Airtac International Group (1590) Earnings Call Transcript

Good afternoon, everyone, and welcome to Airtac's 2Q 2026 Earnings Call. My name is Derrick Yang, I'm the coverage analyst at Morgan Stanley. Today, it's our honor to have Airtac's Vice General Manager and CFO, Ivan Tsao, join us to provide more details regarding 2Q '26 results, business outlook and the industry dynamics. So without further ado, let me pass it to Ivan for the opening remarks.

Thank you, Derrick, and good day, everybody. This is Ivan Tsao speak from Airtac, and welcome to join this conference call. And please let me brief our second quarter results and current market situation. First of all, pneumatic demand has entered a recovery cycle, and we expect this up cycle could sustain longer than 2 to 3 years. both shipment and order book amount have better than our expectation since the beginning of the year. Pneumatic components are replacing human beings direction, and this industry can sustain single-digit growth annually once there is no too severe long-term issues. By continuous developing new products and new business, improving our brand image, we expect our annual revenue growth rate can be 10% higher than the industry growth rate. As pneumatic products support production line rather in the end products as long as customers launch new models or engage in production activities, there will be a greater demand for pneumatic. In addition, recent geopolitical impact on raw material costs remain within the company's control and won't affect our margins too much. Through ongoing improvements in internal production efficiency and product sales mix, the operating profit margin this quarter continues to rise compared to past couple of years. Moreover, it seems that some investors have misunderstandings about our plans for future market share in the pneumatic industry. At present, we are targeting 35% China pneumatic market share before 2030. And when we have around 35% market share, maybe there are some consideration at that time. We will based on the market situation and the sales progress of our new business, meaning electrical controller and electrical actuator situation that decide whether to continue aggressively increase our pneumatic market share or optimize our product sales mix. This doesn't mean we will slow down our revenue growth rate or just fix our pneumatic market share at 35% in the future. Just like we expected the market share to reach 30% before 2028 in 2010, and we have adjusted to reach market share to be 35% by 2030 currently. We used to deliver conservative numbers to investors and adjust them when we're almost there. It doesn't -- it's not necessary for us to provoke our main competitors at this moment. And basically, we can say our market share should be higher than 35% after 2030. Next, let's announce our financial figures. Unapproved consolidated revenue for the second quarter of 2026 was RMB 2 billion, $620 million, a 25% growth year-on-year. Gross profit was RMB 1,303 million, a 35% growth year-on-year. Gross margin was 49.7%. Operating income was RMB 918 million, a 43% growth year-on-year. Operating margin was 35.1%. Net nonoperating loss was RMB 6 million, including 27 million the disposal loss of our fixed assets and RMB 15 million subsidy from government, RMB 6 million of interest income and $1 million of FX gain. Income before income tax was RMB 913 million of 51% growth year-on-year. Pretax margin was 34.8%. Net profit was RMB 713 million of 49% growth year-on-year. Net margin was 27.2%. EPS for the second quarter of 2026 was TWD 16.55 -- the fixed asset disposal loss is caused by our demotioning 301 floor factory buildings to reconstructing another 2 new 4 floor buildings to improve our production efficiency, resulting in a loss on depreciated book value of the old buildings. Such activities won't affect our current production output and shipment. Our approved consolidated revenue for the first half of 2026 was RMB 4,812 million, a 24% growth year-on-year. Gross profit was RMB 2,354 million. 34% growth year-on-year. Gross margin was 48.9%. Operating income was RMB 1,646 million, a 44% growth year-on-year. Operating margin was 34.2%. Net nonoperating income was RMB 16 million. Income before income tax was RMB 1.662 million, a 45% growth year-on-year. Pretax margin was 34.6%. Net profit was RMB 1.298 million. 43% growth year-on-year. Net margin was 27.0%. EPS for the first half of 2026 was TWD 29.91. Effective tax rate is around 22%. And revenues from top 8 industries for the second quarter of 2026, the biggest one still was electronics, -- it's around 27% to our consolidated revenue, it's around 20% growth year-on-year. Battery was around 18% -- sorry, 18% to revenue, 56% growth. Auto was 9% to revenue, 20% growth. Packaging was around 7% to revenue, 17% growth. Machine tool was 7% to revenue, 35% growth. General machinery was around 5% to revenue, 28% growth. Textile was around 4% to revenue, 39% growth and LED lighting was around 3% to revenue is around 7% decline year-on-year. For current market situation, more and more customers are showing positive views on future demand. China government continues to release many stimulus policies and attempt to restore the confidence of people or enterprise. In addition, the China government proposed 15th 5 years plan emphasize intelligent manufacturing and industrial upgrading. Both of those policies will drive demand in pneumatic market. As for the demand of the various sectors of pneumatic, the revenue of the electronics industry grew by 20% in first half of 2026, which is better than our expectation. Airtac is not an AI player, but strong demand on AI-related devices need more pneumatic to support their production activities. We expect we could have double-digit revenue growth from electronics for the whole year of 2026. And battery demand, government have announced its development guidance for battery and customers expand their domestic capacity. In addition, more customers have -- more countries have relaxed their restriction policies on China players and those China players plan to spend their plan to expand their overseas capacity. So it still could be double digit growth for the battery in 2026 and 2027. In addition, government still try to develop more SSD-related demand. So it's still pretty strong demand for battery in coming years. And we have improved our brand image on auto customers and enjoy better share gain in the past couple of years. Even the overall auto industry has not recovered significantly, we have had double-digit revenue growth for years. We expect it still could be double-digit revenue growth in 2026 and coming years. Moreover, government stimulus process for replacing old equipment to be new equipment, customers can get subsidy from government. This policy is still in the market. Those traditional demand that machine tools, machinery, textile and packaging still can enjoy double-digit revenue growth in 2026. And however, we had some demand issue on solar or LED lighting in 2026. The government have taken action to coordinate the overcapacity issues in solar and solar sectors. And we expect solar and LED lighting revenue decline rate will be much lower than 2025 in 2026. Next, selected items for selected customers have pricing competition in pneumatic market, but it's still pretty rational or reasonable. We have increased the selling price in overseas market, but maintain stable pricing in China market, just try to improve or sustain better relationship with customers and accelerate revenue from various new products and business. And the increased raw material cost still can be offset by our internal efficiency improvement. But OP margin still has to depend on revenue scale and capacity utilization rate. Even we can improve our margins by launching more high gross margin new items, improving our selling product mix and continue to improve internal efficiency to reduce our production cost. And we define a 100% utilization rate based on working 24 days a month and 21 hours a day with 2 shift operator working system. Our current pneumatic capacity rate is around 100%. And the inventory turnover days is around 110 days. It's very low inventory level. So we still will maintain around 100% capacity utilization rate in third quarter of the year. For the development of linear guide, despite the overall weak demand and peers aggressive pricing in 2025, our shipment volume growth still could be more than 20%. We also have 27% revenue growth in second quarter of 2026, and we have increased our capacity utilization rate from over 20% in 2025 to over 40% currently and expecting to reach 50% utilization rate by end of 2026. When we have 20% to 30% retention rate, gross margin of Linear Guide is teens percent, 50% retention rate, gross margin is 30%. Even 30% gross margin from Linear Guide is lower than our existing pneumatic business, but we use the same sales team to do cross-selling pneumatic and Linear Guide and don't have to spend too much additional OpEx. Linear Guide won't be a burden to our business from 2027. Our product quality is better than Taiwanese peers and our pricing is lower. So we missed customer in 2020. And our current sales strategy is to enhance our brand image and just compete with Taiwanese and Japanese peers. After achieved a better brand match within 1 to 2 years, we will design additional new spec to reduce product cost, production cost and selling prices to compete with local China players, continue to improve our retention rate, enjoy better fixed cost leverage and implement another aggressive pricing to compete with all the peers. When we have 80% retention rate, gross margin could be around 40%. It can improve our consolidated OP margin at that time. And when we have more than 90% retention rate, we will consider change the current 2-shift operator working system to 3 shift. Current 2 shift, the equipment have to rest by 70 days a year. And once transferred to 3 shift, the equipment just have to rest by 20 days a year. We can increase our equipment working hours and enjoy better output, better fiscal leverage, then we can launch another great pricing at that chart. So basically, we still expect our linear revenue could be around RMB 3 billion in around 10 years. And for our third business, electrical controller is a very good business for Airtac with low CapEx and high gross margin of 60%. We began to develop and launch this product in 3 to 4 years ago and have had around RMB 400 million revenue in 2025. And we also have enjoyed more than 20% market share. And there will -- another 3 new series product will be launched by end of this year to support higher revenue growth from 2027. Total market cap of the electrical controller in China could be around RMB 100 billion with so many different kind of components. And we will pick up more high-yield product to develop it and launch it. And we expect we could have around RMB 3 billion revenue in around 10 years from electrical controller. For the development of the semiconductor product, based on our strategy, we have not developed semi product by 2024. And due to the product can enjoy very high gross margin is around 70%. And China government localization policies and it's better for Airtac or easier for Airtac to convince semi customers buy pneumatic products from Airtac. And we began to develop semi items from early of to launch them gradually from 2027. And current development progress is faster than expected, and we can launch some items from fourth quarter of 2026. But also based on past experience, it used to take around 1 year for new products to have a better revenue contribution. And currently, we can find some products that were developed for other sectors in past, but also can be used by semi customers. And such revenue has increased from RMB 5 million monthly revenue in around 1 year ago and increased to current RMB 13 million per month. And we expect we could have around RMB 1 billion revenue from semi customers in around 10 years. And we expect pneumatic industry can return to mid- to high single-digit growth in 2026 for the whole industry. And we still can have additional 10% revenue growth from market share gain in pneumatic plus the revenue contribution of linear guide and electrical controller. And we're still pretty optimistic of the overall operation of our business in 2026. and the shipment in the first half exceed our expectation and maintains a strong year-on-year growth in July shipment. Even we are optimistic about the market demand in 2026 due to the short lead time of the pneumatic industry, we still provide guidance for 2026 based on a conservative principle and we adjust them upward with the next quarter's operating results. We raised our guidance for the whole year of '26 revenue growth will be over 20% in renminbi terms, and it will be a higher revenue growth rate once based on NTD dollar terms. And if we have over 20% revenue growth, our OP margin will be around 34%, higher than our previous guidance. And we have generated free cash flow for years, also have increased our cash dividend payout from 55% in 2025 to 65% in 2026. And our payout ratio still could be higher in coming years. And it's my briefing. And if you have any questions, we can discuss it. Thank you.

Thank you, Ivan, for the comprehensive update and view on the industry dynamics. Now we will open up for Q&A. Should you have any, read Ivan will answer them one by one. So the first question is from [indiscernible]. It is regarding the fifth 5-year plan from China. How is that going to influence Airtac? And is it going to have some implications to all industries of Airtac's customers?

Basically the 15th 5 years plan, government, they emphasized the intelligent manufacturing and industry upgrading, especially for those new applications, maybe they need more automation. And existing traditional application, maybe they still take advantage of the government policies, they can get subsidy from the government. So basically, when -- from second quarter -- from third quarter or fourth quarter of 2025 after U.S. government have the tariff policies to global countries, we have found some traditional customers back to China and expand their China domestic capacity. So basically, -- once customers still can enjoy higher or better production efficiency, maybe demand for pneumatic still will be higher and higher.

And the second question is regarding the outlook. It goes like what gives the company confidence in suggesting that this time, the cycle will last longer than a typical 2-year cycle? And what end markets are contributing to this growth?

Yes. Basically, once just predict the cycle for the industry, that we cannot exactly to predict which sector will be better or not. And the reason why we have such expectation for this up cycle to longer than 2 to 3 years. First one, this down cycle from late '21 may be mostly affected by government some abnormal control and geopolitical issue for global countries restrict China players to expand their capacity in their countries. And once China government, they have realized economy is too bad for too many years. They still have to restore people confidence. And basically, once economy is not good for too long, it will affect social issue then to affect their political issue. So you can find government have begun to release so many stimulus buses from 2024. A year later, we can find some recovering s for pneumatic demand. And customers, they just spend limited automation improvement what they have to in the past 3 years. And when they find government continue to release more stimulus process, they will spend a little more automation CapEx gradually. And you also can find in past 20 years, every up cycle, the demand could be reshaped or turned. But this up cycle from late of 2024 or early 2025, it's just a moderate linear recovery. And just a moderate linear recovery, it can sustain a little longer. So not just for such thing or situation, also have government tried to propose 15th, 5 years economy plan. It also could be good for pneumatic demand. So we say the demand in 2027 still could be a good year for pneumatic.

The next one is -- let me see. Could you repeat the numbers for the revenue contribution and also growth by sectors for 2Q and decline during the related Internet connection with some technical issues, so we couldn't catch the numbers.

Electronics, 27%, 27% to revenue, 20% growth in second quarter. Battery, 18% to revenue, 56% growth. Auto, 9% to revenue, 20% growth. Packaging, 7% to revenue, 17% growth, 17% growth. machine tool, 7% of revenue, 35% growth. General machinery, 5% to revenue, 28% growth; Textile, 4% to revenue, 39% growth. Solar energy lighting, 3% to revenue, 7% decline year-on-year.

And the next one is that given the offset between lower raw material prices and lower utilization in 3Q, can we expect the gross margin to stay above 48%?

We do plan production. So basically, utilization rate is just one of the factors of gross margin impact. We have discussed this issue earlier. We still will sustain around 100% utilization rate in third quarter because of the low inventory level. So basically, gross margin won't be affected too much in third quarter, even it's the low season of the year.

And the next one is, could you talk a little bit more about the new products in semiconductor in second half 2026? How many SKUs and who are your main customers? And what's your new guidance for semiconductor in 2027 for Airtac?

We have not launched any specific items for semi customers. We also have discussed this issue earlier in this conference call already. We scheduled to launch from 2027. But based on current progress, we could launch a couple of items from fourth quarter of 2026. Our current monthly revenue from semi customers, all of those items just developed for other sectors also can be shared to current semi customers. And we have not given any guidance from semi revenue in 2027, even coming years. We just expect we could have around RMB 1 billion revenue in around 10 years.

Maybe I can quickly follow up -- have a follow-up question on that. So our target is to have RMB 1 billion revenue in 10 years. And at that time, what will be our market share? Or in other way, what's the total market size for pneumatic components for semiconductor in China?

Currently, it could be around RMB 5 billion to RMB 6 billion revenue from semi demand. But whenever Airtac enter a new sector or new industry, this industry overall market size should be declined because our pricing could be much lower than the current market price. And maybe our peers have to decline their same price to compete with Airtac. So basically, once based on current demand volumes, maybe a couple of years later, the market size will be declined to 4 to 5 or just around RMB 4 billion in China semi demand.

Very clear. And the next one is, may I ask about the 2Q OpEx. Are there any nonrecurring items in the quarter driving total OpEx amount higher on a quarter-over-quarter basis? And also any thoughts for second half '26 OpEx or OpEx ratio that we can expect?

1Q based on renminbi terms, our OpEx have not increased too much quarter-over-quarter. But except selling expenses, around 30% to 40% of our selling expenses could be sales teams bonus. And sales teams bonus, the key KPI could be revenue growth rate, OP margin for cash achievement. So basically, we have a higher revenue growth rate in second quarter and margin also could be better in the second quarter. Sales team's bonus could be better than first quarter.

Got it. Got it. And also, I think the second part of that question is regarding any OpEx ratio guidance for second half?

No. We just have annual guidance.

Got it. Got it. Very clear. And the next one is what are the 3 new products to be launched before end of 2026 and the estimated revenue contribution for those products in 2027?

Basically, those 3 series electrical controller have been prepared and ready for sale. And still the same issue. Whenever we launch a new items, it used to take around 1 year, then a better revenue contribution. So we don't have any guidance for such product in 2026 revenue -- sorry, 2027 revenue.

Got it. So those new - 3 new products will be electrical actuator, electrical controller and

With so many different kind of new products. So please tell me what kind of -- which new products are you indicating?

Got it. I think the investor was saying that because in the prepared remarks, it seems to mention that there will be 3 new products to be launched before end of 2026.

Yes, it's electrical controller, new 3 series.

Okay. Got it.

We have 3 new business, except pneumatic. -- second one, linear guide, third one, electrical controller, fourth one, electrical actuator. And we still continue to improve our brain image of linear guide and try to convince more customers buying from Airtac. Electrical controller, we have pretty strong compliments already. And we just launched 5 series products in around 3 years ago and enjoy RMB 400 million revenue in 2025. Those 5 series product revenue could be around RMB 500 million in 2026. And fourth quarter of 2026, we will launch another 3 new series electrical controller. And 2027, we have another revenue growth engine from those 3 new series products. But the revenue contribution, how high it will be still depends on how fast our customers place orders to Airtac to buy those new series product. And we have not launched electrical actuator. And basically, we have developed most of the key parts of electrical actuator already. And we could launch electrical actuator in 2028 or 2029. And then we not just can support more existing pneumatic customers from their pneumatic demand, demand, electric controller, electric actual demand. And when we have electric actuator product, we still can support robotic arms and human no demand on their product, not just support their production process.

And the next one is, do you see any downstream demand accelerating or decelerating from 2Q? And what is the revenue contribution from linear guide in RMB terms in 2026? What is the current price gap of Airtac linear guide versus peers?

The investors' questions, he said the demand in second quarter was surrogate. Why? How? Whose got in?

I think he was referring to the Y-o-Y growth for electronics and the battery sector on a Y-o-Y basis versus the first quarter, not on a sequential basis.