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

Ladies and gentlemen, thank you for standing by. Welcome to Hua Hong Semiconductor First Quarter 2025 Earnings Conference Call. Today's call is hosted by Dr. Peng Bai, President and Executive Director; and Mr. Daniel Wang, Executive Vice President and Chief Financial Officer. [Operator Instructions]. The earnings press release and first quarter 2025 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. Thank you.

Good afternoon, everyone. Thank you for joining our Q1 2025 earnings conference. Today, we will have Dr. Peng Bai, our Executive Director and President, make some remarks on our first quarter performance. Afterwards, I will walk you through our financial results in detail and offer guidance for the upcoming quarter. We will then open the floor for a Q&A session. With that, I'll turn the call over to President Bai.

Thank you, Daniel. Good afternoon, everyone. Thank you for joining our earnings call. First quarter 2025, sales revenue for Hua Hong Semiconductor was USD 541 million, and the gross margin reached 9.2%, both in line with our guidance. Overall, performance has continued the trend from 2024. Sales revenue maintained steady growth. The product portfolio has been continuously optimized and the utilization rate has remained at the full capacity. The capacity ramp-up of the second 12-inch production line is in line with our expectation, which has positive implications for subsequent revenue growth, product portfolio optimization and enhancement of the company's core competitiveness. From a market perspective, customer demand and competitive landscape has essentially continued the trend since the second half of 2024. However, due to recent changes in the global environment and related policies, the entire semiconductor industry will face greater uncertainties in terms of the customer demand, procurement costs and the supply chain landscape. In the face of such uncertainties, Hua Hong Semiconductor would adhere to its strategy of continuously accelerating effective capacity expansion, enhancing its R&D capability, actively exploring marketing opportunities, timely managing possible disturbances from the supply chain, intensively reduce costs and improve efficiency to reduce risk while achieving better performance. Now I would like to hand over the call over to our CFO, Mr. Daniel Wang, for his comments. Daniel?

Thank you, Dr. Bai, for your inspiring remarks. Now let me walk you through a summary of our financial performance for the first quarter, followed by our revenue and margin outlook for Q2 2025 before opening the floor for the Q&A session. First, let's review our financial results for the first quarter. Revenue was $540.9 million, 17.6% over Q1 2024, primarily driven by increased wafer shipments and 0.3% over Q4 2024. Gross margin was 9.2%, 2.8 percentage points over Q1 2024, primarily driven by improved capacity utilization, partially offset by increased depreciation costs and 2.2 percentage points lower than Q4 2024, primarily due to increased depreciation costs. Operating expenses were $97.1 million, 23.7% over Q1 2024, primarily due to increased engineering wafer costs and 12.2% lower than Q4 2024, primarily due to decreased labor expense, partially offset by increased engineering wafer costs. Other loss net was $8.3 million compared to other income net of $3.8 million in Q1 2024, primarily due to increased foreign exchange losses and decreased interest income, partially offset by increased government subsidies. The loss was 79.5% lower than Q4 2024, primarily due to decreased foreign exchange losses and increased government subsidies. Income tax credit was $3.2 million compared to $19.8 million in Q1 2024, primarily due to decreased reversal of dividend withholding tax. Net loss for the period was $52.2 million compared to $25.3 million in Q1 2024 and $96.3 million in Q4 2024. Net profit attributable to shareholders of the parent company was $3.8 million compared to $31.8 million in Q1 2024 and net loss attributable to shareholders of the parent company of $25.2 million in Q4 2024. Basic earnings per share was $0.02 compared to $0.09 in Q1 2024 and minus $1.05 in Q4 2024. Annualized ROE was 0.4% compared to 2% in Q1 2024 and minus 1.6% in Q4 2024, respectively. Now let's take a closer look at our Q1 2025 revenue performance. From geographical perspective, revenue from China was $442.5 million, contributing 81.8% of total revenue and an increase of 21% compared to Q1 2024 mainly driven by increased demand for super junction, other power management IC, flash, general MOSFET, smart card IC and logic products. Revenue from North America was $56.4 million, an increase of 22% compared to Q1 2024, mainly driven by increased demand for other power management IC products. Revenue from Asia was $25.8 million, an increase of 9.4% compared to Q1 2024, mainly driven by increased demand for MCU products. Revenue from Europe was $15.2 million, a decrease of 30% compared to Q1 2024 mainly due to decreased demand for IGBT, smart card IC and general MOSFET products. Revenue from Japan was $1 million, a decrease of 62.1% compared to Q1 2024, primarily due to decreased demand for super junction products. With respect to technology platforms, revenue from embedded nonvolatile memory was $130.3 million, an increase of 9.3% compared to Q1 2024, mainly driven by increased demand for smart card IC and MCU products. Revenue from stand-alone nonvolatile memory was $42.9 million, an increase of 38% compared to Q1 2024 mainly driven by increased demand for flash products. Revenue from power discrete was $162.8 million, an increase of 13.5% compared to Q1 2024, mainly driven by increased demand for super junction and general MOSFET products. Revenue from logic and RF was $66.8 million, an increase of 4% over Q1 2024, mainly driven by increased demand for logic products. Revenue from analog and power management IC was $136.8 million, an increase of 34.8% over Q1 2024, mainly driven by increased demand for other power management IC products. Now let's turn to our cash flow statement. Net cash flows generated from operating activities was $50.2 million, 23.4% over Q1 2024, primarily due to increased receipts from customers and 83.7% lower than Q4 2024, primarily due to decreased receipts of government grants and increased payments for materials and income tax. Capital expenditures were $510.9 million in Q1 2025, including $478.2 million for Hua Hong Manufacturing, $18.4 million for Hua Hong Wuxi and $14.3 million for Hua Hong A. Other cash flow generated from investing activities was $16.6 million in Q1 2024, mainly including interest income. Net cash flows generated from financing activities was $59.1 million, including $861 million proceeds from bank borrowings and $13.1 million proceeds from share option exercises, partially offset by $811.2 million of bank principal repayments, $3.3 million of interest payments and $500,000 lease payments. Now let's move to the balance sheet. Cash and cash equivalents was $4,079.9 billion on March 31, 2025, compared to $4,459.1 billion on December 31, 2024. Other current assets increased from $604.2 million on December 31, 2024, to $648.8 million on March 31, 2025, mainly due to increased value-add tax credit. Property, plant and equipment was 5,967.6 billion on March 31, 2025, compared to $5,859.1 billion on December 31, 2024. Total assets decreased from $12,415.1 billion on December 31, 2024, to $12,286.8 billion on March 31, 2025. Total liabilities decreased to $3,406.1 billion on March 31, 2025, from $3,508.5 billion on December 31, 2024, primarily due to decreased payables for capital expenditures. Debt ratios decreased to 27.7% on March 31, 2025, from 28.3% on December 31, 2024. Now finally, let's discuss our outlook for the second quarter of 2025. We expect revenue to be in the range of $550 million to $570 million with a projected gross margin of 7% to 9%. This concludes my financial remarks. We'll now begin the Q&A session. Operator, please assist. Thank you.

[Operator Instructions]. First question comes from the line of Leping Huang of Huatai Securities.

Congratulations for the good results. The first question, Dr. Peng, you mentioned in your opening remarks, you mentioned that the recent change on the business environment. Can you further explain -- elaborate what are the impact of this new tariff on your Chinese and non-Chinese customers? And what's your plan to react on this recent change on this new tariff environment?

Well, thank you, Leping, for asking the question and good to see, I guess hear you online. I think your question related to the recent tariff that we announced that throw a lot of things into somewhat of uncertainty, it definitely increased some uncertainty. But after a month, we did a lot of analysis. We look at our business situation. I would say the conclusion is that the tariff doesn't seem to have a meaningful impact to us at this point. We still monitor the situation very closely, and we actually will take all the necessary measures to basically minimize impact to us. To answer directly your question regarding our customers, how -- if you look at our customer, about 80% of customers are domestic design houses. And most of the product consumed in China in the domestic market. We do have 20% of international customers, obvious a special concern are the U.S. customers. But right now, the U.S. customer, their product mostly are sold in China as well. So if you notice in our Q1 report, if anything, there -- the revenue has actually -- the revenue we get from the U.S. customer has increased because there's a very minimal impact to them as well because they were -- their products were manufactured in China, but they were also sold in China. So it's not very little impact. On the supply chain side, clearly, there can potentially be some impact if there is no relevant policy that alleviates those. But so far, I think we are -- we have not seen much of an impact. So whatever the impact there is minimal is very much manageable.

Okay. Yes, it's very helpful. The second question is that I noticed that your analog and PMIC sales grew, I think if I calculate correct, it's 11% Q-on-Q in first quarter and 33% year-over-year and continue to grow consecutively for quite a few quarters. As the largest specialty fab in China, so where do you see this localization trend of the analog device in China now? And how big is the business opportunity for Hua Hong in terms of the analog business?

Thank you. I think you actually made a very important observation that the analog and PMIC platform, the technology platform that Hua Hong has is actually is one of those platform that is growing reasonably fast right now for us. I think there's probably a few factors. One is that our offering in this space actually is quite competitive. We are at the sweet spot of the market in terms of our technology and the capability of our technology. That's the first factor. Second factor is the fact that our customers, the design houses in those -- in this space are already largely domestic, but also have an international customer there as well. And their business is going quite well. I think there is probably a trend that in this space, a lot of the product will be designed by domestic customers. Therefore, since they use a domestic manufacturer like us, that it will give us a growth is another factor for our growing business. The third factor, I don't want -- I also want to point it out is that some of the PMIC products we make in this space are associated with the AI applications and AI application has continued to grow pretty fast. Some of the PMIC make for both domestic customer as well as the international customers, especially for the international customer, they have a strong position in the growing AI application. I should point out that the AI application for PMIC, although they are all PMIC, but it does have some newer type of products that drive some of the growth. So I think those 3 factors conspired together to make our analog and PMIC area to be a noticeable growth area for us. I expect this trend to continue in this -- rest of this year. If anything, we're looking for ways to expand our capacity because of a little bit short of -- a little bit short of supply here we cannot satisfy all the demand we're getting in this area, which is a good problem for us to have, but we definitely want to get into more of a balanced situation by increasing our capacity. As we -- as I noted, as I said in my introductory remarks that we continue to expand our capacity, and this is going to be one of the considerations where we spend our capacity is in some of the growing areas for us.

Okay. It's connecting. So a follow-up. So will you adjust your CapEx plan for this year or maintain the terms?

No, I think we will be by and large the same plan that we have. Here, we're just talking about the mix, how we manage to optimize the mix of the capacity expansion so that we can have more flexibility or more emphasis on this -- the platform that it's a growth platform.

Our next question comes from Ziyuan Wang from Citic Securities.

Congratulations on our continuous growth on the revenue side. And I have 2 questions. The first one is about the selling price. As we can see the current average wafer price is still at a relatively low level in the past few years. But the capacity utilization rate remains at full capacity. Under this situation, is there any possibility of the price increase for the product? And how receptive are the customers to price increases? And also, we can see after the tariff war, some materials price such as silicon wafers are they affected by the tariffs? Will this cost of materials rise due to the supply and demand? And will the company pass on this cost increase to customers?

Okay. Thank you Ziyuan, for asking the question. Let me try to answer your basically 2 large questions. First, on ASP, I would say there, we probably want to distinguish between 8-inch and 12-inch. 8-inch, the pricing pressure is still there. We think that it's stable. It's not decreasing, but we don't see appreciable increases either on the 8-inch front. On 12-inch front, the price is gradually going up, clearly not as fast as I would like, but it's definitely pointing to the right direction. There, as you mentioned, the question is customers are going to accept the price increases. Nobody -- no customer like price increases. But when we get into a situation where the demand is higher than supply, I think some of the increases is warranted, especially coming from 2024, which I consider as a low value in terms of the prices. I think I do expect that the price will continue to go up gradually and should continue to go up gradually. So the question is how fast we can do that. So that's the answer to your first question. The second question is on the tariff impact on the supply procurement costs, right? I think you probably understand pretty well about -- you specifically asked about silicon. I think there's -- I would say there is quite a few ways we can manage the tariff situation. One is we have always continued the effort to utilize non-U.S. supplier for some of the ones that are subject to the tariffs. So that originally, there's a domestic supplier, the capabilities coming up. So a lot of switching has been taking place and also will continue to go in that direction. And in this case, for tariff, even if the domestic capability is not there, you probably just need to avoid the U.S. origin, other places don't have much of a problem. So that's one way to do that. On the silicon side, most of the silicon the issue is going to be resolved. There might be 1 or 2 articles that are very specialized in the power device area or it will take a little bit of time to find a replacement. But the impact is going to be minimal with a small amount. We have stock some before the tariff hit and probably give us enough time to manage through that. And also during this time, the -- we're still doing some sourcing work to find the alternative. So in general, I don't think even on the direct material, we're going to see much of a meaningful impact from tariff.

Okay. Got it. Can I have a quick follow-up? We noticed that the gross margin in the Q2 guidance decreased by about 0% to 2% quarter-on-quarter. So what are the main considerations on this?

So it's a straightforward answer, which is, as we said, our second 12-inch line start to come online. In fact, Q1 2025 is the first quarter we're getting revenue contribution from the second line of the 12-inch fab, the fab line, okay? As you know, ramping new fab, it will put a pressure on the gross margin because the depreciation start to show up, and you're never going to be able to ramp fast enough to overcome that. So our goal is to minimize this ramping period so that we get up to the full capacity, full loading as capacity increases. But during this time, the gross margin will basically suffer. That's just how the semiconductor fab works. So that's the reason that the second quarter gross margin guidance is going to be slightly lower than Q1. And this pressure is going to be there in the subsequent quarter as well as fab line ramps up towards its full capacity.

Our next question comes from Tony Shen from SBB International.

This is Tony from SBB International. I've got 2 questions here. The first question is about, can you give us some outlook into the second half of this year in terms of end demand from different areas like consumer, industrial, which one is better and which one is weak from the company's perspective? This is the first question. And my second question is about the capacity expansion pace. Can you give us some color on how the capacity will be by the end of the second quarter and by the end of this year? And how do we see the utilization rate in the second quarter? This is -- these are my 2 questions.

Thank you, Tony, for the question. In terms of the customer demand, as I said, we expect 2025 to kind of continue the trend from the second half of 2024, which is gradually recovering. Right now, first quarter, more or less is aligned with our expectation. We do expect the second half will continue short of anything drastic happening on the policy or tariff front. That is the uncertainty we can say for sure right now. But I think if you just look at the market dynamics, we think 2025 is not going to be worse than 2024. If anything, it will be slightly better. The question is how much better. Second half should continue this trend. In terms of the segments, in general, the consumer side is still the weaker of the 2. If you just divide it between consumer and industrial. I think I would say the new application, AI related is growing reasonably healthy, reasonably robust, but that's still -- the cars continue -- still continue to grow after some inventory correction. I think that will pick up. The consumer it's -- that's the bigger question mark, but I think it's not going to be worse in 2024, it's probably going to be a slight positive. The second half of your question, I'm trying to remember now that capacity, yes. Capacity expansion, first of all, we have had the capacity expansion plan. We're more or less on that plan and going along pretty well. The one we're spending -- the Fab 9 is where we're spending capacity. Q1, as I said earlier, first quarter, we start to get contribution from Fab 9. By middle of this year, the capacity will be in -- it's changing fast. So it's going to give you a range and 20,000 to 30,000 per month type of capacity. By end of the year, we should be north of 40,000. By Q1 next year, we should be at the full capacity of our Phase 1 for Q1 expansion, which is about close to between -- okay, it's about between 600 to -- no the Phase 1 is about 60-ish. Then we have a Phase 2 that was still in the procurement period. That will probably get into the middle of 2026, we get the full fab line fill up, which is going to be 70 -- yes, plus/minus 70,000. So that's the Phase 1 in terms of the capacity expansion. In terms of utilization of the new capacity, so far, we managed to basically as the capacity come online, we get loading on them. That's because we have the benefit of having Fab 7 next door to Fab 9. And in fact, those 2 fabs are connected. We build it like a mega virtual fab connected and a lot of NTO -- a lot of R&D NTO, we actually took full advantage of Fab 7 next door to get them done. So when the Fab 9 capacity come online, we can quickly fill up. This is along the same line, I said earlier that we have this goal of trying to get up to -- try to get Fab 9 capacity built as fast as possible. But it's not just building the capacity, we also need to be able to fully utilize it once they are in place to get them utilized as fast as possible as they get to the full capacity in the second -- in 2026. So that's the current situation. I would say this part, we are doing quite well, and we are pretty happy with our progress here.

The next question comes from Hu Jian from Guosen Securities.

And my question is about the competition. So on the one hand, we can see AI and even demand is strong. So just now Dr. Bai mentioned the price will go up gradually. But on the other hand, we can see a lot of new foundries, especially in power electronics and power management. So what's our price and technology strategies for the intense competition in following quarters? That's my first question.

All right. Thank you Jian for asking the question. This is actually a good question. If you look at the landscape or the competitive landscape we are facing, there are places -- clearly, there are places where there's a lot of capacity coming online that theoretically compete with us on one hand. On the other hand, we do see that there's a growth in demand in some of the areas. I think it's probably boil down to how competitive is your technology whether you have the scale and capacity for that matter, to satisfy customer needs. I use the BCD, the power management area as an example. It's -- on one hand, I see as you do that there is a -- there's a number of small players that also claim to play in this role. But I would say BCD as a technology is not that easy. You have to get to be pretty competitive. Also, you have to have the right sweet spot in terms of the technology offering to satisfy the volume segment of that particular market segment. Also, the PMIC product requirement for reliability, especially once you get to industrial applications are pretty high. Although you see a lot of the capacity out there and there are competitors of ours who will need to use price to get into the market. But even that, I think there are certain things that just don't have what we have. I will be -- I can confidently say that in terms of our technology offering in terms of our scale, the kind of capacity we can offer. But sometimes the premium -- there's definitely a premium to the technology and the scale in that area. So there's obvious a balance. There are certain -- there are some products we just own we will lose to those price competitors, which is fine for us because right now, we have enough demand. But for the big ones, the ones and the premium customers, the ones that are willing to pay a higher price, that gets to how we think we can have a little bit of price increase is that the ones -- their choices are still very much limited. Basically, we are still ranked very high on that list where they can go. I don't know if I explained this well to you.

Yes. I got it. So -- and also, we have covered the top players. So we believe our price and also technology is among the top in the China area. And another question is about the trend of the mature process. So is it -- will it move to more advanced node or integrate the process such as integrate the BCB plus eFlash platform for lower cost and higher integration product. So what's the trend of the mature process.

Okay. Good question again. I would say Hua Hong's position is always going to be Hong -- HHgrad, I should say, not the entire Hua Hong group. But HHgrad's position will be on specialty technology at mature nodes. Now I have to quickly follow that statement with a disclaimer that the mature nodes do evolve over time. But right now, we are already at 50, 40-nanometer as the most advanced node where we do our specialty technology, where we build our technology platform. We do intend to continue to do node migration go to 20, 28, 22-nanometer because those nodes are also now becoming mature nodes where we're going to build all those specialty technologies. So in that regard, we will move towards more advanced node to do specialty technology. But we're not going to get into -- SH grace is not planning to be in the advanced node where most of the high compute products are manufactured. Now you need to be in the 14-nanometer and below. That's not our plan and our intention. So we're still going to be doing the specialty technology at the mature node, with time, we move with the market because the specialty technology is really market-driven. Some of our market area like MCU we already is moving towards 40, maybe a few years down the road, 28 and some of the CAS and the sensor area, they are also getting to there. So we will move where the market is, which is some of the platform will naturally go into a more mature nodes. Another question you have is, do we have a technology offering where we try to combine some of our platform getting to a higher degree of integration. The answer is yes. I'm glad you asked that question. We actually have a BCD plus flash technology combination. That is a higher degree of integration type of approach, a new platform where you have both BCD and flash. This is in a way, somewhat a unique advantage we have because we have multiple platforms and not all our competitors have both BCD and flash and not all of them have very good PCD and flash. We do actually have good BCD and flash. So we try to offer a combination. There are certain classes of the product can be better optimized using a higher degree integration approach to some of the products. We are already in the NTO stage on some of the BCD and flash combination platform, integrated platform. So I'm glad you asked that question. So the answer is definitely yes. We will look for those opportunities to further increase the value of our technology offerings.

Our next question comes from the line of Jen Kuai from Orion Securities.

Just now you talked about the tariff impact from the material procurement. As we are expanding our capacity, so do we see any tariff impact to the new equipment procurement as well as the old equipment maintenance? That's my question.

Okay. You're talking about -- you're asking the impact of the tariff, right? That's what you're asking.

Yes.

For equipment, we don't see much of an impact even from the U.S. company because a lot of the manufacturing is actually outside the U.S. So because the country of origin depend on where the manufacturing takes place. So it's -- in that way, that naturally avoided even the big U.S. equipment supplier, their manufacturing base is actually in Asia. So they were -- for the few items that they might -- I don't know, they might have a U.S. component, but they get routed so many times to rest of the world that when they reach our doors, they are not considered U.S. equipment anymore. So in that regard, as I said earlier, it's really -- we don't see amongst the 3 things that we buy to expand the capacity, equipment, not much impact. The components is also not much of an impact. The raw material silicon, I answered earlier, there might be some special article that will take a little bit of time, but that's a very small amount and it's not very meaningfully impacting us. So again, I don't think -- we don't see at this moment, there's much of an impact. I just hope that things will not get worse. [indiscernible] too pervasive, who knows. That's the uncertainty I cannot predict, okay?

Okay. My second question is about the power device. As some of the global IDMs, they are saying they see some kind of demand bottom of the power device. And so from our perspective, how do we see the demand cycle of power devices?

The power devices is -- first of all, it is one of our platform, our 5 big platforms that we make our revenue from. We will continue to do our best to increase that segment. Second point is that the power devices have a long history originally come from 8-inch, now the 12-inch also a lot of new capacity on 12-inch power devices. And so that is -- there is definitely a strong fierce competition in terms of the supply of the power devices. So in that regard, we have a pretty good presence because, again, in power devices because Hua Hong has a long history, has quite a bit of accumulation of the knowledge of our technology, like a super junction high voltages, that's where we are basically focused more and more of our R&D effort because we think those areas are still -- we can still distinguish us from our competitors. It is true that some of the power device entry level is reasonably low. So that's why a lot of the newcomers and new entry into this now market because it's relatively easy for them to get into there almost as a capacity fill. But we still have a reasonably high expectation or reasonably confident that in this area through our scale and our technology and also some of the new development we're doing -- technology development we're doing to continue to have a very good presence. This is also one area we should -- I want to also say that we have some European customers where they have this China for China strategy that we are also collaborating in the power devices is one of the areas where we have some collaboration for the China for China strategy. So that also gives us confidence that we can continue to make a pretty good living out of -- in this power device area.

Our next question comes from the line of Timothy Wong of Oriental Asset Management.

[Foreign Language].

Thank you Timothy for the question. I think there's always a discussion in the industry on some of the demand uptick, if you will whether that's a short-term stocking behavior because they are worried about the tariff-related uncertainty or there's the reflection, whether they reflect the true end user demand increase. That debate is probably going to go on as long as we have this uncertainty. So I take your point. I think that we are all -- we're very aware of that. But I think -- I do think I still believe that because of 2024 the assessment of 2025 was based on 2024 situation. That was probably before the tariffs come online, that most people were believing that 2025 will be better. So that is point #1. Point #2, right now is probably the most important thing is as long as the tariff situation doesn't disrupt too much of the market dynamics, the market logic too much. We still expect 2025 will play out as we originally expected. Now as we said earlier, the uncertainty is increasing. That's definitely part of uncertainty. We don't know how -- whether the uncertainty become reality. So your concern -- I share your concern, but the current assessment is still, as I said earlier.

Next question comes from Alex Chang from BNP Paribas.

I have a quick question regarding to your revenue by region. So can I clarify that the sales to the North America, is this based on the customers' origin or based on customers' location?

It's based on where the company is registered. It's basically they U.S. company or considered a Chinese company.

Okay. Understood. So my question is that we see the first quarter, the revenue from North America increased 22%. This is a much better trend than the previous quarters. So could you please give more color on this, like which kind of platform -- technology platform and the product is a major driver for this North America sales?

It's mostly in the power management IC.

Okay. Understood. And for the -- for example, for the power management IC, I believe you also have some orders from local customers. Is there any price difference between the North American customers and the Chinese customers?

In terms of the -- what the price they get from us, there is really no -- it's -- there's no -- whether you are domestic or international, it is not much of a factor. That's not to say all the customers have the same pricing because there's other factor, volume or the -- how long we have doing business and whether the special -- each product have a little bit of a customer IC technology customer is based on all those factors. So you will see the prices are not identical even for the same platform. But it's not based on whether you are international or domestic, if I explain this well.

Sure, sure. Understood. And apart from this power management IC, can you comment on the, for example, the analog order from North America customers? Do you see any order trend changes from the overseas customers?

When you say analog, basically PCD is kind of like an analog circuit. So in general, it's a big area, analog, PCD, they will group them together. So it's -- we think this... I'm sorry, yes.

Okay. My second question is about -- there has been some considerations to acquire the foundry assets from Huali Group. Can you give us some update on this timetable of the potential strategies regarding this acquisition?

Yes, it's true that when -- in 2023, when Hua Hong Semiconductor went public in China in April Asia, there was a commitment that was made that within 3 years from that time that the overlapping business between HS Grace and Huali will all be bought under HS Grace's umbrella. That's still the plan. We are like a second year into -- from the original date. So that means that within next year, basically, we still have about a year for a little bit more than a year for that 3-year period commitment. So within that period, we expect that we will fulfill that commitment.

We will now take the last request from Qingyuan Lin from Bernstein.

Thank you Dr. Bai and Daniel for the introduction. My first question is around the gross margin trend. I think Dr. Bai, you explained pretty well around the pressure on ASP didn't increase as well as we expected and then the depletion started kicking. When do we expect the gross margin to bottom? Do we see the third quarter will continue the downward trend or we start to see it pick up?

This is Daniel. I think we're going to -- I think the goal is to continue to, as Dr. Bai said, we -- there's some pressure in the 8-inch space on pricing, overall pricing. But our goal is try to improve gross margin over time, not only just in the 12-inch as well as in the 8-inch as well. We're working very, very hard. So that way, we can make sure that the overage that we -- the benefit we get over time that we will be able to offset the fixed costs that the huge fixed cost that basically is driving the -- basically the negative manufacturing cost from the second 12-inch fab.

So I will add a little bit to what Daniel said. I know we probably didn't answer specifically your question, but I think it's good to add a little bit of color to this. For gross margin, when you have a new capacity online, that depreciation is just a fact of life. You just can't avoid that. The hope is to rapidly get up to scale. So you don't lose anything on the scale just because they are running fewer wafers that you give you a disadvantage. That's one. Another one, if the market situation is better, pricing is better, it will definitely help. The third factor, which we haven't talked too much about, which is probably a good time I bring this up is that we also have a huge effort within the company to cut the cost and improve the efficiency. That's not going to solve all the problem, but I do think there's a room that we can do better there that can help us offset some of the depreciation, the fixed cost aspect there. That I think it's going to becoming a bigger story as we go into the rest of the year and even 2026. I think we do -- are making some structural adjustments to get our cost structure to be a little bit lower. All those efforts plus getting the higher pricing, I think the 12-inch naturally will happen a little bit. 8-inch is where the pricing pressure will be very high. But 8-inch, if we can get the cost down a little bit, even if we don't -- we're not growing 8-inch capacity, the pricing and cost is everything there in terms of the growth trajectorty. So we definitely have quite a few growth that actively we are planning with them and try to get the overall situation. I am some cautiously optimistic that you're not going to see too much of a degradation.

Yes. I mean I think Dr. Bai is absolutely correct. We have a goal. We want to improve pricing on the 8-inch. I also initially said we want to move it from 30% gross margin towards within 12 months to 16 months towards 40% when the market demand gets better. And also for the same team -- it's also true for the first 12-inch fab. The first step, make it positive and then move towards 10% gross margin. And that way we can cover some of the fixed costs that will basically came out from the -- especially from now until for the next, I think, 12 to 24 months in that period, that the cost that would get generated from the -- basically, these are fixed costs, while the fab was ramping up -- will be ramping up during that period of time.

I see. Very clear. My second question is around the embedded NOR Flash platform. We talked a little bit about the other platform, but this is the MCU side is actually a very unique advantage of us, but it still looks quite weak quarter-over-quarter. The share of MCU continue to drop from 25% to 24%. Do we see it's actually a cycle issue or anything around sort of the kind of the China demand or inventory kind of still big? What's kind of leading to that weakness for embedded NOR Flash?

You have a very good observation there. Embedded flash is an area we want that to grow faster for us. And if it does grow faster, it should represent a higher percentage of our revenue. I think right now, you will see that rapid change in the next couple of quarters, next few quarters, I should say. I think it's boil down to our offering, the timing of our offering. We are still -- we're moving from 90-nanometer to 55, that's happening really fast. So once that happens, it will give us a boost, plus we're getting the 14-nanometer also ready pretty much by second half of this year. That will also give us boost in terms of the revenue. I don't think it's the end market issue is really -- we just have to match our offering to where the sweet spot of the market is. Right now, I think it's 55 there and very quickly, we'll go to 40, and we're going to be there. I wish we were a little bit earlier on this, but I think right now, we're still more or less a pretty good match to the time market demand. But you are correct. The last couple of quarters, if you just look at MCU, our share hasn't changed that much. I don't expect -- I don't like that. I also don't expect that to continue in the next few quarters.

Ladies and gentlemen, that's all the time we have for questions. I'll now hand the call back to Mr. Daniel Wang for closing remarks.

Well, once again, thank you all for joining us today and for your thoughtful questions. We appreciate your continued support. And both Dr. Bai and I look forward to speaking with you again next quarter or even during now and then, wish you all stay safe and healthy. We look forward to meeting many of you in person soon. Thank you.

Ladies and gentlemen, thank you for your attendance. You may now disconnect.

Thank you.