Good afternoon. This is Ho- Ik Lee, Vice President of Finance and Accounting at Samsung Electro-Mechanics. Thank you for joining our 2017 first quarter earnings conference call. Today, SEMCO's CFO, Kwang Young Chung, and key executives of each business division and marketing have also joined us. Please note that the comments and data presented during this conference call contain forward-looking statements that could differ significantly based on changes in the macroeconomic environment and market conditions. First, we will look at Q1 results and financials before going into detail results and future strategies of each business division. First, Q1 revenue was KRW 1,570.5 billion, which is a 17% QoQ increase and a 2% YoY decrease. Operating profit was KRW 25.5 billion, returning to a profit.
Supply of major products such as camera modules and MLCC increased due to pilot production of our strategic customers' new flagship model. Also, sales of dual and high pixel camera modules increased to Chinese customers. In particular, improvement in product mix with increase in sales of high value-added components, as well as cost reduction efforts from enterprise-wide operational efficiency efforts are the main reasons for the turnaround in Q1. Pre-tax profit was KRW 11.5 billion, net profit KRW 2.2 billion in Q1. Next, our financials. As of end of March 2017, SEMCO's total assets were KRW 7,671.2 billion, and liability was KRW 3,410.4 billion. Our financial structure remains strong with a debt equity ratio of 80% and capital adequacy ratio of 56%. Now we will look at results and strategies of each business division. First, the DM division.
DM's Q1 revenue was KRW 773.0 billion, which is a 33% increase Q o Q and a 13% increase Y oY . In Q1, sales of high pixel camera modules increased due to stable pilot production of the strategic customer's new flagship model and increase in demand from spec upgrades of the mass handset models. In particular, sales of dual and high pixel slim modules to Chinese major customers have increased by more than twofold and recorded the highest quarterly revenue. Future strategies for the camera module business include, first, further expanding supply of camera modules for high-end models to Chinese major customers. To achieve this, we will expand supply of image fusion type dual camera modules for the new flagship models launched by Chinese customers from Q2, and also increase design-in activity for next models with camera modules that have new features such as high power optical zoom.
Even in the case of single modules, to respond to the trend of high feature cameras, we will continue to increase the supply of 16 meg OIS modules. In order to respond to the expansion of the global dual camera market, we will build a supply system overseas in time. We will strengthen our manufacturing capabilities in terms of yield and quality through exclusive dual camera production lines. We will use new automated production facilities to enhance productivity to maintain a high growth momentum of the camera module business overall. About the communication module business. In Q1, revenue increased Qo Q due to increase of sales of Wi-Fi modules for the new flagship model of the strategic customer.
In terms of future strategy, we will continue to focus on securing foundation technology of telecommunication module products that use new wireless communication standards, such as next generation Wi-Fi and 5G. To do this, we will develop essential technologies such as low loss material for ultra-high frequency and high heat dissipation and ultra-slim packaging to secure competitiveness in 5G mobile RF modules. Next, the LCR division. In Q1, revenue was KRW 490.4 billion, which was a 10% increase QoQ and a 7% decrease YoY. First, revenue from MLCC increased QoQ due to increase in high value MLCCs such as withstand voltage and soft term, thanks to increase in demand for high reliability passive components for the new models of the strategic customer.
Sales of high reliability products with wider temperature range and high voltage characteristics increased for base station applications, which is a high growth market. Sales to global tier 1 automotive customers increased significantly with better quality and customer response using our exclusive line in Busan. Future MLCC strategy include, first, focusing on increasing supply of high reliability products to respond to demands for better quality and stability by the said industry, and also expanding the lineup of ultra small, ultra-high capacity new models where new demand is being created for slimmer and higher density smartphones. We will enhance our global production ability, mainly around high value-added products, with the operation of a new plant in the Philippines and China, and enhance our responsiveness to the high-end MLCC market by improving line efficiency and productivity in major bottleneck processes. Next, EMC business.
In Q1, revenue for the EMC business increased Q o Q, with increase of power inductors for the strategic customer. In terms of future strategy, we will focus on diversifying the customer base of power inductors by enhancing product reliability and by differentiating our performance. While continuing to increase supply of high reliability products with resistance to open circuit failure, internal cracks to the strategic customer, we will strengthen design and activity for the ultra thin, high value-add products to develop new overseas customers. Also, we will further expand the size of the EMC business in 2017 by targeting the Chinese market based on cost innovation from productivity enhancements. Lastly, the ACI division. Q1 revenue was KRW 292.5 billion, which is a Q o Q 2% decrease and Y o Y 15% decrease.
In packaging substrates, even though the revenue for flip chip CSPs for AP and SiPs for communication modules increased, revenue for flip chip BGA decreased due to weak PC demand. The future strategy for packaging substrates is first to strengthen the SiP and memory substrate business based on differentiated manufacturing technique, such as improved plating thickness dispersion and increasing supply for the new 14 nano CPUs of the overseas customer. In Q1, RFPCB revenue increased from response to new models by the strategic customer. The future strategy for HDI is to strengthen our manufacturing competitiveness of Vietnam and Chinese plants and to expand supply for strategic customers' products. We will prepare for RFPCB mass production for OLEDs and successfully develop and prepare mass production of next generation HDI, expected to be adopted in the future to increase the share of high value-added products and improve profitability.
That ends our presentation. Thank you for your continued support for SEMCO, and now we will take your questions.
Now Q&A session will begin. Please press star one, that is star and one, if you have any questions. Questions will be taken according to the order you have pressed the number star one. For cancellation, please press star two, that is star and two on your phone.
The first questions will be presented by Mr. Jo Woo-hyeong from HSBC Securities. Please go ahead, sir.
Yes. I have two questions. One is about the MLCC. Can you give us an update on the ASP as well as utilization of your MLCC in the first quarter? Can you give us an outlook on your profitability for MLCC in the future? Second is related with the substrate business. Recently, a Taiwanese company has introduced its next generation substrate, the SLP. In that context, can you give us an update on your development as well as future outlook of your next generation substrates?
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Regarding the MLCC market, overall the MLCC market is showing strong demand in 2017. This is because many of the handset makers have been launching new models in their flagships. The demand for high-value MLCC is remaining strong from the automotive industry as well. Therefore, we're seeing that this year, the drop in ASP has almost been close to none. Almost ASPs are being maintained. Our utilization is also at full capacity. The demand and supply is quite tight, we're actually using all of the new plants that we put in last year, as well as the added capacity last year, at full capacity. We're utilizing that at full to meet the market demand. Overall, in terms of profitability, even though it's difficult to give you a number, we expect that this year's profitability compared to last will be greatly improved.
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Regarding your second question about our development as well as mass production plans regarding our next generation HDIs. As the handsets become more high density, the demand for smaller and thinner boards have also been increasing. We're expecting that main boards, HDIs that use these packaging technologies, will start to be used in mass from 2018. Of course, the exact timing is up for the customers to decide. Actually, SEMCO has been in development co-working with a customer to develop the next generation HDIs. We put in the development line already in third quarter of 2016 and have been working since with the customer. Actually, this is a technology that we've already acquired a lot of mass production experience in the BGA side. It's a proven technology, and it's actually an area where we believe we have a strength over the competitor.
We believe that with this next generation HDI, we will be able to further strengthen our differentiation in terms of quality and technology and enhance the share of next generation high value-add products.
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The next questions will be presented by Mr. Kwon Sung-ryul from Dongbu Securities. Please go ahead, sir.
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I have two questions. The first question is regarding the share of Chinese customers in your overall revenue in the first quarter, considering that Chinese customers are becoming more important. In particular, what is the share of Chinese customer revenue in your camera modules as well? Second question, actually, I'm frankly very concerned of your HDI business. One of the main reasons why your operating profit was below market expectation was because of the weak performance of the HDI. One way of turning around the HDI business would be to greatly increase the revenue by the flip chip PCBs or RFPCB for the OLED. In order to build that business, the RFPCB business, that would require not only investment, but also, you would need to develop future revenue opportunities, and I'm not sure how that will go.
In that context, when I listen to other competitors who are also planning to do the same RFPCBs for OLED, they're saying that SEMCO, in some companies, are being treated as a minor vendor. Could you give us some comments about your overall business related with the RFPCB for OLED?
First, regarding the Chinese customers, even though overall growth of Chinese smartphone companies have been leveling off versus last year, we have been focusing our marketing and sales towards the Chinese smartphone companies that continue to grow. Also, we have been focusing our design and activities to these Chinese customers' smartphone companies that are continuing to grow versus last year, especially using our strength in dual cameras as well as passive components. Actually, the share of Chinese customers within our revenue has continued to grow since second half of last year and first quarter this year. We expect this to continue to grow, and our target is to have Chinese revenue account for around 30% of our total revenue by second quarter of this year.
Regarding your question about our RFPCB for OLED, we do know the importance of this item in terms of the overall HDI business. Actually, to respond to the RFPCB for OLED, we built a new plant in Vietnam starting from September 2016. Currently, we're in the process of setting up the equipment, our plan is to start mass production from end of second quarter 2017. We will use our strong quality to not only become a major vendor, but a first vendor. Everything is moving ahead according to our plans. We not only plan to increase the RFPCB business year on year by a large degree, but also we're planning to use this as a stepping stone to turn around the entire HDI business in the second half of this year.
Next questions will be presented by Mr. S.K. Kim from Daiwa Capital Markets. Please go ahead, sir.
I have two questions. The first question goes to the CFO. Even though your revenue increased in the first quarter and also your profits turned around, it still was below market expectations. In that context, expecting the full effect of the S8 in the Q2, as well as increase of camera module supply to Chinese customers, can you give us your outlook for the Q2 performance of the business?
The second question is regarding the dual camera module, which will account for a very large and important part of the overall revenue increase of the company. In terms of Q1, can you give us a bit more flavor of the actual supply performance of your dual cameras and what you expect to happen in the future?
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Regarding your first question about our Q2 forecasts. As you mentioned, yes, we will have the full effect of the S8 in the second quarter, which would mean for us that all of our business divisions, the MLCC, camera modules, and HDI will be increasing its supply. Also, in the second quarter, many of the major Chinese customers are expected to launch their flagship models, and we will be supplying, for example, dual camera modules and high value-added MLCCs to these sets. Therefore, we're expecting a large increase, a significant increase on a QoQ basis as well. So we will follow up the turnaround that we had in the first quarter with a significant improvement in our performance in the second quarter.
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Since we started mass production of our dual camera modules in the third quarter of last year, the business has continued to grow. We were also able to supply to a new Chinese customer in the first quarter. This has helped revenue to continue to grow. We're expecting this trend to continue in the second quarter as well, mainly because many of the handset makers are competing to introduce dual cameras in their flagship models. This trend is accelerating. We will not only maintain this, but also continue to launch differentiated new camera modules ahead of the competition to remain ahead of the curve and continue to increase our dual camera supply.
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Next question will be presented by Mr. Park Kang-ho from Daishin Securities. Please go ahead, sir.
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The first question is about the automotive business. Many of the IT component businesses are focusing on automotive applications as their new growth area. SEMCO is not an exception. Especially with Samsung Electronics acquiring Harman, there's more interest in the opportunities in the auto component business. Have you had any visible results from the automotive applications yet? What do you expect would be the share of your automotive sales by 2020 in each of your major business units? Second question is related with PLP. According to our information, you have completed building the line in Cheonan and is expected to start production of small size ICs from the second half. Do you think that you will be able to, for example, deliver visible results from 2018 in terms of memory or IC from your PLP business?
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Regarding our automotive business, thanks to our efforts to develop new customers and to win orders and prepare mass production last year, we have started to see visible results from the first quarter of 2017. We have been winning contracts from OEM and Tier 1 European and North American customers. In terms of revenue, automotive component revenue in first quarter, we have increased our revenue by threefolds on a year-on-year basis, and we expect the revenue will be growing by more than twofolds on a full year basis as well. We are also continuing to do design in activities and customer development activities in OEMs and Tier 1s. We think that especially in terms of the camera business, there is strong demand related with various sensing and high-function cameras for ADAS, SVM, HAS, and other applications.
Also, the new European regulation related with front-end cameras is also a good opportunity for us. We will be using our cutting-edge products, also leverage our manufacturing strength and competitiveness to take on this market. Also, in addition to cameras, the MLCC is another opportunity for automotive supply. We're also actually achieving revenue opportunities in Tier 1s with our high-value-add MLCC as well. We're expecting that by 2020, our revenue and market share would reach two digits.
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Regarding the PLP, actually, as you mentioned, we completed the one pass line in Cheonan last year, and currently we're in the process of line stabilization work. The first product, it will be a small size IC, which we plan to pilot produce in the second half of this year. Actually, the engineering sample for this was passed by the customer last month, and currently we're in the process of achieving the approvals from the customer for mass production. Of course, the actual timing of this will depend on the customer's demand situation and other customer factors. Our basic schedule with the PLP is that we will record our first revenue with the next generation PLP this year and ramp up the business in full scale from 2018. Our first product will be the small size IC, which we're currently in the process of executing supplementary investments for.
We will move over to memory as well as AP. In memory and AP, we are currently in the process of doing the engineering sample work with the customer. Basically, we will be continuing to develop technologies to apply the PLP for basically all of the products that are under the fan-out packaging.
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Next question is presented by [Mr. Jae Yun-lee] from Yuanta Securities. Please go ahead, sir.
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I have a question about the camera module business, particularly the reason why you're so successful in the Chinese market, especially versus the local camera modules and the other leading camera module companies. One theory that I've heard is that the structure of your actuators is the main point of differentiating your camera modules versus the competitors. Can you confirm whether this is correct? If not, what do you attribute your success in China to?
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As you have pointed out, it is true that we have been winning more flagship model contracts than even the local companies in the Chinese camera module market. Our actuators is one of the reasons for our success. Our actuators have differentiation in terms of performance, power consumption, as well as movements. These strengths have been recognized by the customers. That's not the only reason. Our actuators, as well as the overall performance of our camera modules and the camera technology that SEMCO has, all of these have combined to explain the success that we've been having.
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The last question is presented by Ms. Song Eun-jung from Hi Investment & Securities. Please go ahead, ma'am.
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I have a question regarding the next generation HDI investment. We are expecting that you will need to make investments to respond to especially the volume that your strategic customer would want in terms of next generation HDI. How much would this account for in your overall CapEx, the investments that you're expecting this year and next year? Would this be only part of the investment or would this be all of the entire investment that you need for your next generation HDIs?
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Regarding the investments of our new or next generation HDIs, actually the investment plan will be confirmed only around mid-May. We cannot give you the details yet. Currently the direction that we're leaning towards or we're considering is to minimize investments by using our existing facilities as much as possible and trying to stay away from a fully new investment. I think we'll be able to come back to you with details about the amount as well as other policies after we decide in mid-May.
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Thank you very much for attending the conference call. We will end it here. Thank you.