Earnings Call: Q1 2017

May 12, 2017

Ladies and gentlemen, thank you for standing by, and welcome to AAC Technologies 2017 First Quarter Results Investors Webcast and Conference Call. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. I must advise you that this conference is being recorded today and lasts for about 1 hour. I would now like to present opening remarks. We have to have Mr. Benjamin Pan, Chief Executive Officer Mr. Richard Mok, Managing Director and Ms. Konnett Shin, Head of Investor Relations with us today. And now I would like to turn the conference over to your moderator today. Ms. Connie Chin, please proceed with your introduction. Good day, everyone. Thank you for joining AAC Technologies 2017 Q1 results investor webcast and conference call. I'm Connie Chin, Head of Investor Relations. And joining me on the call today are Mr. Benjamin Pan, our CEO and Mr. Richard Mok, our Managing Director. Before we begin, we would like to remind you that the copies of our results announcement, results presentation and press release are all available from our website, www.aectelongshi.com. We would also like to draw your attention to the following disclaimer. Some information that you may hear during our discussion today may contain forward looking statements. This information includes revenue, gross margin, operating expenses, other income and expenses, taxes, future products and capital allocation plans. Actual results or trends could materially differ from what you hear today. As always, we intend to update you with any new information of future events and developments at the appropriate time. We will now briefly review Q1 results before opening up the call to questions. We have gathered growth momentum from last year, achieving a strong start to 2017, which actually represents the most profitable Q1 performance in our history. Overall sales jumped by 66% year on year. Thanks to our wide customer base for the RF mechanical business and the company's leading position in haptic solutions, sales from the non acoustic segments increased by 2 25%, accounting for 52% of total sales. Our operated acoustic solutions, which have higher dollar content, received encouraging market response, enabling us to successfully increase adoption of speaker box among Chinese customers and has driven higher dollar content. Acoustic sales grew by 14%, accounting for 45% of total sales. Gross profit margin improved by 1.1 percentage point to 41.6%, which was supported by our enhanced product mix. Despite the traditional low season, there were several new Engram phones launched with high spec acoustic solutions as well as more iron mechanical projects, which helped to alleviate the impact of the market move. Although sales dropped by 27% quarter on quarter, we still managed to maintain the overall gross profit margin at 41.6%, which is similar to the outstanding performance achieved in Q4 of last year. It is worth noting that non acoustic sales continued to exceed acoustic sales for the 2nd consecutive quarter and delivered more than half of total sales. This shows that AAC has successfully evolved from an acoustic component supplier to an integrated miniature technology solution provider. Lastly, sustainability is an important part of our business, not only to address today's pressing issues, namely climate change, talent acquisitions and property transparency, but to create value for our operations. Our detailed ESG performance was published at noon today in our 2016 Submarine Report, which can be found on the website of Stock Exchange and the company. And this is our 4th sustainability report. We welcome you, our shareholders in Chester, to provide your feedback in regards of the report. That brings an end to our introduction. We would just like to remind you that we have set aside around 1 hour for this call. Now we will start the Q and A session. Thank you, Connie. The question and answer session will be conducted electronically. As a reminder, each participant should limit the number of questions to 2 in each round. You will have to queue again if you would like to ask more questions. Your first question comes from Cherry Ma of CLSA. Congratulations on the great results. In the announcement, you mentioned that gross margin improvement was due to better product mix. Is it possible to give us more color on what was better? And besides product mix improvement, were there margin improvement on each of the product lines, especially RF mechanical? And is that will there be a trend that the margin will continue to improve in the second quarter? Yes. Thank you for your question. I think overall, in the Q1, we've seen improvements in what we call, 1st of all, in the non Acoustic mainly. I think we deliver slight less improvements in the Acoustic. More of the improvements come from the non Acoustic sector, whereby, again, I think due to two factors as well, better efficiency and also higher kind of wider base of customers, a new business enable us to again go higher on the efficiency curve delivering better margins. But then again, I think what is important is that I think like any other years, our Q2 or and quarters following the Q2, we are aiming as business continue to grow as our efficiency on the existing processes like RF mechanical. As we have mentioned last time, we are looking at ways to improve automation process we can built in the RF mechanical process. And also, I think in the 3rd Q4, there are continued exciting opportunities for new acoustics specs components or solutions. Hence, I think the pattern of quarterly improvement on the gross margins would happen like previous years. My second question is on the non acoustics segment. Can you share with us what happened with the non acoustics with especially our mechanical in the Q1, number of projects that you commenced producing and even if are we starting to produce products for Huawei and Samsung, which we started qualification by end of last year? I think the Q1, in a way, as we are focusing on what we call Android customer from China in the Q1, It's a slightly more quieter kind of season for new Android Chinese customers to launch new devices. But nevertheless, I think new projects are on track. We have, again, small projects. ASP is very respectable. And our existing platform for 1 other Chinese customer, ASP is in the range as we have indicated. We believe the shipments for the Q1 is on track as expected. But again, I think more interesting things are happening in the second quarter, whereby we will see something like 4 to 5 new customers coming in, in the Q2 on the RF mechanical. Your next question comes from the line of Arthur Cee of UBS. Please ask your question. Hi, this is Arthur Cie from UBS. Thanks very much for taking my question. The first question actually is with regard to the market concern. And I think the company has already issued an announcement to clarify. But I think it would be good if you could take a chance to provide more details to address the concerns that's being alleged by some investment company. I think that will be very helpful. Thank you, Arthur, for giving us the opportunity to talk a little bit more. I think what's as most of you, our investors and analysts have understood from our business strategy in the past and also very importantly, our very focused business model. It's built on technology platforms. And what we are capable of delivering advanced what we call new customers or user experience for our customers. And I think in the past, we discussed briefly how to look at our gross margins because we believe on the industry side, we are doing better than the kind of norm for the industry for two reasons because, first of all, we have a premium in recognizing the design specs that we could specifically work with customers or deliver over customers' new design module. And the second factor is our proprietary automation production efficiency that help us to deliver an extra 10% to 15% in gross margins premium. And I think that kind of triangular is the kind of structure how we have kind of delivered this level of gross margins on a sustainable period of time. And when we look at when we penetrate and we start on the non acoustic business, which we said the non acoustic business for 2017 will most likely outweigh the contribution from acoustic, the same approach, the same kind of target to deliver 40% above gross margins comes from the same components reason. And other than that, I believe there is no other kind of strange or accounting practices, etcetera. As we have said in the past, we look we view gross margins target as a very important indicator of whether we have selected or based our technology business at the right penetration. So for us, 40% or above gross margins is an important part of our DNA business focus. And in fact, when we looked at some of the other leaders in the other technology supply segments, some of the other suppliers have also delivered not more than the level that AAC is delivering at this moment. Hence, in a way, there is scope for AAC to even deliver better gross margins and which we are striving to deliver on not only on the acoustic but the new non acoustic business as well. The second point I'd like to talk about is, I think, in recognizing the growth of our portfolio of customers since IPO, we have kind of matched the growth of not only international customers international and also domestic customers in the smartphone sector. I think in the industry, it is recognized that the stringent requirement comes not only from international customers in terms of looking at how suppliers discharge their corporate social responsibility features. Even domestic customers are now adopting even higher standards, higher requirements. And I think our business strategy is not only coming up with matching advanced design in the user experience and improvement in efficiency. The kind of, for example, in the HR aspects, the health and safety, the kind of training and development, the benefits, the remuneration structure, etcetera, are all very important features that not only our customer, but AAC to be a successful leader, taking part in a major kind of supply chain have to recognize and adopt early on, and we have been quite successful. And our track record speak for the fact that not only we maintain international customers, but also we grow on new international customers in the new addressable markets as well. I think that's a very strong testimony that we respect and we adopt very high standard in corporate social responsibility, especially in the HR aspect. I think our annual reports disclose not only the workers' kind of numbers, but also in the sustainability report that Connie mentioned in the opening statement that we filed. This is the 4th year we addressed our HR matters seriously, we tried to come out with interesting kind of indicators of how we perform, etcetera. But we do meet we are not the best kind of sustainability supplier, but there are things to improve. But nevertheless, we are we would never be short of expectations or standards set by our customers. And I'd like to talk, I think the last point is about compliance of listing rules and regulations. And I think, again, it's a very important part of our listing. We recognize that it's a serious duty being a public company. And thereby, I think right from the very top structure of having the right professional constituting our independent Board of Directors and improving, making suggestions on how to improve on internal processes related to corporate governance. I think, hopefully, readers of our annual reports would have seen how we improve on the disclosure and how we keep on managing improve better and better compliances and also reporting. And for that matter, I think on the matter of related party transactions, in our meetings with investors, in our requirement of the stock exchange listing, we believe our communications with our kind of connected party transaction. And obviously, our independent auditor have carried out review and discussed their annual report with our independent audit in a way with our audit committee. And in the past many, many years, I think in a way, sorry, let me rephrase that. It has never been shown in any of their reports any information that arose alerts for our audit committee to believe our internal compliance system are faulty and are not working. In other words, our independent review of the by the auditors have been have revealed that we have a good system in place, and we continue to make improvement on that system. We believe being a company that doing international businesses and in the forefront of technology and especially in a very tight, highly regulated soy exchange in Hong Kong, I think, listed issuers like ourselves, we are placed to not only comply, but also to be kind of set ourselves with higher standards. So I think in our announcement yesterday, we strongly hopefully, the message is clear that we strongly deny or we do not accept We think the content of that report is inaccurate and misleading, especially in terms of compliance of listing rules. Yes. Thank you, Richard. I think some of these listing rules are quite well publicized. So it just seems bizarre that they came out with such allegations. Sorry, Benjamin, you're going to say? Benjamin confirmed or pointed out that since IPO in 2,005, it is quite clear that AAC has set out a very clear, what we call, positioning in terms of what we want to achieve in delivering technology solutions. And in terms in the many years of since our listing, I think it's now 12 years, through adjusting the product mix, structure, composition, we are striving that we would maintain to deliver a sustainable gross margins. And through that adjustment, for example, we have seen in the previous in the current series of technology platforms in haptics, we are definitely leading the design. And through management of such evolvement, we are we keep on and continue to deliver such high level of gross margins. We believe this kind of pattern or this strategy is sustainable, and we are unlikely to change this road map of how we could get to the gross margins where we set out. And also, I think if we discussed this 5, 6 years ago, we operate our factories are in China, and we noticed and we observed that it is very likely what's very likely that labor cost in China will keep on rising. This is like 5 looking at 5, 6 years ago when we are assessing what's happening to the labor market in China. We have invested, I think, in developing not only the automation production, but what we call proprietary internal automation system and skill sets that enable us to apply automation not only on single, what we call, broad up segment, and that has helped us to deliver what we call our target gross margins. But that is not the sole way that we have kind of learned in the past. If we looked at the product mix changes 3, 4, 5 years ago when we considered new product platforms such as headsets or the NFC antenna, we did not manage to find a sufficiently high, what we call, a non technical industry standard that AAC can lead and set, which makes our kind of target strategy of delivering a sustainable gross margin very hard to achieve. And those product lines are no longer with AAC. So what we want to achieve is, again, as we have stated in the past, our penetration of proving value in the Android mobile devices, we could capture what we call an early positioning, I. E, we hopefully could pick out the high antenna technology design value projects that AEC would be able to exert to set the standards and improve on the standard. This strategy of not only kind of setting the standard, but creating the new user experience has, in the past, demonstrated the driver to deliver the gross margins. And we believe under this method of achieving a sustainable gross higher gross margins of 40% plus, this is the growth model that we would adopt when we look at new technology segments. And there will be no change to this road map that we set out to do. Thank you. Appreciate that. This is very good. My second question is with regard to the new design. I think for now the major important projects in the pipeline should have pretty much close to finalization. So I would like to know what would be the reasonable expectation for the ASP increase. I think it will be helpful if you can provide some range like for your speaker box or like haptic, say, for the second half compared with last year. Like, should we I mean, because some of our peers are talking about ASP could double for like speaker box product. Is there something that you also share the same view? That's my second question. We are unable to comment specific customers' project. But what we have mentioned in the past investor call that there is already existed a new structure stereo kind of acoustic speaker box of design that has for Android portfolio of customers. And our group of customers have shown very strong interest in that design because of the performance and the design. And we believe the ASP of this new structure box design will be at least 50% more than the previous kind of ASP. This is exactly the kind of business roadmap or strategy that when we answer your first question, we've been striving to have the capability to deliver such design and come up with the user experience defined or sought after by our customer. Only by delivering such user experience, customer could appreciate the value that AAC is creating for them. And we are very confident that the growth that we see in next year continue on this wave could be even more than what we are seeing this year in terms of this upgrade or extra incremental in the value for our customer. Your next question comes from the line of Ken Hui of Wai Tai. Please ask your question. You for taking my question. My first question is in terms of your full year guidance for revenue and gross margin, are there any changes versus your guidance from last conference call? That is my first question. Thank you. Thank you for your question. There's no change to what we have provided in the past in this moment. Thank you. And then my second question is regarding the lenses. Would you able to give us some update regarding the latest situation. I think in your PowerPoint, you mentioned something like closely monitoring the CapEx requirement. Does it mean that there is some changes in the progress that you may need to change your CapEx plan? That is my second question. Thank you. Since 2000 and 8, 2009, we have shown our interest to learn and to invest in optical related technology companies. I think the 2 companies were absolute good investment and vital to our capabilities. Kaleido and the Japanese ISQR whereby, for example, ISQR provided their strong experience and knowledge on designing plastic lenses, whereby their inputs on how we should come out with our lens, proprietary assembly know how and our own kind of assembly system in coming up with a unique approach. It has been a very strong foundation and an important contributor. What we have planned for this year is a capacity of 10,000,000 pieces, whereby during this process, we will focus strongly on how we could control or maintain or even improve our production yields and efficiency. This month, we are already producing 2,000,000 to 2,500,000 pieces of lenses, And we believe we are on track of the timetable that we would see the 10,000,000 target. But more importantly, we believe by the by later half of this year, we will look at opportunities where we turn this capacity number into a shipment number, which is a very important kind of testimony AAC has reached such capability. Okay. A follow-up relating to the optical. I think you're also building a new pillar of growth for AAC, which is what you call sensing. Can you talk about what you plan to do for this particular segment? Thank you. We have made an investment in Kaleido, which the side focus is on wafer level glass lenses. That has been a very important contributor of our capability to come up with wafer level lens, glass lenses. Are we able to see any meaningful progress in the near term for that? I think this year, I think we spent time to continue our conversation and exchange of design ideas with Android phone players, but it will be not easy. In fact, it will be difficult to see the delivery of such component or such solution happening this year. But the dialogues with major customers in our space are very positive. And we believe this year provides strong kind of foundation for these wafer level lens to be part of the important lens structure going forward. Your next question comes from the line of Sam Lee of Credit Suisse. Thank you. My first question is quite straightforward. I want to know what's our guidance for the next quarter revenue and the gross margin? Thank you. Again, thank you for your question. Our quarter 2 revenue growth, we believe, will be high single digit. And like VVAC's year quarters, I think I've mentioned that in the answers of earlier questions, we believe there's a strong opportunity that we should be able to improve or to enhance the gross margins compared to quarter 1. But it's not going to be a big, big, big jump. But like our previous years, we strive to deliver quarter on quarter improvement on our gross margins. That's very helpful. My second question might be a little more complicated. For the short selling report, thanks, Benjamin, to elaborate or expand a lot on our technology strategy and how we pursue and protect our margin. But I think another important allegation from the report would be the so called related transaction. Could Benjamin probably provide a more, I don't know, color or explanation on that part? First of all, all related party transactions are transacted in accordance with requirements of Hong Kong's existing rules and have been subject to vigorous internal approval and review and approval processes and appropriate disclosure have been made all the time since day 1 of our IPO. I think previous discussions or our communications with investors have explained our strategy of what we call using outsourced casing company to help us to prepare what we call the kind of straightforward preparatory casing work that helps AAC in developing our strategy. And in the beginning stages, when we have different outsourced suppliers, they are scattered everywhere in China. And we have assessed and kind of selected what we call kind of partners in when we're considering outsourcing to these kind of CNC equipment providers. And what is important is that we also would be inputting our management's provision and maybe we will kind of demonstrate financial support so that they can be situated more convenient to our production base. But what is important to note is the pricing of such outsourcing service or projects. They are at the same price that we give to all supplier, maybe to the ones that we give financial support, a small discount. But in a way, they are competitive pricing. I think for those who are familiar with the mechanical structure business, it's not unusual even for some of the well known established payer to outsource 100% completely to independent kind of supplier. What AAC has done, I think, as we have entered 2 years ago, as a new starter, we want to quickly catch up from what we call experienced CNC user. And the best way to do this is to what we have explained to outsource what we call the lower end, preparatory straightforward and retaining the important antenna design, the core value work and so on and so forth. And I think what we have described, it's not kind of should not cost any attention as we are kind of practicing anything unusual. That's very, very helpful. Very, very helpful. Very quickly follow-up. The report mentioned about Apple doing whatever investigations and this sensing. So can I ask whether there is such kind of investigation or whether there will be such kind of investigation? We as we have said and as we acknowledge, all established customers have set very high standards and requirements. AEC is committed to deliver such tangibles in terms of meeting established customer requirement. We have what we call dedicated team internally to make sure such processes are firmly in place. And we are not only assessing a standard of meeting those requirements, But like other aspects of our business roadmap, we would like to excel these requirements because that is the only method that we could achieve what we call sustainable long term value. Otherwise, such assets are wasted if we or if any supplier, for example, AAC, is only after short term preparation kind of superficial work to please customers. Our next question comes from the line of Tony Chang of BOCI. Please ask your question. Mr. Chai, your line is open. Hello? Hello? Yes, we can hear you. And my question is again about the entire case because this is the only case the short term in the quarter can raise. So I want to know whether this is actually a subsidiary or out of our supplier, we define it for AC because they showed a picture with logo on their building, the evaluation, Keiji logo and on the gate, there is a Hongi Dari, the name of the company. So I want to know what this is actually a subsidiary or supplier. Is this picture fixed or we allow our suppliers to use our logo on their building or in their factory? And also my question is, do we aware their shareholder or the shareholder of the entire, is there any kind of relationship, family relationship or previous employee relationship with AAC or AAC Senior Management? Thank you. So CEO already spoke related about the strategy of expanding our CNC Mechanical Structural Business. When we started 2 years ago, we first wanted to catch up very quickly. We worked with, at that time, a provider of such equipment and give them kind of what we call basic outsource CNC casing work. But going as we get to know the process and the design better, we added in we put in management input. And as we have explained, kind of we assess and identify which are the core kind of outsourced partners. And to some extent, we may help them out with some financial support in terms of equipment, but they are what we call independent outsource supplier. But what is important to understand is that we view our CapEx, our resources allocation on different businesses, particularly on RF mechanical. We are prudent, but at the same time, we would want to learn more about how to be able to sustain businesses by capturing the most interesting projects. And hence, I think last time, we disclosed the number of machines that AAC owned. We set about a range of 5000 to 6000 CNC machines. But thereby, we use kind of leverage on the capacity of these outsourced suppliers so that in a way, we could elect projects interest of strategic value in terms of building up our technology footprint on Android devices. And I think it has worked well. As I have mentioned in the beginning, that's the Q2 kind of prospects. But I think we can confirm that, yes, we did see a AAC logo on the building exterior wall, we believe is an effort of our marketing department to make sure this kind of premises is recognizable from the customer's perspective as AAC has a very strong management input on the quality and kind of ongoing of the production lines and outputs. But nevertheless, we also understand the business that this outsourced supplier basically 100% comes from AAC. So to capture its essence, basically, 1st of all, yes, we believe this logo is a it makes a lot of sense in terms of getting the business recognition, getting kind of customers recognition that AAC will put management input. But secondly, I think you also pointed out the photograph that our outsourced supplier actually rent the building from such a kind of like a business part arrangement. So they have this flexibility. But nevertheless, what is important, this is a completely unrelated party. We pointed out, as we have already said, in the beginning, when we started this business, we this is an equipment provider of such machines. So there's nothing kind of related to any member of AAC or related party. So the question was about the extent of management involvement or participation in our outsourced supplier. So the situation varies. For example, there are cases that the outsourced suppliers are is capable of delivering a kind of consistently high quality and meeting AAC kind of specs, then clearly, such management requires less so input from AAC. But nevertheless, when there are kind of involvement that there are sufficient scope of improvement to the production efficiency, the cost of the workers are already kind of part of the calculation in the fees that we arrange or agree with the outsourced supplier. Your next question comes from the line of Ann Lee of Nomura. Please ask your question. Hi, Ben, Rachel. My first question is very straightforward. Could you give us a quick update regarding the CapEx for this year? And what's the details on all the spending in the CapEx? Hello, Ann. Thank you for your questions. At this moment, there's no change in the CapEx. But what we have said, I think, is that we will closely monitor the progress and development of new business. For example, in the OpEx sector in the second half, I think we briefly already covered that earlier in the questions that Benjamin spoke. I think we will monitor the progress of optics projects and design requirements. But at this moment, no change to CapEx. Okay. My second question regarding the haptics because since our major customer started to use haptics, it has been almost 3, 4 years. And gradually, step by step, haptics indeed changing our behaviors on how we use smartphone. And so I want to hear about what's Benjamin's view regarding how Haptics will develop in the upcoming new products and also in 2018? I think I can answer that for the company. I think haptics continues to play a very important part in any potential new design because I think the trend is to come up with sneakier and sneakier design with different materials. And I think haptics kind of provides alternate very interesting user experience as we have seen. As you have indicated, haptics is now in the 3rd and almost 4th year. I think in each of the year, the performance and the design and user experience that it managed to create are substantially different from year to year. And I think the trend has especially in the prospects of different material in changing kind of competing more sneakier design and perhaps larger display screen, etcetera, haptics continue to play a very important part of a design solution for all mobile phones. Just a very quick follow-up is, do we see more meaningful pickups on Android cams from this year? I think Android phones have now kind of aware of the kind of value of incorporating haptic design in their smart mobile devices. I think this year, there will be more devices adopting a higher end solution. But I think the complete solution will involve design, will involve new kind of user experience. Nevertheless, I think Android phone, this year's development will be more interesting than last year. Thank you. Your next question comes from the line of Kiley Huang of Daiwa. Please ask your question. I have two questions. The first question is regarding acoustic. I think Benjie mentioned we see for China brands some acoustic product have ASP increase to around 50%. I was wondering if it's more related to new feature like waterproofing or some new platform treatment? We believe the water proof features in the new acoustic specs requirement will become will ever become an essential feature. With that, I think CERO is also very becoming. And I think you mentioned the 50% ASP increase. I think I'd like to clarify that. We described that 50% ASP attributed to a new structured design that we see some of the Android Go players will adopt enhancing kind of capable of delivering close to what we call mini hi fi kind of acoustic performance. But we're not referring the 50% ASP increase to the waterproof or the what you are interested in the stereo features. Okay. That's very helpful. The second question is about the MEMS microphone. We know previously it's quite margin jack in terms of overall product portfolio. I was wondering, could you share with us what's the current status about men's microphone? And any new opportunity or new project in the future you can share with us? We think the continued importance of analog mass microphone will be taken over by what we call higher signal to noise ratio in terms of more like more and more closer to definition of digital MEMS microphone. As you know, we have set up our MEMS design center in Singapore. We have capability of a design team coming up with the corresponding ASIC for such digital MEMS microphones. So just a quick follow-up. So for this digital MEMS microphone, will we see a product going out this year or maybe more like next year? And in terms of this digital microphone, we will produce IC in house or we will No, I think AEC strategy is not to build our own fab or foundry. So we will We see a timetable of Q4 this year or early next year for projects related to digital MEMS microphones. Your next question comes from the line of Jim Yu of Goldman Sachs. Please ask your question. Hi, Richard, Benjamin. Thank you for taking my question. My question is more about financials. So I recognize that in this quarter and also Q4 last year, the tax rate seems to be a bit higher than compared to the past. And I remember before like 2 quarter of last year, AAC used to have like tax rate around 10% or even below, but now since the tax rate has been increased a few percentage points. So could you elaborate about that? Why the increase? Is that because of higher earnings or some structural changes in subsidiaries or regulation? Thanks. Yes. Thank you for asking the question on effective X-ray. I think the increase is actually which is mainly mostly to the RF mechanical business, which is based in our Shuliang district. And in the Shuliang district area, the current new this new business is paying a relatively higher tax rate compared to the growth effective tax rate. We are working very hard to lower that, but there's a lot of work to be done because, after all, in Suyong, we are known to be a successful enterprise, but we have quite good kind of dialogues going on. We believe, for example, an effective tax rate for what we call high-tech enterprise is around 15%. And if we are successful in that, we should see that coming in impacting and lowering effective tax rate as early we don't possibly have to not have to wait till next year. But overall, I think there's a trend. I think we kind of briefly predicted and talked about this. I think not only China but all over the world, I think profitable enterprises are now heavy under heavy attention from tax authorities because those enterprises are kind of capable of accepting a higher tax bill as such. But I think it's also important to note our overall kind of tax management is not based on a short term kind of reaction. We do have kind of long, medium term plan to manage our effective tax rate. There will be constant efforts to improve on our tax planning and on also, more importantly, communications of investment plans with existing taxation jurisdiction or any new jurisdictions that we have planned that we will come into AAC production kind of basis. Okay. That's very helpful. So who expect that effective tax rate may recover back to around low teens or 10 percent around that range? I think going down to 10% will be very difficult. But I think we will I think it's also not completely incorrect to say that with AAC product mix changing and the different kind of performance in the different product areas, I think the effective tax rate may be subject to small variation from quarter to quarter. But overall, I think the trend, as I mentioned, will be a small kind of uplift from the previous lower level in the past, but that kind of trend is not going to grow very steeply. I think AEC is managing very well. We will continue to try our best in terms of working on lower effective tax rate, but it's not going to be an easy exercise. Thank you. We have reached the end of our question and answer session. I would like to turn the floor back over to Ms. Connie Chin for closing comments. Thank you. Consistent with our commitment to building innovative miniature solutions and multi platforms for enhancing the user experience, We will maintain strong R and D capabilities, which will, in turn, enable us to build even greater growth momentum for the company. We are also well prepared to capture the strong demand from the market and to make further inroads in all of our business lines, thereby placing us in an excellent position to be a global provider of integrated innovative technology solutions. To conclude, I wish to thank you all for attending today's webcast and conference call and for your interest in AAC Technologies. So you have any inquiries, please feel free to contact our IR team. We look forward to speaking with you again and addressing our 2017 interim results, which is Tantek's release schedule in August 2017. Thank you. Thank you for your participation. This concludes today's conference. You may go ahead and