Airtac International Group Aktie

[Audio Gap] sector at UBS Taiwan. It's our pleasure to host Airtac management today for their first quarter '26 earnings release. Now let me pass to Mr. Ivan Tsao, the CFO of Airtac for opening remarks.

Okay. Thank you, Ally, and good day, everybody. This is Ivan Tsao speaking from Airtac, and welcome to join this conference call. And please let me brief our first quarter results and current market situation. First of all, pneumatic demand have entered recovery cycle, and we expect this up cycle could sustain longer than 2 to 3 years. And both shipment and order book amount have exceeded our expectation since the beginning of the year.

Pneumatic components are replacing human beings direction and the industry can sustain single-digit growth annually once there is no too severe NOLCOM issue. By continuously developing new products and improving our brand image, we expect our annual revenue growth rate could be 10% higher than industry growth rate as pneumatic products support production line rather than the end product -- as long as customers launch new models or engage in production activities, there will be a better demand for pneumatic.

In addition, recent geopolitical impact on raw material costs remain within the company's control through ongoing improvement in internal production efficiency and production and product sales mix. The operating profit margin this quarter continues to rise compared to the past couple of years.

And our improved consolidated revenue for the first quarter of 2026 was RMB 2.192 million, a 22% growth year-on-year. Gross profit was RMB 1.052 billion, a 33% growth year-on-year. Gross margin was 48.0%. Operating income was RMB 728 million, a 45% growth year-on-year. Operating margin was 33.2%. Net nonoperating income was RMB 22 million, including RMB 14 million subsidy from government. 5 million of FX gain and 4 million of interest income. Income before income tax was RMB 750 million, a 37% growth year-on-year. Pretax margin was 34.2%. Net profit was RMB 585 million, a 36% growth year-on-year. Net margin was 26.7%. EPS for the first quarter of 2026 was TWD 13.35.

And revenue for top 8 industry for the first quarter of 2026, the biggest one was electronics, around 26% to our consolidated revenue. It's 20% growth year-on-year.

Second one, battery was around 20% to revenue, 85% growth year-on-year. Auto was 9% to revenue, 15% growth. Packaging was around 7% to revenue, 10% growth. Machine tool was 7% to revenue, 20% growth and general machinery was around 5% to revenue 32% growth. Textile, 5% to revenue, 22% growth and energy and lighting was around 3% to revenue, is 2% decline year-on-year. And for current market situation, more and more customers are showing positive views on future demand.

China government continues to release many stimulus process and attempt to restore the confidence of people or enterprises. Some of them have improved their confidence and increased their end product consumption or capacity expansion. As for the demand of various industry for pneumatic, the revenue of the electronics industry grew by 20% in first quarter of 2026 is better than our expectation. And so many customers say there could be a good year for electronics in 2026 because they could be launching more new models and the spec upgrade in the year. And with that, we could have double-digit revenue growth from electronics customers.

And for battery demand, government has announced its development guidance for EV and battery industry and customers expand their domestic capacity. In addition, more countries have relaxed their recession policies on Chinese players, and those players plan to extend their overseas capacity. So it could be double-digit revenue growth from battery in 2026.

Better revenue growth from auto industry also could be expected in 2026. We have improved our brand match on auto customers and enjoy better share gain. Even though overall auto industry has not recovered significantly, we have had double-digit revenue growth from auto for years. We expect double-digit revenue growth in 2026 from auto customers. Moreover, government stimulus process for replacing old equipment to be new equipment can get subsidy from government still in the market. Those traditional demand like machine tool, general machinery, textile or packaging customers can enjoy positive growth.

However, we have some demand issues on solar or energy lighting in 2025. But the government has recently taken the action to coordinate the overcapacity issue. We expect solar or energy lighting demand can be positive growth in 2026. And selected items for selected customers have pricing competition in pneumatic market, but it's still rational basically. We have increased the selling price in our overseas market, but maintain stable pricing in the China market to improve our customers' relationship and accelerate revenue from those various new business or new products.

And in addition, we need to comprehensively consider revenue growth, pricing range, operating profit margin and market share rather than just pursuing high-speed revenue growth and the increasing material costs still can be offset by our internal efficiency improvements. The operating margin still have to depend on revenue scale and capacity utilization rate. Even we can improve our margins by launching more higher gross margin new items, improving our selling product mix and continue to improve internal efficiency to reduce production cost. We define a 100% capacity utilization rate based on working 24 days a month and 21 hours a day with 2 shift operator working system. Current pneumatic capacity retention rate is higher than 100%.

For the development of the linear guide, despite the overall weak demand and peers aggressive pricing in 2025, our shipment volume growth still could be around 20% in 2025. We also have a 20% revenue growth in first quarter of 2026. We have increased our capacity utilization rate from over 20% last year to over 30% since the beginning of this year and expecting to reach 50% by end of the year.

When we have 20% to 30% retention rate, gross margin of linear guide is 10% and 50% retention rate, gross margin is around 30%, 80% retention rate, gross margin could be around 40%. Even 40% gross margin is lower than our existing pneumatic business, and we use the same sales team to do cross-selling pneumatic and new guide without too much additional OpEx. It still can improve our consolidated operating margin. And our product quality is better than our Taiwanese peers and our pricing is lower than theirs. But we missed customer expansion in 2020, our current sales reach is to enhance our brand image and just compete with Taiwanese and Japanese peers.

After have a good enough brand image within 1 to 2 years, we will design additional spec or SKU to reduce production cost and selling product and selling price to compete with local China players, continuously improve our inflation rate, enjoy better fixed cost leverage and implement another aggressive pricing to compete with all peers.

When the inflation rate exceeds 90%, we will consider changing the current 2-shift awaited working system to 3 shift and increase our equipment working hours also can enjoy better fixed cost leverage. This will give us the opportunity to implement more aggressive pricing strategy further to compete with all the peers and accelerate our market share in linear guide market. We still expect we could have around CNY 3 billion revenue from linear guide in around 10 years.

For the development of supporting semiconductors business, based on our strategy, we have not developed products to meet semi customers demand by end of 2024. But due to those products enjoy higher gross margin and China government have localized policies. We began to develop semi items from early of 2025 and scheduled to launch them gradually from 2027 and current development progress is better than our expectation, and we can gradually launch some items from second half of 2026. But based on past experience, usually takes around 1 year for new product to have a better revenue contribution. So it could be in second half of 2027 or early of 2028, we could have higher revenue contribution from semi customers. And we expect pneumatic industry can return to low single-digit growth in 2026, and we can have least 10% revenue growth from pneumatic products plus the revenue contribution of linear guide and electrical controller product.

The shipment in first quarter exceeds our expectations and remain pretty strong in this April. Even though we are optimistic about the market demand in 2026 due to the short delivery time in pneumatic industry, we still prefer to provide our guidance for 2026 based on a conservative principle and we will adjust them upwards with the next quarter's operating results. We raised our guidance for 2026 to achieve a revenue growth of mid-teens to high teens percent and operating margin of 33% for the whole year. And we have generated free cash flow for years and also have increased our cash dividend payout from 35% in 2021 to 55% in 2025. It will be 65% in 2026 and still could be better or higher in coming years.

It's my briefing. Should you have any further questions, we can discuss it. Thank you.

Okay. So now let's start the Q&A session. I already see several hands up. So let's start with Ming.

Congrats Ivan, for the great results. So I have 2 questions. The first question, so regarding the current business, I think in the first quarter, you already see a very strong shipment growth. So right now, compared between linear guide and pneumatic, which product has a stronger demand? And do you consider to raise the price for either of the product? I think that's my first question.

So basically, we have stronger demand from pneumatic. And linear guide in the first quarter, the overall demand still has not recovered significantly. Even some peers, they say they want to raise their some price. But as we know, it just selective items can be hiked to customers' pricing. And basically, we have increased our pricing in overseas market but still sustain stable pricing in China market because we still will launch more new items for pneumatic and prefer to sustain better relationship with customers and convince more customers to buy more linear guide from Airtac.

And we also have electrical controller new spare will be launched in second half of 2026. And we're still continuing to develop electrical actuator or electrical thing, maybe we can launch electrical actuator in 2028 or 2029. So based on we have a record high revenue and high position of the OP margin, maybe it's better not to hike our same price in China market in this moment.

I have another question is regarding to your cash management, et cetera. So you mentioned you will raise your dividend payout. So at the same time, your cash flow from operation is improving as well. So how will you make your investment more efficient to improve your ROE or ROIC?

Yes. Firstly, in past, we just sustained around 50% payout ratio. So we have specific profit in the year stay on our return earnings. So once we just continue to sustain 50% cash dividend payout, the base of return earnings will be higher and higher. And even we pay 50%, the ROE still won't be too high. So maybe we can increase our payout ratio, and we also continue to improve our internal efficiency, same product mix also can have a higher OP margin, higher EPS to increase our ROE in coming years.

Yes. Sorry. To follow-up, so because you raised your revenue guidance, so do you need to increase your CapEx or you can spend the same CapEx but generate higher revenue?

Basically, in past 3 years, even over demand still not very obviously recovered, but still spend CapEx to improve our equipment productivities. And we have a lower CapEx number from 2023 to 2026, just around TWD 2 billion to TWD 3 billion a year. And it doesn't mean we slow down our expansion. We have better productivities of our process and still can support 20% output volume growth every year, even we just have TWD 2 billion to TWD 3 billion CapEx. So basically, we still can find some ways to improve our productivity or production efficiency. And 2027, maybe the CapEx still could be around TWD 2 billion to TWD 3 billion. And 2028 or 2029, we have to spend a little higher CapEx to expand our electrical actuator part capacity. But even the CapEx could be a little higher, it just could be TWD 3 billion or a little higher than TWD 3 billion a year.

The next question comes from Daisy.

Yes, this is Daisy from Macquarie. First, congratulations, Ivan, for your very exciting results. I have several questions. The first is regarding, say, your OP margin actually is up that based on the year-on-year or Q-on-Q base. Actually, I want to know what's the reason behind for your OP margin improvement.

Okay. Thank you, Daisy. I mentioned we still can find more ways to improve our production efficiency internally. And we also can improve our sale product mix. So basically, we have a better OP margin first quarter of this year. The other reason could be we have better revenue scale and the OpEx leverage also could be better. And we expect even we can say we could have another higher OP margin in second quarter of this year, even could be a record high number in second quarter of the year because we not just improved our internal production efficiency, and we expect second quarter revenue scale also could be much better than first quarter of the year.

So OP margin, once there is no too severe NOLCOM issue, we believe our OP margin in second quarter of 2026 could be a record high numbers or percentage.

Ivan, you just guided, say, 2026, the OP margin will be around 33%. But given another say that the improvement in the second quarter, is that your OP margin, the whole year guidance is too conservative?

Yes. I have mentioned it in my briefing. The lead time of pneumatic is too short. So we still cannot 100% ensure the demand situation in second half of the year. So we used to give a little conservative numbers to the market in the first half of the year. And based on quarterly results, we'll upgrade the guidance number.

Understand. And my second question, Ivan, is regarding that what's the reason behind your very strong. We are seeing, say, the record high order book in January and then in March again. Is this the industry that overall demand recovery or just your wallet share gain?

As we know, so many FA players, they have pretty strong revenue or order book in the first quarter of the year. And Airtac, we still continue to launch more new pneumatic items. We had share gain. And we also have new business electrical dehydrator -- sorry, electrical controller to support our business.

In addition, even the linear guide revenue still could be a little lower than our expectation, but it has been record high quarterly linear guide revenue in Q1 of this year. So basically, once we can continue to improve our linear guide brand image, we believe the revenue contribution from linear guide in coming quarters or coming years still could be better and better, and it can improve our consolidated revenue growth, also could have a better fixed cost leverage on OpEx.

And my last question that we just want to know your estimated revenue from the semi sale in the second half next year and also the whole year contribution in 2028.

Basically, it's how -- it's our whole new business. And our current semi revenue just coming from those items we used to develop for other applications, but still can be shared by semi customers. And monthly revenue just around CNY 5 million to CNY 6 million a month in 2025, but it could be -- it was a little higher in March of 2026, higher than CNY 8 million. So the -- maybe still too early to tell the expecting revenue for 2027, 2028. But basically, based on -- we could have better brand mix, also benefit from government localization policies, maybe we still could be enjoy higher revenue contribution from semi in coming years. And it's difficult to tell or it's too early to tell the exact number for 2027 or 2028 from semi customers.

Okay. Next, we have [ indiscernible ]

Congratulations on your strong results and good job on delivering your guidance since last year. My question is very simple. I think you guided the electronics to see recovery this year. So from what our observation in the electronics industry in China, there are 2 groups, right? One is the traditional smartphone, PC, those are still pretty weak. But then there's like the AI-related electronic supply chain, maybe the PCB, the optical modules, those have been very strong.

Within your electronics segment, is it able to classify into maybe the traditional PC, smartphone? Maybe historically, you are more tilted to the [ Apple ], right? But then this year, with the orders momentum, I suspect it's related to some of those AI electronics. Is it possible to maybe split your electronics by AI versus maybe smartphone PC? That's my question.

Okay. Basically, any production activities need pneumatic indirectly. And pneumatic customers' production process, not in the end product. So even somebody say the sales volume of smartphone in 2026 won't be too good. But we also have mentioned in my briefing, we need more new models launched and bigger upgrade, then customers need to set up new assembly line of capacity. And the volume -- selling volume of customers' product is not very high correlation to pneumatic demand.

So basically, we expect pneumatic could have double-digit revenue growth and maybe higher than 10%. And we have 20% growth in first quarter is better than our expectation. But also based on the short lead time of the pneumatic product, we just can say it could be double digit for the whole year 2026.

So this is still more smartphone related...

Smartphone revenue just around 25% to 30% of our electronics revenue. And not just what you mentioned, Apple are our customers, all the local China smartphone players are our customers.

How about PCB optical module, maybe AI-related.

Yes. I mentioned, whenever customers have production activities, they need more pneumatic to support their automation improve.

Okay. But you can't say the percentage within the electronics.

Firstly, so many electronic supply chain customers, maybe they're not just engage in specific single product. And we can pick up smartphone revenue from our electronics revenue. The rest of the electronics revenue is not very high percentage to consolidated electronics revenue. And it's better not to quantify those smaller percentage items.

Next, we have Andrew.

You talked a bit about increasing ASPs in overseas markets. So I just wondered, can you please elaborate on the business you have overseas and exports, what products that entails and just how much you're able to raise prices and who you're taking market share from?

Firstly, overseas revenue just around 4% -- 4% to 5% of our consol revenue. And we have a better business in Europe and America. So basically, pricing hike is still based on different items for different customers, and it could be single digit to teens percent for the price hike. And we said the total pneumatic demand in non-China market could be around 75% of the global demand. But we just have 4% revenue from overseas market. So it's very limited market share of our overseas business. And basically, there's still so many bigger competitors or small competitors in global. And we get more shares from Chinese peers in China, and we can get shares from different variant competitors in global. But all of them still not very high revenue for Airtac.

Okay. And maybe just one follow-up. Can you talk more about the products that you're developing within semiconductor specifically? What is it? And are you able to quantify even roughly just the sort of the revenue potential, the margins that you think you can make on these devices?

As we know, the biggest Japanese players, their China revenue almost around 20% to 30% contributed by semi items. And the total semi demand amount in China market could be CNY 5 billion to CNY 6 billion. And we just have CNY 60 million in 2025 and maybe will be a better or higher from 2027 or 2028. We expect we could have CNY 1 billion revenue from semi in around 10 years, but it's just our expectation. And how fast of the progress will be still depends on how fast the customers want to place more orders to Airtac.

Okay. So next, we have Jason.

This is [ Jason Luo ] from [ First Capital Management ]. The first question, I would like to know the profit margin guidance because from late -- from early March, we see the hard metal price or even the energy price be higher. So in the second quarter, do you see any negative effect for our variable cost to our products?

I mentioned we still have found more ways to improve our internal efficiency and productivity. We have 33% OP margin guidance for the whole year. We have included the metal material cost hiked teens percent in 2026. So basically, those hiked raw material costs still can be offset by our internal production efficiency improvement.

Okay. So for my second question and the last question is, could you recap for us the utilization rate in the 2026 first quarter and the guidance for the second quarter?

Pneumatic utilization rate have been higher than 100%. And linear guide had over 30% in first quarter of 2026.

And for the second quarter, maybe we can expect the number will be higher than before?

Still could be higher in the second quarter because the shipment in the first quarter had higher than our expected. And our inventory turnover days even could be just around [ 110 ] days. It's not healthy. It's too low. So basically, we still will keep very high retention rate, even ask for more operators to -- over time to produce more volumes in second quarter.

Next, we have Iris.

Congratulations on your good results. I've got 3 questions, if I may. By the way, this is Iris from Deutsche Bank. Sorry, I forgot to introduce myself. My first question is actually on the raw material price and pricing as well. Could you maybe give us a rough split of what are the key raw materials in your cost of goods sold? I assume it's preliminary aluminum, but want to have an understanding like a rough split is fine.

And then like you've mentioned that your guidance has included a teens percentage increase for the metal price. Then to which point then you will consider increasing the price, I think like by how much the metal price needs to increase, then you will consider to increase the price.

Our cost structure raw material cost, almost around 50% of our cost of goods sold, including 20% cost of goods sold is aluminum, 45% is copper and another 5% is steel. So basically, aluminum cost hiked by 10% in the past 12 months and it's around 30% hiked from copper. And basically, we will keep stable pricing for pneumatic in China market. And it doesn't mean we cannot pass those raw material cost disadvantage to customers. Basically, we just hiked pricing once in 2011 because the copper was hiked -- copper cost was hiked by 5 to 6x, then we just hiked those pricing for customers just for the copper material can change a higher percentage of the cost of goods sold product or SKUs. Rest of the items still keep stable pricing, even similar pricing.

And I still have to stress we still an find more ways to improve our production efficiency. And not just we can speed -- can accumulate our experience to find more ways also caused by the automation knowledge of technology is improving. We can find more ways to improve the equipment productivity or production efficiency. So basically, we won't hike selling price to customers basically. But it still depends on the competition environment. But we believe even the raw material cost still will be hiked in 2026 or rest of the 2026, but still can be controlled by ourselves.

Understand. My second question is on the linear guide business because I believe, like, some of the peers in the linear guide business is pointing to better demand for their linear guide business. But you've mentioned that you believe the linear guide demand didn't really recover for the market in the first quarter. And can you give us maybe a bit more color on that? And also, what do you think is preventing Airtac from kind of seeing higher growth in this business?

Yes, basically, we expect the overall demand could be better in 2026, but we have not seen that in first quarter. And why we expect the linear guide demand could be better in 2026 because the demand cycle of linear guide used to be around 2 to 3 quarters later than pneumatic cycle. So once pneumatic began to recover from end of 2024, the linear guide demand could be better from fourth quarter of 2025, but second quarter of '25, U.S. have a tariff policies. And linear guide could be a CapEx component. It's not like pneumatic with CapEx demand and component replacement demand. The tariff policy impact to linear guide could be higher than pneumatic. So basically, we still expect the linear guide demand could be better or began to recover in 2026, but just not in Q1 of 2026.

Okay. And are we seeing some signs of maybe the demand picking up since toward end of April now in the second quarter?

Yes. Basically, the demand seems a little better in past 1 or a little more than 1 month.

Okay. That's great. My last question on the exciting semiconductor business. And can you give us some understanding of what are the, say, barriers for entry in the semiconductor market? Is it more about customer relationship and the customization required? Or it's more technological in the clean rooms like -- and also how we think we can be -- what are the drivers for us to be successful in this market? I mean I understand the whole localization drive. And other than that, I mean, where -- like what can drive us to grow in this market?

Firstly, we still could be a beneficiary of the government process localization. And our pricing just around 40% of Japanese peers' pricing, that means 60% discount to Japanese peers pricing. We still can enjoy 70% gross margin from those items. So basically, it's our whole new field to support semi customers. And we have our expectation, but still depends on customers' revocation period and how many orders they can place to Airtac.

And basically, pneumatic or even so many high application, higher-end customers, they have very deep brand image for pneumatic suppliers because pneumatics are a little complicated than other FA components, but it's very low ASP, low cost percentage to customers' total production cost. Even we have 20%, 30%, 40% pricing lower than peers, lower than Japanese peers or European peers, but it's very minor to customer total production cost. So many customers, they don't want to take any risk to change their pneumatic price to made in China suppliers.

So basically, in past, is the main reason why we don't want to set semi items development to be our first priority. We still prefer to do those easy money items first. So the progress or the competence of Airtac to enter in semi items. So basically, we could have similar quality, similar large technology with international peers. But the semi revenue progress still depends on how fast the local China semi customers place how many orders for Airtac.

Understand. And just to double check, when you say about the pricing being only 40% of the Japanese peers, you're referring to the semiconductor specific products or you're referring to the broader product portfolio? I guess it's a bit higher than that.

Semi items. You asked me semi items, so I just answer you about the semi pricing.

Next, we have KekYee.

Good to hear from you again. This is from KekYee from Principal. Just want to double check this year, right, do we still see the normal seasonality in the monthly sales? Or this year is a bit abnormal. We may see the sales pick up in April, May and then flattish into August, September? How is the monthly sales seasonality this year?

Yes. Basically, second quarter used to be the peak season of pneumatic. So whenever the economy is good or bad, second quarter always is the peak season, peak season of the pneumatic. And once one to talk about the consider revenue of Airtac, it still depends on the progress of our new business, linear guide electrical controller. Yes, so it still depends.

Okay. And coming back to the segment like Electronics segment, right, you said there's more new model and spec upgrade this year. When you say new model, do you see like new items that are not in the market before coming into the market this year by different new company that enter the consumer electronic or new product range that entering the consumer electronics?

Maybe not just count by new entrants. Existing players in the market, they still have launched or going to launch many new models in rest of the year. So whenever they launch new models, basically, they need to set up new production process or something like, and they need more pneumatic component.

Yes. Okay. And for the auto segment, SMC is about 30% of the mix is auto and Airtac currently, we are only 9%. So it's quite easy for us to gain market share. But how many -- how fast can we go to like, say, 20% -- like we need 2 years to go to 20% of mix or 1 year next year, we can go to -- end of next year, we can go to 20% of mix coming from auto?

Basically, percentage to the mix from basic application still depends on the base. And we could be the biggest traditional pneumatic suppliers -- pneumatic component suppliers. And once we want to achieve 30% of the revenue coming from auto, we think it could be very difficult because we have the best...

Because you are very diversified and your mix is quite different from SMC.

Yes, basically. We think we have -- we just have teens percent market share in China auto industry, much lower than our overall market share, 30%. So we believe we still can enjoy pretty good market share gain from auto customers in coming years. But how high of the percentage will be still depends.

Next question comes from Jeremy.

Just 2 questions from me. So as far as I understand it, there are a lot of different kinds of specifications for pneumatic equipment, right? I mean a lot of different kinds of [ indiscernible ]. And I understand that for a company like, let's say, SMC, they cover a lot of specifications. And in order for them to maintain a very short lead time, they keep a very large inventory in order to respond very quickly to the market, right?

So my question here is, if you are looking to gain more market share in China going forward over the next 2 to 3 years. Does that mean that you will need to build up your inventory in terms of the number of specifications that you have on hand as well? And if that's so, does that mean that you need to actually boost your capacity going forward?

Okay. Basically, most of the different SKU, the production can be shared by the same equipment or production process. We don't have to buy specific new equipment for specific new SKUs. And different companies have different operation strategy. So basically, our lead time to spot customers could be the shortest one in China market. We promised customers they can get their demand in 3 to 5 days after they place order to Airtac. And as we know, the other 2 bigger peers is longer than 1 week. And we review our inventory from raw materials work in process to finished goods under our ERP system.

And we observed or review, even revised the ratio of the -- each items by-weekly. And we just have -- 10 years ago, we just have 120,000 or 150,000 items and our inventory turnover days was around 170 days at that time. And we have increased our SKU number to be around 50,000 to 60,000 items currently. And our inventory turnover days is just around 120 days, even lower than 120 days at the end of this March. So basically, different companies have different strategies, and we could be -- have a better efficiency to manage our inventory level.

I see. So anyway, based on your current strategy and your business model, you feel that you don't need to boost capacity in order to still take market share in the near-term, right?

We still have to expand more capacity because we have basic shipping volume growth. We need to buy more new equipment to increase our output. And in addition, for SMC or Festo, they have around or even more than 700,000 items, 50% customized, 50% standardized. Airtac, we have 250,000 to 260,000 items, 90% standardized. And we just target around 35% of China pneumatic market share. And we just developed 350,000 items to cover 80%, 85% of the total market demand and enjoy 35% among the 80%, 85%. It's good enough for Airtac. So we won't develop 400,000 items, 500,000 items.

Okay. Understand. Very clear. My other question is, you stated in your opening statement that you're expecting possibly a 2- to 3-year up cycle for pneumatic equipment in China. However -- and also, I noticed that you said that you are producing right now above 100% capacity utilization. So -- but then it doesn't seem that you're accelerating your CapEx spend. So you're still going to spend about TWD 2 billion to TWD 3 billion per year. When you speak to your customers, do you get a sense that this year, it seems like demand recovery is very broad-based across many, many industries when I speak to other companies as well. Do you get a sense that the investment is being front-loaded this year because it's the first year of the 15th 5-year plan and they want it to be a good start. And is there a risk that we might see a slowdown next year?

We defined 100% utilization rate based on 24 days a month and 21 hours a day. So once we have a better shipment, we can ask our operator to work for 26 days a month, then meet 110% utilization rate. And in the bester of the process, we still can put it more operator to that equipment work for 24 hours. So basically, TWD 2 billion to TWD 3 billion CapEx a year is good enough for our current demand situation or based on our prediction.

In addition, the equipment, pneumatic equipment lead time from we placed orders to vendors, our vendors to this new equipment could make production just around 3 months. And we used to construct buildings first. And we can -- based on the current shipping situation and decide when to buy more equipment just in 3 months, we can have a new capacity. And just the same world. We always can find some ways to improve our internal production efficiency. Even the same equipment, we could have additional output or production volume to support customer demand. And we can adjust our CapEx whenever we want to. So basically, even 2026, 2027, our current expansion plan, TWD 2 billion to TWD 3 billion CapEx a year but still can support 20% shipping volume growth in those 2 years.

Next, we have Kenny.

Congrats on the amazing results. I have actually 2 quick questions. Just following up the overall demand situation. I guess in the previous several cycles, you had some years growing your revenue over, say, 20% or even 30%. I'm wondering if this time, you need to try picking your orders like your P/B ratio is going beyond control, so you need to forgo a little bit demand. What do you think about the current situation right now?

Firstly, in past 20 years, every 2 years, we have an up cycle then 2 years down cycle. And this time, we prefer not to define as a cycle issue from late 2021 because it's government some specific control policy to that overall demand could be deserted pretty fast. And government have released or launched so many stimulus policies, but they still need to take some time to restore people or corporate confidence. So this up cycle from late 2024, it just could be a moderate recovery. It's not like previous up cycle in 2021 or 2017. It's new turn of V-shape.

So once this time, it's just a moderate linear recovery, that's the main reason why we expect it could be longer than 2 to 3 years. But just for our prediction, the lead time of the industry is pretty short. We cannot ensure our prediction can be achieved 100% in coming years or in future.

I see. If I may squeeze one last question is that regarding the OpEx I know usually you will not give us an absolute number, but looking back on 2024 and 2025, you were so disciplined controlled like TWD 5.2 billion to TWD 5.4 billion every year. Supposedly this year, I think given your guidance, you will probably have $400 billion -- $40 billion revenue. How should we think about this? Is there any ratio you would give us for as an OpEx rate target internally? How should we think about this? I know you have answered that you will have operating leverage, but just for us modeling, if any color.

Firstly, once we have good revenue scale, we could have pretty good leverage for OpEx. And marketing used to be around maybe high single digit to 10% of our revenue. And around 40% of the selling expenses is related to sales team's bonus plan. And our bonus plan used to based on revenue growth rate, OP margin, budget achievement and the receivable received on time or not. So it still depends on those variable issues to decide our selling expenses.

And most of the general and administration expenses or R&D expenses could be fixed cost, but those 2 departments still can enjoy bonus plan based on OP margin of the subsidiary. So basically, we cannot give you any OpEx number by NT dollar because most of our business or expenses are still located in China based on renminbi base. And our functional currency still is renminbi. But we listed in Taiwan, we have to transfer our financial statement from RMB to NT dollar. So once you just compare by NT dollar base, you still have some issue of the FX every year or every quarter is different. So you can say the percentage of the OpEx, selling expenses could be high single digit to 10% and 3% administration expenses, around 3% could be R&D expenses.

Okay. Thank you. I think we are running out of time. So Ivan, do you have anything else you want to remind us?

I'm fine. Thank you.

Okay. Thank you, Ivan, and thank you all for joining the call. This concludes the call today. Thank you. Have a good day. Thank you. Bye-bye.

Thank you, Ally, and thank you, everyone. Have a good day.

Bye.

So, hi, everyone. Let me read the verbal disclaimer first. This call is strictly for clients of Goldman Sachs and people who are invited by AirTAC only. This conversation is not intended for the media and is off the record. Participants will be removed from the call if they cannot be properly identified. This call is not for the purpose of sharing or receiving nonpublic information. Attendees are public market participants who may not receive and should not request nonpublic information about security end markets.

Hi, everyone. So thanks for joining AirTAC's First Quarter 2025 Results Call hosted by Goldman Sachs. This is Chao Wang, technology and automation analyst at Goldman Sachs. Today, it's our pleasure to have Ivan Tsao, CFO of AirTAC, to be with us on the call. Ivan will start with business update first and followed by the Q&A session. Okay, Ivan, over to you now. Please kindly go ahead. Thank you.

Okay. Thank you, Chao, and good day, everybody. This is Ivan Tsao speaking, from AirTAC, and welcome to join this conference call. And please let me brief our fourth quarter results and current market situation. First of all, the U.S.-China tariff issue and the China government anti-involution policy are limited impact to our business. Currently, for the recovery of the China economy, the importance of how the China government implement more policies to restore people's confidence, consumption confidence is far greater than the impact of U.S. tariffs. And pneumatic industry can sustain single-digit growth rate annually once there is no too severe noneconomic issue. By continuously develop new products and improving our brand image, we expect our annual revenue growth rate can be 10% higher than the industry growth as pneumatic product support production line rather than in the end product. As long as customers launch new models or engage in production activities, there will be more demand for pneumatic.

Moreover, the impact of cross trade between China and Taiwan tariff agreement, we mean ECFA, and our margins have subsided by the second quarter of 2025, and we can improving our OP margin to be better and better. And approved consolidated revenue for the fourth quarter of 2025 was RMB 2.64 billion, a 21% growth year-on-year. Gross profit was RMB 980 million, a 25% growth. Gross margin was 47.5%. Operating income was RMB 645 million, a 35% growth year-on-year. Operating margin was 31.3%. Net nonoperating income was RMB 31 million, including RMB 29 million of FX gain, RMB 9 million loss on equipment disposal, which caused by replacing equipment to improve our production efficiency, and RMB 7 million subsidy from government, RMB 5 million of interest income and RMB 2 million of interest expenses.

Income before income tax was RMB 675 million, a 34% growth year-on-year. Pretax margin was 32.7%. Net profit was RMB 532 million, a 33% growth year-on-year. Net margin was 25.8%. EPS for the fourth quarter of 2025 was TWD 11.64 and improved consolidated revenue for the whole year of 2025 was RMB 7.931 billion, a 15% growth year-on-year. Gross profit was RMB 3.647 billion, a 13% growth year-on-year. Gross margin was 46%. Operating income was RMB 2.378 billion and 17% growth year-on-year. Operating margin was 30%.

Income before income tax was RMB 2.459 billion or 14% growth year-on-year. Pretax margin was 31%. Net profit was RMB 1.941 billion, a 13% growth year-on-year. Net margin was 24.5%. EPS for the whole year of 2025 was TWD 42. And revenue from top 8 industry for the fourth quarter of 2025, the biggest one still was electronics, around 26% to consolidated revenue, is 17% growth year-on-year. Second one, battery was around 15% to revenue, 57% growth. Auto was 10% to revenue, 31% growth. Packaging was around 9% to revenue, 16% growth. Machine tool was around 7% to revenue, 17% growth. General machinery was around 6% to revenue, 16% growth. Textile was 4% to revenue, 5% growth. And energy lighting or solar was around 3% to revenue is 15% growth year-on-year.

And revenue breakdown for the whole year of 2025. Electronics was around 27% to consolidated revenue is 10% growth year-on-year. Battery was around 14% to revenue, 84% growth. Auto was 10% to revenue, 40% growth. Packaging was around 8% to revenue, 9% growth. Machine tool was 7% to revenue, 14% growth. General machinery was around 5% to revenue, 13% growth. Textile was 4% to revenue, 5% decline. And LED lighting and solar was around 4% to revenue. It's 31% decline year-on-year.

And for current market situation, more and more customers are showing positive views on future demand. We believe that the pneumatic industry demand has entered a recovery cycle from late of 2024. Even it may only be a gradual or moderate recovery. This duration of the recovery cycle may be longer than normal 2 years recovery period in the past. In addition, China government continued to release many stimulus policies and attempt to restore people consumption confidence. Some of them have improved their confidence and increased their end product consumption or capacity expansion.

Overall shipment was better than our expectation in first quarter of '25, but just in line in the second quarter of '25 caused by the U.S. tariff policies because some customers postponed their demand. However, the impact of such tariff issue have been diluted and customers still need to improve production process automation and replace pneumatic product. The shipment from last September or September of 2025 to this moment have been better than our expected. As for the demand of various industry of pneumatic, the revenue of electronics industry grew by 10% as we expected in 2025. And so many customers say it could be a good year for electronics in 2026 because there will be -- there could be more new model launch and spec upgrade in the year. And we expect we could have another 10% revenue growth from electronics in 2026.

And battery demand, government has announced its development guidance for EV and battery from late of '24 and the shipment was better than our expectation in 2025. In addition, more countries have relaxed their restriction policies on Chinese players and those players plan to expand their overseas capacity, also will increase their domestic capacity. So we expect we could have double-digit revenue growth from battery in 2026.

Better revenue growth from automotive industry also could be expected in 2025 and 2026, and we have improved our brand image on auto customers and enjoy better share gain from that. Even the overall auto industry, especially for those ICE demand still have not recovered significantly. We have had double-digit revenue growth rate for years, and we expect we could have double-digit revenue growth in 2026 from auto industry. Moreover, government stimulus policies for replacing old equipment to be new equipment can get subsidy from government still in the market. Those traditional demand like machine tool, [indiscernible] machinery, packaging, textile still enjoy positive revenue growth. And it's mid- to high single-digit growth in 2025 and all of them still was better than our expectation. We expect those traditional demand can enjoy positive growth again in 2026.

And even we have some demand issue on solar or energy lighting in 2025, but the demand seems to have won up from a decline of 46% in first half of 2025 to 15% growth in fourth quarter of 2025. And we also expect this industry demand still could be turned to positive growth in 2026 from solar or energy [indiscernible]. For the pricing, selected customers selected items still have some pricing competition in pneumatic. But overall speaking, it still could be rational basically. The increased material cost can be diluted or offset by our internal efficiency improvement. The OP margin still have to depend on revenue scale and capacity utilization rate, even we can improve our margin by launching more higher gross margin new items, improving our selling product mix and continue to improve internal production efficiency to reduce production cost.

And we defined 100% capacity retention rate based on working 24 days a month and 21 hours a day with 2 shift system. Current pneumatic capacity utilization rate is around 110%. And the inventory turnover days at end of 2025 was around 124 days and accounts receivable turnover days was also 124 days at end of 2025.

And for the development of [ Mini Guide ], industry demand is still weak and peers still keep aggressive pricing. We have changed our pricing policy since third quarter of 2024 and also extend new sales reach. Our shipping volume has been around 20% growth in 2025. The revenue number is still lower than our expectation. We have asked our sales team to convince more customers and also expect the Mini Guide market overall demand will be better from 2026 because the Mini Guide demand cycle used to be around 2 to 3 quarters later than pneumatic cycle. And when pneumatic began to recover from later of 2024, it could be better from fourth quarter of '25 from Mini Guide demand. And once the Mini Guide overall demand is warm up, peers used to raise their same price and AirTAC will maintain the same price to increase the pricing gap lower than peers and [indiscernible] more customers to place more orders to AirTAC. Current that capacity utilization rate is around 30%.

Gross margin is teens percent. The shipment quantity in past 2 years has higher than the output, and we continue to decrease Mini Guide inventory. And we have the opportunity to increase utilization rate in 2026. When we achieve 50%, 5-0% utilization rate, production gross margin could be around 30%. And once we have 80% utilization rate, we can support 40% gross margin from Mini Guide. Even 30%, 40% gross margin is lower than our existing pneumatic business, but we use the same sales team to do cross-selling pneumatic and Mini Guide and without too much additional OpEx we still can improve our consolidated OP margins.

And for the development of supporting semiconductors customers' demand. Based on our strategy, we have not developed products to support semi customers' demand by end of 2024. But due to those products can enjoy higher gross margin and China government localization policies, we began to develop semi items from early of 2025 and scheduled to launch some items gradually from 2027. And the current development progress is better than our expected, and we can gradually launch some spread to support semi demand from second half of 2026. But based on past experience, used to take around 1 year for new product to have a better revenue contribution. And better revenue contribution may be still have to wait to second half of 2027, even 2028.

And we expect pneumatic industry can return to low single-digit growth in 2026. And we can have at least 10% revenue growth from pneumatic product, plus the revenue contribution of Mini Guide. The shipment in this January has exceeded our expectation. And even we could have a monthly revenue record high number in this January. Even we are optimistic about market demand in 2026 due to the short lead time of the pneumatic business, and we prefer to give a conservative guidance to the market at the beginning of the year.

Annually revenue growth rate for the whole year in 2026 could be over 10% and OP margin of 31%. CapEx number could be TWD 2 billion to TWD 3 billion. And we have generated free cash flow for years, also have increased our cash dividend payout ratio from 35% in 2021 to 55% in 2025. And it will be around 65% payout in 2026 and also could be higher in coming years. Despite briefing and should you have any questions, we can discuss it. Thank you.

Yes. Thank you, Ivan. That's pretty comprehensive. So, hi, everyone, let's start the Q&A session now. Please feel free to raise your hand on Zoom if you like to ask live. So before we start taking questions from the investor online, I'd like to ask a few questions first, if I may.

So Ivan, so my first question is that regarding your business outlook in 2026, which is pretty good. And in 2025 for fourth quarter, you delivered the record high EPS number in the fourth quarter. Just want to know your view on the overall 2026 seasonality. In the past, we actually see -- we're definitely see that fourth quarter is a low season, but this time it's not. So I just want to know how should we think about -- do you expect that in second quarter this year will still be the traditional peak season? Or you do believe in the full year, we will not see a very strong seasonality just like before? That is my first question.

Okay. Basically, more and more customers, they think the demand could be better and better in coming months or coming quarters. So our order book or shipment value in this January could be record high. So basically, we could be very optimistic of the demand in 2026. And second quarter used to be the peak season for pneumatic. So it still could be based on such rules for 2026. And it's still too early to tell what the growth rate will be in second quarter of 2026, even next month because Chinese New Year located mid of February. And every time when the location of Chinese New Year in mid of February, the demand seems a little flat because some customers, they used to let their employees have early holidays and also that then back to their workshop a little late. And overall, we just can say once China government continue to release more stimulus process, the demand still could be better and better in 2026.

Got you, Ivan. That's pretty clear. So my next question is regarding your Linear Guide business. You mentioned about Linear Guide business, you expect that the overall demand to recover sometime in 2026. But should we expect -- or do you have any guidance on the revenue in 2026, just like what you did in the past few years? Or any target on the utilization will be good enough?

We are sorry to say we miss our Mini Guide sales numbers for years. And we still have our internal expectation or budget target. And maybe it's better not to give the Mini Guide numbers to the market this time. And our Mini Guide capacity, not just support our customers, we still have internal demand to support our pneumatic product. So once pneumatic products have a better demand in 2026, and we also expect we can convince more customers buy more Mini Guide from AirTAC. And the overall industry demand still could be better in 2026. So we expect we could have 50%, 5-0% rate in second half of 2026, and we can improve our production gross margin to be better and approaching 30%. But once we have a higher revenue number of Mini Guide in 2026, at beginning of the year, we still have to suffer a little lower gross margin in first half '26 because our existing inventory production cost still could be a little higher and gross margin just around teens percent. Once we have a higher revenue from Mini Guide, the impact of our consolidated gross margin still could be a little higher. But we continue to improve our internal production efficiency and the gross margin still could be better than 2025 in 2026.

Got you, Ivan. That's pretty clear and looking forward to see the progress here. So we are open to the Q&A session right now. Everyone, again, please raise your hand on Zoom with your name, and please unmute yourself to discuss with Ivan. Before asking question, please speak out your name and the company name first.

So our first question will come from Helen. Hi, Helen, [indiscernible] unmute yourself.

It's [ Helen ] from HSBC. So our first question is about the downstream verticals, if we may, because you sound quite positive towards the 2026 outlook. I was wondering if we can break that into different downstream verticals. What about auto? Because auto capital expenditure has been quite strong, I would say, for almost 18 months now. And speaking from the past experience, the first half or the June this year, it might be going down. Is that the case that you are looking from your side now? That's for the auto sector.

Number two is for the smartphone because we have high expectations for smartphone as well for the second quarter orders. I was wondering, is it like more coming in, in the second quarter and will tune down more towards the third quarter? How big is the impact of the smartphone for us this year?

Okay. Basically, for auto demand, most of the revenue growth could be supported by market share gain, especially from those ICE customers. And in past, so many ICE customers that have very deep [indiscernible] for pneumatic suppliers. Even we could have 20%, 30% pricing lower than international peers, but it's very limited to custom total production cost. And around 6 years ago, the ICE sales volume is not good. So some customers, they still have production cost pressure. So we made a pretty good opportunity for us to support their demand from noncore production process. So we have pretty good or double-digit revenue growth from auto industry for 5, 6 years, mostly coming from market share gain. And even the overall CapEx in 2026 will be slowed down from auto customers, but they still have [indiscernible] demand from auto. So we just gain more shares from those existing demand and still can support our auto revenue, could be double-digit revenue growth in 2026.

And for smartphone, basically, even some end brand customers will release more -- release some affordable spec. And we always talk to customers, always talk to investors, pneumatic support customers' production process, not in their end product. So whenever customers, they have more new models launched and greater spec upgrade, they have to set up new capacity. And once they have any production activities, they still have to maintain or replace their existing old capacity to be new pneumatic demand. So basically, 10% revenue growth from electronics may be still not too aggressive for AirTAC.

Okay. Thank you, Helen. So our next question is coming from [ Daisy ]. Daisy, you can unmute yourself and -- yes, you can unmute yourself.

Actually, I have 3 questions. The first is that you just mentioned the recent order book and the shipment value actually reached a record high, but you only have 10% revenue growth. Is that too conservative? And the second question is regarding your market share of the pneumatic products in 2025? And how is the comparison with SMC? And the last question that you mentioned that you are going to launch the semi-related products that in the second half this year, maybe we are going to see some revenue contribution. And could you give us some estimation for the revenue contribution next year from semi side?

Thank you, Daisy. And firstly, pneumatic is very short-time business, and we used to give a very conservative guidance to the market at the beginning of the year. So I say the guidance for revenue growth for 2026 is over 10%. But how high it will be still depends. And our internal percentage could be higher than this number. And maybe we can raise up our guidance quarterly in next couple of quarters. So 10% -- over 10%, over 10% revenue growth rate for 2026, just a number for you.

And for SMC, firstly we release different sales rate on different region to compete with SMC. And we still have pretty good progress to get more shares from the market. So basically, SMC, as we know, they still have revenue growth in China market in 2025, but maybe not just not as high as AirTAC did.

For semi revenue, basically we said we can launch semi items from second half 2026. But whenever we launch new items, used to take around 1 year, they have a better or obvious revenue contribution. So we say maybe from second half 2027 or 2028, we could have much higher revenue contribution from semi customers. And current revenue from semi customers just around RMB 5 million to RMB 6 million monthly. And maybe by June of 2027 still could be such a similar number. And in second half 2027, it could be a little higher and higher, but it's still too early to tell what's our expectation for the whole year revenue in 2026 -- sorry, 2027. The whole year semi revenue for 2027 is still too early to tell. Even we have some number internally.

I'm [ Angela ] coming from [ Citi Research ]. And congrats on the strong results and outlook. My first question is about the fourth quarter gross profit margin. Can you share with us what are the key drivers for the strong fourth quarter gross profit margin? And also, is it sustainable?

And the second question is about your guidance for 2026 OP margin, which is around 31%. And is it driven mostly by better leverage on OpEx? Or is it driven by GP margin expansion?

Yes. Basically, we have good numbers for fourth quarter gross margin maybe still contributed by our internal production efficiency improvement. And we have find some new ways to improve efficiency. So basically, such condition still can sustain it to 2026 and next couple of years. And sorry, what was your second question?

Second question is about the guidance of the OP margin of 31% for '26. And is it driven by better leverage on OpEx? Or is it driven by gross profit margin expansion?

Maybe both of them because we still can continue to find more ways to improve our internal production efficiency and also can offset the higher material cost currently. And [indiscernible] scale still could have a better fixed cost leverage of OpEx. So you can find our OP margin in fourth quarter have been around 31.3%. It still included nonnational holidays in October. So basically, maybe it's not difficult to sustain 31% OP margin for the whole year of 2026, even could be higher.

Thank you, Angela. So our next question will come from [ Jason ]. Jason, you can unmute yourself. Thanks.

This is [ Jason Lu ] from [ First Capital Management ]. My first question is about the future of the China market. I think many analysts concern about the involution policy such as in the auto sector, the decrease in the subsidy and for the electronic sector, we see a decrease in the PC or laptop market in 2026. And for the battery, we see some maybe restrict policies. So have you seen our clients be more conservative? If not, what's the driver for our revenue growth in these 3 sectors in 2026? That's my first question.

Basically, I don't know what your information got from. And basically, information from our customers, especially for battery, they're still pretty optimistic and also try to expand their capacity aggressively. And the overall demand for pneumatic from battery still could be higher in 2026 than 2025, but just the base. 2025, we have low base in 2024. So we have 80-plus percent revenue growth from battery industry and high base for 2026. So we just expect double digit, but still could be 30 -- even could be higher than 30% revenue growth from battery.

And we think in the [indiscernible] in China market in the past couple of months, maybe it could have short-term impact for demand. But basically, it could improve the transaction orders for the China market is good to mid to long term. So basically, pneumatic is not just a CapEx component, also is a consumable product have replacement demand. And in past 20 years, every 2 years, we have up cycle and then 2 years down cycle. But this time, the demand was [indiscernible] from late of 2021 and just a little better from late 2024, almost around 3 years. And some customers, they just explain what they have to spend in the past 3 years. And once they have -- once they want to improve the automation level or improve their production efficiency, they still have to improve automation level and they need more pneumatic. It's the best thing for our guidance for 2026. Thank you.

Okay. For the detail, I'd like to know for the auto sector, our clients, they are major in the traditional ICE vehicle or also we have the customer in the new EV or PHEV sector.

Yes. Basically, ICE customers, they have deep [indiscernible] for pneumatic suppliers and because their company history could be much longer than AirTAC. And EV customers, EV brand customers, most of them could be young company. Their brain [indiscernible] for pneumatic suppliers is not that high as ICE customers. So it's easier for AirTAC to convince EV customers buy pneumatic from AirTAC. And we could have a higher market share in EV than ICE demand.

Okay. And my last question is for the expense value in 2026. Is that maybe 1.3 -- 100,000 and 300 million every quarter in 2026 or maybe it's for the 17% for the revenue? That's my last question.

You mean OpEx?

Yes, the OpEx value. Yes, okay, value.

Yes. Basically, we spend what we should spend and not a percentage to revenue or any index. So basically, once we have a better revenue scale, we can enjoy better fixed cost leverage, especially for OpEx. And variable OpEx could be certain expenses and bonus to our sales team. And our bonus plan to [indiscernible] is based on revenue growth rate, OP margin numbers and budget achievement is flexible. And R&D expenses or administration expenses could be fixed cost basically. So once we have a better revenue scale, the OpEx percentage still could be lower.

It's [ Kenny ] from Nomura. Congrats on the very good Q4 results. I have 2 questions. The first one is I want to go back to fourth quarter. I remember, correct me if I'm wrong, you were targeting flat quarter-on-quarter sales for the fourth quarter 2025, but it turns out it's much better than we thought. Could you please provide a little bit color on which end application you saw were better than expected and whether they are carrying such momentum into first quarter?

Yes. Basically, electronics is better than our expectation and some customers, some electronic customers, they will wait and observe the development situation of the U.S. tariff and also postpone their demand from second quarter to maybe August. And it just around [indiscernible] single-digit growth in first 3 quarters from electronics, but it's 10% growth in fourth quarter. So the shipment or revenue from electronics is better than our expectation. And also from those traditional demand textile machine tool or general machinery or packaging also is better than our expectation in fourth quarter of 2025.

Okay. Based on your strong January order book, I can assume the momentum at least be carried on to the first quarter, right? Is that correct?

Basically, it's correct. But what I mentioned earlier, the Chinese New Year holiday located in mid of February, and you still have a little higher uncertainty whenever the location of the Chinese New Year holiday in mid of February. But just the revenue is higher or lower, but we still believe we could have a pretty good revenue growth rate in the first quarter of 2026.

Very helpful. And I have a follow-up on the semiconductor equipment. Could you provide a little bit more color on with the first launch of your new products in second half of this year, so it could be mid- to high end already? Or how do you just maybe categorize the semiconductor pneumatic equipment? Like do we do start from those entry level or we can easily go to mid- to high end? I assume it's very complicated. So I want to understand how you can upgrade your products over time.

Firstly, to [indiscernible] semi items start [indiscernible] to AirTAC. And we still we will start this business from back-end customers, but it doesn't mean we just can support -- it doesn't mean we just can support back-end customers' demand. We still will launch more items to support from low end, mid and even high application gradually in coming years.

Okay. Thank you, Kenny. So our next question will be coming from [ Bill ]. Bill, you can unmute yourself. Thanks. Okay, Bill is offline right now. So we have [ Jeremy ]. Jeremy you can unmute yourself right now.

I just had kind of like 2 small questions. The first question is, so it sounds like you still have quite decent momentum right now. What would you say is -- do you think will be your biggest risk for 2026?

Government policies.

Okay. Meaning it might be maybe delay, it might not come as fast as expected, is it?

We expect government can continue to release a lot more stimulus process. And how long it will last or how strong it will be still depends on government.

Okay. And one small kind of like housekeeping question because I couldn't really hear one number earlier on in your presentation. Your auto-related revenue in the fourth quarter was 31% year-over-year growth. And how many percent of total revenue?

You mean consolidated revenue or auto revenue?

Auto revenue for fourth quarter. How much...

10% to consolidated revenue from auto and 31% growth.

Thank you, Jeremy. So we have Bill on the line right now. Bill, you can unmute yourself and starting to ask questions. Thanks.

This is Bill from JPMorgan. I have 2 questions. First of all, can I have the inventory days as of fourth quarter? And given you have very strong order intake in January, do you plan to further raise up your utilization rate in first quarter and second quarter? Second is for the cycle of the Linear Guide. I think in the past, usually, when AirTAC shows some recovery inside Linear Guide, demand will coming up maybe 2 to 3 quarters later. But if you look into the competition landscape in China in recent years, we are seeing more competitors enter the Linear Guide business. So for this round of the Linear Guide demand recovery, apart from the cyclical view, is there any indicators you think can point to a better growth of the Linear Guide business? Because if you look in 2025, actually revenue already grow pretty good, but the Linear Guide demand is still weak.

Okay. Basically, 110% [ industry ] rate for pneumatic is good enough. And we still can support the shipping volume growth in 2026. And for Linear Guide, basically Mini Guide is a CapEx component. It's not like pneumatic with CapEx demand and component replacement demand. And it's a little difficult to find index for Mini Guide demand basically. And even we expect the Mini Guide demand will be better or recover from 2026. And it's still too early to tell peers will raise their pricing or not. But basically, we still can convince more customers AirTAC Mini Guide is good enough. And 2025, even in such low demand environment, we still have 20-plus percent volume growth. And once we spend more time to convince more customers AirTAC is good enough, and we believe we still can enjoy pretty good volume growth in 2026.

Thank you, Bill. So our next question will come from [ Eric ]. Eric, you can unmute yourself. Thanks.

It's glad to hear that you're getting more positive for the outlook. But I'm just curious about, we have noticed that China has recently tightened the subsidy standards for new energy vehicles and consumer electronics. So could you comment on whether these changes have affected your expectations or guidance for the 2026?

Okay. Basically, based on past experience, once government want to encourage battery application, even the existing or old policy have been terminated, they still will launch another new policy to support such application or demand. And our main revenue growth from auto industry is coming from market share gain. And our market share in total China pneumatic market in China could be around 30%, but our market share in China auto industry just around teens percent. So we still have so much addressable market to gain more shares from China auto and support our revenue growth.

Okay. Thank you, Eric. So Ivan, I would like to ask one question, if I can. So you just mentioned for the dividend in 2026, it could be probably around 65% and it's up from a very low level in the past few years. So I'm just wondering, in terms of the capital allocation, don't you really find any new investment target in the core business side, for example, investing in more capacity in pneumatic or linear AI or even for the electrical actuator versus that you decided to just pay out a dividend. So how should we think about the ROI for this kind of new business or invest in existing capacity?

Okay. Firstly, in past 3 or 4 years, we spent some CapEx to improve our equipment productivities. Same equipment, the output volume could be around 20% higher than 4 or 5 years ago. So even we have slowed down our CapEx number from 2023. But our product capacity or output volume still can support our revenue growth or shipment volume growth by teens, even double digit. So basically, we have been net cash for 2 years. And low CapEx, higher payout ratio won't affect our business in coming years. And we said in 2026, even 2027, our CapEx just could be around TWD 2 billion to TWD 3 billion. And we still continue to develop electrical actuator product or business. And maybe we will set up new capacity to support electrical actuator parts manufacturing in 2028 or 2029. And even we will increase such new business capacity. The CapEx could be TWD 3 billion or a little more than TWD 3 billion. It won't be TWD 4 billion, TWD 5 billion as our peak CapEx period. So basically, higher payout ratio won't affect our business development in coming years. Thank you.

Thank you, Ivan. That's super clear. So that's my last question regarding the market share target for pneumatic linear guided electrical actuator in the long term. Do you have this kind of target on your hand or any target you can share with us on these 3 business segments? Thank you.

Firstly, we expect we could have RMB 9 billion, even a little higher than RMB 9 billion revenue from pneumatic by end of 2030. And Mini Guide still could be RMB 3 billion, RMB 4 billion -- RMB 3 billion to RMB 4 billion in around 10 years. And we have another new business, electrical controller. And maybe to achieve RMB 3 billion in around 10 years won't be difficult to AirTAC. And it's still too early to tell electrical actuator revenue number, even electric actuator can support robotic arms or humanoid demand directly, but it's still too early to tell. Thank you.

Got you. Got you. Thank you, Ivan. So given the interest of time and Ivan's already very comprehensive introduction of the company's fourth quarter and result in the guidance outlook in 2026 and beyond, I would like to conclude the call here. And thanks for everyone to join this call, and thank you, Ivan, and congratulations for the fantastic fourth quarter and good 2026 guidance. Yes.

Okay. Thank you, Chao, and thank you, everybody. Have a good day.

Okay. Bye-bye.

Good afternoon, and good morning, everyone. Welcome to Airtac's Third Quarter Earnings Call. This call is hosted by UBS. I am Ally Chen, Taiwan Strategist and Industrial Analyst. Before we start the call, we would like to ask for your support in the Extel survey, which will start in November. This survey is important for UBS. Please vote for UBS and myself in Taiwan industrial and equity strategy categories.

Now let's start the call today. It's our great honor to have Mr. Ivan Tsao, Airtac's CFO, in this call. We will start with Ivan's updates on the company and then open up for Q&A later. So Ivan, I'll hand the microphone to you.

Okay. Thank you, Ally, and good day everybody. This is Ivan Tsao speaking for Airtac, and welcome to this conference call. And as usual, please let me brief our third quarter results and current market situation.

First of all, observing the impact of the U.S.-China tariff issue, we thought that most of the China customers have experienced the tariff from U.S. since 2018. Although new tariff factors have had a partial impact on the China current economy, it most could be caused by customers' psychological influence and this time will not be greater than that in 2018, '19.

Currently, for the recovery of the China economy, the importance of how the China government continues to implement more policies to restore people's confidence and improve people's consumption and is far greater than the impact of U.S. tariff. For Airtac, we are closely observing the development of tariff friction and proposing corresponding stretch timely to continuous increase our market share and support revenue growth.

Pneumatic industry still can sustain single-digit growth annually once there is no too severe NOLCOM issue. By continuous developing new products and improving our brand image, we expect our annual revenue growth rate can be 10% higher than the industry growth rate. Recently, some investors concerned the anti-innovation, evolution policy may affect demand for pneumatic products. However, we believed this policy has very limited impact on the pneumatic demand and is actually beneficial to the overall market trading orders as pneumatic product support production line rather than end product. As long as customers launch new models or engaged in production activities, there will be a greater demand for pneumatic.

In addition, the impact of the cross-trade tariff agreement between Taiwan and China, we seen it as ECFA issue and our operating margin has subsided by the second quarter of 2025. The year-on-year decline in our operating margin over the past 4 quarters will tend to recover and grow from this third quarter onward. And our approved consolidated revenue for the third quarter of 2025 was RMB 1,971 million, a 20% growth year-on-year. Gross profit was RMB 907 million, a 20% growth year-on-year. Gross margin was 46.04%.

Operating income was RMB 588 million, a 28% growth year-on-year. Operating margin was 29.84%. Nonoperating income was RMB 46 million, including RMB 35 million of FX gain, RMB 9 million subsidy from government, RMB 8 million of interest income and RMB 3 million of interest expenses. Income before income tax was RMB 634 million, a 31% growth year-on-year. Pretax margin was 32.16%. Net profit was RMB 502 million, a 30% growth year-on-year. Net margin was 25.46%. EPS for the third quarter of 2025 was TWD 10.5, and TWD 30.36 for the first 3 quarters of 2025.

And revenue from top 8 industries for the third quarter of 2025. The biggest one still was electronics, is around 26% to our consolidated revenue and is 10% growth year-on-year. Second one, Battery was around 14% to revenue, 100% growth year-on-year. Auto was 11% to revenue, 52% growth. Packaging was around 9% to revenue, 10% growth. Machine tool was 7% to revenue, 17% growth. General machinery was around 6% to revenue, 15% growth. Textile was 4% to revenue is flattish year-on-year in third quarter. And LED lighting was around 3% to revenue is 8% decline year-on-year.

For current market situation, we believe that the pneumatic industry demand has entered in a recovery cycle since late of 2024, even it may only be a gradual or moderate recovery. The duration of this recovery cycle may be longer than the normal 2 years recovery period in the past. In addition, China government continues to release many stimulus policies in past couple of quarters and attempting to restore people confidence in government policies. Some of those customers have improved their confidence and increased their end product consumption or increased their capacity expansion.

Overall, shipment was better than our expectation in Q1 of 2025, but just in line in second quarter of 2025 caused by the tariff policy from U.S. and some customers postponed their demand. However, the impact of tariffs have been diluted and some customers still need to improve production process, automation and replace pneumatic product. The shipment in the third quarter of 2025 is once again better than our expected.

As for the demand of various industry for pneumatic component in 2025, pneumatic support customers' production process, not in their end product. Once customers have more new models launched or spec upgrade, they need more new production processes to support their production. However, due to some customers observing the development of tariff negotiation in second quarter, especially those in consumer electronics industry, electronics revenue in second quarter were lower than our original expectation, but some of such postponed orders have gradually been delivered starting from this September. There is still a chance of the growth nearly 10% throughout the 2025 from electronics.

In addition, there is still so many customers saying it could be a good year for electronics demand in 2026 because there could be more new model launch or spare upgrade in the year. And we expect we could have another 10% revenue growth from electronics in 2026.

And for battery demand, government announced its guidance for the EV and battery industry for 2025 in last November, and the demand has accelerated pretty fast from that time. We have had around 1% revenue growth from battery year-to-date, and was better than our expected and still could be double-digit revenue growth in 2026 because government process used to be suspended more than 1 year, and we still expect the battery demand still could be pretty good in 2026.

Moreover, government stimulus process for replacing old equipment to the new equipment can get subsidy is still in the market. Those traditional demand like machine tools, general machinery and packaging still can enjoy positive for 2025 and 2026. It's mid- to high single-digit growth in first 3 quarters of 2025 from those traditional demand and is better than our expectation.

Better revenue growth from automotive industry also could be expected from 2025. We have improved our brand image and enjoy better share gain from auto customers. Even the overall automation -- even the overall auto industry has not recovered significantly, we have had double-digit revenue growth in the past 5 years, and we still expect double-digit revenue growth in 2026 from auto customers. However, we [ had ] some demand issues on solar or energy lighting demand, but its decline rate have narrowed from 50% in first half of '25 to 8% in third quarter of 2025. Even it still could be weak for the year. It just around 3% of our revenue and won't affect our business too much.

Selected items for selected customers have some pricing conditions in pneumatic market, but it's still rational or reasonable basically. Material costs have been relatively stable and fluctuate within a reasonable range, which will be friendly for our profit margin. The OP margin still has to depend on revenue scale and capacity utilization rate, even we can improve our margins by launching more higher gross margin new items, improving our selling product mix and continuing to improve internal production efficiency to reduce our production costs.

Pneumatic capacity utilization rate currently is around 1% and the inventory turnover days at the end of this September was 122 days and the accounts receivable turnover days was also 122 days at the end of the September. It's including 1/3 of risk-free bank acceptance notes. All of those numbers are pretty healthy.

For a development of our linear guide, industry demand is still pretty weak and peers still keep aggressive pricing. We have changed our pricing policy since third quarter of 2024 and also extend new sales rate. Shipping volume has been around 20% growth year-to-date, but the revenue number is still lower than our expectation. We have asked our sales team to convince customers continually and also expect the overall demand of linear guide will be better from 2026 because the linear guide demand cycle used to be around 2 to 3 quarters later than pneumatic cycle, and we believe pneumatic cycle have entered in recovery cycle from late of 2024. So we expect the demand for linear guide could be better in coming quarters or 2026.

Whenever demand warms up, linear guide peers always raise same price and Airtac will maintain the same price to widen the price gap lower than peers and persuade more customers to place more orders to Airtac. Current linear guide capacity rate just around 20% to 30%. Gross margin is [ 10% ]. When we can achieve 50% production rate, production gross margin could be around 30%. And when the production rate is 80% gross margin could be around 40%. Even 40% gross margin is lower than our existing pneumatic business. We use the same-store team to do cross-selling pneumatic and linear guide and want to spend too much additional OpEx. It still can improve our consolidated OP margins.

And we expect pneumatic industry can return to flat or low single-digit annually growth in 2025 and 2026 will be better than 2025. And we can have at least additional 10% revenue growth from pneumatic product. Plus the revenue contribution of linear guide, the shipment of this October have also better than our expectation, and we raised our 2025 revenue growth rate guidance to mid-teens percent in renminbi terms. Operating margin could be nearly 30%. CapEx of 2025 still could be around TWD 2 billion to TWD 3 billion, and we have generated free cash flow from 2019 and it's around RMB 6.5 billion in 2023, RMB 8 billion in 2024. We also have increased our cash dividend payout ratio from 35% in 2021 to 55% in 2025, and it could be 60% in 2026. And still will be higher in coming years. This is my briefing. And should you have any questions, we can discuss it. Thank you.

Okay. Thank you, Ivan. Now let's open up the floor for Q&A. I do see Ming Hsun has a question. Ming Hsun, please go ahead.

I have 2 questions. So first question, Ivan, you just mentioned that in terms of the business cycle, linear guide is supposedly a few quarters later than pneumatic. So since you expect the linear guide demand will also improve next year, which sector do you expect to see better demand? Is it also 3C and auto and also battery? And also specifically, do you think Apple's upgraded affordable smartphone launch next year will drive overall FA demand next year?

Thank you, Ming. And firstly, compared to pneumatic, linear could be CapEx component mostly in nonpneumatic with component replacement demand and CapEx demand. And for Airtac linear guide business, basically, we have limited market share in linear guide industry. So in 2026, we expect we could get more orders from the market and still will follow current policy. We won't target on any specific application or industry demand. We just ask our sales team to assess any customers once they can pay receivable to Airtac on time. And whenever these customers -- these bigger customers, small customers, in any application or any industry, we still will accept those orders to improve our linear guide business. So basically, you can find linear guide components in so many assembly lines, also can find so many machine tool or general machinery. So basically, it's still pretty difficult to tell which segment will be enjoy higher growth in 2026 for linear guide.

And another question is your OP margin. So as you mentioned, I think this quarter is the first time in the past few quarters, you start to see OP margin to turn positive on Y-o-Y basis. So looking into 2026, do you expect the overall margin can recover back to maybe 31%, 32% if the linear guide utilization continues to improve. And also the pneumatic component utilization is supposed to improve as well. So could you share your outlook?

I mentioned earlier, the OP margin still will be affected by the revenue scale. Even we have find some additional ways to improve our internal production efficiency, and we also can find some higher gross margin new items to support our OP margin improve. But it's still too early to tell, it will be 31%, 32% OP margin in 2026 or not. But basically, it could be higher than 2025 -- it's very high probability and also could be higher than 30% in 2026.

Okay. While we are waiting for others to raise questions, let me -- I actually have 2. So first is on the semi customers. Ivan, can you share with us more color on how your product and also business expanding in the semi and semi equipment-related categories?

Yes. Basically, we could be the beneficiary of China policy, China government policy, local procurement, local production. But we have limited SKU can support semi customers currently. And we just can find some SKU product, which used to support other industry and also can support partial new semi customers. And our monthly revenue from semi customers just around CNY 5 million or CNY 6 million. And we began to more aggressive to develop semi items from late of 2024. We also total market maybe it takes around 2 years to develop and improve it to a better or best cost structure, then we will launch the semi items. And current schedule, it seems a little faster than our expectation, maybe in second half of 2026, we can launch some semi items gradually and also can improve our revenue from semi customers.

Okay. I understand. Can we have a little bit like a background on the customer? Are they like equipment -- local equipment suppliers? Or can you give us a little bit color on the background, what type of industry subsector within the semi industry?

Okay. Basically, most of our current semi customers could be backend, local China semi equipment players and limited from international customers.

Okay. Understand. Okay. And then separately, I also want to ask you another question on pricing strategy. We had -- like Airtac has been aggressive in gaining market share. And so particularly some pricing strategy for SMC. Do you foresee a change in rest of this year or next year? And also, when we talk about market share gain, you just mentioned actually next year, you can still have 10% market share gain. What market segment like do you get more market share from?

Basically, we still have so many SKUs have not developed and launched as could be in so many different applications. For example, even electronics is our biggest sector of our revenue, but our market share number in China electronics demand still lower than our total China limited market share. So our electronics market share in China is just around 20-plus percent. And auto is just around 10% market share of Airtac. And we still will as our sales team and marketing team to find what items, Airtac have not produced -- the market has demands urgent and we shall pass those items and develop them in first priority. And it could be so many different applications. And we also have not focused on any specific applications to develop new items to support such specific applications. So it still could be strong -- the SKUs still could be from so many different industries.

And our aggressive pricing just focused on specific customers, not across the list of the customers. So most of our existing customers, the pricing is still pretty stable. And we're just talking on those customers who do limited business with Airtac, but mostly could be international peers or Japanese peers support such kind of customer demand. In past, such customers have very deep brand image and price limited even 0 orders to Airtac. So once the orders volume is small and pricing by Airtac could be very high. Even the customers is a very big company or big demand volume. But from second quarter or third quarter of last year, we ask salespeople to base on this customers' total demand volume whenever they buy the limited product from any peers, any suppliers, we just based on their total demand volume and give them pricing, low pricing directly. So we can get more shares from such kind of customers. So our aggressive pricing is not across these customers, just best customers can enjoy aggressive pricing from Airtac. Thank you.

Okay. Thank you, Ivan. I see more questions in the list. Helen.

Hi Ivan, this is Helen from HSBC. Well, thank you so much for the briefing, and it's glad to hear that you are getting more positive for the outlook. I just want to double check with you because next year, some of your peers has been talking about the potential replacement cycle of the machine tools that were purchased during the last peak cycle, i.e., during the year 2017 and 2018. Would you expect something similar to happen? And do you think it is going to benefit Airtac? And if so, by how much?

Thank you, Helen. Basically, customers could be pretty conservative from late of 2021. And what I mentioned earlier, pneumatic can enjoy single-digit growth annually. And from late of 2021, the demand was disturbed caused by COVID issue or government abnormal control. So the pneumatic industry was suffered double-digit decline year-on-year in 2022, single-digit decline in 2023 and around 10% decline in 2024. So, so many customers, they just spend or replaced their pneumatic component cautiously. So maybe we won't say the replacement cycle will be pretty obvious, pretty strong demand in 2026. But just based on our prediction for assessment, the pneumatic cycle could be entering recovery cycle from late of 2024. Even it was affected by U.S. tariff issues in second quarter, but the shipment also be better in third quarter of 2025, even in this October.

So basically, the pneumatic demand will be better and better or recover moderately in 2026 and its CapEx demand or replacement demand still depends. But once customers have more or higher production activities, they should need more replacement demand for pneumatic product.

Understood. If I may follow up, when you're guiding for about 10% of the growth for the smartphone sectors in next year, so 2026, are you already considering into the potential model change for some smartphone companies or that would be an additional catalyst for 2026? You're just giving a baseline kind of the guidance for smartphone growth.

Basically, we have not finalized our forecast or budget for 2026. But we still contact with our customers closely, and we could have some numbers from customers' feedback or information from the market. And we can say currently, the opportunity for pneumatic demand to have low single-digit growth for the whole industry is very high. So demand from smartphone or electronics still could be good in 2026. And we say, we always ask our sales team have to enjoy additional 10% revenue growth higher than industry growth. And just I mentioned, we expect electronics revenue growth rate could be 10% at least in 2026. And we have not allocated to any specific sector or application.

So next question comes from Kenny.

I have 2 questions. First off, I want to have a follow-up on the semiconductor equipment. Could you give us some more color on whether the entry barrier is relatively high compared with your current portfolio? And do you have any initial thoughts on how much bigger than total addressable market will be unlocked, [ thanks ] to this SPE development?

Firstly, pneumatic is a very mature industry and also for more than 100 years. And we don't have too many semi items. It doesn't mean we don't have such capability to develop and produce it just because we have so many easy money items have not been developed and launched in the past. So we prefer to do those easy money items first.

And second one, semi could be the last territory of our main competitors or main competitor. And in past, we don't want to attack their last territory. So we have not focused on semi items developed. But we believe we have been stronger enough and also follow China government policy, local production, local procurement. So we became more aggressive to develop semi items from late of last year. And we don't think it's difficult for our tech to develop and support semi customer's demand. So maybe from late 2026 or 2027, we have higher and higher semi revenue to support our business.

Appreciate it. I have a follow-up on the OpEx. I just noticed that in the fourth quarter in 2023 and 2024, you were having relatively higher R&D expenditure. I'm wondering if this will be a new pattern continuing in 2025 or 2026?

We spend what we should spend. So the higher R&D expenses in 2023 or '24, it doesn't mean 2025. We also have had higher R&D expenses still depends.

Our next question comes from KekYee.

This is KekYee from Principal. I'd like to go back to semi as well. Can you give us an idea like how big can semi be as a segment over the next few years? Can it be like as big as auto in 1 year down the road or 2 years down the road? That's my first question.

Okay. Basically, as we know, our biggest competitors in China, their semi revenue in China could be around RMB 2 billion to RMB 3 billion. And it's still too early to tell how much will Airtac can enjoy it. But basically, it's a new sector for Airtac. And based on past experience, we still can get shares from this sector in coming years.

Okay. My second segment is related to humanoid. I was just wondering because you're also developing linear guide, right? Do you have any -- have you engaged any companies on parts for humanoid from linear guide or pneumatic or what or what segment? I'm not sure. Do you have exposure there?

Firstly, pneumatic is for all the production activities to improve their automation. And maybe we still have limited revenue to support humanoid customers directly because the humanoid demand still could be pretty limited. And we not just have pneumatic linear guide. We also have developed electric actuator, which can support humanoid directly for years. And electric actuator, the main paths could be motor driver, linear guide ball screw switch and some frame to assembly as the set of electric actuator to support robotic arms or humanoid demand.

And we have had stepping motor, linear guide and sensor switch already and still in developing servo motor and driver. And we expect we could launch the set of electric actuator in 2028 or 2029. And once the demand of humanoid or electric actuator proved to be very high or before we launch the set of electric actuators or before we can predict the development of the server motor and driver, we still can buy the servo motor or driver from the suppliers and accompany linear guide ball screw switch to be the setup of the actuator to support market demand.

Next question comes from Jason.

My first question is about the gross profit margin. We see our gross profit margin is almost flat from the second quarter. And however, our revenue is seasonally decreased in third quarter. So I would like to know what's the driver to keep the gross margin in third quarter? And did we provide any sales discount in the third quarter to dilute the gross profit margin? That's my first question.

First one, we do plan production. So basically, the product we sold in third quarter, it doesn't mean we produce it in the third quarter. And second one, from 2016, '15, we have not stressed our gross margin numbers because we used to consider the market share gain, the specific customers we want to approach or get more procurement percentage from them. So many different factors will affect our pricing strategy or policies.

And also depends on the overall demand. And for sustained specific percentage of the utilization rate and enjoy better fixed cost leverage. We also have timely pricing policy to specific customers. So basically, we prefer to target on our quarterly OP margin rather to keep our gross margin.

So maybe you found our gross margin in 2014 could be around 55% and gross margin 55%, OP margin just around 27%, 28% every time. And we changed our sales rate or pricing rate because Airtac still is a growing company. We have different sales rate on different stage. So we prefer to have a higher shipment growth, revenue growth and enjoy better fixed cost leverage, enjoy a higher OP margin rather than to keep a very high gross margin, also can improve our market share in the market at the same time. So in past 3 to 4 years, our gross margin just around 40%, but we can keep our OP margin to be around 30%. So it's our sales' range -- it's our current sales range.

Okay. And my second question is about the revenue. We saw a really outstanding revenue in September, almost 30% year-to-year growth. So I'd like to double check, there's no any like postpone from the second quarter or any advanced shipment from maybe sequentially months if there's no situation, we can assume that our revenue in the fourth quarter, maybe we can achieve maybe high 10% year-to-year growth or almost 20% year-to-year growth in the fourth quarter?

You mean for Q4, Q1?

Yes, the fourth quarter in 2025, the Q4.

Q4, okay. Basically, pneumatic industry was entering recovery cycle from late of 2024. So it should be better and better from a demand, even there's still some synergy in pneumatic industry. The second quarter, it should be much better than the shipment what we did in the second quarter of 2025 caused by some customers that postponed their demand. And maybe from late of August or this September, some of such postponed demand began to deliver to customers. So not just for this September. October, even we have 9 days for the national holiday, but the daily shipment still much better than September in this October. So basically, we just can say postponed delivery it should be in September or October. But the industry recovery is still support better shipment in past 2 months and it still could be pretty good in next couple of months. Even it still could be low season for pneumatic for fourth quarter, Q4 of the year. So we expect the quarterly revenue of this fourth quarter, this Q4 could be flat compared to Q3. It's better than past experienced seasonality.

Next question comes from Jeremy.

I have just 2 quick questions. It's very, very good news to hear that you are being more optimistic as suggested by you raising your outlook for the full year. So I think that maybe this next question is a little bit maybe not timely, but looking forward, going forward, I'm just a little bit concerned because the pneumatic market in China has always been, I would say, rather like the oligopoly. So yourselves and the biggest player about 60% market share in China. So when you look at pneumatic versus other components in China, other components, you have seen very, very fierce pricing pressure and very, very fierce competition. But increasingly, as you are going into the field of your #1 competitors, is there a risk of this sector, pneumatic becoming much more competitive going forward? And is that going to impact profitability?

Basically, our biggest competitor is a very big company and good company. We cannot speak for that. But based on past 10 years years experience, even they still launched so many sales stretch want to against Airtac and start Airtac getting share from that. But so far, those stretch seems not successfully to against Airtac. And pneumatic still is a conservative industry, big player always will be bigger. And top 3 players in China, SMC, Airtac, Festo is just around 50% -- 50-plus percent market share totally in 15 years ago in China but have increased to be around 70%.

And Festo is a private company. They prefer to keep their margins rather to keep their market share. So the pricing leaders could be SMC and Airtac. But the last time SMC launched aggressive pricing is in 2014. And such pricing war just ascended around 3 quarters. And from late of 2020 -- so late 2014, they start cutting some price and raised price back. So from 2015 to this moment, have 3 to 4 times down cycle, but the pricing between Airtac, SMC in pneumatic market still could be rational reasonable. So basically, we think severe pricing competition, even pricing war in pneumatic market in coming years could be pretty low risk or the opportunity could be very limited, but it's the same war, we cannot speak for SMC.

I understand. Yes, I hope that the pneumatic market continues to grow so that the competition can remain quite benign. But I'm just a little bit concerned just because I looked at the inventory days outstanding at SMC and they have expanded a lot of capacity recently. So, I'm just worried if the demand disappoints going forward, there's some risk there. That's all.

My next question is, if you're going to get into newer fields, like, say, into semis, my understanding is that pneumatic is an industry whereby you want to keep the lead times quite low, quite short, like within 1 week, right? So, as you expand the number of [ quicker ] specifications products that you have, does that mean that you're going to have to invest much more in terms of working capital? So will your inventory days outstanding start to go up?

Basically, it won't because once we have better scale, we could have a higher efficiency to manage our inventory. Maybe you can find our inventory turnover days could be around 150 days in 2 years ago. And even we still continue to launch more new items, and we have decreased our inventory turnover days to be around 122, 124 days in the past couple of quarters. So more SKU, it doesn't mean we have to increase our inventory turnover days.

And once we track back to 10 years ago, in 2015, 2016 -- our inventory turnover days even could be 160 days, much longer than our current inventory turnover days. Even we have additional one or additional 100,000 new SKUs have been launched in past 10 years, but we still can decrease our inventory turnover days.

Yes, I understand. So it depends on the -- whether or not you can increase your revenue as fast as well is the answer.

Next question comes from Iris.

This is Iris from Deutsche Bank. I have actually a question which is more longer-term oriented on the return of investment, so the ROI that you have on the new products or the new categories that you are expanding into. And I mean, people have asked about semiconductors. So I want to ask about maybe the other areas. One is the linear guide, which is new, but not so new. And the other area is the electric actuators area.

So firstly, on the linear guide because you've mentioned that even if we increase the utilization to, say, to 80%, then the gross profit margin will be 40%, which should still be lower than the current group level. So do you think that maybe it is in the longer-term, a lower return business? And how do you think about it? Or should we more look at the operating margin perspective?

And then what is the operating margin that you foresee for your linear guide business in the longer-term once it reaches a more stable state?

And also related to the linear guide and how do you assess the competitive landscape of the linear guide business? Because you've mentioned before that when you entered the business, you thought the biggest competitor should be the other Taiwanese peer, but then you realized there might be -- they might not be like the best indicator for the market. And then we hear there are many local competitors also emerging who also claim to be of good quality for their products. So how do you think about the question is the ROI for the linear guide business on an operating margin perspective in the long-term? And also in relation to that, the competitive landscape for the linear guide business. And this is question number one.

Okay. Basically, 40% gross margin when we have 80% utilization rate just based on to ship operator working system. So when we have a higher retention rate, we still can transfer our operator working system from 2 shifts to 3 shifts. So 40% gross margin is pretty conservative numbers. And the business of Airtac is much lower than our expectation for 5 years. So we prefer not to give a very aggressive number or pretty good number to the market. It's too far away from the practice. But it doesn't mean we just can have 40% gross margin from linear guide.

And second, we use the same sales team and don't have to spend too much additional OpEx to sell linear guide. So 40% is still pretty good for our consolidated OP margin. And another reason why we have to develop more new business, linear guide, electrical controller, electric actuator because we just target on 35% pneumatic market share currently, maybe by 2030, we have such 35% market share in China. And it's been more effort to increase additional 1%, 2% pneumatic market share after we have 35%.

So basically, we prefer to have more new business, to have better fixed cost leverage because all of those new business, pneumatic linear guide, electrical controller, electric actuator, all of them use the same sales teams, same sales employees. And we cannot expect all of our business can enjoy such high gross margin pneumatic, high 40%, even 50%. And it's easier to develop the new business and high yield for Airtac to enjoy high revenue growth or higher revenue growth, higher operating income and it's good -- also it's good for our bottom-line.

And our new guide development stage, currently, we could have a better product quality, shorter lead time, lower pricing than Taiwanese peers. And we missed the best timing to enter a linear guide market, also missed customer expectation in 2020. So the sales progress was much lower -- slower than our expectation in the past 5 years. But our current target just wanted to improve our linear guide brand image.

So, we just compete with Taiwanese and Japanese peers. We have not competed with local China players. After we have a better brand image, then we can develop inferior product quality and lower our unit production cost to compete with local China players. And we can improve our retention rate consecutively to 80%, 90%, then we have better fixed cost leverage, also can decrease our higher-quality product pricing, lower our high-quality product pricing to compete with Taiwanese and Japanese peers, then we can transfer our operator working system from 2 shifts to 3 shift and enjoy better fixed cost leverage again.

So 40% gross margin, it doesn't mean 5 years later, 10 years later, we just could have 40% gross margin from linear guide. And gross margin number also depends on our pricing surge. Once we want to increase our linear guide market share faster, we can have a lower pricing -- aggressive pricing to speed up our share gain. And it's good for our revenue number, operating income and bottom-line. Even the GPM number or OPM number won't be improved to be very high, but it's good for our bottom-line. We still believe linear guide is a good business for Airtac.

Understand. Thank you for sharing that. And a very quick housekeeping question related to linear guide. Can we check how much revenue linear guide generated in the third quarter and in the first 9 months of the year?

Just around CNY 142 million in third quarter and around CNY 4 million in first 9 months.

Got it. My second question is also related to the return on investments. So similarly, this is related to the electric actuator business. So as you know, I mean, for electric actuators because it can be used for humanoid robots. So many local Chinese players, I mean, many of them, I'm sure you know that they are also now developing electric actuators used mainly for humanoid robots, but can be used for other areas as well. And also given that, as you've mentioned, you are developing the servo motors and the drives still, but then there are local Chinese players who have already developed the servo motor products. So can you maybe elaborate a bit more with us on what you think is the competitive advantage of Airtac in this business and why Airtac has chosen this as a kind of one of the new business areas to expand into?

Thank you. Basically, we could be an expert of mechanical parts, including pneumatic, linear guide, mechanical even electric actuator or parts of electric actuator. And we can -- we always can find some ways to achieve most competitive cost structure. And we just can say we could enjoy competitiveness of those items we're going to develop. And it's just like 20 years ago, nobody believed Airtac can compete with SMC, just such big pneumatic players. And pneumatic component is much complicated than linear guide, electric actuator or electrical controller. So basically, we believe we can success in this sector.

Okay. Thank you, Ivan, for sharing with us. So I think we are running out of time. So we'll need to end the call here. Thank you, everyone, participating. Thank you, Ivan. And again, we appreciate your support for UBS in the Extel survey. Have a good day. Thank you. Let's conclude the call here. Thank you.

Okay. Thank you, Ally. Thank you, everybody, and have a good day. Thank you.

Good afternoon, everyone. We already have Mr. Ivan Tsao from Airtac on the line. We're going to get started in about a minute or so. I appreciate your patience until then. Thank you so much. We want to wait for everyone to join.

We're going to get started on 4: 02 sharp. Please wait for another minute or so. we already have Mr. Ivan Tsao from Airtac. We want to wait for everyone else to join. Once again everyone thank you so much for joining. We're going to get started in 30 seconds.

Everyone there is some question about the voice issue. I believe our voice, both Ivan and myself, seems to be very much active. So please review your own system at this point. Thank you so much.

Let me get started. Good afternoon, everyone. Thank you so much for joining second quarter 2025 earnings call for Airtac International Group presented by Goldman Sachs Asia Industrials team. Today, we have Airtac International Group, ticker 1590.tw with us, one of the most focused popular automation company in Asia. It is our pleasure to welcome Mr. Ivan Tsao, CFO of Airtac. Ivan, thank you so much for your time today.

Thank you, Isyama-san, and good day, everybody. This is Ivan Tsao from AirTac.

Thank you so much. We, Goldman Sachs Asia Industrial team will be the host and the moderator of today's earnings call. We have Chao Wang, our Taiwan Industrials and Tech analyst; and myself, Yuichi [ Isyama ], Head of Asia Industrials. We'll be the co-host moderator of the call today. There are some statements we have to make beforehand. Today's call is strictly for clients, analysts or investors invited from Airtac International or from Goldman Sachs only. It is not intended for media and it's off the record. If you're not an investor or an analyst and did not receive invitation to join this call directly from Airtac or Goldman Sachs, you should hang up now. Also, please be remembered that this call is not for the purpose of sharing or receiving nonpublic or otherwise confidential information. Attendees are public side market participants who may not receive or should not request nonpublic or otherwise confidential information about issuers or about the markets or securities.

For today's call, we are going to be starting with Ivan's presentation of second quarter earnings review and full year outlook commentary, followed by the Q&A session. [Operator Instructions] Thank so much for patience. I have nothing further to state. Ivan, the floor is all yours. Thank you so much.

Thank you again, Isyama -san, and good day, everybody. Welcome to join this call. And let me brief our second quarter results and current market situation. And first of all, more than 90% of our revenue and expenses are denominated in renminbi and renminbi is our functional currency. FX impact on our operating income level is limited. Our consolidated financial statements are settled in renminbi and then convert to NT dollar at a certain exchange rate. The recent sharp appreciation of NT dollar has not affected our actual operation financial data, but we are listed in Taiwan and have to report NT dollar term financial statements to Taiwan government.

Stronger NT dollar results in a lower growth rate of our NT dollar term financial numbers. This situation just is only due to the conversion of the reporting exchange rate. In addition, observing the impact of the U.S.-China tariff issue, we thought most of the China customers have experienced the U.S. tariff since 2018. Although new tariff factors have had a partial impact on the China current economy mostly caused by psychological factors influence and this time will not be greater than that in 2019.

Currently, for the recovery of the China economy, the importance of how the China government continues to implement more policies to restore people's consumption confidence and enterprises expansion willing to expand domestic demand is far greater than the impact of U.S. tariffs.

For Airtac, we are still closely observing the development of the tariff and proposing corresponding strategy to continuous increase market share and support revenue growth. pneumatic industry still can sustain single-digit growth annually once there is no too severe noneconomic issues. And we still expect it could be flattish to low single-digit growth for pneumatic industry in China in 2025. By continuous developing new products and improving our brand image, we expect our annual revenue growth rate can be 10% higher than the industry growth rate.

And our approved consolidated revenue for the second quarter of 2025 was RMB 2.12 billion, 11% growth year-on-year. Gross profit was RMB 967 million and 8% growth year-on-year. Gross margin was 46.0%. Operating income was RMB 641 million and 8% growth year-on-year.

Operating margin was 30.5%, in line with our expected. Net nonoperating loss was RMB 38 million, including RMB 67 million of FX loss RMB 25 million subsidy from government, TWD RMB 7 million of interest income and RMB 3 million of interest expenses. Income before income tax was RMB 603 million, a 6% decline year-on-year. Pretax margin was 28.7%. Net profit was RMB 478 million, a 6% decline year-on-year. Net margin was 22.8%. EPS for the second quarter of 2025 was TWD 10.19 and it's TWD 19.8 for the first half of 2025. Revenue from top 8 industries for second quarter of 2025 -- the big one still was electronics, around 29% to our consolidated revenue. It is 6% growth year-on-year.

Second one was battery around 14% to revenue, 117% growth. Auto was 10% to revenue, 35% growth. Packaging was around 8% to revenue, 1% growth. Machine tool was 7% to revenue, 2% growth. General machinery was around 5% to revenue, 11% growth. Textile was around 4% to revenue, 14% decline and LED lighting was 4% to revenue is around 35% decline year-on-year.

For current market situation, -- there are still some customers who are watching the development of the tariff from the U.S. before they deciding their expansion plans. Uncertainties is always worse than a bad outcome as customers usually do not make major decision to expand their capacity. The recent tariff negotiation seems to be moving in a positive direction.

In addition, China government continues to release many stimulus policies in past couple of months and attempting to restore people and corporate confidence in government policies. Some of them have improved their confidence and increased their end product consumption or increase their capacity expansion. The overall market demand was slowly recovering since late 2024 and over shipment was better than our expectation in Q1 of 2025, but just in line in Q2 of 2025, mostly could be affected by U.S. issue, psychological impact.

As of the demand of various industry for pneumatic component in 2025, we expect electronics industry demand could be 10% growth in 2025 at the beginning of the year because so many customers say there could be more new model launch or new upgrade in 2025. Pneumatic supports customers' production process, not in their end product. Once customers have more new model launch or spec upgrade, they need more new assembly to support their production. However, due to some customers observing the develop of the tariff negotiation, especially those in consumer electronics industry or application, shipment in the electronics industry in the second quarter was lower than our original expectation.

For battery demand, government announced its guidance for the EV and battery industry for 2025 in late last October and demand was accelerated from last November. We expect double-digit revenue growth from battery in 2025 and it's more than 1% growth in past 4 months, also was better than expectation. Moreover, government stimulus policies for replacing old equipment to be new equipment can get subsidy is still in the market. So many traditional application customers like machine tools, general machinery and packaging can enjoy positive growth for 2025 is mid- to high single-digit growth in the first half of 2025 and also better than our expectation from those traditional demand.

Better revenue growth from automotive industry also could be expected for 2025. We have improved our brand image on auto customers and also enjoy better share gain in this demand. Even the overall auto industry have now recovered significantly, we have had double-digit revenue growth in past couple of years. And we expect double-digit revenue growth from auto in 2025, even in coming years, still could be expected and also has been better than our expectation in first half of 2025.

We still have some demand issue on solar and also have suffered 50% decline in first half of this year. Even it still could be weak for the year. Its decline rate have narrowed from 55% in the first quarter to 8% in this June. In addition, it's just around 4% of our revenue and won't affect our business too much in 2025.

Selective items for selected customers still have some pricing competition in pneumatic market, but it is rational basically. This week -- sorry, the weak of the Japanese yen will not affect the competition with our Japanese peers, mainly because the cost of material accounted for about 40% to 50% of pneumatic cost of goods sold. Most of the main material cost was metal materials. Japan's own production of metal should be limited. So it needs to purchase major material from foreign suppliers. The weaker yen will increase the cost of material, but it still can enjoy the benefit of Japanese production capacity in labor cost and overhead.

In addition, the production capacity of main competitors in Japan is around 40-plus percent. Another 3% is in China. The currency impact should be similar to Airtac. So -- the stronger yen or weaker yen never affected the competition between Airtac and peers. Material costs have been relatively stable and fluctuate within a reasonable range, which will be friendly for our profit margin in 2025. But OP margin still has to depend on revenue scale and capacity utilization rate.

Even we can improve our margins by launching more higher-margin new products, improving our selling product mix and continuing to improve internal efficiency to reduce production cost. Total days of inventory was around 124 days and it's around 117 days for receivable days at end of June. Both of those numbers are healthy. And our pneumatic capacity rate is around 10% currently and just around 30% for our capacity. For the demand of guide business, industry demand is still pretty weak and peers still keep aggressive pricing. We have changed our pricing policy since third quarter of 2024 and also extend new sales stretch from this February. Even shipment volume has been more than 20% growth year-on-year, but the lower pricing still have not improved our monthly revenue, obviously.

We still expect we could have RMB 600 million revenue in 2025 and additional RMB 300 million for internal demand to support our pneumatic cylinder product. Also expect we can achieve 50% capacity rate at end of this year and the production gross margin of the guide could be around 30% and just around 20% in 2024 and first quarter even first half of 2025. If the rate is 80% gross margin could be around 40%. Even 40% gross margin is lower than our existing business. We use the same sales team to do cross-selling pneumatic and without too much additional OpEx, we still can improve our consolidated OP margin with continuous rate improving. Sorry about that capacity expansion, gross margin still will be improved.

Pneumatic is a short lead time business. And no matter the economy is good or bad, pneumatic don't have to digest inventory in or customer side and its visibility is only around 1 month. Why is 1 month? Because the probability of the order delivery with 1 month is a little higher. We cannot ensure whether the demand for the next quarter will be better or better. We can only predict the annual shipment based on our experience, market situation and feedback from our customers.

Uncertainties are still in the market. We as our China sales team and overseas sales team still have to do their best. And also as China sales team have to achieve 35% China pneumatic market share by 2030. That means additional RMB 2 billion to RMB 3 billion revenue can be increased from our China pneumatic business. Even our new guide sales progress is slower than expected, we still could have 30% China market share and around RMB 5 billion revenue in around 10 years from China business. And we were requested by our pneumatic customers to develop their electrical controller system demand.

After 5 years of development and sales, we have had around RMB 400 million revenue in 2024, and it still could be better and better. also expect we could have RMB 2 billion to RMB 3 billion in 10 years and continue to develop electrical cylinder to support higher precision push power demand. And we have had part of include motor switch and motor and driver still in developing. And we still can support such demand when the demand is obviously improved.

Just those 4 business can support Airtac enjoy double-digit revenue growth in the next 10 years. We expect whole year of 2025 can return to low single digit or flattish for the whole industry of pneumatic. And we still have 10% revenue growth at least from pneumatic product, plus the revenue contribution of business. We keep same guidance for revenue growth rate for 2025, low teens percent growth. OP margin could be around 30%. CapEx will be around TWD 2 billion to TWD 3 billion in 2025. We have generated free cash flow by TWD 6.4 billion in 2023 and TWD 8 billion in 2024, also have increased our cash dividend payout from 35% in 2021 to 55% in 2025. It still will be higher in coming years, and it could be around 60% in 2026.

Lastly, in past 2 to 3 months, so many investors have asked me why we have decided to exit our U.S. market. This is a rumor spread by competitors. We are just changing our sales model to have our U.S. distributors place orders directly to our [indiscernible] factory with FOB terms, and we can reduce the potential risk of U.S. tariff. This is my briefing. Should you have any further questions, we can discuss it. Thank you.

Thank you so much, Ivan, for your presentation. Everyone, we're going to be moving on to the Q&A session. [Operator Instructions] Chao, the floor is yours. Please state your name and also the company.

This is Chao from Goldman Sachs. So my first question will be on the second half 2025 outlook. Given that you still believe that the overall China pneumatic market demand to be up a little bit year-over-year in overall 2025 and your revenue still outgrow the overall market by 10%. So I just want to know what is your thought on the second half demand outlook, especially from the electronics and also the auto and battery industry?

Yes. Basically, the shipment the daily shipment still was around 10% or 1% growth year-on-year year-to-date. And it could be -- it has been better in the first quarter. But second quarter, some of the customers have been affected by the U.S. tariff issue. But even affected by tariff issue, the shipment is still in line as our expected. So basically, we still expect the China government will continue to implement more stimulus process to restore people's confidence or improve their domestic economy.

And even pneumatic still have its synergy. second quarter used to be the peak season. Third quarter will be decline single digit quarter-over-quarter. And monthly revenue in third quarter also will be lower than second quarter. But it's the similar seasonality in 2024. So even we have a lower monthly revenue in third quarter than second quarter of this year. The year-on-year, the monthly revenue year-on-year base still could be teens percent. So we still expect the demand of pneumatic still will recover gently or gradually. And second quarter used to be the peak season of electronics. And we will not expect electronics demand can sustain 10% or double-digit revenue growth for 2025, but it still could be mid- to high single digit for the whole year 2025, and it could be mid-single digit in second half of 2025. Auto is still pretty good. And month-to-date still has around 30% to 40% growth year-on-year. And I mentioned earlier, we have improved our brand image in auto customers. So basically, we still can enjoy better share gain from the market. And battery still could be better and even it has been more than 10% in the past 4 months and it could sustain such more than 10% growth year-on-year in the second half. It's still too early to tell, but it still could be high double-digit revenue growth for the rest of the year.

Thank you. And my next question will be related to the volume discount you provided to your key customers that you already expressed in the last few results calls. Just want to understand what is the result of this volume discount you provided to your customers in the 2025, at least year-to-date? And how should we think about -- is it the key reason why we see that the gross margin in second quarter 2025 to be less than the fourth quarter -- less than the last year second quarter 2024? Or is there any other reason we see that the gross margin to decline and OP margin to decline year-over-year?

Basically, lower gross margin OP margin in the past 4 quarters mostly caused by the issue. China have canceled some items tariff benefit between the street. And we have to relocate some production -- some product production from Taiwan factory to Nimbo factory. And such capacity still have to accrue depreciation expenses without any output. In addition, we still have to lay off some operator in Taiwan factory. And such situation could be better from third quarter of this year. But the issue between the still is there. We still will consider what product production be relocated is better for our consolidated basis. For example, some electrical controller product was produced in Taiwan factory by second quarter of '24 and the gross margin just around 30% to 40%. After we relocate such production to our Nimbo Phase II, such production -- such product gross margin could be more than 50%, but we have to suffer a couple of quarters low output or output to relocate such capacity. So basically, once year-on-year compared to base from third quarter of this year, we believe we will be year-on-year growth or improved.

Your next question is coming from Bill Lin.

I'm Bill-san from JPMorgan. So I think my question is also about the gross margin part. Apart from the impact of the and the production relocation, can you share with us about the pricing trend about Line pneumatic and the linear guide product? Also, I also want to understand what is the linear guide sales in the second quarter for you?

Okay. The pricing is still rational for pneumatic industry. But I mentioned, there's still selective items for select customers have selective price competition. And why we have project pricing discount or annual discount for specific customers, just for specific customers, not all the cross the customers because we try to approach more new customers or prevent some customers bothered specific competitors. And we still believe such pricing is successful in past couple of quarters. We not just can increase our market share, also can have a stable or much better relationship with specific customers. And we have a reserved for such pricing discount by RMB 6 million a month. It doesn't mean we will have RMB 72 million pricing discount for the whole year of 2025. So maybe in fourth quarter of '25, we will assess such RMB 6 million monthly discount reserve is too high or too low. Basically, it could be too high, then we can reverse such discount reserve.

The pricing for [indiscernible] even peers still keep very aggressive pricing, but the pricing began to decrease aggressively from late '21 to mid of '24. And from mid of '24 to this moment, the pricing have been at low level or bottom. And most of the peers have not decreased their pricing further after mid of 2024. But the overall demand is still pretty weak and pricing have a little stable from mid of 2024, but still a very low level. You can see other peers, their gross margin OP margin in the past couple of quarters have been much lower than the past couple of years.

I think my second question is about what is the linear guide sales in second quarter, if you can share with us. I mean the linear guide sales in second quarter, how much is the numbers in renminbi, if you can share with us?

You mean the monthly revenue?

No, I mean the quarterly sales of linear guide in second quarter.

Quarterly sales is RMB 150 million.

t's Your next question is coming from Iris Zheng.

This is Iris Zheng from Deutsche Bank. So 2 questions. The first one is on profitability. I believe you've already answered like the bulk of it. I just want to double check what is the extra impact on the operating profit margin or on the gross profit margin in the first half. And I want to double check if my understanding is correct that you are basically implying that the gross profit margin and the operating profit margin should see a year-on-year growth or a year-on-year improvement in the second half versus the second half of last year?

Yes. Basically, we expect our quarterly gross margin, OP margin will be better in second half of this year compared to second half of last year quarter. And it's difficult to tell the exact impact for tariff in first half of this year because the production -- the product production and the volume of the production was pretty varied in past 2 to 3 quarters. But at least it could be more than 0.6% or 1%, but it's very roughly numbers for you. The impact [indiscernible] is and pretty so many impact factors of the OP margin impact by [indiscernible]

Understand. That's already very helpful. My second question is on the top line. So if we think about your target or guidance of the full year for the top line of being low double-digit growth for the full year, and I believe it's in RMB terms, right? And then we have 10% in the first half, then this implies a slight acceleration of growth in the second half of the year. And do you think this acceleration comes more from the market that can potentially pick up in the second half of the year? Or you think it's more AirTac can do better than the market?

Maybe both of them because impact from U.S. tariff may be well lower and lower because some customers may still have to make some decision for their capacity expansion. And we still will apply different kind of sales range, and we also have improved our brain. And we also expect we could have a better share gain from the market. And also because of the low base of second half of last year, and we can have double-digit revenue growth in second half of this year.

Your next question is coming from Jason if it is not working, please reconnect yourself. Let me move on to some of the questions that came through from the Sorry, Jason. Now we can hear you. Jason, I'm sorry, can you start from the beginning again?

This is Jason Lu from First Capital Management. My first question is about the environment. In the June and July, the China government announced the [indiscernible] or we say the [indiscernible] competitive policies. Do you see our clients be more conservative in the purchase or the future guidance?

Sorry, I cannot understand the you mentioned.

Sorry. My question is the [indiscernible] like an agent in their policy. Have you seen our clients be more conservative in the purchase of their confidence?

Basically, such kind of shipment will be still pretty similar to first quarter or first couple of months of the year. And some policy have some deferred impact. So it's still too early to tell such new policies will affect customers' behavior or not. We still have to observe that. But in past 1 to 2 months, we don't have seen too much change.

Okay. So my second question is for the second half year, the utilization rate of the linear guide, could you give us more detail for your expectation?

Basically, even we have overcapacity for years, but we still have to keep basic [indiscernible] rate to let our operator experience or accumulated experience. So 30% or high 20% retention rate will be kept in rest of the year. But once we have a better shipment, maybe we still depend on the shipment improvement and increase our [indiscernible] rate. So basically, we still expect we could have a higher [indiscernible] rate later this year, but we won't increase too much inventory, just want to keep our [indiscernible] rate.

Thank you so much, Jason. There is one question -- 2 questions coming from one investor. Let me ask that on behalf. Ivan, thank you so much for your time today. Please, can you clarify Airtac's U.S. strategy and the changes made in recent months in response to U.S. tariff? Are client letters suggesting the U.S. withdrawal entirely fixes is the first question. I appreciate if you can answer that, Ivan.

Yes. Basically, we have a sales subsidiary in Houston. And in past, we have built inventory for our direct customers and distressed customers. Then we have to import inventory and pay tariff first. And such inventory just stuck on our Houston warehouse. But it doesn't mean all those inventory can be go to our customers. So we have potential or thinking cost of the tariff expenses. And the so many fixed cost or expenses in U.S. is pretty high. For example, our Houston warehouse rental, we have to pay USD 70,000 a month. And the tariff still could be uncertainty. So from this, we have informed our customers include [indiscernible] and [indiscernible] customers. We will give them some pricing discount, but they have to price orders, they have to place orders to our [indiscernible]. And the trading term could be FOB [indiscernible] port, then we don't have to -- don't have to check the tariff for any customers. We not just can decrease our tariff sinking cost, we also can decrease our monthly warehouse rental. In 2024, U.S. subsidiary almost lost USD 5 million. And after we change such model, we can make money from U.S. subsidiary.

Thank you so much, Ivan. The second question is about electronics area. Ivan, thank you once again. Please, can you outline AirTac's competitive positioning within electronics? And any progress in penetrating into semiconductor manufacturing supply chains?

Yes. is a small company in past, and we started our China pneumatic business from traditional application. So many high application customers, they still have very deep bra for pneumatic suppliers. They always believed Europe better than Chinese made AirTac. So after 2011, 2012, we began to develop high application SKUs to support such higher application. But we still have to spend more time to improve our image. And we have success in past 10 years. So basically, not just improve our, we also have wider product portfolio can convince more electronics customers can trust Airtac is good enough and can support most of their demand. So many customers don't be afraid to be punished by their existing suppliers once Airtac don't have too wide or once Airtac can support most of their demand. And such happened in past 5 or 7 years. So it's one reason why we can continue to gain shares from the market because we have wider product portfolio also can enjoy multiplier effect to improve our market share.

For Semi, in past, we have not focused on semi SK development because we have so many easy money items are not developed and launched. We prefer to do those easy money items first. And second one, so many semi customers have some abnormal requirement to AirTac such abnormal equipment, they have not pushed on other Chinese peers. So we don't think semi businesses are based business for Airtac. So we have passed -- we have not put it on our first priority and develop that. And third one, in past 1 to 2 years, China government had local procurement, local production process. So many local China semi equipment players came to Airtac actively trying to seek any with Airtac. After we such of all our product SKUs, just limited product can support customers limited demand. And our pricing just around 40% of SMC's pricing, we still can enjoy 70% gross margin from such demand.

So from end of last year, our Board have authorized or even have to develop semi items aggressively. And this progress is still on track, and we talk to the market, maybe in 2 years, such semi revenue won't be improved, obviously, but it still could be higher and higher. And around 2 years later, it could be another growth engine for Airtac business.

Your next question come from Kenny Chen.

I have 2 questions. The first one, I just want to follow up on the impact from Airtac you just mentioned. Can we get some sense that will this continue to be impacting second quarter's margin or it will be totally resolved somewhere in the second quarter or third quarter?

Well, any impact or not in the second half of the year still depends on the [indiscernible] development. And any or any product production in Taiwan will be lower efficient than our [indiscernible] factory production. We still will consider to move some product production from Taiwan factory to [indiscernible] factory. And such process impact still depends on the scale of the product production relocation and we have to lay up additional operator in Taiwan or not. But basically, such impact won't be that high as it did in past 4 quarters.

Okay. Got it. Very clear. And the second one is kind of a relatively long term or maybe we have to wait and see. But I see your quarterly sales like have been increasing year-on-year for many quarters, but there still be a cycle for kind of industrial automation, factory automation in this kind of industry. So I'm wondering if you can give us just a brainstorm or any thought you have right now for 2026 or the next cycle? Will you see some more constructively positive views on 2026, 2027 or you will want to like warn some of downside risk going forward?

Basically, is very short term short lead time business. We cannot tell the situation in 2026 or 2027. And in past 20 years, every 2 years, we have an up cycle and another 2 years could be down cycle. So every 4 years is a cycle include down cycle and up cycle. And this weak demand started from late 2021. And mostly, it was [indiscernible] in first half of '21. China government want to calm down the overall demand. And second one, China government have some abnormal control for specific application, specific industry from September or October of 2021 and mostly was related to political issue. So we say this weak demand from later '21, we prefer not to define a cycle issue. This noneconomic issue to affect that. And after government has resolved most of the political issue and they try to restore China economy from late '23, but most of the people have lost to government policies, even some pretty strong enterprise also expand their capacity conservatively. And government continue to release more stimulus policies, but restore people confidence takes time. So even though may have been better from later 2024, and we also talk to the market, it just could be a gentle recovery, slight recovery won't be a rebound that did in first 2 up cycle. So basically, once just slightly recovery from late '24, and we also believe China government still will continue to release more [indiscernible]. So this recovery cycle from later 2024 will last longer than 2 years, but it still depends on China government process.

Your next question comes again from Chao Wang from GS.

This is me again. A little bit more housekeeping question from me. The first question is coming -- is related to your inventory days by end of this quarter -- sorry, end of second quarter? And how should we think about the inventory level going into second half this year for pneumatic and also linear guide? That's the first question.

Firstly, 124 days is too low for pneumatic business. And we still will depend on the shipment situation and some fixed cost and decide the attach rate in second -- third quarter or fourth quarter. Basically, we used to decline our attach rate from July or August of the year, and October will be the lowest one and increase our attach rate from late November or from December. But we still have to consider the inventory level is good enough to support our customers short lead time demand or not. So basically, 124 days at end of this June is not healthy. It's not good numbers for the production cost.

Got you. That's pretty clear. So we're basically implying that the inventory level will continue to go up in the second half and probably will not lower our utilization so fast in second half this year compared to the past few years.

Yes, that's, yes.

Got you. That's pretty clear. So my next question will be coming from the market share outlook or the market share in 2025 because we continue to hear some feedback from the Chinese industrial automation suppliers and also the customers saying that they are -- have better intention to buy localized local production products, just like your products compared to the Japanese peers or Germany peers' products. So I just want to understand the trend. Have you also see this trend happening? And should we expect that the market share to be higher than 30%, 35% probably next 1 to 2 years?

Yes. Basically, we have been seeing as a local truck company for years. And the situation you mentioned also have been happened in past 1 to 2 years, but it's not easy to denominate how fast it will be because different customers have different consideration all have different procurement behavior. But basically, we have very high confidence to enjoy 35% China market share by end of 2030.

We're actually just about to finish the time. If I may finish with one final question from myself, actually. Ivan, is there any changes in terms of cash flow outlook that you are having? I think you started to step up on the shareholder return from last year. Given the, I would say, rather moderate business condition that you've been seeing for this year, are you having any views that maybe you need to think more about the shareholder return going forward? Or you want to deploy further capital towards even further new businesses, including M&A and such. Any update on the cash flow, if you can mention about it as a closing remarks, that will be deeply appreciated.

Basically, we don't have any acquisition plan currently even in short term. And our CapEx just could be TWD 2 billion to TWD 3 billion in 2025, 2026, even 2027. And next CapEx expansion depends on the scale of our electric business. But even we have a little higher CapEx in 2028 or 2029, it just could be a little more than TWD 3 billion a year. And we still can generate pretty good free cash flow. So basically, the cash dividend payout will be higher or how high it will be still depends on our balance sheet situation. And once we have better revenue growth, we need more working capital demand because our cash cycle could be around 220 days. Higher revenue, we need more -- we need more working capital. But basically, to keep our payout ratio to be around 60% from 2026 to near term, it will be difficult for Airtac.

Thank you so much for that commentary. Everyone, we would like to conclude the call. And Ivan, thank you so much for pushing yourself despite the fact that you've been having a short road. We truly, truly appreciate your effort in here. If there is nothing further, we would like to conclude the call. Ivan, would you like to have any other closing remarks?

No.

All right then. Thank you so much, everyone, for joining today's call with Airtac International Second Quarter 2025 results. We hope that you're going to be having a great weekend ahead and hope to see you sometime soon. Thank you, everyone. The call is going to get concluded. Thank you, Ivan. Have a great day.

Thank you, Isyama-san, and thank you, everybody. Have a good day.

Thank you, everyone. We're going to close the call.