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

Ladies and gentlemen, thank you for standing by. Welcome to Hua Hong Semiconductor's Second 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 second 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 Q2 2025 earnings conference. Today, we will first have Dr. Peng Bai, our Executive Director and President, share some remarks on our second quarter performance. I'll then take you through our financial results in detail and offer guidance for the upcoming quarter. We then open the floor for a Q&A session. With that, I turn the call over to President Bai.

Thank you, Daniel. Good afternoon, everyone. Thank you for joining our earnings call. Second quarter 2025 sales revenue for Hua Hong Semiconductor reached USD 566 million, in line with guidance while gross margin stood at 10.9% above guidance. Both sales revenue and gross margin showed sequential growth with capacity utilization hitting a record high for recent quarters. Amidst global trade and foundry market fluctuations, the company focused on enhancing core competencies in products, processes, R&D and supply chain management. The initial progress has been made in cost reduction and efficiency improvement, leading to continuous optimization of key operational metrics. Facing a semiconductor market with demand fragmentation, we remain anchored to our speciality technology domain, striving for breakthroughs in key technology platforms to diversify our product portfolio. As the new 12-inch production line in Wuxi steadily ramps up capacity, the company will achieve comprehensive upgrades from capacity scale to technology capability. Regarding market strategy, we are aligned with domestic and international strategic customer needs while embracing an international and open business development approach to expand our global client base. Hua Hong Semiconductor will continue to actively deploy strategic initiatives in the future to solidify the company's leading position in foundry industry. Now I would like to hand the call over to our CFO, Mr. Daniel Wang, for his comments. Daniel?

Thank you, Mr. Bai for your inspiring remarks. Now let me walk you through a summary of our financial performance for the second quarter, followed by our revenue and margin outlook for Q3 2025 before opening the floor for the Q&A section. First, let's review our financial results for the second quarter. Revenue was $566.1 million, 18.3% over Q2 2024 and a 4.6% over Q1 2025, primarily driven by increased wafer shipments. Gross margin was 10.9% or 0.4 percentage point over Q2 2024, primarily driven by improved capacity utilization and average selling price, partially offset by increased depreciation costs, and 1.7 percentage points above Q1 2025, primarily driven by improved capacity utilization. Operating expenses were $97.9 million, 8.4% over Q2 2024, primarily due to increased engineering wafer costs and the depreciation expenses, and 0.8% over Q1 2025. Other income net was $10.6 million, 54% over Q2 2024, primarily driven by decreased foreign exchange losses and finance costs and increased government subsidies, and compared to other net loss of $8.3 million in Q1 2025, primarily due to decreased foreign exchange losses and finance costs. Income tax expenses was $7.1 million, 15.2% lower than Q2 2024, primarily due to decreased taxable income. Net loss for the period was $32.8 million compared to $41.7 million in Q2 2024 and $52.2 million in Q1 2025. Net profit attributable to shareholders of the parent company was $8 million, 19.2% over Q2 2024 and 112.1% above Q1 2025. Basic earnings per share was $0.05, 25% over Q2 2024 and 150% over Q1 2025. Annualized ROE was 0.4%, flat with Q2 2025 and Q1 2025. Now let's take a closer look at our Q2 2025 revenue performance. From geographic perspective, revenue from China was $469.7 million, contributing 83% of the total revenue and an increase of 21.8% compared to Q2 2024, mainly driven by increased demand for other PMICs, super junction, analog and logic products. Revenue from North America was $53 million, an increase of 13.2% compared to Q2 2024 mainly driven by increased demand for other power management IC products. Revenue from other Asia was $28.6 million, a decrease of 1.2% compared to Q2 2024. Revenue from Europe was $14.7 million, a decrease of 14.2% compared to Q2 2024, mainly due to decreased demand for general MOSFET products. With respect to technology platforms, revenue from embedded nonvolatile memory was $141.2 million, an increase of 2.9% compared to Q2 2024, mainly driven by increased demand for MCU products, partially offset by decreased demand for smart card ICs. Revenue from stand-alone nonvolatile memory was $27.6 million, an increase of 16.6% compared to Q2 2024, mainly driven by increased demand for flash products. Revenue from power discrete was $166.7 million, an increase of 9.4% compared to Q2 2024, mainly driven by increased demand for super junction and general MOSFET products. Revenue from logic and RF was $86.6 million (sic) [ $68.6 million ] an increase of 8% over Q2 2024, mainly driven by increased demand for logic products. Revenue from logic and power management IC was $161.2 million, an increase of 59.3% over Q2 2024, mainly driven by increased demand for other power management IC products. Now turning to our cash flow statement. Net cash flow generated from operating activities was $169.6 million, 75.1% over Q2 2024 and 238% above Q1 2025, primarily due to increased receipts from customers. Capital expenditures were $407.7 million in Q2 2025, including $376.4 million for Hua Hong Manufacturing, the second 12-inch fab. $17.6 million for Hua Hong 8 inch and $13.7 million for Hua Hong Wuxi, the first 12 inch fab. Other cash flow generated from domestic activities was $22.2 million in Q2 2025, mainly including $19.4 million interest income and $5.5 million receipts of government grants of equipment, partially offset by $2.8 million investment in an associate. Net cash flows used in financing activities was $25.2 million, including $125.7 million in bank principal repayments, $38.6 million interest payments and $1.2 million lease payments, partially offset by $138.1 million proceeds from bank borrowings and $2.2 million proceeds from share option exercise. Now let's move to the balance sheet. Cash and cash equivalents was $3.8469 billion on June 30, 2025, compared to $4.0799 billion on March 31, 2025. Other current assets increased from $648.8 million on March 31, 2025 to $688.5 million on June 30, 2025, mainly due to increased value-add tax credit. Property plant and equipment was $6.102 billion on June 30, 2025, compared to $5.9676 billion on March 31, 2025. Total assets decreased from $12.2868 billion on March 31, 2025 to $12.2371 billion on June 30, 2025. Total liabilities decreased to $3.3634 billion on June 30, 2025 from $3.4061 billion on March 31, 2025, primarily due to decreased payables for capital expenditures. Debt ratio decreased to 27.5% on June 30, 2025, from 27.7% on March 31, 2025. Finally, let's discuss our outlook for the third quarter of 2025. We expect revenue to be in the range of $620 million to $640 million with a projected gross margin of 10% to 12%. This concludes my financial remarks. We'll now begin the Q&A session. Operator, please assist. Thank you.

Thank you. We will now begin the question and answer session. [Operator Instructions] We will now take our first question from the line of Ziyuan Wang from Citic Securities.

Okay. Congratulations on very good results of this quarter. And I think the gross margin of Q2 and Q3 guidance beats our expectation. And my first question is we think maybe there is -- there are some impacts from export rushes and inventory replenishment in the second quarter. But based on the downstream demand, how can we assess the sustainability of the subsequent demand in the second half?

Okay. Thanks. Let me try to answer that question. First of all, I think the second quarter, the gross margin indeed exceeded our expectations a little bit as well, primarily driven by a few factors. One is the demand has continued to be robust. I think there are 2 or 3 big internal factors that drove this change because the external demand has been pretty robust over the last few quarters now. I think the Q2 results is probably primarily due to 2 internal factors that have exceeded our expectations. One is our capacity utilization. Capacity utilization has been a little bit better. Another one is our cost reduction efforts is also going pretty smoothly. I should add another third factor, which is the pricing erosion, what we're seeing over the last few quarters has stabilized somewhat. I wouldn't say the prices increased, but definitely has not continued to be low especially on the 12-inch side. And obviously, there's a lot of complexity there because it will depend on different technology platform, some are doing better than others while the power discrete, for example, still under pretty tremendous pricing pressure, but other platforms IT platforms that we have are doing okay. Now to your second part of your question, second half of this year, the two internal factors I just mentioned for Q2, I think they will continue. But you have to realize in the second half, the fab 9 capacity will continue to come online and will give us more depreciation pressures. So that's the factor that should be taken into count. Overall, I think our view is reflected in our Q3 projection, which is gross margin. I think it's going to be around 10% to 12%. And our visibility into Q4 is obviously less than Q3, but I think it's probably still going to be in that range, but we should wait until we get close to Q4 to give you a more precise projection.

Okay. I want to have a quick follow-up for this question. On the pricing side, we also see the ASP on the second quarter is stable Q-on-Q. And do you think there will be any ASP going up in the second quarter? And if there is any price -- sorry, in the second half -- but -- and is there any price increase or which kind of products will it primarily focus on?

I would say we would like to have a small price movement in the second half of the year and probably in a single-digit type of range, is mostly being focused on 12-inch and IC platforms.

Just to add, we basically start to do all the price adjustment in second quarter. So the -- most of that is going to reflect starting Q3 and Q4. So I think in Q3, Q4, you're going to see a pretty clear price basically lift in the 2 quarters. We expect -- the adjustment we did in Q2 to reflect in Q3 and Q4.

Let me be clear, but not too big. Just make sure you don't overestimate that.

Okay. Got it. Okay. And the second question is, I think about the anti-internalization. The current policies is guiding the industry like some photovoltaics to begin anti-internalizing.

Sorry.

Could you please repeat that question again?

We seem to have lost him. Yes, operator we seem to lost...

Is there any -- sorry, can you hear me?

Yes. We lost most of your question, can you repeat that?

Okay. Okay. Sorry. The current policies is guiding the industry like photovoltaics to begin anti-internalization process. And in the semiconductor industry, especially the mature nodes in recent years, we can see the competition has been intensified. Is there any possibility of similar anti-internalization process in the semiconductor industry? Or is the industry still in a period of unregulated growth?

That's a good question. It's actually a question a lot of people are asking. I would say for semiconductor industry, first of all, the end market, the end market like EV and solar, they are going through their own dynamics and maybe there's going to be less unhealthy competition there. Semiconductor, we certainly hope that will be the case as well. I think my personal take is that there are some market forces that will start to have an effect on that, meaning that -- the second factor is when the market goes for another one is the policy direction, my reading of the policy direction are also pointing to the same direction that you're probably going to constrain some of the capacity increases over the next couple of years, which in turn will reflect into more stability in the semiconductor industry if that's what you're asking. So I do think in next couple of years compared to last couple of years, we will see a more stable, more stability in terms of the capacity increase. Overall, it should be a positive factor for our industry.

We will now take our next question from the line of [indiscernible] from Guosen Securities.

[Foreign Language] I have 2 questions. First, I will follow up the previous questions about the demand first. Currently, we can see the regional differentiation in the demand. The domestic demand is strong, while the overseas demand is weaker. And also the differentiation exists among the manufacturers since our utilization is high, but some foundries are facing challenges. So many investors worry about demand uncertainty of the longer term. So are there any details you can give us, some of the drivers in the following quarter or the longer-term growth maybe from management or other sectors.

Okay. Thank you for asking the question. We got quite a few of them mixed there. Let me try to see if we can tease out each one of them and give you a more comprehensive answer. In terms of demand, let me -- I think we -- as I said, for our -- we have been seeing robust demand actually over the last few quarters now. I think that will continue into near future for as far as we can see. This is hard to explain in simple terms because our end markets are quite complex. There are some end markets probably are not growing as robust, but some others are probably growing pretty fast. So for example, all the AI-related applications are pretty healthy and also growing robustly. And the consumer sector seems to also be doing okay, probably helped by the stimulus policy that has been going on. And also the consumer electronics I think its after some inventory adjustment seems to be back to normal as per our reading. And EV, that has also has been driving some growth. So although the end market also seems to go through a lot of changes, we'll see exactly how that will translate. So with all the different end markets have different dynamics, but all -- you got them all together that combine them and translate into our business since we do think that the near term the situation, the demand situation is fairly stable and has been similar. probably similar to what we have seen over the last few quarters. So for Hua Hong, for both near term and long term, you asked about our long-term growth strategy. Many differentiate. The near term, basically, we got to work with the capacity we currently have. And what we will try to do is improve the efficiency, try to get more out of the current asset base and try to get the technology better and also deploy into the areas where we think the pricing are better or the pricing are more and more robust and try to flex from the area where there's a more price erosion to areas where price can hold up a little bit better. Near term is basically what we have been doing over the last 2 quarters with improved efficiency, continue to drive cost reduction, continue to focus on technology development so that we get -- have a better technology and better product offering to our customers. Longer term, the growth has to come from an increase in our capacity. So we are -- we will be expanding our capacity as -- just like we have been doing continuously over the last few years now. So we'll continue that journey. We will continue to expand our scale, increase our capacity, and we'll do so in a fashion that obviously needs to be efficient. Also, we will target technology in the specialty technology area where we think the growth potential is good and also we have a competitive advantage. So on that particular point, I'm sure in the later quarters as we get some of the growth plan more firmed up then we can give you guys more update.

Understood. And my another question is about the power devices since we can see the market is recovering while the margin is relatively low compared to other products. So what's the target proportion of the power device in our overall capacity planning? I believe maybe there's a trade-off here.

The power device, first of all, it is a large market. I think the overall market is still growing, largely because a lot of new applications -- let me wait until it is over. So I think our view is that the end market is still growing. The market is also large. There's a few growth factors for the end market like EV, maybe eventually robotics. So also become a big growth factor for power devices. So that is not the issue. Another thing that's positive is that the power devices, the technology continue to evolve, some of the technology -- we have a pretty comprehensive technology offering in the power devices. And we also have some specialized areas that we're doing pretty well like Super Junction because Hua Hong has been probably a leader in this area in terms of technology. So that's one of the factor I want to also say that. The less positive factor for power devices, frankly, is more of a supply-demand balance. I think over the last few years, one can argue that the capacity growth mostly from our competitor has been pretty fast. That might have led to some imbalances between the supply and demand, although the overall demand is still growing, that does -- it does have some pressure on the pricing, especially on the lower end of the market. So we have clearly seen that Hua Hong has a pretty large power device capacity. We have a large base. We have that in 8-inch, and we also have that in 12-inch. So that we have a pretty large capacity. So we will continue to basically use our competitive advantage there, including the scale we have, which is pretty large in the foundry market for power device -- in terms of the power devices. And we will continue to use our advantages, our competitive advantages to make this market work for us better in the future. All the new capacity planning we are doing in the future, we do not expect to continue to expand the power device capacity. What we have is already pretty large when you put the 8-inch and 12-inch together. I hope I answered your question.

Yes. And we are looking forward to the better performance in the following quarters.

We will now take our next question from the line of Leping Huang from Huatai.

Okay. So first, congratulations for the very strong result and also the guidance. I noticed that the percentage of sales from the analog and power management increased again this quarter by 3.2 percentage. And can you share some kind of what are the end application of this analog you are increasing? And what are the outlook of these analog segment looking forward in the next few quarters? .

Thank you Leping. Good to hear from you. I think you have a very astute observation. Indeed, that particular platform is the one that has grown the most. The biggest segment there is what we call BCD platform, which is used for power management chips. That's the area that's growing the fastest. This is where I think Hua Hong, we have done a pretty good job over the last 2 quarters because, frankly, the demand exceeded our capacity. Originally, we're planning certain number of capacity for that area. Now almost -- the demand almost doubled relative to the original -- what we planned. This is where we did a pretty good job using the capacity flexibility that we have. This also our large scale in this area also helped us to be able to flexibly deploy the capacity to where the demand is the highest. So in the end, it's a pretty good story there, I would say that we continue to derive quite a bit of increase in revenue from that sector. We expect this trend just from local -- from Hua Hong standpoint of view, this supply-demand imbalance, we should be able to get to a very good point by end of this year or beginning of next year as we continue to increase the capacity in this particular sector.