program. The market is very big. We need to meet the demand because the future of human civilization hinges on it. We need to provide quality education for students. We continue in our effort to sustain human civilization and support education. We will increase supply.

In the first half of last year, we started to notice the importance of education online. So in the second half of the year, we made adjustments to the supply chain, equipments and capacity. As a result, notebook capacity increased to 50%, which made us the second biggest supplier in the world. We made flexible adjustments to product lines of various generations to meet rigid demand in the education sector and demand from the work from home. This is how we do our part to support the global economy.

Besides the blue ocean of notebook demand in the education sector, we also took on another challenge. To my right, as you can see, is our integrated in-car multimedia dashboard panel. Our plan is to become a global leader in this field by 2023. Shipments have begun already. As you may have been aware, the design cycle of the auto industry is relatively long. With our large-sized integrated irregular-shaped AM miniLED technology, we hope that by 2023 we will become a major supplier of this type of panels, with a more than double-digits market share in the more than 1.4 million high-end car markets across the world.

In addition to TVs and cell phones, these are the strategic areas we want to set foot in and focus on. This strategic and value-added products are all made possible by our CTO. So I will now hand over to him.

[Ding Jinglong, executive]

Good afternoon, investors, media and distinguished guests. Followed by James Yang, I will elaborate more about the topic of automotive displays, especially the miniLED automotive displays. I'll try my best to make it short.

Innolux was the first to raise the key word miniLED, mini L-E-D in 2017. The responses was great afterwards. There is only one reason for that. During the competition between the 2 major technology camps in the panel industry, LCD and OLED, miniLED is a key weapon. More precisely, miniLED backlight is a key weapon. I think the whole industry paid great attention to it. What contribution can miniLED backlight offer to the panel makers, everyone was looking forward to that.

Today, I will focus on the automotive application field, in particular. I think you all know that car has become a hot topic recently. Electric cars and self-driving cars have made automotive applications a hot topic as well. In the future, the total area of displays will become larger and larger. However, we have to know that from the perspective of the automotive display and automobile makers, LCD was not a perfect technology in the past. There was no perfect technology to satisfy the need of automotive industry.

So recently, some of the automobile makers started to consider O-L-E-D, OLED. But OLED has serious drawbacks. Now because of the miniLED backlight, we have an initial lead in the key decisive point. We won't talk about it in technical details today. Here, you can see a radar image. It basically means that in the automotive display field, our advantage in using miniLED backlight can give us a clear chance to win over O-L-E-D, OLED. In fact, we have already started some projects with our key clients and have been shipping out products in a small amount. Once we go on the right track, the business will gradually expand. So I think it is clear that Innolux has a leading miniLED backlight technology. Especially that we have more backlight dimming zone with excellent performances, we can take advantage of our active metrics to take the lead and will become more successful in the future.

The next topic is more interesting. I have to stand up to make a presentation. We only talked about this in public recently. But actually, we have been working on this project for more than 5 years now. In general, Innolux has some non-display new technologies, which are new fields that we have developed.

Today, I will only mention 2 icon products that we put here. These 2 products are very easy to understand. They are non-display products. This company is Kymeta. We've worked with this company for more than 5 years now. This is a product that has already been put on the market. It is a satellite antenna. Recently, because SpaceX has been launching a lot of Low Earth Orbit satellite, or LEO, the world starts to pay attention to satellite communication. Then when there are enough LEO satellites in the sky, we need to have more ground antennas connecting to those satellites. So our technology is used for this purpose.

This antenna looks huge, and it is quite heavy. But this one is actually for geosynchronous orbit, GSO, satellites. We all know that satellite communication has developed for decades. GSO satellites are the one that everyone uses every day. When we transform to LEO satellites, they are very close to the surface so that the size of the antenna will shrink significantly and the cost will decrease too. It will become lighter and cheaper. So in the predictable future, each car will be equipped with one of these antennas. This will happen in just a matter of time.

In the future, the car will be called connected cars. When you have a self-driving car, what do people do in a car? You would want to have massive information and external communications, and this is the best solution.

Next, this is an X-ray detector. We put TFT on glass and use it as sensors. Not a lot of people know about this. For the past decade, we have been a hidden champion in this arena. We used to manufacture the TFT sensors on glass, which were then made into detectors by our customers. Recently, Innocare Optoelectronics Corporation, our subsidiary, has developed an X-ray flat panel detector using our own sensor glass. It's already a finished product. Move forward, we will work on image display. The product displays x-ray images. We are an expert in image display all along. Building on our strength, Innocare will continue to develop image processors on x-ray detectors, including AI image processing. We seek to achieve more in the medical and health care ecosystem. Thank you.

[Jin-Yang Hung, executive]

Thank you, Jinglong. As Jinglong mentioned, for the past decade, Innolux invested a lot of resources into a few niche markets. X-ray sensor is one of them. Why do we focus on this market? We are not alone. The panel industry as a whole has recognized the fact that capacity expansion alone is not enough. There's an end to capacity scale-up. Instead, we should focus on increasing and deepening the essence of value.

Based on this, we have been promoting a dual transformation. It's been an ongoing effort for the past 1 or 2 years. Going forward, we will continue our efforts in the existing segments, such as TVs, monitors and notebooks. We are committed to lower cost, higher efficiency, automation and smart manufacturing. We have an obligation to do so. At the same time, we go into niche markets through subsidiaries such as Innocare. We will be able to add value to end products in niche application markets and even create new applications. This is what we expect to achieve in the future.

The benefits are clear. Market valuation for panel markets is limited. Companies in niche markets, such as the health care sector, often enjoy higher valuations. As one of our business units become a separate new company, we should get higher valuation by investors in sum-of-the-parts valuation. It will be good news for our shareholders. This will also allow the group to diversify our business.

When the original shareholders have access to the capital markets through the subsidiary, there is no need for more funding. This is an obvious benefit for the shareholders. For our employees, business units-turned companies are more attractive to talent and easier to repositioning. The organization will be able to attract younger members. This can be an opportunity for internal entrepreneurship. All of this does not mean that we intend to split into too many markets. We will continue to focus on our core business.

As a component provider, we will continue our work in existing markets, such as notebook, TV and monitor. We will be even more cost effective and efficient. At the same time, we believe there are opportunities in niche markets. With market recognition, we will continue to create a new venture under Innolux Group. This is the focus of this slide.

As Jinglong mentioned, based on our observation of the market, we will not expand capacity in discriminatory. Instead, we will focus on value-added in various fields.

The next page, ESG is what investors care about recently. Actually, in business operation, ESG has always been a goal of Innolux. But here, I need to explain to our investors that our pursuit of ESG is not about winning more trophies and putting them on the walls. More importantly, we care about what we can actually create for the earth and human beings and what we can do. You can see that we have water shortage issue. In 2020, the recycling rate of waste water from all manufacturing processes in the Taiwan plants reached 290 million tons, the recovery ratio reached 96.2%. This was not only a new high in the past, but also far outperformed other competitors. We are very proud of that. 290 million tons of water equals to 110,000 standard pools, so that we can responsibly and happily share with you about Innolux efforts on saving water. Our goal and achievement is up there to all.

Then in terms of saving electricity. Since 2020, Innolux has saved 18.5 million kilowatt hours of electricity, which equals to the annual electricity consumption of 5,300 households. As I mentioned, water and electricity are essential to our livelihood, and saving water and electricity has always been our goal of continuous improvement. We hope that under the ESG commitment, the company's operation can continue to be stable and can realize ESG in factory operation and our staffs' daily lives.

Next page. This page is the financial report that our investors are very familiar with. Q4 2020 Innolux' revenue was TWD 78 billion. This was a quite good result. Earnings before taxes reached TWD 10.1 billion. Gross profit margin is 20.4%. I think after our announcement, investors should have seen these results.

So I would like to emphasize and share 2 points with you on this page. First, many people may want to know if the gross profit has hit the ceiling or is there any room for improvement. As I mentioned, in the past, many people saw the panel industry as a cyclical sector. If you look at the past 20 years or even 1 cycle in the past, you can see that cyclical stocks have a special feature. Q1 2016 was a trough. The gross profit margin was minus 7.2% at that time. Then its upward swing came in Q2 2017. During the 6 quarters, the gross profit margin had reached 24.9%. The whole upward swing was 32 percentage points.

If you compare the cycle this year from Q4 2019, the gross profit margin was minus 2% until now, Q4, roughly 20%, this upward swing was roughly 22 percentage points. So this is an obvious comparison. In the last cycle, we at least had 32 percentage points of gross profit margin improvement. So I think we still have room for improvement. This is the first point that we see from a traditional cyclical point of view.

As Mr. Yang mentioned that before, and I also introduced to corporations that we think the structural change this time is like an upward spiral. Along with the healthier development of the industry, the trough will gradually increase each time. The low point of the gross profit margin last time might be at minus 7.2%, now minus 2%. Next time, we believe that it will be higher. So that means you can keep improving. Even when you achieve the high point of the last time, you still have room for improvement. This is the second point that when we talk about upward improvement in cyclical sector.

In addition to the existing degree of upward movement, we believe that there is still a chance to break through the heights because of the structural change. Many investors know numbers better than I do. But the above mentioned is our observation. I'd like to take this opportunity to share these 2 points with you using the financial figures. I won't explain other financial figures now because you can download them and read them on the financial reports.

So this is the summary of our financial report. Now I hand over to the emcee.

[Unknown Executive]

Thank you, Chairman. That concludes the first session of the earnings call. We will now proceed to the Q&A session. We have collected some questions from institutional investors in advance. We will begin by answering the most asked questions before opening up the floor for live questions.

[Unknown Executive]

[Operator Instructions] The most asked questions are about industry and market updates or supply and demand. First question. Recently, panel prices have gone up significantly. What is your outlook for the year's supply and demand? What is the order visibility for Q2? Would President, Yang, like to take this one?

[Chu-Hsiang Yang, executive]

Sure. With vaccine rollout, people expect to have the vaccine shots by June or July. The first batch of vaccine has just arrived in Taiwan today. Vaccination begins with the frontline health care workers. With the vaccine rollout, the education online and work from home might experience a shift. We used to go to work and go to school, and then we moved to everything online. Personally, I believe the future will be a mix of online and off-line work. In Taiwan, because we have COVID under control, we are able to go to school and go to work like we did before. But in other parts of the world, people are less fortunate. They have to resort to online education.

During this shift, we have been talking to our clients. In our conversation, I remember clearly, someone said that they now need low-end Chromebook for educational purposes. Once everybody goes back to work, the need might change. For example, airline companies in the U.S. make up a large sector. There's also the [ taxi ] industry. For them, desktops and notebooks are necessary for office operation. So some of the demand in the education sector will shift to commercial applications.

There are other examples. Taiwan is blessed with nice weather. But there are parts of the world subject to extreme weather. Texas in the U.S. is usually warm, but was certainly struck by a snowstorm. All of the semiconductor equipments could face pipeline blast. Also ICD monitors, desktops, notebooks in conditions without a heating system might have reliability issues when turned on again after 6 months or 1.5 year. So big companies would want to upgrade or repurchase their facilities.

Besides rolling out stimulus packages to support education online, governments across the world also issued stimulus vouchers, like we did in Taiwan. Small and medium-sized companies spend that money on production equipment. They will also upgrade ICD products to address security requirements and to keep up with the launch of 5G ecosystems and infrastructures. So demand for notebooks, desktops and monitors will shift from the mostly stay-at-home gaming online sector, the education sector and the work from home sector to off-line offices. Demand from these sectors remain strong.

What about TV? Besides spending more time watching TV or Netflix at home, people also spend time on video conferencing. Conferences with a large crowd require large-sized PIDs. With our efforts, we are seeing growth in large-sized PIDs in multiples. There are differences in the specs of a 65-inch TV and a 65-inch PID. The even larger 85-inch or 100-inch displays are even more different. This will become a driver of growth when economy opens up again. So demand for ICD and TV will remain strong.

What about small and medium-sized tablets? Tablets are important tools for education. With our efforts, we have moved from the third largest to the second largest manufacturers of tablets. As for our cell phones, we have moved from manual assembly to full automation with 0 touch. Everything, including glass and touch display has all moved to total integration manufacturing. We have achieved one-stop manufacturing. We have AI-enabled smart automation factories. We will strive to become a paradigm for lights-out factories in the future. These are the preparation we have made for the next challenge.

At Innolux, we embrace challenges. We are able to deliver our commitment to clients. We will continue to deliver even more to our shareholders.

[Unknown Executive]

Thank you, Mr. Yang. The second question is regarding current events. Now semiconductor and panel are out of stock. The government also alerts that because of water shortage, we have to do some preparations. Will this result in a tighter supply and a higher price? Could Mr. Yang answer this question?

[Chu-Hsiang Yang, executive]

We all know that semiconductor front end wafers are the patron saint of Taiwan. It doesn't matter if it is 8 inches or 12 inches. This PMIC, driver IC and the TCO-NIC have to be cut, tested and packaged to be put on the top of our PCB. Now we know that the wire bounding machine for packaging are all in shortage, like K&S. Even if you place the order now, they can only deliver the goods 11 months later.

Then in terms of testing, Advantech, which manufacture the main testing facility -- as for testing, for example, Advantech, which manufactures the main testing facility, also has a 6-months long waiting time after placing an order. We have increased the investment in the front end in the past, but the production capacity of IEC, the driver IC that mainly uses 8 inches wafer, did not expand. And at the same time, PMIC for electric vehicles and 5G cell phones are in high demand on the market.

Also, there are disruptions from the German and U.S. governments regarding their concerns about the automotive industry, causing the whole supply chain tighter than before.

Luckily, in Taiwan, the COVID-19 is well controlled so that we received more resources in IC industry. I have to let you know that the front end is insufficient and the packaging is in shortage as well. But thanks to our supply chain partner support, we believe that we can manage this risk.

[Unknown Executive]

Thank you, Mr. Yang. Next question is about the supply chain. Because there are many questions, I compiled them together, so it is easy to answer. Recently, both driver IC and glass substrate are in shortage. In addition to supply difficulties, panel suppliers are also experiencing labor shortages. Will this affect Innolux shipment? How do Innolux maintain its supply chain advantages? Could Mr. Yang answer this question?

[Chu-Hsiang Yang, executive]

Indeed. We have clients who asked if they can have our notebook products shipped from Taiwan. They asked us, can you find workers? I told them that over 70% of our notebooks are assembled by robots, fully automation with AI, so that our products have a better quality and we can deliver the products on time. So Innolux can manage labor shortage by automation.

In terms of glass substrate, the NEG accident in Japan and the Asahi incident in Korea. After making adjustments, I believe that we had little impact and everything is under control.

[Unknown Executive]

Thank you, President, Yang. Here's the last question about business operation. In 2020, Innolux managed to turn loss into profit. Could you please tell us about your competitive advantage? How do you maintain these long-term advantages? President, Yang, could you please answer this one?

[Chu-Hsiang Yang, executive]

First, I want to thank our 59,000 employees for their hard work and teamwork. During COVID-19, they have stayed with us for risk management, resilient recovery and we will enjoy organic growth. As for our strength, starting from the Gen 3.54 fab to the Gen 8.64 fab, we have the complete production generations. They can be used to produce a wide range of products, such as 1.2-inch wearables and 100-inch products, covering wearables, tablets, cell phones, notebooks, monitors, car displays, TVs, PIDs and special application products. We can use our strength in the supply chain flexibly, while leveraging our advantage in smart manufacturing. Combined with dual transformation and digital decision-making, we can allow the complex supply chain to kick in very quickly to meet customer demand.

Besides continuing on these efforts, we will invest in ultra-large sized 8K display. Also, we will continue to invest in IPS and high-end commercial use notebooks. We also invest in 4K for gaming, such as fast response notebooks and monitors. We also use LTPS in tablets and ICD in notebooks. All of this is to increase our value to achieve value upgrades. To achieve this integration, we rely on the support of our supply chain. They adapt quickly to meet customer needs.

[Unknown Executive]

Thank you, President, Yang. The next few questions are related to technology. We will turn to our executive VP. First question, where is Innolux in the development of miniLED, please?

[Ding Jinglong, executive]

Sure. We will take questions one by one, right?

[Unknown Executive]

Yes.

[Ding Jinglong, executive]

Like I said, everybody is talking about miniLED. Just now, I focused on car displays. Allow me to elaborate. MiniLED backlight is under the spotlight in the industry, it's the LCD camp's best chance against the OLED camp. The 2 technologies are competing in many fields. MiniLED is the killer of LCD. I focused on car display because in car environment, it's very challenging for displays.

During the day, the display should be able to show through strong sunlight. Sunlight readability needs to be high, which means information on display should show clearly despite strong ambient light. And at night, when lights are off or when you are driving over dark road with no light, the display should be dimmed, but still be able to show information clearly. That's very challenging technology for displays. We need to be able to show clearly in very bright and very dark environment without glare, because glare would undermine safety.

Backlight bleeding is also an issue. OLED advocates often criticize LCDs for backlight bleeding, which is not an issue in miniLEDs. These LEDs also maintain the advantage of LCDs. That's why we call our attention to miniLEDs. With car display, we have successfully used the miniLED to solve the backlight issue, making it a strong rival for OLED. We are very confident about our large-sized curved displays and new free-form display. We are already a leader in the field and will remain so.

MiniLEDs might have a place in other areas, such as large TVs, monitors, notebooks, tablets and eventually cell phones, although the dynamics of competition between miniLED and OLED in various segments might be different. As we focus on car displays today, I can tell you it has a strong advantage over OLED. We are already seeing some results.

[Unknown Executive]

Thank you. Next question is about LC meta-surface antenna. Many people are curious about its functions. Firstly, does it only receive signal on the ground? Or it can be applied to LEO satellites? This is the first question. The second question is about the overall antenna market demand this year. How does Innolux see this emerging market? And your prediction on the future shipment growth rate?

[Ding Jinglong, executive]

In the past, we don't know much about the space technology industry or satellite communication industry, as they are relatively new industries. So we are not familiar with some of the terms. I'll explain it using simple languages. This is user terminal, UT, which is used on the ground, not on satellites. There are lots of technologies being used on satellites, but that is not the main battlefield for this antenna technology.

The reason we put this product on the ground is that this technology shares the basic panel TFT-LCD technology. I can't reveal more because it is our clients' trade secret. We work with our clients. Inside this product, there's core antenna component that looks very much like our general LCD structure. It is used on the ground, but it has transmitting and receiving functions. Some people say, it only contains receiving functions. But no, it has transmitting and receiving functions. In the future, the so-called connected cars moving on the ground have to have both upload and download functions. This antenna can transmit and receive signals. But it is used on the ground, not on satellite. Antennas put on satellites, to be honest with you, the price is very high and the quantities are less.

I can also answer your second question. In the future, we have very high expectation in this industry, as connected cars will definitely be there. There's no doubt about that in the self-driving car industry. This industry will develop in high speed. What do people do in a self-driving car? You have to obtain massive infotainment. People need to go online as this is the connected car. So to answer the question simply, if we can develop this technology quickly enough, good enough, make its cost performance good enough, it will become the standard accessories in every car in the future.

As far as I know, the automobile industry produces about 100 million units a year. So you can imagine that every car will be equipped with one of these antennas in the future. We hope that the LC antenna or flat panel antenna in wider definition, that is manufactured from our panel fab right now will become a huge industry in the future. This is my answer for the second question.

[Unknown Executive]

Thank you. The next 2 questions are about the financial section and the company's outlook. Could Mr. Hung answer these questions first?

[Jin-Yang Hung, executive]

Sorry, I would like to talk more about the previous questions, I forgot to mention, very, very important. The 2 products on the desk, including antenna, are manufactured in the earliest factories in Innolux, Gen 3.5 fab. The X-ray detectors is manufactured in a Gen 4.5 fab, the earliest and the second earliest factory in Innolux. But those products are the most advanced ones in the non-display field. I forgot to mention that earlier.

We are very proud of that. Innolux being part of the panel industry, we have found a great pathway to go. We don't shut down our earliest old factories, but we create new values in these factories.

[Unknown Executive]

The next question is about CapEx. In 2021, Innolux CapEx is TWD 25 billion. What is your operation outlook for 2021? How do you allocate the CapEx? Let's hear from Chairman Hung.

[Jin-Yang Hung, executive]

I will begin, and maybe James will want to add something later. Continuing on what our executive VP just said, even our earliest factories can adapt to the latest technology and the panel applications. You might remember, President Yang and I both talked about reinvention and value upgrades. It sounds like cliche when you think about it, what does it really mean? The reinvention of our oldest factory or a Gen 3.5 fab or Gen 4 fab is a case in point. In China, they don't have factories like this. They don't have the technological capacity. The point I'm trying to make is CapEx goes hand-in-hand with the future of a company. The panel industry and all of the panel makers need to position themselves.

From our perspective, we should stop pursuing capacity expansion alone. It's not an arm race anymore. Investing more money in the next-generation factory is no longer the key. Instead, we need to recognize our strengths. It could be our IP, our engineers, our technology or our RD capacity. It could also be clients' trust, which is very important. When we connect all the dots, we are able to develop the right products. Overall, our CapEx grows at a steady pace. It has stayed at around TWD 25 billion, but allocation could vary over the years.

I want to take this opportunity to say that in the past 2 years, our CapEx was about TWD 22 billion to TWD 25 billion. Despite cyclical changes, we, as a player in the panel industry, which emphasize the value of technology, have been fully committed to CapEx and R&D. James mentioned that our notebook shipment is now #2 in the world. But that didn't happen overnight. We invested heavily in IPS capacity over the past 2 years. This is a drastic change from the TN-based process.

We didn't have a crystal ball. We didn't see COVID-19 coming. But we have been preparing so that we are ready for whatever changes come our way. Our business department and R&D department have kept their radars on to explore various fields. When we sense an opportunity to work with other industries, governments or academia, they give us the feedback very quickly. That, in turn, becomes a driver for CapEx.

Going forward, this will continue to be our approach. It's unlikely that we will increase CapEx significantly to build another factory. Instead, we build strategic partnerships, look for new business opportunities or build ecosystems. This will be our guidance for CapEx.

James, would you like to add something?

[Chu-Hsiang Yang, executive]

In 2018, we got TWD 70.1 billion from our government for returning to invest in Taiwan. It's a commitment we made to both the government and island. Since then, we have kicked off many projects. We decided to rebuild the industry chain of TV sets in Taiwan. We are seeing some results.

In collaboration with our clients, we have 4 production lines in Taiwan, all operating at full capacity for 3 clients. Both output value and volume have growth in the double digits. This is a good example of flexible arrangement. This allows us to adapt amid geopolitical tension. As Chairman Hung mentioned, we saw a business opportunity and then used our existing resources to allocate CapEx appropriately between the front end and back end. It has brought good results.

[Unknown Executive]

Thanks to both. Here's about Innolux dividend policy. At the moment, the cash level is quite high. Is there any chance to provide cash dividends to shareholders in the next few years? We would like to ask Chairman Hung to answer this question.

[Jin-Yang Hung, executive]

The answer to this question is positive. Innolux will evaluate the current capital status taking into consideration of CapEx and shareholders' benefits. We would like to pay back to our shareholders. We would make appropriate adjustments, but we cannot commit to any fixed figures as this has to be approved by the Board of Directors and shareholders. But we are surely going to make efforts on this front.

[Unknown Executive]

Thanks to Chairman Hung's feedback. We have concluded the most asked 7 questions as above. And now we will open to the floor for investors' questions. [Operator Instructions] Citicorp's Arthur Lai, please?

[Arthur Lai, analyst]

I'm Arthur Lai from Citicorp. Thanks to the management teams for providing a wonderful presentation. I have 2 questions here. President Yang shared with us a supply/demand chart. One of them is the impact the component shortage has caused on supply and demand. Can you share with us the detailed numbers involved? Originally, the installed capacity may be plenty. But what's the percentage of glass or driver IC that's caused the problem? The second question, I remember a while ago, Innolux announced a project called Panel Level Package. Can you elaborate that a bit? Also, I'm curious about the antenna. You mentioned that these products use the existing techniques. Can you also explain a bit more?

[Unknown Executive]

Was this the slide that you were referring to?

[Arthur Lai, analyst]

Yes.

[Unknown Executive]

Thank you, Arthur. Both the #2 and #3 glass suppliers in the world are in Japan, NEG and Asahi. What's happened in NEG caused world's glass supply by 5%. With its recovery, the drop might decrease to 2.5% as far as we know. The impact from Asahi might be 1.5% globally. But because tank repair is very complicated and takes time, the effect might prolong. As reported, glass supply in the first half of the year is really tight. On a different note, driver IC, TCOM (sic) [ TCON ] and labor shift and TTDI (sic) [ TDDI ] are in short supply because 8-inch wafer capacity did not expand. There is no new capacity for 8-inch wafer.

But makers of the more profitable CMOS sensors, high-performance computing products and 5G cell phone chipset all offer higher prices for capacity that's already in short supply. So overall demand is not met.

For the past decade, many invested in panel makers. The driver IC factories did not expand. In Taiwan, we have TSMC, UMC, Vanguard and Powerchip. The rest are in China, such as SMIC. Overall, investment in the low end and the low gross margin part of the semiconductor supply chain is low. That problem remains. While the front end is in short supply, the back-end testing and the packaging is also in short supply. From our perspective, the problem will remain well into the first half of next year. As a result, there could be a 3% to 5% shift in time lag between demand and supply.

[Jin-Yang Hung, executive]

I will take the second question. There are 2 sub-questions in your question. I will first talk about antenna. This is an antenna module. It requires weather resistance. It's now mostly used in emergency rescue and communications. It has to withstand all kinds of weather conditions, wind, rain sunlight and impact from machines. It's covered by a case called radon to protect the radar. It's made from a special kind of mechanical material that allows radio signals to go through. Our product is inside. We cannot see it. It's protected by the case.

This is a partnership, and what we make is essentially 2 sheets of glass with liquid crystal in between. Surprisingly, it looks a lot like our LCD display in structure. Liquid crystal put between 2 sheets of glass with TFT to control the liquid crystal. These elements are the same. That's why we are a perfect match. Our product, which is the core of the antenna, is hidden inside. But the antenna itself is developed by a U.S. start-up called Kymeta. That's a breakdown of what we each do.

With this opportunity, I want to emphasize that cross-domain collaboration and innovation has great potential in Taiwan because we have relatively complete supply chains. What we are lacking in is scale, but our infrastructure is complete. There are many opportunities. We need to step out of our domain and work and innovate with others. At Innolux, none of us are experts of antennas. Even if we do find one among ourselves, they must have joined us to make displays despite a background in antennas. By definition, we have no experts of antennas. But how did we pull this off? That's because we have a mechanism where new technology need our expertise in TFT-LCD infrastructure, we need to be able to engage. This is a very good example of that.

Your second question touched on something we are working on, panel-level package, PLP. I believe part of TSMC's success can be attributed to its packaging technology, WLP, referring to wafer level packaging. WLP is performed on round substrates. When we perform packaging on square substrates, the size are bigger. We now face 2 major challenges. First is technologically challenging. We'll continue to work on this. We have secured an A+ technology project. We will continue to develop the technology.

The second challenge comes from domain knowledge. We have to set foot in the domain of semiconductor package, actually, the most advanced technology of semiconductor package, wafer-level package and panel-level packages, both of which are fan-out packages. We need to look for the right partners in the semiconductor industry. Not just 1 or 2, but the whole supply chain and infrastructure, including materials, equipment, design house and others. We are working on this. On the one hand, we continue to do R&D. On the other, we are trying to engage with the right partners in the semiconductor industry.

[Unknown Executive]

Thank you, Chairman Hung.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]