Hua Hong Grace Semiconductor Limited (1347) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Hua Hong Semiconductor's First Quarter 2024 Earnings Conference Call. The call is hosted by Mr. Junjun Tang, President and Executive Director; and Mr. Daniel Wang, Executive Vice President and Chief Financial Officer. Please be advised that your dial-ins in listen-only mode. However, at the conclusion of the management's presentation, there will be a question-and-answer session, at which time you will receive instructions on how to participate. The earnings press release and first quarter 2024 summary slides are available to download at our company's website, www.huahonggrace.com. Without further ado, I would like to introduce you to Mr. Daniel Wang, Executive Vice President and Chief Financial Officer.

Good afternoon. Thank you all for joining our first quarter 2024 earnings conference. Today, we will first have Mr. Junjun Tang, our Executive Director and President, make some remarks on our first quarter performance. President Tang will addressed in Chinese and Kathy Chien, our Deputy Director of Investor Relations, will be the translator. After that, I will discuss our financial results and provide guidance for the next quarter. This will be followed by our question-and-answer session. The call will be conducted in English. So please ask your questions in English. And I will now turn the call over to Mr. Tang.

[Foreign Language]

[Interpreted] Good afternoon, everyone. Thank you for joining our earnings call.

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[Interpreted] Hua Hong Semiconductor reported first quarter 2024 revenue of USD 460 million, in line with our guidance. For the gross margin, we achieved 6.4%, slightly exceeding our guidance.

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[Interpreted] The overall semiconductor market has not yet emerged from the downturn. In addition, the first quarter is usually the off-season for foundries due to seasonality and the impact of annual maintenance. However, Hua Hong Semiconductor achieved quarter-over-quarter growth in utilization rate, sales revenue and gross margin, which confirms that market demand for our specialty technologies is improving.

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[Interpreted] For the full year of 2024, our first 12-inch production line will be operating on the basis of a monthly capacity of 94,500 wafers. Our second 12-inch production line is under construction and expected to be put into operation by the end of this year.

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[Interpreted] We will keep up with the market trends and seize opportunities, enhancing our advantages in specialty technologies by continuously promoting development of new technologies and optimization of existing technology platforms. Hua Hong Semiconductor will be focusing on the new quality productivity goals and the promotion of industrial ecological synergy rewarding our investors with better operational efficiency and investment returns through faster improvements in quality.

[Foreign Language]

[Interpreted] Now I would like to hand the call over to our CFO, Mr. Daniel Wang, for his comments.

Thank you, Mr. Tang, for your wonderful comments. Now let me begin with a summary of our financial performance for the first quarter, followed by an outlook on revenue and margin for the second quarter 2024. And then we will move on to the question-and-answer session. First, let me summarize financial performance as of the first quarter. Revenue was $460 million compared to $630.8 million in Q1, 2023, primarily due to decreased average selling price and increased by 1% over Q4, 2023. Gross margin was 6.4% compared to 32.1% in Q1, 2023, primarily due to decreased average selling price and the capacity utilization and increased 2.4 percentage points over Q4 2023, mainly driven by increased capacity utilization. Operating expenses were $78.5 million, 3% over Q1 2023, primarily due to increased engineering wafer costs and 17.4% lower than Q4 2023, mainly due to decreased bonus expenses. Other income net was $3.8 million, 37.9% lower than Q1 2023, primarily due to foreign exchange losses versus foreign exchange gains, partially offset by increased interest income and 95.7% lower than Q4 2023, mainly due to decreased government subsidies and foreign exchange losses versus foreign exchanges gain. Income tax credit was $90.8 million, 122.8% over Q1 2023, primarily due to decreased taxable income. Loss for the period was $25.3 million compared to profit for the period of $140.9 million in Q1 2023 and $3.5 million in Q4 2023. Net profit attributable to shareholders of the parent company was $31.8 million compared to $152.2 million in Q1 2023 and $35.4 million in Q4 2023. Basic earnings per share was $0.09 compared to $0.16 in Q1 2023 and $0.21 in Q4 2023. Annualized ROE was 2% compared to 19.6% in Q1 2023 and 2.4% in Q4 2023. Now we will provide more details on our revenue from Q1 2024. Revenue from China was $365.7 million contributing 79.5% of total revenue and a decrease of 23.4% compared to Q1 2023 mainly due to decreased average selling price and the decreased demand for smart card ICs, IGBT and super junction products, partially offset by increased demand for MCU, logic and CIS products. Revenue from North America was $46.2 million, a decrease of 34.7% compared to Q1 2023, mainly due to decreased demand and average selling price for MCU products, partially offset by increased demand for other power management IC products. Revenue from Asia was $23.6 million, a decrease of 39.7% compared to Q1 2023, mainly due to decreased demand for MCU, general MOSFET and other power management IC products. Revenue from Europe was $21.7 million, a decrease of 41.8% compared to Q1 2023 due to decreased demand for smart card ICs, IGBT and the general MOSFET products. Revenue from Japan was $2.7 million, a decrease of 57.9% compared to Q1 2023, primarily due to decreased demand for MCU products. With respect to technology platforms, revenue from embedded LiM volatile memory was $119.2 million, a decrease of 5.2% compared to Q1 2023, mainly due to decreased average selling price and demand for MCU and smart card ICs. Revenue from a stand-alone LiM volatile memory was $31.1 million, a decrease of 2.3% compared to Q1 2023. Revenue from discrete was $143.3 million, a decrease of 38.4% compared to Q1 2023, mainly due to decreased demand and average selling price for IGBT, super junction and general MOSFET products. Revenue from logic and RF was $64.2 million, an increase of 63.8% over Q1 2023, mainly due to increased demand for CIS and logic products. Revenue from analog and power management was $1.5 million, an increase of 15.9% over Q1 2023, mainly due to increased demand for other power management IC products. Let's now take a look at the cash flow statement. Net cash flows generated from operating activities was $40.7 million in Q1 2024, decreased by 69.2% compared to Q1 2023 and 79.3% compared to Q4 2023, primarily due to decreased receipts from customers and government subsidies. Capital expenditures were $302.6 million in Q1 2024, including $199.4 million for Hua Hong manufacturing, $71.4 million for Hua Hong Wuxi and $31.7 million for Hua Hong [indiscernible] business. Other cash flow generated from investing activities was $3.6 billion in Q1 2024, including $21.2 million interest income, offset by $17.6 million investment in equity of instrument. Net cash flows generated from financing activities was $789.9 million, including $689.4 million capital contribution from noncontrolling interests. $103.4 million proceeds from bank borrowing units and $100,000 proceeds from the share option exercise, partially offset by $2.1 million interest payments and $900,000 lease payments. Now let's move to the balance sheet. Cash and cash equivalents was $6.18 billion on March 31, 2024, compared to $5,585.2 billion on December 31, 2023. Inventories decreased from $449.7 million of December 31, 2023 to $431.2 million on March 31, 2024. Property plant and equipment was $3.587.4 billion on March 31, and 2024 compared to $3.519.3 million on December 31, 2023. Equity instruments designated at fair value through other comprehensive income increased from $270.5 million on December 31, 2023 to $287.1 million on March 31, 2024, due to new investments in equity instrument. Other noncurrent assets increased from $445 million on December 31, 2023, to $492.8 million on March 31, 2024, primarily due to increased advanced prepayments for construction and equipment for Hua Hong manufacturing. Total assets increased from $10,944 billion on December 31, 2023 to $11.64 billion on March 31, 2024. Our total bank borrowings increased to $2.225.7 billion on March 31, 2024 from $2.996 billion on December 31, 2023. Total liabilities increased to $2.988 billion on March 31, 2024, from $2.928.9 million on December 31, 2023, primarily due to increased bank borrowings. That ratio decreased to 25.6% on March 31, 2024, from 66.8% on December 31, 2023. Finally, let me give you a high-level outlook for the second quarter 2024. We expect revenue to be approximately $470 million to $500 million and our gross margin to be in the range of 6% to 10%. This concludes my financial remarks. Now we would like to start the question-and-answer session. Operator, please help. Thank you.

Thank you. [Operator Instructions] Your first question comes from the line of Ziyuan Wang from Citic Securities.

Congrats on our continuously Q-on-Q growing performance. I have 2 questions. The first question is about our pricing. I have calculated our ASP and there was a slightly decreased Q-on-Q in Q1. Has there any price adjustment in the first quarter? And how do you view our price trend in Q2, and further? Is there any price turning point any-- what will be the price turning point? And is there any possibility of price increasing in the future? That's my first question.

Ziyuan, I think that was a very valid question, good question. There is a decline in overall average pricing, okay, in Q1. Overall, I think it was down by approximately 7% overall between Q1, 2024 and Q4 2023. This is basically it's that the part of the overall price adjustment, all you can call concession that we did in 2023, okay? I think we are at the-- basically, when you look at pricing, it is at the bottom at this point, okay? We expect price should gradually recover in the next several quarters. As you can see, our utilization rate has gone up quite significantly in the past quarter. The 12-inch Fab is virtually at pretty much at 100% utilization rate. And the 3-inch Fab overall, it is at 95% to 100%. So we expect the price declining is at the end, okay? I mean, these things in the next quarter. I mean, from here and there, there might be some price adjustment again, but we expect overall in the next several quarters, things should recover, should improve. Overall, pricing should improve within the next several quarters.

Okay. Thank you, Daniel. Glad to hear there's gradually increased pricing. And the second question is about our power discrete within there-- on Q1, the power discrete platform is only weak point in Q1? And is there any tendency of that the demand of power discrete is improving? And is there any difference between low-end and high-end products like we just hear that some low-end power discrete product in the market are likely to increase their pricing. So is there any better demand that we can see at this point?

Overall power discrete demand, especially for the high-voltage discrete products. The demand continues to be weak at this point. But I expect things will probably start to improve starting Q2. Discrete has a huge demand, especially for IGBT and super junction for Hua Hong Semiconductor, where there's no question, this is a very strong area for the company. we have the biggest market share in China, for IGBT and super junction. But the market has been slowing down for the past 2 and 3. So we expect things will start to recover, as I said, in starting, I think, in Q2, okay, in Q2. So I expect overall, the demand will come back for IGBT as well as super junction.

Thank you. Your next question comes from the line of Leping Huang from Huatai Securities.

The first question is about your revenue mix. So if you look this quarter results, you see that there are 2 applications actually grow sequentially. So it was the logical and another analog and the PM. So power management. I would like to know what you are doing to fill the capacity and improve the utilization rate of your Fab in the last few quarters? And what will be the impact on your product mix. I think you have a 50% decline in your embedded nonvolatile memory and also discrete declined a lot. But on the other hand, you have a very large logic and analog. Should I expect, this will be a new product mix for you in the coming quarters?

Let me just start first and then will hand it over to Mr. Tang. I mean, overall, I mean, several areas have been very, very strong. We talked about logic mainly because of CIS. Is it has been extremely strong for us since Q4 last year, it seems to me the demand will continue for-- I mean, throughout this year, okay? And so, the only area at this point that continues to be weight is it is discrete, particularly for IGBT and super junction. But other than that, I think the other technology platforms have been strong. Embedded nonvolatile memory, it was a 6% growth compared to Q4 2023. For smart card, we also had a nice jump about 7%. MCU was up by 6.2%. So we see signs of recovery, okay? As I said earlier, cost utilization rate is up, okay? And the 12-inch Fab at this point it's fully loaded. It is more than 95,000 wafers in terms of loading, okay? And the 3 8-inch Fabs are at the average-- the utilization rate is around 95% to 100%. So yes, I mean, it is a good sign, but price is still not up, okay? Once I think the market start to have a strong recovery. That is the point I think we can start adjust the price upwards, okay, at that point. So that's I'm telling you it is basically the current situation. And we hope-- we're also hoping that things will get better hopefully quickly.

Okay. So my-- I just want to clarify. So since your first quarter, the utilization rate, the 8-inch is reaching the 100%. And the 12-inch is reaching the 84%. So the additional application you got in the 8-inch is PMIC and the additional for the 12-inch CIS. Is my understanding correct?

For the 12-inch Fab, it is [indiscernible] basically BDC, okay? That is used in the AI servers and then we have CIS and embedded nonvolatile memory flash, okay? So flash, CIS and BCD. They've been very strong. And also, for the regular MOSFET business that also have been very, very strong.

Okay. So the second question is about your plan this year. So considering this recent the oversupply situation in the market. So what's your-- but you still spend around $300 million this quarter. So what's your current CapEx plan? Do you have any adjustment? Or what's your-- especially the new Fabs, you plan, do you have any change?

Well, we're expanding the capacity for the second 12-inch Fab. The Fab will be-- the construction will be complete by end of third quarter this year. And then starting Q4, we're going to start pilot production. So starting from next year, hopefully, the market will come back at that point. We plan to ramp up the second 12-inch Fab.

So what's your latest CapEx plan for this year?

Yes. Well, for the CapEx for this year from [ PR & PO ] perspective. The overall, I mean, for the 3 8-inch Fabs, it's probably going to be around $200 million to $300 million, okay? And then for the new 12-inch Fab, it's going to be around about $2 billion, basically, the construction of the Fab and the equipment cost for the first 40,000 wafers.

Your next question comes from the line of [indiscernible] from CICC.

It is very happy to see that the revenue and gross margin of Hua Hong is increasing in the first quarter of 2024. My first question is about embedded memory. I don't think that in the first quarter of 2024, the revenue from in embedded memory increased a little bit compared with the past quarter. Does it mean embedded memory products like Smart Card or MCU has reached the bottom and will get better in the next few quarters?

Well, that is surely our hope, and we feel that things start to come back to us. markets start to recover, especially for embedded nonvolatile memory, but I think it's still at the very early stage. I think this should be at a very-- as I said, a very early stage. I think we expect things should get better and better in the third quarter and fourth quarter.

Got it. My second question is about downstream or application. You know that Hua Hong made some chips to vehicle class to the vehicle industry like car class MCU. And we will think that the whole car industry is under pressure this year, leading foundries like TSMC also said the auto semiconductor will decline in this year. So, I'm curious what is Hua Hong's view about the car industry, especially auto semiconductor this year?

[Foreign Language]

[Interpreted] Thanks for your question. Actually, the overall auto market is still very strong.

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[Interpreted] Yes. Currently, they're facing some adjustments, but I think this adjustment is just temporary.

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[Interpreted] From Hua Hong's perspective, the automotive products are just involve a very low digit is under a very reasonable range.

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