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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by, and welcome to the Hua Hong Semiconductor's First Quarter 2018 Earnings Conference Call. Today's call is hosted by Mr. William Wang, President and Executive Director; and Mr. Daniel Wang, Executive Vice President and Chief Financial Officer.
[Operator Instructions] The earnings press release and first quarter 2018 summary slides are available to download at our company's website www.huahonggrace.com.
Without further ado, I'd like to introduce you to Mr. William Wang, President and Executive Director. Thank you.
Good afternoon, everyone. Thank you for participating in our conference call. Our company continued to thrive. In the past quarter, our team was able to successfully reduce cycle time by approximately 1 day in each of the 2 fabs that performed annual maintenance. As a result, the company delivered more revenue and a better margin than we initially expected.
Revenue reached USD 210.1 million, 3.1% somewhat lower than the previous quarter, but an increase of 14.7% compared to a year ago. Gross margin of 32.1% was 1.6 percentage points lower than Q4 2017 largely due to seasonality and a slight increase in depreciation expenses, but 2.4 percentage points above a year ago, driven by increased shipments, improved average selling price and better utilization. Net profit margin remained flat at 19.2% (sic) [ 19.1% ]. Once again, our revenue and the gross margin exceeded our plan.
We remain very positive about the potential for the sustained growth of the company and are moving full speed ahead with the build-out of our first 12-inch fab in Wuxi. In the near term, we foresee a robust second quarter and we believe we will achieve another quarter of superior performance. Strong demand comes from many fronts, in particular for ICs for bank cards and the power discretes. We are undoubtedly hopeful we will achieve another year of success.
Now I'd like to hand the call over to our CFO, Mr. Daniel Wang for his comments.
Thank you, William. Hello, everyone. Thank you for joining us today. I'll begin with a summary of our financial performance for the first quarter, followed by an outlook on revenue and margin for the second quarter 2018 and we then move on to the question-and-answer session.
First, let me summarize financial performance as of the first quarter. Revenue was $210.1 million, 3.1% lower than Q4 2017, but 14.7% over Q1 2017.
Cost of sales was $142.7 million, 0.8% lower than Q4 2017, primarily due to decreased wafer shipments, partially offset by increased depreciation expenses and 10.8% above Q1 2017, primarily due to increased wafer shipments and depreciation expenses.
Gross margin was 32.1%, 1.6 percentage points below Q4 2017, primarily due to increased depreciation expenses, but 2.4 percentage points above Q1 2017, mainly due to increased shipments, improved average selling price and better utilization, partially offset by increased depreciation expenses.
Operating expenses were $25.4 million, 30.8% under Q4 2017, primarily due to an accrual of year-end bonus and an impairment provision in Q4 2017 and 13.5% above Q1 2017, mainly due to increased labor and R&D expenses.
Other loss net was $2 million, versus an other income net $12.2 million in Q4 2017, primarily due to one, decreased share of profits from an associate; and two, increased foreign exchange loss, and versus an other income net of $2.4 million in Q1 2017, primarily due to increased foreign exchange loss, partially offset by increased interest income.
Income tax benefit was $0.3 million compared to income tax expenses of $7 million in Q4 2017, primarily due to a reversal of $9.3 million of dividend withholding tax accrued for the prior year.
Profit for the period was $40.2 million, 3.1% lower than Q4 2017 but 18.1% above Q1 2017.
Net profit margin was 19.1%, flat to Q4 2017 and 0.5 percentage point over Q1 2017.
Earnings per share was $0.04, flat to Q4 2017 and $0.01 above Q1 2017.
Annualized ROE was 9.2%, 0.8 percentage point lower than Q4 2017 and flat to Q1 2017.
Now please let me give you with more details of our revenue from Q1 2018. From geographic perspective, revenue from China was $117.4 million, contributing 55.8% of our total revenue and a decrease of 4.1% compared to Q4 2017, primarily due to decreased demand for smart card IC and analog products.
Revenue from the United States was $40.2 million, a decrease of 2.2% compared to Q4 2017, primarily due to decreased demand for flash and super junction products, partially offset by increased demand for logic products.
Revenue from Asia was $23.9 million, an increase of 7.6% compared to Q4 2017, chiefly driven by increased demand for general MOSFET products.
Revenue from Europe was $16.4 million, an increase of 5.5% compared to Q4 2017, primarily driven by increased demand for general MOSFET products.
Revenue from Japan was $12.1 million, a decrease of 22% compared to Q4 2017, primarily due to decreased demand for MCU, flash, super junction and the logic products.
With respect to technology platform, the revenue from embedded non-volatile memory was $83.7 million, a decrease of 2.6% compared to Q4 2017, primarily due to lower demand for smart card IC, partially offset by increased demand for MCU products. Revenue from discrete was $66.2 million, an increase of 6.2% compared to Q4 2017, mainly driven by increased demand for general MOSFET and IGBT products, partially offset by decreased demand for super junction products.
Revenue from analog and power management IC was $35.4 million, a decrease of 12.7% compared to Q4 2017, primarily due to decreased demand for analog and LED lighting products.
Revenue from stand-alone non-volatile memory was $5.4 million, a decrease of 35.3% compared to Q4 2017, primarily due to decreased demand for flash products.
Let's now take a look at the cash flow statement. Net cash flow generated from operating activities were $57.5 million, down by 34.8% quarter-over-quarter, primarily due to: one, increased trade payments; and two, a payment of year-end bonus, partially offset by a receipt of rental income from a related party.
Capital expenditures were $86.7 million in Q1 2018, including $49.8 million for Hua Hong Wuxi.
Other net cash generated from investment activities were $74.4 million, including payout of $71.8 million from investment in time deposits, and $2.6 million of interest income.
Net cash flows generated from financing activities were $189.6 million, including: one, $188 million of equity injection to Hua Hong Semiconductor Wuxi Limited, our joint venture subsidiary; and two, $2.1 million proceeds from share option exercise, partially offset by $0.5 million payment of interest expenses.
Now let's move to the balance sheet. Cash and cash equivalents increased to $617.7 million on March 31, 2018, compared to $374.9 million on December 31, 2017. Restricted and time deposits decreased from $193.5 million on December 2017 -- December 30, 2017 (sic) [ December 31, 2017 ] to $125.2 million on March 31, 2018, primarily due to payout from the investment in time deposits.
Property, plants and the equipment increased from $733.5 million as of December 31, 2017, to $752.9 million as of March 31, 2018.
Other non-current assets increased from $218 million as of December 31, 2017, to $277.7 million as of March 31, 2018, mainly due to the prepayment for Hua Hong Wuxi.
Total assets increased from $2 billion -- $2.078 billion on December 31, 2017 to $2.375 billion on March 31, 2018.
Our total bank borrowings was $94.3 million on March 31, 2018.
Total liabilities decreased to $382 million on March 31, 2018, from $383.1 million on March -- December 31, 2017.
Debt ratio decreased to 16.1% on March 31, 2018, from 18.4% on December 31, 2017.
Finally, let me give you a very high-level outlook for the second quarter 2018. We expect revenue to grow in the range of 5% to 7% and gross margin to be between 32% and 33%.
So this concludes my financial remarks. Now we would like to open up the call for question and answers. Operator, please assist. Thanks.
[Operator Instructions] Our first question comes from the line of Szeho Ng of China Renaissance.
Two questions from my side. First one, what is the utilization your capacity can theoretically achieve?
Can you just speak louder, please?
Okay. What is the...
Utilization rate for the second -- for the first quarter?
No, I mean, the [ factory ] utilization you can achieve theoretically.
Theoretically? In theory, 100%.
100%, okay. All right. And the second one is regarding the customer order lead time. Are you seeing the lead time stretching or normalizing?
I think our lead time is very, very stable. We're talking about normally about 45 to 60 days.
Our next question comes from the line of Leping Huang of CICC.
So I have a question. So you have, I mean, quite a few platforms, so -- non-volatile, discrete, analog. So can you elaborate because of which will gradually migrate through Wuxi or what will be the timetable to leverage your new fab under construction?
Leping, thank you for attending this current meeting. So we have very clear strategy for the Wuxi project. We'll continue our non-volatile memory products, which can be available to migrate to our new fab. At the same time, we are seeking for some niche markets, take for example, BCD or any other margin high enough products can be migrated to our 12-inch. But this kind of strategy is continuously a judgment based on the market demand and our technology revenues.
So what will be the timetable currently, if we look so at your -- the Wuxi fab start to have any meaningful revenue or...
As you know, we have started construction already at Wuxi. We started basically at the end of the Q1. So we expect the building -- the construction of the building will be complete by mid of next year, okay? And we're going to start moving the equipment in the second half of 2019, okay? So our plan is to, by the end of 2019, we'll have 10,000 wafer capacity, okay, and that in the each of the following years, by 2020, we expect we will get to 20,000 and then 30,000 by end of 2021 and 2022 to 40,000, that's when we will complete the first phase of our capacity installation. 40,000 wafer, 12-inch -- 40,000 wafer capacity that's by 2022. So by end of next year, we should start -- basically the second half of next year, we'll start to ramp up.
Our next question comes from the line of Aaron Jeng of Nomura.
Your 1Q result, particularly on gross margin was great, 32%. But your 2Q gross margin guidance, which is 31% to 33% looks to be only slightly increasing from 1Q, despite that you are growing revenue by 5% to 10% -- 5% to 7%. This is my first question. Could you elaborate why? It looks to me that it might be growing faster than what you guided. Is it because of rise in depreciation? That's my first question.
Well, definitely you hit the key. I think depreciation expenses we expect will increase in Q2 by approximately $2 million. So therefore, it definitely will impact the margin. The other thing that I want to mention that just because the revenue increased, it doesn't mean it will cause margin increase. But our -- as a management -- as a team we -- it's our effort, it's our job just to constantly to -- look to improve the product mix sort of on a daily basis. But yes, you're right, it's mainly because of depreciation expenses.
Can I follow up on this gross margin question? So when we look into the second half, I know it might be a bit far away, but which level of gross margin we might be thinking to reach in second half?
Sorry, you're talking about which period?
Second half of 2018.
Second half?
Yes, correct.
Okay. Well, I mean, look, I think we have made some significant increase, I mean, investment in the past couple of years. The depreciation expense will grow as we are expecting throughout the year, so -- but our goal is to continue to improve the product mix and also to drive down our overall fixed costs. And that's the only way we can improve margin. I think -- we're hopeful that the margin will continue to grow over time within the year.
Another question, not relevant to margin, but it's about ASP. When I looked into your blended ASP in 1Q, it was growing by 7% quarter-on-quarter, which was impressive because if I recall correctly, last 4 years, you only grew by 7% Y-o-Y. So now we're in May, do you have a sense on through the year, how much ASP increase we can have year-on-year or what kind of guideline you can give us for the end of the year?
William?
Yes, I think we are continuously, just now Daniel mentioned, to improve the product mix. So this kind of ASP improve is mainly contribute to our previous job for the -- improve the product mix. And I cannot give you the very clear guidance for the second half, but sometimes ASP is not equal to the gross margin. We will balance the gross margin and net profit to improve the company's status.
But one thing I also would like -- one thing I also would like to add, and that you can see, we have made some significant improvement on ASP over the last several quarters, including last year. These are not easy tasks, and I think we'll continue to do our best, and that's our job, but let's see.
Yes. If I may ask one more small follow-up. So for depreciation costs in 2Q, it's a 2 median, you started more in 1Q. And could you give us the guideline on how much it will be in the second half for depreciation costs?
Well, let me give you overall figure. I think I've given this figure before. Last year, we were talking -- our total depreciation expense was about $105 million. We expect this year we will increase by $20 million, okay? So that's the number and that number still stands.
[Operator Instructions] Our next question comes from the line of [indiscernible] of Goldman Sachs.
So regarding the CapEx guidance for Wuxi project for this year, could you -- or next year, could you please give me some color?
Yes. I think we're -- we have started the construction already. We started to build some staff there. So we're talking about several hundred people by end of this year, okay, 200 to 300 people, that's the plan. So there'll be some operating expenses. The total capital expenditure -- total capital expenditures will be somewhere around $600 million to $700 million. This -- well, actually, I mean the entire project would be about $2.5 billion. This will be -- we're talking about in the 4-year span, so I would say average is about $600 million to $700 million a year. But the capital -- capital expenditures will be completely capitalized within 2018.
Okay. And my second question is regarding the ZTE case. Does it help us to take more shares from the competitors, maybe like in bank card business, et cetera?
Yes. So H-Grace will very carefully continue our promise and commitment to all the vendor and our customer. So this kind of job we continuously -- continue doing. So we will not change any of our policy about -- to these kind of things. So in such case, we see very stable demand and -- within our anticipated bank card IC and also related to all the Chinese customer. So we have full confidence to continue this kind of job and provide committed products and reliable products to our customer around the world.
[Operator Instructions] Ladies and gentlemen, that's all for the time that we have for our questions. I'd like to hand the call back to Mr. Daniel Wang for closing remarks.
Okay, thank you. Thank you all for joining us today. We certainly enjoyed it. We hope you will continue to join us next quarter, and please have a very good afternoon. Thank you.
Ladies and gentlemen, thank you for your attendance. You may all disconnect.