Afternoon, and welcome to E Ink third quarter 2022 earnings conference call. At this time, all participants are in the listen-only mode. After the presentation, there will be a question and answer session. Today's conference is being recorded. The WebEx replay will be available on E Ink's website after today's conference. Joining me today are Chairman Johnson Lee, CFO Lloyd Chen, and Finance Center Senior Director Patrick Chang. Now, I would like to turn the call over to Lloyd.
Hi. Good day, everyone. Welcome to E Ink third quarter earnings conference. Before we start, I would like to spend a few minutes on the photo on the cover page that show on the screen. Basically, this photo is about Alaska Airlines. They partner with a Dutch company called BAGTAG, announced the ePaper BAGTAG program, which made Alaska Airlines become the first U.S. airlines to introduce the ePaper BAGTAG with our 3.7 inch batteryless display. It basically enables the entire check-in process almost all off-airport and reduces the time spent dropping off checked luggage by nearly 40%. All right. Let's move to the next page.
Let's take a quick look at safe harbor statement. Okay, next page. All right. Let's look at the third quarter individual quarter first. The sales revenue was around TWD 8.1 billion. Operating profit, TWD 3.22 billion. Net income, TWD 4.24 billion. EPS, TWD 3.72. For third quarter cumulative, from Q1 to Q3 revenue, 11-year best. Operating profit and the net income almost, I mean, hit the record high. Operating profit more than twice 2021 whole years. That's for the P&L part.
For operating profit, basically, it continues to grow due to strong demand from markets through different applications such as eReader, eNote, retail, logistic, and signage. As I mentioned earlier, the third quarter cumulative operating profit, more than as you can see from the screen, triple the 2021 third quarter cumulative. Operating profit and operating profit percentage against total sales revenue hit the record high. Next page. ROE and ROA, basically, they have been rising since 2018. Third quarter accumulative ROE was 21.2%, and ROA was around 13.5%. Both returns grew positively. Both ROE and ROA more than 2021 whole years.
Basically, once again, it shows the growing profitability and how we efficiently and effectively utilize shareholder equity and assets to generate the profit at E Ink. All right, next page. Okay. Strong balance sheet with an increasing net assets. If you look at the cash and cash equivalent from third quarter last year to third quarter this year, basically, the cash has been increased from TWD 12.2 billion to TWD 15.7 billion. By third quarter this year, the total assets was around TWD 64 billion. All right, next page. For cash flow, cash increased to TWD 10.3 billion by third quarter.
So, um, we basically, we utilized, um, cash inflow, um, from operations and investments, um, to further, um, you know, financial investments to, um, dividend payment and to CapEx on ePaper production line. Um, the total financial assets, um, plus cash was increased to around thirty-seven point five billion by third quarter this year. So that's, um, for the cash flow. Um, the next page is about, um, the third quarter accomplishment. Um, the first one is, um, Asia Responsible Enterprise Awards , um, AREA. It's, um, the second year we won, um, area in three categories in comparison with two category, um, we won in last year. Um, the third, um, categories are, um, corporate sustainability, reporting, and green leadership, and social empowerment. And also, um, it's the consecutive second year we've won, uh, best company to work for in Asia.
Also some local recognition in Taiwan. This is the first time we participated in Taiwan Sustainability Action Award. This award is consistent with the United Nations SDGs, Sustainable Development Goals. We were honored by winning awards in 3 categories. The first one is eReader for the Future, which is consistent with SDG 4, Quality Education. The second one is Diversified Renewable Energy Leads to Net Zero, which is consistent with SDG 7, Affordable and Clean Energy. Last one is Sustainable ePaper Enable Smart Green Retail consistent with SDG 12, Responsible Consumption and Production. The next one is, you know, one of the leading Taiwanese magazine called CommonWealth Magazine.
We were honored in Top 50 Companies, Excellence in Corporate Social Responsibility. In August, we also received awards, first ePaper module carbon footprint verification in compliance with the ISO 14067 standard, which define carbon footprint of products, you know, by selecting 6.8 inch and 2.9 inch module, the certification bodies. The last one is we understand the importance of the, you know, information security. We started implementing ISO 27001 to protect our data confidentiality, integrity, and availability. During the implementation, it was also recognized by TPSA, Taiwan Panel and Solution Association, with the award, it's called Cybersecurity Excellence Award. Right, next page.
Further recognition on our technologies with the continuous product innovation, we won the 2022 SDIA Smart Display Industrial Alliance Vision Display award, Silver Award. Basically, we are stepping up with the new color ePaper technology, Gallery 3. That is not only more colorful, but also flexible. The next example, next in recognition, was the battery-free color ePaper device. We won a Bronze Medal in the invention competition at 2022 Taiwan Innotech Expo. When the display image needs to be updated, the wireless power transmission module provides power for the SoC of the device to communicate with computers or mobile phone applications. The color images can be updated instantly.
After the updates, the display image can be maintained for a long time with no power consumption. Last but not least, BMW, the iX Flow, the conceptual car, is wrapped in E Ink ePaper film, which enables color changing. It was also selected as one of the best innovation of 2022 by Time Magazine this month. It's absolutely one of the best examples of E Ink on every smart surface. That's innovation, the technology that we been recognized in third quarter. Next page.
I believe during the post-COVID period, the hospital and the government around the world would have more time and resources, you know, considering how to implement smart medical and smart city. Few examples we would like to share. The first one is we have been showcased with NTU Hospital, the local hospital in Taiwan, GIS-KY, Qisda, TPV, Liqin. Basically those partners in our ecosystem in the smart medical. We also, you know, collaborate with Darwin Precisions Corporation, utilizing an in-campus ePaper signage product demonstration at National Chung Cheng University. That's a university at the southern part of Taiwan.
The smart campus sunlight readable digital signage uses 31.2 E Ink Triton color ePaper and 28-inch black and white ePaper module. The next example was the Shanghai Commercial Bank, even Shanghai, that's a bank in Taiwan. Basically, they switched from the conventional poster to ePaper digital signage for market promotion to enhance the ESG implementation. Last but not least, in cooperation with Taipei MRT, Taipei Metro, and Avalue Technology, the system integrators adopted the color ePaper signage in MRT station, metro station in Taiwan, with the timely information and less manpower to improve the operational efficiency. That's few examples to explain how to use the ePaper on smart lights. All right, next page.
The next one is something about the ESG committee at E Ink. Currently, we already have the corporate level ESG committee internally. A board level ESG sustainability committee was created in November. As you can see from the screen, there are seven subcommittees under both corporate ESG committee and board ESG committee. They are product sustainability, green production, enterprise care, corporate governance, supply chain, project and stakeholder. The very important one is risk management. Basically, the creation of the board level ESG committee can guide a management to allocate the appropriate resources and attention, so the board member and the E Ink management can jointly see ESG issues and connect to E Ink long-term success. Right. The next page.
All right. Based on the E Ink sustainability framework, as I just explained now, as for the social engagement, we have been conducting eRead for the Future project since 2017. We collaborate with ePaper ecosystem partners jointly to donate eReader devices and eBooks in order to build up eLibraries for schools. After years of solid works, we have humbly donated nearly 3,000 eReader devices, more than 261,000 copies of eBooks to nearly 135 elementary schools. 19 libraries benefited more than 40,000 students, with accumulated more than around TWD 200 million value equivalent. This year, 2022, eRead for the Future ceremony was held outside of Taiwan in Penghu.
We are glad to share this information with you. One of the important sustainability event, TCSA, Taiwan Corporate Sustainability Awards, was held yesterday for the consecutive sixth year of joining this event. We continue to be awarded with the most prestigious sustainability, Top 100 Corporate. Also, Corporate Sustainability Report Platinum, under the Platinum Growth through Innovation Leadership. That's the achievement we made in terms of the sustainability. Next page. In third quarter, we also joined another initiative, it's called EP100. EP100, EP is short for energy productivity.
Basically, it is an initiative that calls on global enterprises to actively respond in three ways, doubling energy productivity and implementing energy management system and net zero carbon buildings. Currently there are 125 companies around the world have joined, committed the EP100. This program basically encourages the company to use energy in a smarter and more efficient way to improve the productivity. It requires all committed members to submit annual energy saving reports every year to specifically reduce greenhouse gas emissions. It is expected that enterprises can reduce the rate of global warming through their environmental impact, which reducing long-term operating costs and climate risks.
We already are committed to achieve Net Zero in 2040. This EP100 program is definitely a good one for us to achieve Net Zero more efficiently and more systematically. All right, the last page. All right. Last but not least, 1,500 solar-powered ePaper bus stop in Pudong, Shanghai are set to become the first carbon-neutral bus stop in the world, thanks to ePaper technology low power consumption. This great example basically also certified by BSI. The whole system, the operation system for that 1,500 solar-powered ePaper bus stop only produces 42.9 tons CO2 equivalent emission by utilizing the benefit from ePaper low power consumption.
Whatever corporate or organization can spend limited budget on the carbon credit in order to achieve the carbon neutrality target. That's my sharing for what we achieve in terms of the financials and some events we have done in third quarter. We can move to the next session for Q&A.
We are now in the Q&A session. At this time, we will now open for the questions. To ask a question, please press your hand icon on the sidebar. When we take your question, please remember to unmute yourself. The first question is from Ajay Sharma. You may ask the question.
Yeah. Hi, good afternoon. Thanks for the update. I want to check on Q3. There was a pretty substantial jump in both gross margin and operating margin. Can you talk about that? Like it's almost swung from 47%-48% to almost 60% gross margin.
Hi, Ajay, this is Johnson. Yeah, I mean, it's a one-time thing. It's not really the trend that E Ink is gonna be doing 60%+, gross margin. That's not how we operate. We really wanna share profit with our partners, so we can grow this market together. The main reason for that 60% is really, you know, like in Q1 and Q2, we have yield losses in our FPL, the E Ink material itself. We found a way that we can save that, but because of IFRS rule, you need to book that expense right away.
When you are able to save it and then ship it out to your customer, then it gets, you know, booked as a revenue and then which indirectly affects the gross margin. It's really a one-time thing. Also, you know, we were shipping out some of our inventory that we weren't able to ship, and that kind of also increases that gross margin as well.
Okay. Okay. We should take the average of the nine months as the realistic margin, right? Basically, because it was a one-time adjustment in Q3 for what you saved in Q1, Q2, right? Basically, effectively you are still realizing that margin, right, on a nine-month basis.
Um, yeah, I guess so. I mean, from a nine-month basis. Yeah. Um, yeah, that's true, though. Um, but do-- we, we do have -- we also ship out some inventory that we're able to ship, and that also helps the gross margin. That's, that's a one-time thing.
Right. Okay. I see that October revenues are a bit light. Are you seeing some slowdown or how do you see this quarter panning out?
You mean October, right?
Yeah, yeah.
Oh, okay. Yeah. I mean, it's a month-to-month thing. Sometimes we just ship more ink materials, which is lower sales revenue but higher gross margin. If we sell more module, you get higher revenue and then less gross margin. You know, we don't really look at month-to-month. There might be some variation, but we do believe that Q4 will be better than Q3 in the single digit. Looking further out to Q1, year-to-year, we expect it to grow, but quarter-to-quarter we expect to fall, which is quite normal for us because Q1 is usually the low season for us. Yeah, that's how we look at it.
Okay. Just lastly, can you update on the expansion progress?
Sure. Last year we decided to expand on our ink material line, which is we expand three lines, and that's installed this year, and it's been helping us grow our business. Next year in Q1 we'll have the fourth additional line ready. That's where we are. Looking further down, which is we call H5, we expect that to be ready in 2024. Yeah, 2024. H6 maybe in 2025. Recently we've been looking at whether we can make the equipment with bigger to service the signage market. We're looking at whether the H6, yeah, the H6, if we can modify that, whether that's gonna affect our schedule or not. We're still in that phase of determination.
That's the expansion plan in Taiwan. In U.S., that's on track. We're expanding the ink manufacturing part. That's on schedule. That's according to plan. Also the China part, we're also expanding that. Our Guanyin factory, which is a new site for us, we may slow that down a bit 'cause we feel that the construction cost may come down in the middle or Q3, Q4 next year. We were planning to start that construction in Q1 next year, but we're gonna push that back maybe to Q2 or Q3, Q4, depending on the cost of construction.
'Cause this year, the construction cost in Taiwan has really went up due to lack of labor and also material costs. We believe because there's gonna be a global slowdown in the economy, that there should be a lower cost in terms of the construction of the building. We're gonna push that back.
Okay. Just the last bit, would you have the revenue split between the eReader and the ePaper for Q3?
Oh, yeah. We usually don't disclose the breakdown 'cause, you know, it varies quarter to quarter, month to month, and, yeah, we really don't disclose that. You know, like, a lot of customers always ask us that, and we really don't wanna share that type of information. Sorry about that.
Okay. What you report in your financial statement in terms of monitors and electronic shelf labels, that number is available for Q1 and Q2. I'm just looking at a comparable number for that for Q3.
Hmm.
Right. You could see that historical information in our financial statement. Yeah. That will be released very, very soon. Yeah.
Okay. No problem. Thank you.
Next question is from Jerry Xu with Credit Suisse.
Thanks for taking the question. Hi, Johnson Lee, Lloyd Chen, and Patrick Chang. Just want to follow up on the capacity expansion. I think you mentioned that H6 could be a bigger line. I thought that you previously already guided that H5 and H6 is going to be 50% bigger compared with the existing lines. Are you suggesting that H6 can be even greater than the 50%, you know, you guided earlier? That's the first question. The second question about the Guanyin site. I remember this, you know, should be supposed for buildings for some material.
If you are delaying this, you know, construction, this shouldn't be impacting your FPL or, you know, your overall revenue, right? Last one, probably on the business model. Can you help us or give us also update about how you are thinking about the business model for signage? Because right now, I think majority or all of your shipment for reader should be module, and then majority of the ESL should be in, you know, in FPL field. How about signage? That's all my questions. Thank you.
Thank you, Jerry. Yeah, it's a great question. H6, yeah, we're looking at how do we make H6 gonna be bigger than H5 as possible. Because I think there's a trend of bigger sizes for ePaper, and we wanna really push that boundary to see whether we can make even bigger E Ink materials or FPL. Yeah. I think because now we have the time to really look at that. We were back then, I mean, this year we're just trying to meet the demand, which is not really good for us. I mean, trying to run a company, I don't think that's really good for us. Now we do have time.
We really wanna see if we can expand H6 to even be bigger than H5, and we're looking into that. We don't know yet at this time whether that's gonna delay installation of H6. We wanna keep the same time, so like every year you get a new line in place. That's what we're thinking about. We're still trying to consider, you know, what makes the most sense for E Ink. That's your first question. The second question is about signage, right, in terms of business model.
Let me say this, you know, like for our ESL business, I think the business model is quite successful, where we sell the E Ink materials, which we call it FPL. We also do some modules, which gives our SI partner more choices to choose on which module partner they wanna do. That has been really successful for E Ink. We're also reviewing whether we should be doing the same thing with eReaders and eNote, where we open up. You know, instead of just E Ink doing the whole module, you can buy it from our partner to get those module as well. We're looking into that as well. For signage, we'll probably take the same strategy, where we also make the module and we sell the FPL to our module partners.
Hopefully that can help get ePaper everywhere. I mean, the goal is to get E Ink everywhere. If it requires E Ink to be more open for more partnership to open that market, that's the strategy we will take. What was the second question? Jerry, can you repeat your second question? I kind of forgot your second question.
Yeah. Second question is about Guanyin.
Oh, yeah, yeah.
This one should be for material, right? A delay ramp up shouldn't impact your revenue or, you know, your shipment.
So-
Just check if that's correct.
Yeah. Jerry, I think that's a great question. Yes and no. Because when we're thinking about Guanyin factory, right? We're also thinking about, you know, we're just building out our Yangzhou factory, but after that we wanna really run out of space, you know, either to expand more FPL lines or, you know, if we want to build E Ink ink at Guanyin, or expand more FPL lines. That fab can also be support our PI materials and other materials that we want to choose. Because of the CapEx, you know, which is quite high next year, we're really trying to push it out to see how do you get the best bang for the buck to build that factory. Because that really comes online in 2025.
Does a two-month or three-month delay or two-quarter or three-quarter delay, does that really impact us? We think we should be okay. I mean, considering, for H6, if we can go for a bigger width, if that's possible, then that gives us some leeway. Yeah, that's what we're thinking about. Yeah, so that's what our thinking is behind these.
Okay. After H6, you should have some space for H7, H8, right?
Correct. We have space for H7. H8, maybe not, because it really depends on the coating width and what kind of size we wanna go to. We also have a new process of making E Ink material, which hopefully by then it should be ready. Before that's ready, you know. Yeah, you know, we're working on how we can spray it. Yeah, you can spray the E Ink material over a large surface. That's something we're really looking at, especially going to smart surfaces. I think that's really important for us, you know.
You know, making E Ink display is one thing, but in order to get E Ink everywhere, we gotta be able to spray E Ink material over a large surface, and we can start doing that. You know, we can start going after real architectural projects and or automotive projects, where spraying the E Ink material over a surface will. Yeah, I think that's really a game changer. We're still working on that.
Okay. Got it. Maybe just on the signage side. I know this could be a next growth driver, you know, after the ESL. How should we think about, you know, the timing or what kind of revenue contribution we can see, you know, in the coming years?
Jerry, that's a great question. I mean, yeah, we do believe, you know, the next growth from E Ink is gonna come from signage as a new application. Really we're seeing growth from ESL and hopefully with the introduction of color to eReaders, to eNote, we can grow that business. Unfortunately, next year we're thinking the world is really hitting a recession and how that's gonna impact the consumer business, it's really hard to say. We're taking more of a conservative approach looking at that. We don't really know if we can really grow the eReaders or eNote next year in such economic environment. Also how quickly our customer adopt color and how it's gonna be accepted into the marketplace. That remains to be seen.
In a general sense, we do believe that by introducing color to eReaders and eNote, it can really open up the category because for eReaders it was mostly yeah, fictional novels, right? It was all about novels. Once you get color then different kind of nonfiction books can really come into the mix, and that size really goes up. You know, when you're talking about, I don't know, travel books or other types of books, which the size is a lot bigger. I think that's good for us because what we're really selling is meter square, how big we can go. Even get into the educational market, which we always think that E Ink is a great opportunity to go after this market, because of the characteristic of E Ink technology.
It's bistable, it's easy on the eyes, long battery life and paper-like display. We think that that's something we really want to go after. Which brought us back to Guanyin because we think that if we really go after by doing flexible PIs, you can get the whole device really thin, light and unbreakable. Which is, I think it's quite necessary for educational product because students do throw their bags around, you know. How do you make it more robust? By making our own PI then we can really drive that cost, you know, to a point where educational market is possible. Also as we expand in terms of our FPL lines, we really get that economy scale, which help us really drive our costs down.
I think that's needed in order to enter the educational market. At the same time, when you talk about signage, when you go up in size, no matter it's 50 inch, 60 inch or even 30 inch, right? The ASP really go down. I mean, if you look at LCD displays, you know, if you look at a 32 inch LCD, I mean, an open cell 32 inch today is relatively cheap. It's like, what? $30 or less because of the economic situation. Yeah. That means that we need to get that economy scale to help us really win that signage business for masses. I mean, we're winning signage business, but it's more of a niche market. If we can really get it after the outdoor signage, that's a huge market.
I mean, that's a lot of meter square being consumed. If we can start winning those market, I think it's a game changer for E Ink. When that'll happen? At this moment it's hard to say, but we're still working on it.
Okay. Thank you. That's very clear. Thanks for your answer.
Thank you, Jerry.
Hey, this is Max from Morgan Stanley .
Oh, Max. You may ask your question.
Perfect. Thank you so much. First of all, congratulations on these really amazing Q3 results. I just want to touch up on one point you were previously mentioning regarding the inventory levels. Do you have some visibility on your customers, if we're talking SES-imagotag, Pricer, et cetera, how they're currently coping with the inventory levels? Do you expect the recession you were just previously talking about also to impact the demand for ESL in 2023?
Max, I think that's a great question. In terms of inventory, you know, if we look at the whole ecosystem partner side, on our module partner I think it's relatively healthy. Also on the ESL side I think that's relatively healthy. In terms of like the driver IC partners, they do have some inventory and also some TFT makers they do have some inventory. I think that the main reason for that is last year IC and TFT was in shortage, so we really worked hard on enabling more partner, IC partners and more TFT partners into the E Ink ecosystem. I think especially the new players that's coming in, they're more aggressive in terms of pricing, which caused some inventory on our existing partner and so forth. It's really up to them to make that adjustment.
I think from an ESL perspective, I still feel it's relatively healthy, at least in looking through. You know, we sell mostly FPL to our module partners for ESL. We do sell some modules, but we think it's relatively healthy and yeah, I think should be okay.
Okay, great. Just a quick follow-up. You're basically working as a market constraint for the ESL market or like the paper market in general in that case. How often do you speak to the likes of SES-imagotag and Pricer in terms of orders? Is that happening on a monthly or on a semi-annual or annual basis?
Customer you mentioned like Pricer and SES-imagotag, we really don't really like to comment on, you know, the SI partners because, you know, they're a listed company.
Mm-hmm.
You know, you can get a lot of answers from them. You know, we do sell some modules to them, but usually they're our indirect customer. We sell the FPL to our module partners, and they sell to these SI partners. They're, like two levels down. Yeah, two levels down from that supply chain. We do sell some modules for them, when they needed us to help service them.
Mm-hmm. Okay. Perfect. No, thank you very much for the comment. Again, congratulations on this great Q3 as well.
All right. Thank you, Max.
Next question will come from Patrick Bell. Your line is open.
Thanks. I just wanted to follow up on the second part of your question of the last question about the outlook for ESL demand next year. Do you see a recession impacting that? Are you still seeing retailers looking to adopt ESL despite the tougher macroeconomic conditions?
Thank you, Patrick, for that question. Yes, we do believe ESL will grow next year, but it's gonna be less than what we forecast in Q1 this year. We do think that there is some impact because of recession and I think mostly the anticipation of recession that will hit the world market next year. Usually during inflation, retailers are more willing to adopt ESL because the price change they need to do on the stores really push them to really adopt ESL. Because of the anticipation of possible recession hitting the world market, I do see some concern in this in some of the retailers in terms of adopting ESL. Overall, because there is still inflation that's happening, some retailers are very eager to install ESL as soon as possible.
In an overall sense, we do believe next year ESL will grow, but to what degree or what percentage of growth, it's really hard to say.
Got it. I think previously you'd spoken about most of your 2023 capacity being sold out already. Is that still the case or is there no longer being a good operational capacity?
Sorry, I didn't understand the question.
Yeah, Johnson, I think what Patrick mentioned is previously, maybe not last quarter or the quarter before, someone ever asked, have we already sold out the capacity next year? I think our answer was this year is pretty much booked, and we think it should be okay for next year. I think Patrick just mentioned if the capacity next year, we already sold all the capacity next year.
Oh, I see.
Right.
Basically, you know, like, even if we sold our capacity for next year, it's hard to say because if the market is not as strong, then, you know, we're gonna let our partners off. You know, we're not gonna force them to take our FPL into it, although they do pay some down payment. We're really not gonna force them to take it, I mean, if there's a slowdown. We're asking our partner not to really book as much as they wanted because, you know, the overall global economy is not in the best shape. That's, I guess it's not the average way of doing business, but we think that we really treat our partners as long-term partnership.
How do we grow this market together and how do we make sure that our partner remains profitable and not, you know, the burden with inventory as the market slows down? We're taking a more of a different approach. We're not really taking the approach like the foundry, where they kind of force the IC design house to commit. I mean, we do make them commit, but we don't force, we don't penalize them for not making that commitment. We get their down payment, but we're not gonna really force them that, "You don't pull X number of volume, we're gonna penalize you for, you know, not doing it." We could do that, but that's not the approach at E Ink.
Yeah, I mean, we're still looking at from the end market. How does it look? I mean, is that strong enough? Is it gonna suck up all our capacity or, you know, it's gonna grow, but not really sucking up all our capacity? At this moment, it's hard to say. Does that answer your question?
Yeah. Got it. That's very clear. Thank you.
Next question will come from Guido .
Hi there. Thank you for taking my question. I'm slightly newer to the story, so apologies if a couple of these are slightly high level. On the first point, it's just on the royalties, which I noticed on your P&L. If I look over the last few years, they have kind of slowly been declining. Could you please just remind me the business model around these royalties? What are these payments? Are they expected to continue to decline going forward?
Sure, Guido. Yeah, the royalty income that we've been receiving, I think for the past 10 years.
10 years.
Yeah, it's been 10 years. It's mostly from LCD. We have this technology where we call FFS or Fringe Field Switching technology that's been used for mostly smartphones and tablets where if you press on the LCD, you don't get that watermark. You know, like old LCD, you press on it, you get that ripple effect. A lot of people call it IPS because there was an IPS technology, there's an FFS. When our IPS went to IPS two, it was licensed from our subsidiary, Hydis, that owns the FFS technology. They licensed that from us. Most of the world LCD players license that technology from Hydis. We've been collecting pretty good royalties over the years. I think maybe TWD 1 billion.
Yeah. Billion-dollar already.
Something like that. I think it's TWD 1 billion already. We expect it to come down. The first reason is because mobile phone, most of the premium has switched to OLED. Most of the phones have been switching to OLED. Only the low-end are using LCDs now. Tablet, although the majority is still LCD-based, but there is a sign that that's moving to OLED as well. We expect the royalty of this FFS license to come down. Also, you know, it's almost the end of life for our technology in terms of IP protection. Yeah, we expect that to come soon in the near future.
Okay. Okay, understood. Thank you very much. Just second question is just broadly on your competitive positioning. My understanding is that you obviously have a lot of patents in this area, which are sort of a key barrier to entry. Could you maybe just touch on are the patents your key barrier to entry? If so, or your key competitive moat? If so, when do the key ones expire? Who are the sort of competitors you're keeping an eye on, and is anyone kind of making inroads?
Oh, okay. That's a great question again. In terms of E Ink IPs, I think we have, like, 6,000+ IPs as related to ePaper. I think our IP position is quite strong in that space. You know, we really invented this ePaper technology. It was first invented at MIT Media Lab. It was a spinoff to form a company called E Ink. We bought E Ink in 2005, I believe. 2005. We really have invested a lot of money taking this technology from black and white to color. We really have built up a new portfolio of IPs around how do you do color E Ink technology. Today most of the growth from E Ink is really from the color ePaper displays.
I think from an I.P. perspective, E Ink is in a good position. I think the most important thing is, can E Ink continue to open new markets or markets that E Ink has opened up? Can it continue to grow? From the current outlook, we believe that, yes, we can continue to grow in the ESL space because the market penetration rate for ESL is low. We maintain very good position in terms of technology leadership and innovation on the latest technology, and also driving the whole cost down in terms of ePaper module used in the ESL space. Now you're seeing ESL, some of them go up to size of a 10-inch display instead of the traditional two-inch or one-inch display.
That size has really moved up as well because as we introduce more color, it becomes more like a signage product on the retail space. There are talks about, you know, if you can really advertise where the product is. Like say, if you go in a store and then you look at Coca-Cola or Pepsi, and then you see this advertisement from Coca-Cola about, you know, the latest flavor from Coca-Cola or promotional buy two, get one free, and that helps drive the revenue at the store. We do believe that there is a possibility for E Ink to expand from ESL into retail signage as well, and also outdoor signage because of, you know, the shortage of electricity bills and the change in regulations about not able to use 8K LCD displays in Europe.
That's mostly driven by the energy consumption of 8K LCDs, because doing 8K, you consume twice or even 3 times as much power as a 2K or 4K TV. That has really been banned and used in Europe. Now the people are talking about outdoor signage that you can only lit it up for like 8 hours or 10 hours a day because it consumes so much power, the LEDs or outdoor LCDs. People are talking with E Ink and say whether E Ink can provide a solution with ePaper for outdoor advertisement. I think that's a great market for E Ink to go after because we're bistable, we don't consume any power when it's in that static stage. We only consume power when we start changing the advertisement.
Also it looks better outdoor than indoor for E Ink displays because it looks great when it's under the sun. How it can be powered with purely solar power on E Ink displays. You really don't need to drain the electricity from the city. There's really a shortage of electricity in Europe with the Ukraine-Russia war that's happening that really drives the natural gas price up and the whole world environment. I think there is a great opportunity for E Ink in the signage space. Yeah.
Okay. Sorry, just on the competition point, are you seeing any competitors, you know, when you're bidding for projects or work? Are you beginning to lose to other people, or is your win rate still, you know, essentially 100%?
Yeah. I mean, we're really trying to replace paper, right? I think we're really competing against paper. Paper is a hard thing to compete with. It's cheap, right? It's dirt cheap. How do you compete with that? I think paper is our major competitor. We're making some inroads, but we really wish that we can make bigger inroads into replacing all the paper that's out there. Also replacing textbooks, right? All these books out there. That's something E Ink is striving to do. We just got to get our color good enough, you know, the user experience good enough to really start replacing paper books, right? That's something we really want to do. Competition is against paper.
Well, you can say iPad, like using LCD or AMOLED or LED. It's a competition because the prevalency of iPads, right? Tablets. Now, once we start getting to color, how well E Ink can compete in that space or we're gonna be a niche player, that remains to be seen.
Very clear. Thank you. If I can squeeze just one final one is just on color. You know, you talked earlier on the call about, you know, getting color into the eReaders and I think you used the words game changer, which always sounds quite exciting. I think I read somewhere and maybe you alluded it just there that kind of at the moment, the refresh rate is still maybe not quite that fast. Is that a barrier? Could you maybe just give me a bit of a sense of the ASPs, you know, how much more than black and white would you be selling the color for?
Finally, have you had any sort of commitments from eReader customers that, you know, they'd be willing to take this color stuff in large volumes? Is it kind of more of a wait and see approach? Thank you.
Yeah, that's another great question. Color, for eReaders and eNote, we do have two technology that we're going after. One is our Kaleido technology, where we print the color filter on top of our capsules or FPL. Another one is our Gallery product line, where we make color ink instead of using black and white ink. Our strategy for that market is, let's price it the same as black and white for now. The plan is to drive it even cheaper than the black and white, because we think that it's a much bigger market TAM. That's our strategy for the eReader and eNote in terms of our color product line. We're gonna price it more competitively than our black and white.
We believe that with the scale that E Ink is having right now at this moment, where we used to have two lines, right, one in Massachusetts and one in Linkou, Taiwan. Now we have, well, in Q1 next year, we'll have six lines. With that economy scale, we can really drive our unit costs, to drive it to be even more competitive. I think pricing is also an important factor in terms of adoption of color. Yeah, there's a lot of interest from our customer, but how quickly they can build the product. 'Cause, I mean, designing a color, let's say eReader or eNote, is a lot different than designing a black and white. The whole software needs to change. You know, the whole driving method, it's different.
It's gonna take some time for our customer, and hopefully next year you're gonna see more and more color launch through the marketplace. It's hard for us to predict how the outlook for eReaders and eNote will be for next year and how quickly. Let's say, if they launch it in Q4, that only gives us, like, a quarter of revenue, right? If they launch in, like, Q1, that's like music to us. You have a full year to drive that revenue. You know, when customer launches, it's hard for us to say, and it's up to them to decide when they want to launch it. They have their own strategy behind it.
Great. Thank you very much.
All right. Thank you.
Hi. It's pretty much 4 past 5, so we are really running out of time. Let's take the final question from Jennifer .
Hi, can you hear me? Yeah, okay. I actually have three questions here.
Yeah.
First of all, I want to follow up on the reader pricing. When you refer to the same pricing, do you mean both ACeP and Kaleido are aiming for the same price as black and white? How about the eNote with more functions versus eReader? Do we expect the ASP growth and the margin growth as well?
Jennifer, yeah. Our strategy for our color, no matter it's Kaleido or Gallery product line, is gonna be just as competitive as our black and white from a customer perspective. Yeah, you know, eventually, it's gonna be cheaper than black and white. That's our strategy moving forward. Because with scale, I think our overall cost structure will go down, and that can help sustain it.
Okay, I see. How about the eNote with more function embedded? Can we expect higher ASP or margin versus eReader here?
Oh, I mean, eNote is usually a lot bigger. They're roughly like 10 inch or sometimes going up to 13 inch. Well, eReader is moving from 6-7, and then I think it's also migrating to 8 as well. Yeah, there is a shift in size, it does do help on the ASP. It's hard to say for us next how well that will do and how quickly our customer can launch their product. It's hard to predict next year.
Understood. Another question is for ESL. Do you see any potential for smaller retailer adopting ESL or our major customers are still some mega retailers like Walmart or those international companies? Just trying to get the color of, like, to what extent this ESL thing can be adopted in retail market. Yeah.
Yeah. Well, you know, most of the ESL partners we talk with, the SIs, they're relatively bullish about the growth of ESL, even in a down economy, right? Hopefully, it doesn't hit recession, but even in down economy, they're relatively optimistic about the growth. They're talking about it may be the only growth in terms of electronic business, right? If you look at mobile phones, tablets, T.V.s or even notebook computers, none of them are really expecting growth next year, right? They think that ESL may be one of the few that will be growing next year. Most of them are pretty bullish about it. We do get some positive feedback from retailers.
They usually do pilot sites with ESL, and if they love it, you know, they get the budget, they'll scale it. Yeah, you know, we're expecting growth next year from ESL, but we really don't know what percentage of growth it's gonna come from. You know, whether it's gonna be 10%, 20%, 30% or 5% or 50%, we don't know. I mean, we don't really know what that kind of growth will be. Overall, we believe that ESL should grow next year.
Understood. My last question is about the Guanyin side. You have slowed down the construction. As far as I know, the CapEx plan mainly be based on customers' outlook. Do you see any outlook revision or, as you mentioned previously, the H6 line can maybe be wider than H5 to compensate the delayed construction? I'm just trying to get the schedule of the overall, say, new capacity coming online, if there are any change.
Okay. Jennifer, let me clarify this. I think it may sound a bit confusing. H4 will be ready next year in Q1. That plan is done. We're installing it right now. We want to ramp, get it ramping by Q1 next year. That H4 is done. Now, H5 is something that we expect to come online in 2024. Okay? H6, we're expecting to be coming online in 2025. Okay? The construction of a new building in Hsinchu, where our headquarter is, that's gonna be ready by end of next year. We can have the H5 running by 2024. Okay? That building is set. That's a done deal. We gotta make sure it's on schedule, whether we can pull that ahead or not.
Most likely not. I mean, hitting that on schedule is a key we're trying to achieve. What I talked about was we're gonna delay the Guanyin, which is a new factory site that's in Taoyuan area in Taiwan. Well, we got a lease on that land, and we want to build a building on top of that. We were expecting to build that building in 2023, in Q1 next year. Expect that to be ready by 2025. We're pushing that a bit out, maybe two quarter or three quarter out, because we feel that the construction cost at Taiwan right now, it's quite high. We expect the construction cost to go down maybe 10%-20% by middle of next year or even Q3 next year.
We're gonna delay that until the construction cost is at a price that we think it makes sense. Building that building is not cheap. How much does it cost us? Like $60 million or something. If we can get a 20% saving, that's, what, $12 million right there, you know. If it's 10%, it's $6 million. We're delaying that until we can get the right price to start that construction. We file in all the papers that's necessary, so we can get that permit, but when we're gonna start that construction depends on the price. Okay? That's the part that's gonna be delayed. The plan for U.S. in Massachusetts, that's ongoing.
We gotta get that ready as soon as possible because that's a fundamental technology at E Ink, which is the E Ink ink, right? The ink that makes everything tick. We gotta have that capacity ready, especially now we're introducing more color. We gotta have it ready. That plan is ongoing. The part in China as well, we need to get that part ready because if we don't have that ready, we might get issues with our supply chain. We gotta get that Yangzhou site expansion ready as well. Okay?
Okay. Understood. Clear. Thank you.
Thank you.
All right. Thank you for all of the questions and your participation. Let's talk soon next quarter. Thank you very much. Bye-bye.