Q2 2023 ASE Technology Holding Co Ltd Earnings Call
With gross margin at 20%.
Arguably the current downturn is more severe and duration and at least equal in terms of corruption percentage and yet our margin structure has held up and we are making more EPS in this downturn during the two trough quarters than compared to any of those full years.
We believe this downturn is proving that our market position has significantly increased our resiliency and improved our structural business model.
For the second quarter, our ATM business experienced a relatively sluggish environment, but was somewhat better than original expectations due to higher than expected rush orders overall demand for services slightly improved off of first quarter trough levels.
Customer wafer inventories at our facilities appeared to be in the initial stages of decline. However, given the overall tepid market environment customers are becoming even more conservative on their inventory levels.
For ATM factories during the quarter key equipment utilization rates were still low staying near 60%.
On a more positive note, we are seeing more incremental pick up related to R&D new product introduction work.
Our EMS business picked up slightly as anticipated. This is in line with our outlook and in line with our typical seasonality.
With that please turn to page three where you will find our second quarter consolidated results for the second quarter, we recorded fully diluted EPS of $1 76 sites and basic EPS of $1 80 sites consolidated net revenues increased 4% sequentially and declined.
And 15% year over year.
We had a gross profit of $21 $7 billion with a gross margin of 16% our gross margin improved by 1.2 percentage points sequentially and five four percentage points year over year. The sequential improvement of margin is principally due to higher loading in the current quarter.
The annual decline in gross margin is principally the result of lower loading during the current downturn.
Our operating expenses increased by 0.7 billion sequentially and declined by one $5 billion annually. The sequential increase in operating expenses are primarily due to higher R&D expenses at our ATM business and labor related costs as customers are starting to ramp.
New product introductions.
The year over year decline was primarily attributable to lower bonus and profit sharing expenses across the company.
Our operating expense percentage increased 0.1 percentage point sequentially, and 0.4 percentage points year over year to 9%. The sequential operating expense percentage increase was primarily related to higher R&D costs relative to revenues generated the annual operating expenses.
This is primarily due to lower overall loading relative to semi fixed operating costs.
Operating profit was $9 4 billion up $1 $7 billion sequentially and down $11 $2 billion year over year operating margin was six 9% improving 1.0 percentage points sequentially and declining five nine percentage point.
Year over year.
During the quarter, we had a net nonoperating gain of 0.7 billion, our non operating gain for the quarter primarily consists of net foreign exchange hedging activities profits from associates and other non operating income offset by net interest expense of one point.
$1 billion.
Tax expense for the quarter was $1 $9 billion, the effective tax rate for the quarter was $18, 9% net income for the quarter was $7 7 billion, representing an increase of $1 9 billion sequentially and a decline of eight 3 billion year over year.
The NT dollar depreciated, 0.6% against the U S dollar sequentially during the second quarter and 4.5% annually.
From a sequential perspective, we estimate the NT dollar depreciation had a 0.16 percentage point positive impact to the company's gross and operating margins from a year over year perspective, we estimate that the depreciating NT dollar had a 1.28 percentage point positive impact.
To growth in operating margins.
As a rule of thumb for every percent the NT dollar appreciates, we see a corresponding 0.29 percentage point impact to our holding company gross margin on.
On the bottom of the page, we provide key P&L line items without the inclusion of PPA related expenses consolidated gross profit excluding PPA expenses would be $22 7 billion with a 16, 6% gross margin operating profit would be $10 6 billion with an operating margin.
So then <unk>, 8%.
Net profit would be $8 9 billion with a net margin of six 5% basic EPS, excluding PPA expenses would be $2 seven sites.
On page four is a graphical presentation of our consolidated financial performance you can see the impact of the current weak environment here. It does look like we are looking at the first quarter as the bottom though.
On page five is our ATM P&L. It is worth noting here that the ATM revenue reported here contains revenue eliminated at the holding company level related to intercompany transactions between our ATM and EMS businesses.
For the second quarter of 2023 revenues for our ATM business were $76 1 billion up $2 8 billion from the previous quarter and down $18 9 billion from the same period last year. This represents a 4% improvement sequentially, rather than a flat quarter, while on a year over year basis.
<unk> declined 20%.
Gross profit for our ATM business was $16 2 billion up $1 4 billion sequentially and 11 6 billion year over year.
Gross profit margin for our ATM business was 21, 2% up one one percentage points sequentially and down eight percentage points year over year. The sequential margin improvement is the result of slightly improved loading offset in part by higher utility costs.
While the annual margin decline is primarily the result of lower loading due to the current downturn.
During the second quarter operating expenses were $8 7 billion up 0.4 billion sequentially and down $1 $1 billion year over year. The sequential increase in operating expenses was primarily driven by higher R&D expenses related to higher labor and new.
Product introduction costs.
The annual operating expense decline was driven primarily by lower labor costs due to lower profit sharing and bonus accrual.
Our operating expense percentage for the quarter was 11, 5% up 0.1 percentage point sequentially.
And one two percentage points year over year. The sequential increase was due to increased R&D expenses, while the annual increase was due to lower loading relative to semi fixed costs. During the second quarter operating profit was seven 4 billion, representing an increase of $1 billion quarter over quarter.
<unk> and a decline of $10 $6 billion year over year.
Operating margin was nine 7%, improving one percentage point sequentially and declined nine two percentage points year over year.
For foreign exchange, we estimate that the N T to U S. Dollar exchange rate had a 0.28 percentage point impact on our ATM sequential margins and a two point to one percentage point impact on a year over year basis without the impact of PPA related depreciation.
And amortization ATM gross profit margin would be 22, 4% and operating profit margin would be 11, 2%.
On page six you'll find a graphical representation of our ATM P&L as can be seen here current year loading levels are still significantly lower than 2022.
On page seven is our ATM revenue by market segment.
It's fairly similar as last quarter. However over the course of the last year and a half our computing segment does appear to be gradually taking on larger segment sure.
On page eight you will find our ATM revenue by service type there isn't a significant change here.
On page nine you can see the second quarter results for our EMS business and a graphical representation of its market segment allocation.
As usual the second quarter is the Dol financial quarter during which not much changes from the first quarter, but in actuality our EMS business is in the midst of preparing for its seasonal upcycle.
During the second quarter EMS revenues were $60 4 billion, improving $2 7 billion or 5% sequentially.
And declining five 8 billion or 9% year over year sequentially, our EMS businesses gross margin improved one four percentage points, while our operating margin improved one two percentage points. The margin improvements were driven primarily from favorable foreign exchange.
<unk> to raw materials, and overall product mix.
Our EMS second quarter operating profit was $2 1 billion up 0.8 million sequentially and down 0.6 billion annually.
For EMS market segment, our consumer segment picked up as industrial and automotive segments declined. This was driven by slightly stronger demand in the current quarter related to our consumer S IP product and temporarily weaker demand environment related to <unk>.
Australia products, our automotive business looks to be impacted by end market dynamics.
On page 10, you will find key line items from our balance sheet at the end of the quarter, we had cash cash equivalents and current financial assets of $66 $4 billion.
Our total interest bearing debt was down $3 $2 billion to 187 1 billion.
Total unused credit lines amounted to $384 6 billion.
Our EBITDA for the quarter was 25 8 billion.
<unk> debt to equity was down to 41% at the end of the quarter.
We expect our debt position to increase during the third quarter as a result of incremental cash usage to pay our upcoming dividend.
On page 11, you will find our equipment capital expenditures machinery and equipment capital expenditures for the second quarter in U S dollars totaled $209 million of which 107 million were used in packaging operations 60 million and test operations 33 million.
And EMF operation in.
And $9 million in interconnect material operations and others.
Current quarter EBITDA.
0.8 billion U S dollars continues to outpace our equipment capital expenditures of zero point $2 billion.
Before we get to our outlook I would like to spend a bit of time on what we believe drives our business and touch upon the topic of the moment.
Hi.
Our core business is to provide our customers unprecedented scale and repeat ability of manufacturing.
With such scale, we are able to achieve the lowest manufacturing cost without compromising quality into.
Interestingly this improved scale of manufacturing also delivers the highest packaging yield.
We consider this to be our competitive advantage.
I've included a rough and various simplified chart related to our business. The X asks this represents the number of package iOS and the Y axis is a smooth exponential scaled estimate of volumes.
We've placed some of our offered package types roughly along the X axis. These package types actually overlap much more than what is shown here, but the basic message follows our business is driven by the center area of the plant where there are mass volume.
The more units, we manufacture of a particular package type the better able we are to ramp up economies of scale and manufacturing efficiency.
The right side of this curve identifies leading edge advanced package types.
As we've seen time and time again as the industry adopts higher Io counts new package types reach a manufacturing critical mass and start climbing up the curve.
This represents when lower volume R&D lives become suitable to be scaled up for high volume mass production.
We're starting to see this with some of our fan out based packages.
For us, having substantial capabilities and leading edge technologies as necessary as we want to be ahead of the curve.
Iteratively as in this reference to this graph.
But the most technologically advanced packages, neither drive significant volume nor significant profitability.
For the back at package technology migration matters, but volume fundamentally determines manufacturing efficiency and thus for us profitability.
Now to the business of AI.
Recently, we have been frequently asked to comment on our view of AI often these discussions have centered on products that are very specific to the core enablement of AI training.
We understand the excitement and importance of such specific products, which are enabling AI development.
However, we believe that zeroing in on a couple of specific tip of the iceberg products tend to be somewhat missing the bigger picture.
Ai's impact on ASC will be much broader and multifaceted.
Focusing in on specific leading edge units.
We believe AI is substantially a much larger phenomenon. We believe AI serves as a catalyst to the next super cycle for the semiconductor industry.
At a basic level AI means more information will be collected stored and analyzed everywhere and pertaining to anything.
Everything.
From a is edge data collection to the influence of that data represents new volumes all along.
<unk> processing chain.
Not only do we see incremental product volumes ahead.
Future AI features will require an incremental step up in capabilities.
Increasing both die and packaged level requirements.
If we try to show this on our chart here.
As incremental complexity ramps higher Io counts pushed the entire curve to the right.
As you can see this step up will also drive adoption at the leading edge of our vertically integrated solutions in this graph the line pushes up for volumes and to the right for the technology step up.
We also see further opportunities for system level complexities that May force further parallel design versus historical monolithic design tendencies.
As overall system architecture must accommodate increasingly power hungry applications, such as AI, we believe it becomes increasingly necessary to solve power issues near or at the package level.
These are all frontiers unhurried genius integration roadmap.
AI only serves to add to this need and opportunity for us.
The chart here extends once again for the potential proliferation of.
Heterogeneous integration.
All across our package types.
We may see AI as a novelty now, but it will be ubiquitous soon enough.
As we come back to look towards the nearer term we.
We are seeing a ramp in manufacturing for the coming third quarter across our businesses, it's definitely not a pickup of a typical manufacturing year.
But given the entire macro climate, including post COVID-19 spending patterns lackluster China demand.
And tightening inventory controls by our customers.
It's a decent start.
The current year does not look to be the V shaped recovery that the industry was hoping for it's looking more like a checkmark with a return to optimal manufacturing unfortunately stretching into future quarters.
From the cost perspective, the coming quarters cost environment will be impacted by higher summer consumption.
And three full months of higher summer utility rates.
Further we have a smaller set of products ramping in the third quarter as versus normal given the selective product mix, we see a temporarily higher raw material content environment for the coming third quarter.
We would like to summarize our outlook for the third quarter as follows for our ATM business in NT dollar terms, our ATM third quarter 2023 revenues should grow quarter over quarter by mid to high single digits, our ATM third quarter 2023 gross.
<unk> should improve 75 to 100 basis points versus the second quarter of 2023.
For our EMS business in NT dollar terms, our EMS third quarter 2023 revenues showed increased 20% quarter over quarter, our EMS third quarter 2023 operating margin should be similar with the second quarter of 2023.
This concludes our prepared remarks, we would like to start the Q&A here.
Yeah.
Yeah.
Now we would like to open the floor for questions.
If you have any question please raise your hand.
When you ask a question.
Please hold two questions at a time.
Thank you.
Okay.
We have a question from Mr. Randy and brands of <unk> Suisse.
Okay. Thank you.
That's the first question on the sales guidance.
For the IC ATM it looks like it's tracking fairly close to TSMC, but meeting be sure to foundries.
Could you discuss a bit more on the split my applications, where youre seeing the incremental growth momentum continuing and if you see that continuing into fourth quarter and then for MFS, the 20% sequential it looks like it's lagging traditional seasonality.
Could you talk if it's delayed timing on product ramps.
Softness in certain applications.
Or we're just the timing issue that could help.
We shipped some of the business up to fourth quarter.
I think before both ADM as far as your Mezz.
The delayed of the.
Some are delayed.
New product launches.
It sounds like the impact on the <unk>.
Second half pro forma revenue performance.
I see.
Are you expecting.
The sequential growth continuing.
For the second half.
Also into fourth quarter.
The inventory digestion as well as CEO .
In market consumption is still continuing.
So we are taking a more.
Conservative outlook on the second half.
And so the.
What we are what we're showing here is really the forecast with some judgment.
With the focus that we got there.
Some of our own judgment to come up with the numbers.
Okay.
For the.
The profitability you discussed a few impacts utilities.
And materials could you discuss a little more of the mix.
What's driving that in short term material shift and with the leverage where it is so it looks like about a point or two light of kind of a normal pick up with that type of volume.
Are there headwinds from pricing environment, how you're seeing pricing or other factors.
I think pricing is still remains to be resilient at this point and.
Going into third quarter, we do have a higher cost structure, given the fact that the.
We're in the summertime and we're subject to summer rates for energy.
And.
Put us some pressure on the margin expansion.
Typically when we when we see our overall.
Utilization goes up when revenue goes up.
The March issue.
Especially it should be a bit higher than what we are presenting here.
Given the higher energy cost I think thats.
Putting some pressure on the margin expansion.
It also in terms of product mix that thing.
Some of the higher material content products are being put out in the coming two quarters.
Yes.
Also putting some pressure on the <unk>.
Zero cost of ours.
And therefore, the largest expression.
Yeah.
But I think overall the us.
In terms of material content.
All product mix.
Okay.
We start to improve in the fourth quarter.
Next question is from Mr. Goku hunting her on of J.
J P Morgan.
Okay. Thanks for taking my question. My first question is on the.
State of the inventory cycle could you give us a little bit more color on what USDA Award on bank inventory, how quickly our customers drawing that down.
And also could you give us some more color on our Q3 revenue guidance of sequential.
Sequential growth a bit.
And.
The growth of mid to high single digits is there any divergence between what you're seeing on your communications platform, both the automotive industrial and.
And beauty.
I think the.
The overall <unk>.
Up in third quarter I think it is across the board through our applications as we see new products come Y'all received.
Automotive continued to be up by the spot for us.
And the first part of your question.
Wafer bank I think it's being gradually worked out but I think the.
Nowadays I think the old customers given the soft market condition I think people are getting more cautious.
So I.
I think the inventory digestion will continue for.
Maybe in the next two quarters or even.
Yeah.
Further quarters into the future but.
As a whole I think going into 2020 for these things will start to improve quite a bit.
And we are expecting.
A much more healthier.
Both year four.
For us in 2024.
Got it.
My second question is on the AI related demand.
Any estimate of exposure to AI for ALC as of now and then.
TSMC talked about roughly 6% of revenue and.
And how are you planning for capacity on AI study from some of your <unk> and fan out related products to also like Ken mentioned.
Going into some of the more mainstream high end volume kind of products as well.
Are you thinking about like building these products start to kind of kick into yard.
Packaging and testing portfolio.
Got.
If we are narrowly defining a today the.
The associated revenue for us.
Roughly at this low single digit.
ATM revenue at this point.
But I think more importantly is really given time.
It will be adopted into all existing and new applications.
Therefore.
Give it to you with that.
A tremendous volume of business opportunities for us.
Covering all kinds of different chips that will be coming on stream.
Yes.
Kim has demonstrated in the chart that we showed earlier on.
In terms of exact timing I think that's.
Yes.
Right now AI is still at its early.
Early stage.
I think it will take some time for us to.
For this segment to continue to grow.
But not particularly just AI itself, but as a I guess.
Guess immersive into all different application, that's when we will start to see explosive growth.
Volume growth in that.
And driving the whole industry into the next Super cycle.
Next question is from Mr. Brett Lee of CLSA.
Hello, Brad.
Hello, Hi, sorry also thank you for taking my question. So I have a question on advanced packaging. So basically can you just mentioned that critical mass is quite important for us to ramp up the best packaging capacity. So are.
Are we reaching our so called sweet spot yet or when should we expect the company to or the industry to reach that sweet spot and do we have any incremental capex on it. That's my first question. Thank you.
Well it will definitely go to into that stage and we are preparing ourselves by keeping us.
At a full rollout of the technology development.
We will be making the necessary investments as we see fit when the time comes.
And you know.
When it was starting to happen.
It will be progressive.
Yeah.
Take steps annual progressive.
We are very nicely going forward.
We do have the capacity in place.
Meetings are different kinds of.
Requirements are.
But.
While we're waiting for is for the volume to start to increase and to grow.
We will make the necessary investment accordingly.
Got it got it. Thank you very much. So also we have learned from Umc's call yesterday about its.
Its collaboration with <unk>.
I see and some IC design service firms on that so called open ecosystem for advanced packaging. So would you. Please share the pros and cons associated with this open system that ASE and UMC are for me and so would you. Please also provide some insights into the so called <unk>.
Optimal cuzzort regulation model versus the current dominant closed system by TSMC. Thank you well, we are definitely one of whatever the initiator of the collaboration.
Particularly on the Asia closer and you know this.
This is a major.
Component up to you overall chip away for type of process.
Uh huh.
So we are collaborating with the foundries too.
To complete the full process for us.
And on top of that we also have our.
Our own solution.
Focus is progressing well we have very active.
Engagement with a lot of them.
Quite a few of our customers.
Leif.
Mass production will start soon.
Get into the.
The later part of the year or maybe early next year.
Yeah.
Next question is from Mr. Ritchie of Taiwan.
And you guys hear me, yes, okay great.
First question, just a very general housekeeping ones you are utilizing raise across the board that would be your packaging.
Q2 and Q3.
Q2, we are roughly at 60% across the board.
And go into Q3.
Three given the.
The pickup of our business we believe the.
Hum.
Average utilization will be hovering around 65%.
Okay, great. Thank you.
Second question is.
A quick follow up on this open ecosystem Youll go up with you guys cooperation with the foundries.
Z producing.
The Poser and you guys are in charge of the debate.
In services like.
<unk> and towards.
No further follow up you guys had any.
Any thoughts right now.
The core GPU area code.
E participant.
This area Board.
Yep Yep.
Capitalizing the AI server demand growth.
Oh, well, Brian , though the AI related exposure is still low we have as I mentioned earlier on a single low single digit percentage of our overall ATM revenue.
I'm not commenting on the specific products, but we are.
We are.
Defining this as our leading edge.
Packaging technology.
That that's related.
Mostly the networking.
In the.
In the SBC.
Type of applications.
And I think the Oh.
The potential of this business is also.
Pretty good I think.
Going into next year.
We.
We could probably see this part of the or this particular segment of the business should.
So easily double for in next year.
Next question is from Sunny Lin of UBS.
Hi could you hear me okay.
Yes, yes.
Thank you very much good afternoon.
My first question is a bit longer time.
And so obviously lack of yes, AEP have been overwhelming.
The semi industry.
Probably because of that share again and why that was thank Jason.
I Wonder now looking ahead.
Much of the upside you think ethane will continue to rely on.
Meanwhile, China OPEC company that Oh boy plenty always he also will that affect these opportunity to some extent.
Well it definitely would be a worthy.
The clear leader in our space and we will continue to gain shares going forward leveraging our scale technology competencies.
As well as our proximity to the foundries, particularly on these more advanced technology that is coming on stream.
No going forward I think.
Joe geographical expansion will continue that's the really the going trend as we see demand starting to put polarized.
I mean, China and outside China.
On that we do have a very good footprint around the world.
We are currently expanding in Malaysia, and Paul Poland in Korea, and Japan.
As we see fit or as required by the customer when we see the business opportunity that we that justifies our expansion we will continue to do so.
And I think it.
Alright.
Okay.
Obviously, the Chinese will do the same but given the scale and also the.
Leadership of hours in all aspects I think Neil.
We will continue to out compete with our peers wherever there are they are.
Got it thank you for the color.
Paul.
Previously the company had a go.
Our target to grow about two times of the largest semi.
Is that.
Valley target, although we continue that we would continue to anticipate.
Yes, well of course 23 is a very different year, because were going all going through a very.
Challenging year, but as I mentioned I think.
Going into 2024 things will start to pick up.
Yeah. It will go to a much more healthier.
Condition and.
Our target has continued to grow twice the logic semi growth.
Next question is from Laura Chen of Citigroup.
Hello, Hi, good afternoon, Cam Jeremy yes.
Yes, hi.
My first question is actually about our IC ATM gross margin outlook.
Not that bad.
This year, we still see the inventory correction continue.
But previously you were looking for like a meantime, with a 30% gross margin for IC ATM.
So I'm just wondering that is aimed at what kind of duration right.
All we can reach that level and also.
And that we are also doing some advanced packaging for the AI chip. So I'm, just wondering that far that kind of spotty.
But the well that'd be a margin dilution.
Oh well.
ITM before.
Right now the.
Well, we called a leading edge technology or leading edge packaging athene deals rural.
<unk> problem.
Profitability is was a return is actually above corporate average.
And in terms of Dr structural margin that we mentioned before.
I think it takes us to go to a utilization rate of.
Around 70%.
Anything below that it will be very difficult for us to to reach that structural.
Margin.
Got it thank you and I will show on the EMS space also.
Hum.
This filing.
Randy previous I wanted to ask about seasonality into Q3 seems to be minor.
Tony just wondering that is that.
Is that just due to the mutated demand or we see any significant delays for the new product launched in the second half.
No I think it is.
Just overall the the muted demand.
That is causing the.
<unk>.
A weaker seasonality seasonal seasonal pick up.
For our EMS business.
But you're typically.
If you look at a whole year from quarter to quarter.
Typically the third quarter with BD.
The peak quarter and.
At this time around I think are not trying to be.
A spokesman for our customer I think the.
And market knowledge about your sum of the.
But it seems to be launched later than normal.
It does have a.
Some impact on in terms of some of the old are being pushed back too.
The fourth quarter.
So I think this year will be a little bit different from a on a quarter to quarter performances perspective.
Our next question is from Bruce Lu of Goldman Sachs.
Yeah.
Hello, Pammy, yes.
Yes, okay.
Okay, let's start with an easy one so I think three months ago, you talk about why ADM business declined high.
High single digit to low teens, as we get closer to the year and can you give us some outlook for the full year for the ADM business.
Yes.
Thank you just going to be.
Low teens to mid teens.
Okay.
Okay. So based on this kind of low teens with meetings.
We shall see.
What kind of profitability.
I think it will be a subpar structural margin.
Hi, Thank you.
Then I will go back to the.
Hi, Chris.
Perfect.
I do acknowledge that you guys talk about where are you now.
You know.
A larger addressable market or the AI potential.
But what which part of the AI packaging business.
Faster growth.
I see.
I mean quarter.
<unk> for the cohorts, one or for the peripheral chips, which while we have had some pockets of good.
And in terms of like coal was all related packaging business, what's your return.
Threshold and margins ratio for you to continue to invest a lot more invest more for this business.
Oh, well now still trying to figure out what kind of return that we can get out of it.
<unk> process of course think.
That's depending on a lot of different factors. Most importantly, what do we have a stable volume that we're going through.
We will have a how why the adoption will be and I mean, the customer will be using that so we can diversify the risk.
There are a lot of factors are being considered as I don't think there is no more as matured stage as we are.
So I think the.
How much or how soon we will start investing into food process of course.
It really depends on the deal.
A situation that we're looking at right now we do have some colas.
Capacity, but that's.
That's to maintain.
To help us maintain our technology.
Hum.
Well Kurt.
Acquisition.
Hum.
But for the.
The real bread and butter for US is really was the AI starts to proliferate into other applications going.
Going into <unk>.
Automotive communication computing, all sorts of new applications, and that's where we're going to see the mainstream packages be start to be required for these ships and that's where the volume is and.
I think that will be the main investment areas that we will be focusing on.
Next question is from <unk> of China Renaissance.
Oh, Hello, gentlemen, two questions first one regarding this shift our capex Patrick can you provide us an update and in what areas spanning all of our Capex about Japan.
Jonathan.
Billion.
I think the the capex flow equipment.
Our guidance remains the same as three months ago in terms of its breakdown of being.
Roughly 50 50.
50, 556% will be for assembly and the bulk of it is for this.
Packaging.
And roughly 25% for test and then.
15% or so for EMS and then another three four material.
Alright, and then going forward in the next couple of years should we expect the capex intensity to rise because of our involvement in advanced packaging area.
Yeah.
Yes, it really again it really depends on your where the volume is where we should be investing.
All in all I think given the fact that this year we have been.
Fairly cautious and conservative about our capex.
And we are we are.
We were expecting.
Those two star resume next year.
We believe the capital investment.
Capex for next year.
It will be somehow somewhat higher.
Next question is from Mr. Goku, Holly Hunt of Jpmorgan.
Yeah.
Okay.
My question is.
We are seeing a lot of capacity expansion on the front end happening in China, especially for older technologies.
What have you.
As for.
<unk> do you think that you will launch you will kind of miss out on that potential packaging demand.
Given you have lesser exposure in China today.
Is that potentially a competitive threat down the line given that we are seeing some of the competitive threat emerge for the foundry side at this point in time, how do you see this evolve because we had a.
You, maybe BARDA you back at the market is kind of becoming a little bit more divergent between China and non China.
Do you still think Thats. The case are you seeing some of the given that there is a lot of capacity getting built in China, even some of the non China Fabless companies will eventually.
Go back and it went back to the China capacity to leverage the lower pricing.
Well I think it is.
Man is diversed at this point and.
But that also create.
Creates a.
A lot of requirements in China for localization.
And so where we are seeing that and we do have are aside from the selling of four factories.
Years ago, we still remain to have a very sizable operation.
So which will could accommodate.
Whatever the.
The opportunity there is.
Plus the Suzhou factory that we have.
Is of more advanced technology and more.
Higher yield and efficiency, so I think it's.
So very very competitive.
Operation of ours in China.
To address the local demand.
Hum.
We are also seeing that Neal.
A lot of investment being put in in China is for the mainstream.
Technology type of.
Products.
And so we do feel that there is.
Fairly good potential in the deck.
Area as well.
So.
Yeah.
I don't know if you will.
Where we are.
Investing into.
The combination of.
Uh huh.
Hum I should I put this.
We are putting back some of our investment into the.
Four factories that we so.
Therefore factories is now.
Combining with the <unk>.
With another entity today.
So we are.
Taking a two pronged approach one is using our own facility leveraging our own facility to capture some of the opportunity for the more advanced type of demand and also some.
Alrighty interests.
In the in the <unk>.
Is the.
In the four factories that we sold.
And.
We continue to benefit or to share some of the prospect.
In the mainstream.
Or the legacy kind of demand.
In China, which has a fairly good potential at this point.
Got it and just a further question on the AI.
And demand.
For the global like technology.
One what portion of the demand this ASC expect to kind of fulfill next year do you expect to.
I think it gives them to you talked about expansion of their own capacity and they probably are going for the <unk>.
Majority of the capacity right now.
But.
What percentage of like roughly how much of that demand does <unk> expect to satisfy I wanted to start bringing some of the capacity online next year.
Oh, I think I think Brian luxury I think most of the demand will still have to be satisfied by.
By the foundry itself because of your this this type of technology or process is mostly wafer process and I think there should be taking the leading role on this end.
And Neil.
As we've been saying all along as time goes by as the technology because more mature.
The adoption becomes wider and they are multi customer using the volume becomes more stable.
The most.
Much bigger in size.
There will be a natural division of works between us and the <unk>.
Foundry.
Dan.
With us with us spaces by what kind of share we will be having I think that that is the growing trend.
<unk>.
It really depends on how much demand there is and.
What got worse the suitable working.
Model.
Clean Earth and <unk>.
In the foundry.
To share the work and to satisfy that demand.
Next question is from Mr. Bruce Lu of Goldman Sachs.
And I know, what's the capex for the second half and what's the Capex.
Capex allocation for two Fived packaging in the second half.
Uh huh.
Yeah.
Okay.
Okay.
Okay.
I think so.
So second half overall.
Our overall capex will be the range of.
<unk> $600 million.
With two quarters.
With two quarters, yes.
No no for the for the second half.
Okay.
And the allegation.
We're not commenting on the.
2.5, Capex at this point.
Yeah.
So what's the threshold for you to invest more than one five.
Like I said the building.
The business has to justify the investment.
Okay.
Hey.
What is the threshold.
What is the threshold.
So.
In terms of margin in terms of needle.
The lifespan in terms of the return.
Hum.
It has to be above the corporate average.
But it looks like the revenue is growing all like meaningful way believer knob.
That's the current outlook for all of the culture.
My sense to me it seems to me that you are not a grace of in terms of investing in this business.
Like I said, we are now focusing and we should not be focusing on these.
This so-called AI chips as narrowly defined.
Which may be.
Includes CPU GPU or a.
Accelerators I think that's really just the catalyst of our business expansion going forward. So it doesn't really not.
The part that we should be focusing on our investment at.
Once it gets to.
Once it gets to.
Proliferates into other applications and then volume be created.
Got it.
For the mainstream pathogen test.
That's really when we start to invest in.
In a major way.
So I don't.
I don't think is wise to just focusing on the <unk>.
On the <unk>.
Yeah.
Coal was a 225 D specifically.
Because that's what we will be missing out the hope that the full picture here.
Okay got it very clear and one more question. So what's the what's the what do you think about the system level testing business.
What's the revenue concentration of partners L. P for you and is that a growing in businesses that are core to the business.
Hi, OE business for you in the future.
Well, we do have we do have system level test and is making known your reasonable return.
Just like every other business as we see there is there is real business potential.
There is enough return for us to make and then we'll make the necessary investments.
If you have any question please raise your hand.
Yeah.
There is a question.
More or no.
Okay.
Okay. Thank you everybody hand.
Hopefully, we will clear some of the.
Concerns or questions you may or may not have and we I think we had a decent second quarter, we'll have a decent second half to look after as well.
So thank you very much we will be seeing you next quarter.