Good morning and good evening, ladies and gentlemen. Welcome to the ASM Pacific Technology 2019 Second Quarter Results Announcement Investor Conference Call. Before we proceed, I would like to note that during this conference call, there may be certain forward-looking statements with respect to ASM Pacific Technology's business and financial conditions. Such forward-looking statements may involve known and unknown uncertainties and risks, which could cause actual results, performance, and events to differ materially from those expressed or implied during this conference call. For reference, the IR presentation related to our Q2 results can be downloaded from our website, www.asmpacific.com. With us this morning are Mr. WK Lee, CEO of ASM Pacific Technology, and Mr. Robin Ng, CFO of ASM Pacific Technology. We will start with a brief discussion about our 2019 Q2 results, followed by a Q&A session. Without further ado, let me hand this over to Mr. WK Lee.
Mr. Lee, please.
Thank you, Leonard. Good morning and good evening, ladies and gentlemen. We appreciate you are joining us for our 2019 second quarter investor conference call today. I will first provide you with the summary of the company's performance, followed by the Q&A session. During the period, group bookings increased by 13.8% quarter-on-quarter to $602 million. Group revenue experienced a small Q-on-Q decline of 1.2% to $461 billion. The group ended the period with strong backlog of $795 million, slightly lower than the record backlog of $809 million as of end Q2 2018. All three of our business segments achieved Q-on-Q booking growth during Q2. Bookings of our SMT Solutions segment surged 54.4% to a new record of $296 million. SMT Solutions segment's bookings were driven by automotive, industrial, consumer electronics, and 5G infrastructure demand.
The group benefited from the 5G infrastructure investment and a strong SMT equipment market in China during the first half of this year. In the second quarter, new order bookings of the Materials segment grew 28.5% Q- on- Q. Bookings of the Materials segment increased consecutively over the past two quarters, signaling the semiconductor market may have reached the bottom and will start to recover. We anticipate that the semiconductor industry is still facing strong headwinds due to the trade tensions and economic uncertainties. During the period, bookings of our Back-end Equipment segment rebounded by 10.9% Q-on-Q, driven mainly by the strong bookings from the CIS market. Demand for traditional die and wire bonders for the IC discrete and LED markets remained weak. Billings of our Back-end Equipment segment increased 5.2% Q-on-Q during Q2.
Besides the strong momentum from CIS, advanced packaging contributed close to 20% to the revenue of the Back-end Equipment segment during the first six months of this year. Strong demand for ASM NEXX advanced packaging deposition tools for RDL with redistribution layer and copper build-up applications continued from Q4 2018 into the first half of 2019. A significant portion of this order backlog is expected to be realized as revenue in the second half of 2019. Billings of our Automatic Inspection Equipment, AOI, for the first half of 2019 more than doubled the billings in 2018. The equipment is deployed for the detection of particles and bonding quality in camera modules and automotive devices. The Materials segment is continuing on its path of recovery. During the second quarter, billings of the Materials segment increased 13.2% Q-on-Q to $57 billion.
Affected by a 10.3% Q-on-Q drop of the revenue of the SMT Solutions segment, group billing suffered a small reduction of 1.2% comparing to Q1 this year. The drop of the SMT Solutions revenue was due to lower bookings received in Q1 this year. During the six-month period, billings of the SMT Solutions segment were $418 billion, a small reduction of 3% comparing to the same period last year. Our strategies of serving a diversified equipment market and investing in advanced packaging has enabled the group to partially mitigate the likely impact brought by the Sino-US trade war. In the second quarter of this year, gross margin for the group improved by 185 basis points Q-on-Q to 35.7%. All the three business segments achieved a Q-on-Q improvement in gross margin.
Headcount of the group was reduced by around 2,400 people over the past 12 months, mainly from manufacturing. Group OpEx was reduced by 5.6% year-on-year. Excluding the acquisition made during the second half of last year, group OpEx would have been reduced by 14.5% year-on-year on an apple-to-apple comparison. Group net profit was HKD 70 million, which would have increased by 10.3% Q-on-Q if the under provision of tax of HKD 49 million booked in Q2 2019 was excluded. While we remain cautious of the short-term trajectory of the semiconductor industry, we are optimistic of its long-term future. Accordingly, we remain steadfast in our R&D commitment and our focus on new developments that are geared towards meeting the needs of our customers in areas like advanced packaging, CMOS image sensors, 5G, IoT, automotive, silicon photonics, and mini micro-LED displays, to name a few.
Against the above backdrop, we are anticipating the group revenue in Q3 2019 to be in the region of $ 550 million-$ 600 million, subject to actual timing of revenue recognition. All the three business segments are anticipated to deliver Q-on-Q revenue growth. With the uncertainties in the global economy and the semiconductor industry, we do not expect the year record bookings achieved by our SMT Solutions segment in Q2 this year can be repeated in Q3. We anticipate group bookings in Q3 to come down from the level of Q2 due to seasonality. Bookings for Back-end Equipment and Materials segment are likely continue to show Q-on-Q improvement. Due to the geographical mix of SMT Solutions revenue in the next few months, we only expect Q3 group gross margin to improve slightly despite higher Q3 revenue.
With this, we thank you for your attention. We are ready to take your questions.
Thank you, sir. We will now poll for a question. If you'd like to register for a question, please press star one on your telephone. Ladies and gentlemen, that is star one to register for a question. Thank you. Ladies and gentlemen, that is star one to register for a question. Thank you. Our first question comes from Donnie Teng from Nomura in Hong Kong. Thank you.
Good morning, management. My first question is regarding to the bookings. Could you elaborate more on the third quarter booking momentum within the Back-end Equipment segment? For example, IC discrete, FE and CIS. Also, I'm curious about the strong SMT booking in the second quarter, because there was some Huawei issue in the second quarter. Could you elaborate more on how far would this related business to have impact on SMT business, and why we can still maintain very high booking in the second quarter? My second question is regarding to backlog. Our backlog has been pretty high, as you mentioned in the presentation. Is there any customer postpone their payment during the down cycle? Thank you.
Okay, thank you. Regarding the booking momentum for 3Q, I would say the industry overall still have a lot of uncertainty. Judging from the momentum, we believe for our Materials segment, the lead frames, booking will continue to go up. We see this, probably the trend is much more obvious. Coming to the semiconductor Back-end Equipment, we still see the Trade War has a certain impact on our customers, affecting our customers' confidence of investment. As I mentioned earlier, bookings or demand for the traditional die-to-wire bonders for the IC discrete or LED remain weak at this point in time. However, we look at the CIS. Typically in the past, most of the booking for our CIS business will come in the first two quarters of a year. This year, we see there has been a delay by approximately a quarter.
Q1 CIS booking was not as strong as the last few years, but Q2 booking for CIS was pretty strong. We noticed that this momentum seems to be continuing in Q3. We believe that Q3 will still see a quite strong booking momentum for CIS. However, we do not foresee a very significant pickup for the booking of traditional die-to-wire bonder. Whereas for the demand for this advanced packaging, we see the momentum continue. However, because this is still in the early stage of industry development, so it would depends on the timing of the projects for particular specific customers. It may affect the timing of actual booking coming in. Whereas for the SMT, very interestingly, the strong booking also took us by surprise. When we carefully examined the market momentum, we noticed that actually China market was pretty strong.
When we say China market, it's not only for ASMPT, but probably for our peers also. From the market statistical data available to ASMPT, we see the European market pretty flat, stable, I would say. Same as for the American market. The market, especially the China market, really shows a very strong momentum of market pickup for the past few months. 5G infrastructure investment is definitely one of the factors. Besides that, we also see demand from a very diversified industry application. Ranging from automotive, industrial, electronics, consumer applications are all good. However, typically, Q3 is a quarter the European market will be quiet because of this holiday season, this vacation season. That's why we do not expect we are able to repeat that momentum. Yes, the market has a lot talking about Huawei, all this.
However, from our actual business activities, I would say the direct impact on ASMPT is fairly limited so far. Probably, on the other way around, we're seeing some urgent rush spot orders in Q2 for the semiconductor end equipment. We believe it could be from these suppliers to Huawei, because they are localizing their supply chain. For the backlog, it has been a very high backlog for us. So far, no customer really postponed payment to us due to this industry climate. We do face a little bit customers pushing back or holding back their delivery. That actually has been, I would say, happening since the trade war started a year ago, but this is not serious today. The high backlog partly due to the timing of the delivery and the timing of the revenue recognition. We expect backlog to come down by end of Q3. Thank you.
Thank you. Our next question come from Kyna Wong from Credit Suisse in Hong Kong. Thank you.
Hi, WK Lee. Good morning. Thanks for taking my questions. I have a question about the gross margin, because we see that the advanced packaging actually account for 20% of Back-end sales in the first half. So far, the first half Back-end gross margin seems like it hasn't really benefit from this kind of mixed increase. Somewhat, maybe it's due to the other segment that face more challenge. Can we read it from this? This is the first question.
Okay. Well, thank you. Well, the gross margin for the Back-end Equipment in the first half or in Q2, mainly affected by the relatively low volume of shipment and also the low production activity. These are the major factor for that. Yes, you are right. The gross margin for advanced packaging actually are, I would say, not bad. Overall, actually, the gross margin, or we call this the Materials margin for all those Back-end Equipment show in the first half of this year, pretty okay. However, because of this plant utilization, absorption of overhead, production overhead, so this track down the gross margin. We believe when the sales activity recover to a high level, our gross margin for the Back-end Equipment will show a much better performance. Thank you.
Okay, actually, you have increasing more flexibility strategy in this manufacturing, taking balance between the in-house and also outsourcing. Seems like the deleveraging is still pretty high in these cases. How would you improve this kind of a situation, and what can we expect the production utilizations in the coming few quarters? I mean, this year still face a lot of challenge in terms of manufacturing allocation, right?
Yes. I would say, if you're looking at our billing for the first half of the year, or particularly for Q2, actually, the Back-end Equipment billing actually suffer a 30.3% on a year-on-year basis, the contraction on a year-on-year basis. If we exclude acquisition we make in the second half of last year, actually, you can see that the contraction will be even higher. Actually, this is the major factor affecting us. However, you compare the gross margin, last year, Q2 last year, we achieve a very good gross margin of slightly above 50% for the Back-end Equipment business. Q2 this year is slightly above 40%. I would say, comparing with all the acquisition, there's a 140% drop of Our Back-end Equipment business. However, our gross margin only deteriorate by around 10%. Comparing to the years before, actually, the strategies has worked for us.
It really reduced the volatility of this gross margin due to this fluctuation in this sales volume. Of course, we continue to work on it. That's why we also continue to work on reducing our manufacturing headcount and also continue driving cost reduction effort. We hope to achieve an even smaller gross margin fluctuation in the next cycle, business fluctuation.
I have a question back to the backlog that Donnie asked about. This high backlog, previously you mentioned advanced packaging, that backlog will be fulfilling the second half. We could expect the backlog level should be back to a more normalized in the second half or not only the advanced packaging, but the other back end or SMT that's stuck in there and then properly because of customer pushing out the delivery. What should we expect? We pull from this backlog because it may not really convert to your sales.
It won't directly immediately convert 100% to our sale in Q3. For the second part of it will convert to billing in Q3. For the advanced packaging, majority will be converted into billing or utilized as a billing in the second half. A certain portion, based on today's expectation, we will only be able to deliver towards end Q3, beginning of Q4. From the revenue recognition point of view, it could be in the first quarter of next year. There's a smaller portion of it. Yes, for the SMT, because last quarter was a very strong booking, we still have to deliver those machines in Q3, and then recognize those revenue. The revenue recognition for those big orders, not big orders, strong orders in Q2 will be recognized partially in Q3 and partially in Q4.
I would say by end of the year, I think the overall backlog level will come back to a more normal level.
Okay. Thank you.
Thank you.
Sorry.
Our next question comes from Arthur Lai from Citigroup in Hong Kong. Thank you.
Hi, thank you for taking my question. I have three questions. Number one is on the advanced packaging. I think TSMC, they have an earning call last week, and they raised the CapEx to HKD 10 billion-HKD 11 billion, especially on the increasing 7 nm and 5 nm. So WK, can you elaborate more about your AMICRA and NEXX, how they benefit from this raised CapEx? This is my first question. Second one, I noticed that this quarter, the tax rate was extremely high at 62%, and last quarter 40%. I think recent three years, average tax rate is about 20%. So, I suspect that because the SMT business mainly made in Europe. Can you elaborate more about your production of the SMT between the Europe and also the Asia, and how we expect this migration to the Asia? Third one is more about the gross margin.
If we look back the recent semi cycle, for example, 2009, there's a first quarter gross margin up from 21%- 36%. The second cycle in the 2012 is up to also 5%-6% increase. My question is why this time when we reach the trough, and your gross margin forecast is flat or slightly down? This is my third question. Thank you.
For the first question on this advanced packaging, in particular relating to the customer you mentioned, as you know, we can't comment on specific customers' activities. In general, when the industry are moving into finer line geometries, advanced packaging assembly will, in general, benefit because you need more a new method, new way of assembling the chips. Wire bond is definitely out of the question. Even for traditional flip-chip bonding, you will have a certain limitation over there. That's why typically for those applications, customer are looking for either a TCB solution or a fan-out solution. In general, that will benefit a supplier who will be able to supply those advanced packaging equipment. Okay. The other questions from the tax and also the gross margin, I let Robin to elaborate on that.
On the tax rate, you're right. Tax for Q2 is around 62%, but you mentioned that there is this under-provision one-time tax that we have to make of HKD 49.3 million. If you exclude that one time, the headline tax rate will come down to around 36%. Yes, that's still high. That's because of the relatively higher profit mix from the SMT. As you know, our SMT tax rate now tax higher than the Back-end. Mainly due to the profit mix for the tax.
Gross margin?
Yeah. I think for gross margin, talking about why Q3 is still relatively low in terms of reduction, I think WK Lee has already mentioned. We can see that the geographical mix of SMT in the coming quarter, so that will also affect the SMT gross margin. As a result, in a blended fashion, we expect Q3 gross margin to improve slightly despite the higher forecasted revenue in Q3.
Yeah. If the revenue recognition comes a little bit earlier, particularly for advanced packaging, then the overall gross margin should improve further. Okay? At this point in time, we take a more conservative approach looking at the revenue recognition. This geographic mix of the SMT business will have an effect on the group gross margin.
Yeah. Thank you. I will bear on queue. Yeah. Thank you.
Thank you. Ladies and gentlemen, should you have any questions, please press star one on your telephone touch pad. Thank you. Okay, we have another phone question come from Arthur Lai. Thank you.
Quick. WK, can I also ask more question on advanced packaging? I think this is quite important. Can you compare the lead time between the traditional back-end business with the advanced packaging? Is the lead time significantly higher? That's my first question. The second is, I understand we cannot mention the client name, but I think last time we visited the SEMICON China, and we saw AMICRA's machine, and we think that's quite leading in the, like you said, the final geometry to get placed. Can you share with us the competitiveness you have in this area, and how you will be breakeven in 2020? Yeah, that's my two question. Thank you.
Thank you. Well, on the lead time for this advanced packaging equipment, it really depends. It is not too long for the PCB bonders. When it comes to those deposition equipment from the ASM NEXX business we acquired during the fourth quarter last year, it would take a longer time, and also it will take a longer time for the delivery and installation. That's why it would take us also a little bit longer time to have the revenue recognition. For the AMICRA, we have a very strong leading position in those products AMICRA is offering to our customer. However, they mainly serve the silicon photonics market. For the high-precision placement market relating to the advanced packaging, we more serve with the products from our Hong Kong operations. We do some very high-precision pick-and-place machine and also the thermo-compression bonder.
On the silicon photonics, actually, the booking for the last quarter was pretty strong, and actually we are expecting this strong momentum to be continued into the second half of this year. We see probably customers are really gearing up for the 5G. The investment in data center are really increasing to prepare for a much, I would say, larger amount of data to be transferred, to be handled, to be stored in those data centers. We are seeing the good momentum there, and we have a good market position in those areas.
Thank you. Our next question comes from Lynn Luo from Goldman Sachs. Thank you.
Hello? Hello.
Hello. Good morning. Hi.
Yeah. I have two quick questions. The first one is on the 5G infrastructure that you mentioned are driving strong bookings for SMT segment in second quarter. Could you share with us how do you expect the trend to play out in next few quarters? Will it still continue to be strong also? Second question is regarding the 5G smartphone. When do you expect that 5G smartphone-related SMT demand will start to be more significant?
On the first question on the 5G infrastructure. We see the momentum continue. We are expecting summer orders in Q3. How many quarters it will last, I think we probably won't be able to answer this question directly. It really depends on customers, their own plan and also the pace of rolling out the 5G infrastructure also beyond China. We are closely watching that. We believe 5G is a trend and finally, I would say, a very large part of the world will be covered by 5G. We are very optimistic about this opportunity going forward. For the 5G smartphone, we can't be 100% sure at this point in time. Judging from the 5G infrastructure build-up, we believe it's coming. We do have orders for our SMT equipment in the second quarter relating to smartphones, but we are not able to be sure 100% it's 5G smartphone related. Thank you.
Thank you. Next question come from Kyna Wong from Credit Suisse. Thank you.
Hi, WK. I have a question on the cash flow. Maybe this question to Robin, actually. I see two negative quarters in terms of the net profit, et cetera. What kind of cash flow position by end of the first half? Do you see any need for other facilities and also, or other means of the capital raising, et cetera?
Yeah. Cash flow ironically in the downturn, typically our free cash flow turn out to be better, has also happened in the first half of this year. Principally because we buy less materials, that helps in terms of generating more free cash flow. At this point, we are sufficient. As you are aware, in March this year, we paid in our convertible bond. We've assimilated loans and with a consortium of banks to finance the CV. We are sufficient at this point in time, so we don't see the need to raise further capital in the near future.
Thank you.
Thank you.
Oh, sorry.
Our next question comes from Chris Yim from BOCOM. Thank you. Chris, please go ahead.
Oh, hi. Sorry. Good morning. Thanks for taking my question. [guess], I have a few follow-up. The first one is regarding 5G again. For 5G infrastructure driving SMT business, is it because 5G require higher SMT precision so that you're seeing a 5G-driven upgrade, or is it just because of capacity expansion? That's the first question. Second question is related to, again, your advanced packaging business. You highlighted that your advanced packaging are now account for more than 20% of your Back-end Equipment. Your Back-end Equipment in the first half is down by around 30%. Can you talk about how the overall growth is looking? Also, you mentioned there are some new projects that you're waiting for your customer to ramp.
Without talking specifically about your customers, can you give us more color on what type of projects, what type of solutions perhaps, and what type of tools you ship into these customers when they do ramp up? Thank you.
Well, on the first question on the 5G infrastructure. We believe actually, to our customer, probably is for upgrade as well as a capacity expansion. Typically, in the SMT business, a customer will buy the latest generation of SMT equipment for their new projects and then took that opportunity to retire some old equipment. This is happening in our opinion. Certainly, the 5G infrastructure also need a better accuracy equipment. Also we expect the 5G smartphone will need a better accuracy equipment. From that perspective, we are pretty, I would say, optimistic about the near to long-term future of the SMT business. Whereas regarding the tools for the advanced packaging, at this point in time, mainly focusing on a few area. The TCB. TCB is one of it. We have delivered
A significant quantity of TCB bond during the first half of this year. The other area is relating to this fan-out. Both this wafer-level fan-out and this panel-level fan-out applications. These fan-out applications, typically, we supply customers with the deposition equipment from our ASM NEXX business in U.S.A., as well as the pick and place, very high accuracy pick and place equipment, mainly from our Hong Kong operations. These are the two areas. For the deposition tools, they are a significant backlog on hand. As we mentioned earlier, a large portion of this backlog will be realized as revenue in the second half of this year, and a smaller portion of it will take place in the first quarter of next year.
Besides these two equipment, the deposition tools and also the pick and place, the other tool for this advanced packaging will be the laser singulation separation tools from our operation in the Netherlands. Also, last year, this wafer level pick, place and pack equipment, this SUNBIRD is also another important business for us relating to the RF filter applications. Thank you.
Thank you.
Thank you. Our next question come from Flora Lai from Hang Seng Bank. Thank you.
Hi. Good morning, Mr. Lee. Thanks for taking my questions. I was thinking about the strategy of the group. I was known that your group is taking an organic growth, at the same time, doing a lot of merger and acquisitions, just like the one of last year. May I know if your group is looking for any merger and acquisitions deals in the coming months or next year? If you are really taking some merger and acquisition deals on hand, would it be related to Back-end Equipment or the SMT Solutions? Thank you.
Yes. Thank you for your questions. Actually, we continuously, I would say, looking for new opportunities, but as of this point of time, there's nothing, I would say, concrete that we can share with you. Actually, if you refer to our presentations, we also mentioned about our investment in this inspection business. Actually, besides acquisition, M&A, last year we also make an investment in a startup in Silicon Valley. They are developing and also producing a very high speed X-ray inspection machine for advanced packaging. In the past, typically, a customer use X-ray as an offline tool to sampling check the quality of their production. The speed of those X-ray are not fast enough. This startup in Silicon Valley, they have a technology they believe will be at least 100 times faster than the traditional X-ray machine and make online inspection possible.
We are very interested in the technology, and we invested in this company. This company also started to deliver their first machine to the end customer. I would say going forward, our strategy is not only limited to M&A, we also want to make this kind of strategic investment in technology companies that we think will be relevant to our business in the future. We are pretty open at this point of time, but as I mentioned, at this point of time, nothing concrete that we should be sharing with the public. Thank you.
Thank you. Our next question come from Simon Woo from Bank of America. Thank you.
Hey. Good morning, everyone. Yeah, management. First question is, regarding your top-line growth year-on-year basis, which quarter should be the first time we can see again the year-on-year growth? Because so far, every quarter revenue showing year-on-year decline. Maybe we should assume that maybe fourth quarter should be the first time to see the year-on-year increase. If so, which application can be the catalyst, more SMT related or more the Back-end area related? Thank you.
Yeah. Thank you for your question. Unfortunately, for the last few quarters, there's always a year-on-year drop. It was partly also because of 2017 and also the first half of 2018 has been a very strong quarters for us in terms of billing. If you're looking at the guidance in the billing for Q3, I would say probably Q3 2019 billing will be not that far away from the level of a year ago. Judging from today's momentum, we hope to achieve a year-on-year growth in billing by Q4, as you said. However, in our opinion, it's still subject to a lot of factors, external factors that are probably beyond our control. I think today, the biggest uncertainty is still the trade war.
If there's any new development that affects our customers' confidence, I think that will still derail the path of recovery of the semiconductor industry we are seeing today. That is the biggest concern. Assuming that is not going to happen, that's not going to suddenly have a big negative impact on the semiconductor industry, I would say it would be a fair assumption to assume that by Q4 this year, we should be able to deliver a year-on-year growth in our group revenue.
You mean this coming December quarter?
Yes.
I see. Lastly, sir, regarding your shareholder return policy, because the first six months of 2019, EPS number already below HKD 1 versus a year ago, HKD 3.60 range. Any idea what to expect regarding the interim cash dividend for the first half of 2019 and then maybe the second half? Thank you.
Yeah. The board has resolved to give an interim dividend of HKD 1.30. Despite our earning per share, EPS, is so low, but we are confident about our business, our profitability capability. That's why we stick to our dividend policy of a sustainable and gradually increasing dividend policy. We are matching the same dividend payout last year, HKD 1.30 for the first half. The second half of last year, it was HKD 1.40. If we are able to hold on to this dividend policy, you should be able to assume or expect final dividend will be at a similar level for the second half of this year.
Yeah. Thank you so much, sir. Appreciate it.
Thank you, sir. Our next question comes from Allen Deng from Kiara. Thank you.
Hi, management. I think that my question has been asked already. Thank you.
Thank you, Allen. We have another following question come from Arthur Lai from Citigroup. Thank you.
Hi, WK. My question is on advanced packaging. I recall two quarters ago, you mentioned that the advanced packaging already made up 10% of the Back-end Equipment revenue. You also mentioned this time you see a backlog in the end of this year or probably to the first quarter of next year. Can you share with us right now the advanced packaging in the second half already can achieve the 10% or even higher of the total Back-end Equipment revenue? Thank you.
Yeah. Okay. Well, I think we are pretty confident. On a full year level, it was definitely higher than 10%. For the first half of this year, it was close to 20%. It was below 20%, but close to. Based on today's momentum, unless there's a sudden very strong ramp-up for the demand for dynamic random access memory, otherwise, based on the current momentum, I think the overall picture will be the same. Probably above the 10% level, but maybe not too far away from the 20% level of the Back-end Equipment business for the whole year. Thank you.
Okay, thank you.
Thank you. Next question come from Kyna Wong from Credit Suisse. Thank you.
Hi, WK. Just a follow-up question on the overall OpEx trend, because we see the OpEx of the sales increase in the second quarter, but from the other reasons. In the second half, should we look at the level of OpEx? As you also increase the R&D to 12.9% of the increment sales, should we maintain this level or going forward, you still expect around 10% of the increment sales?
Well, actually, on I would say a longer-term perspective, you should continue to expect 10%. It going up to 12 point something percent during the second quarter or the first half is mainly because of the sales revenue has come back. Okay. The group actually has done a lot of things to control our OpEx. As I mentioned earlier, if we are comparing on an apple-to-apple basis, actually, it was around 14% year-on-year reduction. We are doing our best to control it, and we expect to do even more. However, the OpEx will go up slightly in the second half due to also, in general, there will be a salary review across the board in the middle of the year. This will slightly increase our OpEx. However, we try to offset this effect as much as possible by having more prudent cost control efforts across the board.
The quarter-on-quarter increase of OpEx is mainly relating to the expenses relating to the share incentive, because we typically will grant the shares to our employees by the board at the end of March. The expenses related to this will be started to book in by then. That's why compare I think the two quarters, you will see a small increase, a single-digit percentage increase in this OpEx. Thank you.
Thank you. Our next question come from Winnie Tao from Kiara. Thank you.
Hi. Good morning, management. Thank you for taking my question. I got two questions. The first one is, if you take out the rush order from the big client, for the rest of our clients, compared with two to three months ago, do we see the momentum of the booking improving? That's my first question.
Well, maybe I should clarify. In the Q2, we don't really have a single order coming from one big client. Actually, this current basis pretty diversified. You can see, on a billing basis, actually, the top five customer only account for 15% of our group billing. We do not have one big customer giving us a big order, unlike those time in 2014, 2017.
Okay. The second question is, given that we mentioned some of the 5G related project in SMT that helps in the second quarter, so if we take out the 5G related SMT, do you feel for the rest of the year, you could actually see the first quarter to be better than third quarter in terms of the booking, and just as what we mentioned three months ago?
Well, regarding the booking trend in Hong Kong, I would say it's really a bit too early for me to predict at this point in time. There are two factors affecting it. One is typically when it comes to year-end, the market will be shorter. On the other hand, the trade war continue to be a factor. I don't think the trade war has been resolved. Hopefully, after the U.S. administration's meeting with all the major tech CEOs in U.S., there will be a change in this policy regarding the ban on Huawei. If that is the case, I think it will help to boost up the demand for semiconductors and semiconductor equipment in general. Otherwise, I would say, if it turn the other way around, it will continue to affect the confidence or investment of our customers.
If looking at Q2, what we can see is that the customers in China comparatively more optimistic than customer outside China. I think probably we can understand the rationale behind. For our customer in China, they believe more semiconductors will be produced or will be insourced within China. Whereas, for our customers outside China, they really want to watch what is the development of the Trade War, how this will affect their business. China is still a large market for all the semiconductor companies in the world. I think this uncertainty will continue to cast a doubt on the future of the business, and it make us difficult to make any, I would say, sensible forecast of our Q4 booking at this point in time.
Okay. Got it. Thank you.
Thank you, Winnie. Once again, ladies and gentlemen, should you have any question, please press star one on your telephone. Ladies and gentlemen, that is star one to register for a question. Thank you. Our next question come from Jeff Hui from Morgan Stanley, Taiwan. Thank you.
Hi. Good morning, management. This is Charlie Chan. I just want to follow up with the 5G infrastructure SMT question. Can you elaborate a little bit what kind of infrastructure demand you are seeing? Is there more like a base station, or those core networking, optical networking products? Can you elaborate what are those kind of product need more SMT machine? My question is really about Infrastructure development has been in discussion for maybe two years. You also see that China Mobile, China Unicom, China Telecom all gave their CapEx already maybe half year ago. Why there is a sudden acceleration of the demands of SMT? Can you give us some thought on that development? Thanks.
For the 5G infrastructure, well, to be honest, we are not that familiar with the details of those applications. We can tell you that base station definitely is one of it. Certain server applications are the other area. For the 5G, actually, for the last two years, we do have some orders, 5G related, but it was a small quantity. Our observation is that customers are building some, I would say, testing the role of the 5G in certain areas. If we read from the news, we know, in China, they have built up a certain number of 5G coverage in selected cities, selected area. This year, we start to see customers are ordering more equipment from the number of SMT lines they order. We can see, we can believe there will be a massive rollout on a much wider coverage.
This is what we see, and as I mentioned earlier, we see the discussions not only for those orders we have already received in Q2, but we are still discussing some orders to be closed in Q3 this year. I think, probably, because China has tested the 5G to a certain extent and start to feel they are comfortable with the technology, our customer comfortable with that technology, and start to prepare for this massive rollout. Well, we hope that is the case, and also depends on the 5G smartphone. If the 5G smartphone also generate a new consumer experience, that probably will be a positive reinforcement of the further use of the 5G infrastructure demand.
Yeah. Thanks. Thanks for your explanation. My question is more about because I perceived that from 4G to 5G is kind of a migration, right? It sounds like dual-cam upgrade to triple-cam, you need more of those active alignments or SMT machine. From 4G migration to 5G, you can still use the original 4G base station SMT lines to produce the 5G base station. Why there is an increase of SMT demand? Do you see any kind of incremental SMT demand comparing doing a 4G base station assembly versus 5G? Do you see that difference?
Well, according to our customer, they explained to us is that because of the differences in the wavelength between 5G and 4G, the coverage of a base station, a 5G base station, is roughly only one-third of the coverage of the 4G base station. In order to cover the same area, the customer told us they use a rough thumb number 10 times. Because the square feet line, so they use a rough thumb number, telling us that roughly, in order to have the same coverage, you need 10 times the base station, compared to 4G. The demand for these semiconductors, the demand for this SMT actually will increase.
Okay. Thanks. Yeah, interesting, because typically we should see a broad revision of operators' CapEx before we see more demand for hardware. I guess we will see. My next question is about your CIS. Demand is also improving, right? I think we all know that Huawei overseas smartphone demand is impacted by restriction in using Google mobile service, and this should impact Huawei's high-end smartphone demand, and that is a major source of the triple-cam demand. Right? How do we reconcile this discrepancy? I mean, the triple-cam demand should be impacted, but you still see a very strong CIS business recovery.
Well, it seems to be Huawei is not the only company introducing the triple-cam. I think there are also other Chinese brand phone makers. They have the similar and also there's rumors about other first-tier smartphone companies also introducing a smartphone with multiple cameras in the later part of this year. Actually, in our opinion, high resolution, more cameras, are definitely the trend, and high magnification. Today, the high magnification, we are talking about optical magnification. Actually, it really generate a lot of excitement from a user perspective. We believe this will be the trend, and that will be what the consumer will demand. The political situation could affect the business of individual phone maker. However, in our opinion, the loss of business from one phone maker will be taken up by other phone makers.
Since our equipment are not tied to a particular phone maker, so I think the impact on our equipment will be very limited.
Okay. Thanks. Just one more if I may. Substrate PCB, sorry, a substrate like PCB. I remember a couple quarters ago you mentioned that when 5G smartphone comes, that a substrate like PCB demand should increase, and they would also boost the demand of your SMT. Do you think that is happening and in which quarter do you see the business will start to materialize?
Well, we still believe that will be the case because the rationale for the industry belief so is that you need a bigger battery, a high capacity battery to support the 5G smartphone. We don't see any technology development in the battery is significantly enough to change this picture yet. That's still the assumption by the whole industry, not only ASMPT, but also our customers. Even on the semiconductor packaging side, we see customer keep telling us they have a need to continue to shrink down the size of the chips in order to give more space to the battery. We believe this will be the trend. Substrate and PCB, smaller form factor ICs, smaller form factor passive components, discrete components will all be the case. Then they will need a higher precision, higher accuracy SMT equipment.
As I mentioned earlier, we also receive some order for smartphone. Although we are not sure it is 100% 5G related, but judging from this customer ordering these batch of orders from ASMPT for their smartphone applications, we believe customers are really looking for certain performance, like the higher accuracy from the higher price equipment we are offering to the market.
Yeah. Okay, got you. Thank you very much.
Thank you, ladies and gentlemen. Should you have any question, please press star one. Thank you. There seems to be no further questions at this point in time.
Okay. Well, I think we had a good discussion this morning. There being no further questions, I think we'll conclude the conference call now. Thank you very much for participating in this conference call, and we'll talk to you again next time. Thank you very much. Bye bye.
Thank you. Bye bye.
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