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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 Hua Hong Semiconductor's Second Quarter 2020 Earnings Conference Call. Today's call is hosted by Mr. Junjun Tang, President and Executive Director; and Mr. Daniel Wang, Executive Vice President and Chief Financial Officer. [Operator Instructions] The earnings press release and second quarter 2020 summary slides are available to do and 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. Please go ahead.
Good afternoon, everyone. Thank you all for joining our second quarter 2020 earnings conference. Today, we will have -- first have Mr. Junjun Tang, our President and Executive Director, present his remarks on our second quarter performance. President Tang will address 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. I would now turn the call over to our President and Executive Director, Mr. Tang.
[Foreign Language]
[Interpreted] Good afternoon, everyone. Thank you for joining our earnings call.
[Foreign Language]
We are very pleased with Hua Hong Semiconductor's performance in the second quarter of 2020 where both sales and gross margin exceeded guidance. The growth in the first quarter is now behind us. The global semiconductor market continues to exhibit signs of recovery, especially in the Chinese market, driven by market demand for IGBT, super junction, MCU and CIS products, revenue increased to USD 225.4 million in the second quarter with double-digit growth quarter-on-quarter. At the same time, our gross margin increased 4.9 percentage points quarter-on-quarter to 26%, thanks to a higher utilization rate and improvement in product mix.
[Foreign Language]
[Interpreted] Due to the tremendous interest and support for our Wuxi 12-inch project from our customers and partners and the emergence of excellent domestic design companies, the plan for a new 12-inch fab has been accelerated. While ensuring high-yield shipments of existing products, we are advancing certification of multiple technology platforms, offering diversified and comprehensive solutions to our customers. Smart card chips, power discrete and CIS products were delivered to customers first. In the second half, IGBTs, super junction and other products will be shipped in succession to meet the needs of emerging markets, such as new energy vehicles.
[Foreign Language]
[Interpreted] The pandemic has not been contained. Guided by protect yourself, protect family members, protect Hua Hong people and protect Hua Hong. We are committed to prevention measures, maintaining close communication with our domestic and foreign suppliers. We continue to expand our market and increase cooperation, ensuring the company's long-term development. I would like to thank our shareholders, customers and suppliers for their support and our employees for their unremitting efforts to overcome challenges. Looking forward, we hope the pandemic will be over soon. We are confident in our ability to take advantage of every opportunity and are working hard for another successful half.
[Foreign Language]
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 second quarter followed by an outlook on revenue and margin for the third quarter 2020. Then we will move on to the question-and-answer session. First, let me summarize financial performance for the second quarter. Revenue reached $225.4 million, 2% lower than the prior year, primarily due to decreased average selling price, partially offset by increased wafer shipments, but 11.1% over Q1 2020, mainly due to increased wafer shipments. Cost of sales was $166.8 million, 5.2% above Q2 2019, mainly due to increased wafer shipments and 4.2% over Q1 2020, primarily due to increased wafer shipments, partially offset by lower labor expenses. Gross margin was 26%, 5 percentage points below Q2 2019, mainly due to decreased average selling price and a change in product mix. And 4.9 percentage points above Q1 2020, mainly due to improved capacity utilization and the lower labor costs. Operating expenses were $62.5 million, 76.8% above Q2 2019, largely due to increased development costs and depreciation expense for Wuxi fab, and 12.5% below Q1 2020, primarily due to lower labor costs and development costs. Other income net was $12 million, 51.3% lower year-over-year, primarily due to, one, foreign exchange loss versus a gain in Q2 2019; and two, decreased fair value gains on financial assets at fair value through profit or loss and interest income, partially offset by increased share of profit of an associate and 40.1% lower quarter-over-quarter, mainly due to decreased government subsidies. Income tax expenses was $6.7 million, 37.6% lower than Q2 2019, primarily due to decreased taxable profit. Profit for the period was $1.3 million compared to $49.9 million in Q2 2019 and $2.7 million in Q1 2020. Net profit attributable to shareholders of the parent company was $17.8 million compared to $43.4 million in Q2 2019 and $20.3 million in Q1 2020. Basic earnings per share was $0.014 compared to $0.034 in Q2 2019 and $0.016 in Q1 2020. Annualized ROE was 3.2%. Now I would discuss the operating results of both the Hua Hong 8-inch wafer fabs and Hua Hong Wuxi 12-inch wafer fab. Now first, let's have a look at the Hua Hong 8-inch wafer fabs. Revenue was $215.9 million, 6.2% below Q2 2019, primarily due to decreased average selling price, partially offset by increased wafer shipments and 7.6% over Q1 2020, mainly due to increased wafer shipments. Gross margin was 27.7%, 3.3 percentage points below Q2 2019, mainly due to decreased average selling price and change in product mix. Partially offset by improved capacity utilization and 6.6 percentage points above Q1 2020, mainly due to improved capacity utilization and lower labor cost. Operating expenses were $26.3 million, 5.9% below Q2 2019, primarily due to RMB depreciation and decreased development expenses and 9.5% lower than Q1 2020, primarily due to lower labor and development costs. Profit before tax was $41.8 million, compared to $47.7 (sic) [ $47.4 million ] million in Q2 2019 and $27.2 million in Q1 2020. Now let's have a look at the performance of Hua Hong Wuxi wafer fab. Revenue was $9.5 million, 4x more than the prior quarter. Operating expenses were $36.2 million compared to $7.4 million in Q2 2019, largely due to increased development and depreciation expenses and $42.4 million in Q1 2020, mainly due to decreased development and labor expenses. Profit before tax was minus $33.8 million. EBITDA was minus $18.5 million, $4.3 million more favorable than Q1 2020. Now I will provide more details on our revenue from Q2 2020. From geographical perspective, revenue from China was $137.6 million, contributing 61% of the total revenue and an increase of 8% compared to Q2 2019, mainly driven by increased demand for logic products. Revenue from United States was $33.8 million, a decrease of 19.7% compared to Q2 2019, mainly due to decreased demand for general MOSFET and super junction products, partially offset by increased demand for MCU products. Revenue from Asia was $28.6 million, an increase of 1.9% compared to Q2 2019, mainly driven by increased demand for MCU products, partially offset by decreased demand for general MOSFET and logic products. Revenue from Europe was $19.1 million, an increase of 4.6% compared to Q2 2019, chiefly driven by increased demand for smart card ICs. Revenue from Japan was $6.4 million, a decrease of 55.6% compared to Q2 2019, mainly due to decreased demand for logic and MCU products. With respect to technology platforms, revenue from embedded nonvolatile memory was $76.9 million, a decrease of 3.4% compared to Q2 2019, primarily due to decreased demand for smart card ICs, partially offset by increased demand for MCU products. Revenue from discrete was $86.8 million, a decrease of 6.2% compared to Q2 2019, mainly due to decreased demand for super junction, partially offset by increased demand for IGBT products. Revenue from logic and power management was $31.6 million, a decrease of 5.4% compared to Q2 2019, mainly due to decreased demand for LED lighting and analog products, partially offset by increased demand for other power management IC products. Revenue from logic and radio frequency was $26.7 million, an increase of 23.6% compared to Q2 2019, largely driven by increased demand for logic products, partially offset by decreased demand for RF products. Revenue from stand-alone nonvolatile memory was $3.2 million, an increase of 16.5% compared to Q2 2019, primarily due to increased demand for EEPROM products. Now let's move on to cash flow statement. Net cash flows generated from operating activities were $101.8 million in Q2 2020 compared to $20.7 million in Q2 2019, largely due to receipt of VAT tax return. Capital expenditures were $178.1 million in Q2 2020, including $144.8 million for the Hua Hong Wuxi fab and $33.3 million for Hua Hong 8-inch fabs. Other cash flow generated from investing activities were $259.6 million in Q2 2020, including one payout of $187 million in investment in financial assets at fair value through profit or loss; two, payout $70 million in investment in time deposits; and three, $2.6 million of interest income. Net cash flows used in financing activities were $3.2 million in Q1 2020, including $2.1 million of repayment of bank borrowings, $1.1 million of lease payment and $0.1 million of interest expense for bank borrowings, partially offset by $0.1 million proceeds from the share option exercise. Now let's move to the balance sheet. Cash and cash equivalents were $699 million on June 30, 2020, compared to $518.3 million on March 31, 2020. Financial assets at fair value through profit or loss decreased from $270.2 million on March 31, 2020 to $84.8 million on June 30, 2020, due to payout from investment in financial products. Other current assets decreased from $143.7 million on March 31st to $77.8 million on June 30, 2020, primarily due to receipt of VAT tax return. Property, plants and equipment was $1.79089 billion on June 30, 2020, compared to $1.6598 billion on March 31, 2020. Total assets increased from $3.5403 billion on March 31, 2020, to $3.5759 billion on June 30, 2020. Our total bank borrowings were $23.3 million on June 30, 2020. The total liabilities increased to $526.1 million on June 30, 2020, from $498.1 million on March 31, 2020, primarily due to increased payables for capital expenditures. That ratio increased to 14.7% on June 30, 2020, from 14.1% on March 31, 2020. Finally, let me give you a top level outlook for the third quarter 2020. We expect revenue to be approximately $236 million, and our gross margin to be between 20%, 24%.
This concludes my financial remarks. Now we would like to start the question-and-answer session. Operator, please help. Thank you.
[Operator Instructions] We have the first question comes from the line of Randy Abrams from Crédit Suisse.
The first question I wanted to ask on the 8-inch where it's now running pretty much 100%. Could you talk about the -- I guess, 2 things, if you have plans to add any capacity on that side? And then also the pricing environment on 8-inch, I think also factoring in that you have the Wuxi fab, if you're able to see some of the pricing that other foundries are or if by having that capacity might be limiting that opportunity?
Thank you, Randy, for your question. Well, first of all, yes, you're right. 8-inch is running at virtually, I mean, all 3 fabs are virtually running either 100% or above 100%, okay? So it's a wonderful case. We still have some space in our fab 3, as I said, to the investors in the past. We will look at the timing for that. I mean we can potentially add another 20,000 power discrete products into our capacity, 20,000 wafer capacity into that fab. At this point, if you look at our 8-inch fab, we still bring a lot of upgrades and resolving some of the bottlenecks, even in the past 6 months. But we're doing that -- so that it would be able -- we can constantly upgrade the improved product mix and upgrade the operation, basically just the tools, okay? So the other question is about the 12-inch, right?
Yes. Well, actually, I'll get to that. I guess I was going to ask also on the pricing since you're tight there, how pricing is, but also balancing that you have capacity on 12-inch to move applications. So how you're seeing the pricing on that side of the business?
Yes. That is something we have to balance. It is not a -- it's always not an easy task because we are moving some of the stuff from 8-inch to 12-inch, for example, the smart cards. I mean we're also doing a lot of R&D works on smart cards as well as other products, okay? So we are doing that. We have to be extremely careful with pricing increase, okay? I think this is something we normally would consider at this point. But at the same time, we're moving products from 8-inch to 12-inch. As you can see, our -- the revenue from our 8-inch is low compared to last year, largely because of -- because the pricing, okay? Price has come down compared to a year ago, okay? Compared to last quarter, it's virtually flat. We have not increased price yet, but that would be something that we definitely would consider in the second half when things continue to be very, very tight.
Okay, great. Yes. And on the 12-inch, I'm curious on the ASP. I think based on the revenue and the shipments, it looks like it's about $1,000 per like 12-inch. And so I'm curious just -- it looks kind of more similar to the pricing you're getting on 8-inch initially. So I was just curious if it's a factor of maturity of the fab or the type of products or technology node on the 12 inch? And maybe how you see the pricing trend for the 12-inch fab?
Again, I mean, Randy, we're in the -- still in the early stage, okay? I mean we're -- the utilization rate at this point is above 50%, okay? For Q2, it's -- overall, it's 30.3%, okay? So -- and for Q1 -- I mean, for Q2, most of the products are actually CIS, okay, for that quarter, okay? So the assumption you had was pretty close, the price, okay? That was the price. But you know what, initially, that's what you have to do. You want to make sure the fab is gradually will be fully loaded over time. That is the most important thing, okay? And then, at that point, we will improve the product mix. At this point, we -- it is a lot of CIS products for Q2, some embedded and smart cards and some discrete, but we expect smart cards will start to take off. We start -- we believe discrete even IGBT and super junction will start to take off in the second half. So overall, price will improve over time. So it is the process we have to go through. It's something that you guys are going to watch us very, very closely.
Okay, great. And the last question on the 12-inch. If you could just give an update on the capacity. It's showing the 10,000 now. So maybe the timing, the capacity would then ramp to 20,000 and 40,000. And I think the second part because you did say in the prepared remarks about continuing that acceleration plan. I guess is it the view with these applications next year. I mean the way you're qualifying applications with that capacity, it feels like there should be a lot of growth if the application's come through. So I'm curious about both the capacity ramp and then how it looks maybe 6, 12 months out from a growth perspective?
Right, right, right. Absolutely. No, we -- at this point, we're running close to 10,000. So we have -- in terms of capacity, we're very, very close to 20,000 wafer capacity. The second 10,000 has been stocked pretty much, except for a few tools, maybe they're still doing the testing. But virtually, the second 10,000-wafers has been stocked. So we expect by end of this year, hopefully, we'll get to 40, depending on how we're doing with the acquisition, either end of this year or early next year, okay? That is the -- but with that said, we have 6 products that has been either currently been qualified in that fab, going through R&D work. And embedded non-volatile memory, discrete and CIS has already started to ramp up, okay? But when you look at other things, for example, I talked about NOR Flash, we're talking about some of other stuff. We're talking about logic and RF. We are -- part discrete, part discrete is another thing. So these 6 technology platforms has been basically going through R&D work and qualification process. Once that they are ready, we will have the 40,000 wafer capacity to fill these products, okay? Probably not even enough. That is something we have to consider maybe next year, late next year.
We have the next question comes from the line of Szeho Ng from China Renaissance.
My question is also regarding the 12-inch ASP. Q2, I think, is kind of low, right, [indiscernible] wafer. But medium to long term, how should we read the ASP when it very gets to let's say 30,000 wafer per month capacity.
I think as we start to ramp more products, okay, we have a lot of other things going on. I mean you would not believe how many new customers we have to sign up during the last 6 months, new products, let us surprise you guys over time. But I'm sure ASP will improve from now $1,000 to, I think, easily to $1,300 to $1,500 in the next 6 to 12 months.
Okay. And that's a very huge leverage, yes. Okay. And then the other question on the tax side. Q1 actually is a tax credit, right? But you just swing back to your tax expenses. Going forward, how should we model it because I think it's kind of fluid, yes?
Roughly, it is about -- I would use the net. It's 15% plus that is the tax rate, basic tax rate in China, plus we have to pay for the dividend tax. So roughly it's about 19%. That's the rate you should -- you need to use real model going forward. But this is -- it's a special policy again by the government.
Right. Right. But then last week, the state counsel actually has summoned a new tax incentive, right? Are we going to benefit somehow?
For the 8-inch fab, we'll continue with this thing around the 15%. But I think for Wuxi fab, we're going to have to enjoy this for the -- starting -- once we become profitable, okay? For the first 5 years, once we become the profitable for the first 5 years, we will be virtually tax-free. And then the following 5 years, we will pay half of the normal rate, which is -- if it's 25%, it's would pay about 12.5%.
Yes true. Okay. And last one, regarding our Q3 guidance, right? Should we expect any potential given the fact that for Q2, the company actually deliver a very nice upside for both revenue and also gross margins? I'm not sure if you're trying to be conservative for Q3? Or what's holding you back?
For Q3, I -- hey, we give a guidance, guys, Szeho. But normally for companies -- I mean, you guys should know our style. [indiscernible] conservative. We never missed a target before. Never really missed the target in the past. So we will do our utmost to make sure that we will get -- we do better.
Okay. All right. Okay. Last one. Yes, on depreciation, how should we model for next year?
This year, okay, let's talk about depreciation expense. I know you guys are very -- it is because of the new 12-inch. I think the 8-inch fab will continue to be around $100 million. I can't even get very close to it. It's going to be around $132 million, okay? Most of that will go in to COGS. A little bit will go into -- maybe a little bit -- around $10 million of that will be in operating expenses. And then on Wuxi 12-inch. So we will have, in total, around $90 million. It come -- basically, it's lower than what I said last year. I said, I think last year, on our last call, I said is about $100 million. It's going to be around $90 million, okay? Probably $60 million is going to be in the operating expenses. $30 million is going to be in COGS because the reason I said operating expense because we -- overall, the fab is underutilized for the part that it was -- success has not been utilized with actual fixed costs. We actually move it into the operating expenses.
Next, we have the question comes from the line of Leping Huang from CICC.
So the first question is about the third quarter guidance. So if we compare with your third quarter, the $236 million versus the $225 million increase about USD 10 million revenue. So how this increase is will come from? Mainly come from Wuxi, or it's mainly come from the -- how do split the growth from Wuxi fab and the traditional the 8-inch fab?
This is -- yes, okay. Well, it is -- actually, the increase is mostly from Wuxi. The increase will be coming mostly from Wuxi. But I mean, we're -- I mean, at this point, as I said to Szeho, we will continue to -- there are many things we can do here, okay? Yes, the 8-inch fab is pretty fully loaded, but we will do our best to make sure that you will continue to get some efficiency out of it. And also on the price side, we will also work on that. But I think the most -- the increase were coming from Wuxi.
Yes. So I think this is -- okay. So if Wuxi -- if we do the math, Wuxi increased by around $10 million revenue and if you currently -- your capacity is 10,000 wafer per month. I mean you are very quickly increased to 20 and then by the end of this year, it will be 40. So if you -- it then seems to be the -- it seems that the revenue growth is not so strong as I expected because if you double your capacity in third quarter then your utilization rate was roughly maintained on the average is 40 -- how quickly your capacity will be filled if you look at third quarter, fourth quarter? So if you -- let's say, by the end of this year, you have 40,000 wafer equipment capacity. So you are still 30%, 40% utilization?
You have to realize, we plan to get to about 20,000 wafers, hopefully, output by end of this year, okay? But the 40,000 wafer capacity we get in store by end of next -- end of this year, it will be really used in the next year, next year, okay? So I mean this year, the average, I think will be -- if we can do like 10-average-1,000 wafers per month, with the target to get to 20,000 by end of this year on output. That is a very good outcome for us.
Yes. So I think another is the -- looking to your EBIT margin. So when you can -- if you go to the 20,000 wafer per month output. So will you reach the breakeven point in the EBIT margin level? Or how much you need to reach because that concerning Szeho and Randy answer -- the ASP seems to be much lower than we expected. So it maybe change our assumption when you -- when your Wuxi fab can reach the breakeven point in the EBITDA margin? So one could...
Right. It's a very good question. I mean you have to realize in the early stage of the fab, the ASP tend to be a little bit volatile because of the product mix, the changing products, okay? So for example, last quarter, we had more smart cards. This quarter, we had more CIS. It makes sense because we want to make sure the fab is fully filled, okay? So as much as we can do that, okay? So it is -- basically, things are going to change. But I think we're going to have more products going to that fab. I believe the ASP will improve over time, okay? And then the utilization rate certainly will improve over time. I'm sure that the Q3 utilization rate will be much better than Q2, okay? But Q2 has already been much better than Q1. It's -- we're going through that process right now. And you guys just have to enjoy this process. There's -- I mean the price hope -- we'll do our best to improve the cost, the price. But at the same time, we want to make sure that the fabs, the capacity that we had stocked get utilized.
Okay. I think another question...
That make sense?
Yes, yes. Yes, yes. Sure. Definitely. You need to feel the fact first, right? Then increase the ASP for the next. Then another question is how we should look the 8-inch fabs ASP. So I think your ASP was declining continuously for the last few quarters. I think we understand that the move from high ASP like logic, or the non-volatile memory to the 12-inch fab. So what's the -- how much is coming from the market supply-demand chain? How much is due to the -- or should I say, the product mix change because you have more power stuff? And how we should look the 8-inch fabs ASP going forward?
Here's the thing, okay? Price, I mean you guys realize overall, the price has come down in Q1 because COVID-19, okay? I mean just overall, the business demand came down. It impacted us, impacted many people, okay? So therefore, the price came down, okay? I mean it was -- Q1 was a very low quarter for us. So the price overall hasn't really changed. But the demand came back. We were able to fill the fab. So the 8-inch -- utilization rate for 8-inch really came back, okay? Now it is at 100% utilization rate, okay? So it is a combination of both. I think, overall, the COVID-19, okay? And then plus product mix change, okay? At the same time, we moved some of the stuff from 12-inch -- from the 8-inch to 12-inch. So all of that play are factors of the ASP degradation, the pricing degradation.
We have the next question comes from the line of [ Yang Lu ] from [ Founder Securities ].
And 2 questions about the power discrete segment. You just mentioned the IGBT and super junction will take-up in second half, right? I wonder how much these 2 segments contribute to the second quarter's revenue. I mean how much is IGBT and how much is super junction, respectively for 18-inch and 12-inch fab? And then second, can you share some view about the domestic IGBT industry in second half of this year?
The IGBT and super junction for second quarter?
Yes, yes.
It's -- so we talked about -- the overall discrete was about 38% of -- 39% of revenue of that $225 million. So super junction was about 9.5% okay -- 9.4%. And IGBT was close to 5%, 4.6% of the revenue -- overall revenue. There is some very good MOSFET business coming out of the -- from the 12-inch fab. The total revenue is very, very small. It's about -- it was at about $100,000. Still small, but we expect this would go up in the second half.
And secondly, can you share some view about the domestic IGBT industry in second half of this year?
The domestic what?
IGBT industry in second half?
[Foreign Language]
[Interpreted] Along with some emerging markets, such as 5G and the new energy vehicles, we believe that the domestic IGBT market will be stronger and stronger.
[Foreign Language]
[Interpreted] Our IGBT technology platform has a broad application range. And both in -- we have technology development work in both 8-inch and 12-inch processes.
[Foreign Language]
[Interpreted] Due to the specialty of IGBT Technologies, the verification process will be a bit longer than compared to other technologies.
[Foreign Language]
[Interpreted] But in general, we think the IGBT demand will be extremely strong.
The next question comes from the line of Sebastian Hou from CLSA.
So first question, I want to ask about the gross margin. So if I look at your 8-inch fab versus -- the gross margin is actually down 4 percentage point year-over-year. But your utilization rate on 8-inch would actually increase from 93% to 100% in a -- year-on-year. So what's the reason behind that?
Sebastian, you always ask some very challenging questions but this was pretty easy. Actually, I was very happy with 26% gross margin. This -- if we would not -- if our utilization rate was not at 100%, I mean, for that 3 fab -- 8-inch fabs, I mean, our gross margin will actually be lower. It'd be somewhere -- I think it would be around 24%, okay? But the high utilization rate, I mean virtually, it was at the very high rate for that 3 fabs, okay? I think you will continue. I mean we have been running at 100% for the past basically 1.5 month. I mean even in our last call, we talked about the Fab1 was still underutilized, slightly lower. Fab2 and 3 were strong. But right now, all of these fabs are going strong, okay? Now what we have to do is improve the ASP, okay? But at the same time, we also have to fill the 12-inch fab, okay? Because the capacity -- right now utilization rate for 12-inch fab is still -- it's still underutilized. We have to face the reality. So we're doing many things. So -- but to answer your question, it is -- the reason is because the ASP has come down. And I have addressed the question before, it was basic question from Leping earlier. We basically -- the ASP has come down since Q4 last year, largely because in many factors, largely because of COVID-19 in Q1, okay? That affect us. I think that probably affect many, many other fabs as well, okay? So I expect we're going to have a very strong second half. I mean it's going to be a good second half for us. I think we will do better. I mean we're still small, but we'll do better than some of our colleagues, okay? So that's what I think. But to answer your question, yes, it could be better, okay? If the price was still at the same level as last year, I think we should be able to have under the 2 percentage points, maybe at 29% which is -- it's not going to be -- it's unfortunate, but that's just part of the reality. We have to deal with it. But the good thing is we're moving towards a good direction, which is the fabs fully utilized at this point. We have to focus on the 12-inch fab. And then price is the next thing we have to work on. But we have to be careful because we still have a 12-inch fab that is still underutilized at this point.
Okay. I think if we step out a little bit just on the bigger picture. If you compare our 8-inch foundry gross margin in the past few years has been pretty consistent, about 30% to 35% level. And theoretically, what we see -- the [ development age ] is getting more favorable for us and our competitors, given that 8-inch demand is strong and most of the time we are only high value generate, and the industry has been on this tight -- this constraint of the supply for some time. So that actually gives us some flexibility and privilege to prioritize the product mix. So even we are not raising price like-to-like basis, but we can still probably like to improve our product mix. So theoretically, there should be a good setup for our pricing and gross margin for 8-inch business. But it looks like there's -- our members are showing the opposite direction. And so I'm just wondering what the structural profitability outlook for their 8-inch business in the long term?
For the 8-inch business?
Yes.
I think as long as the demand is strong for us. You have to realize in wherever -- even though they are 8-inch business, even though the business is very, very strong, we have a very diverse technology platform. I mean we have -- our products are many, basically, okay? Our fab was -- we're working on many different products. It is not easy to keep all of the -- all the manufacturing corridors at 100% at all time. That is the challenge we have to face all the time, okay? So therefore -- but still, I mean, it's not easy for us actually was able to run even Fab1 at this point at a very, very high utilization rate, okay? We're dealing with many different products. We have to -- the MOSFET business, it goes anywhere from 250 to 550, okay? Per wafer. We have the BCD business, sometimes good, sometimes not that great, okay? We're also running the 95-nanometer technology in that fab, okay? So the demand for various products could vary at different time. That also affects ASP as well. So that is something that we have to manage. It's a structure, it's a fab structure that we have, we have to deal with that all the time. But I think overall, as long as the demand is back, we are -- I'm very confident we should be able to gradually improve ASP. It's not something that we can do overnight, but that's something that we can gradually improve over time. And I'm pretty confident that demand will come back.
Noted. Second question is on the third quarter guidance. So gross margin is slightly down Q-on-Q. But -- and it's your -- your Wuxi fab is actually is improving from the output side. So what's the parameters -- the factor to affect the lower -- sequentially lower gross margin? Is it depreciation or what?
Yes, you're right. It is depreciation because quarter-to-quarter for 12-inch fab, the depreciation expense were -- be virtually close to $8 million to $9 million, okay? That was the main reason for that, okay? And then the -- on the 8-inch side, the depreciation expense will also go up slightly, okay? About a couple of million dollars because of some of the investments we made. And then you have to realize when these things go up, you directly affect your gross margin.
Okay. Understood. Last question is, do you -- yes?
I would be very happy if we can continue to maintain 26%, okay? But that is something -- it's not easy to achieve. I think a safe range of 22% to 24%. But if we can continue to maintain the utilization rate, if 12-inch can really ramp up pretty fast, we can always have a nice upside.
Got it. Got it. And last question from me, a simple one. Just -- I wonder if there's any progress or anything in mind about our potential dual listing in Asia with Starboard.
[Foreign Language]
[Interpreted] We also pay attention on these new -- some new policies on the Asia market. And for us, Hua Hong semiconductor market, we listed in Hong Kong market and through the half of this years, our management systems are more transparent and more efficient.
[Foreign Language]
[Interpreted] We also placed attention to the new policies issued domestically.
[Foreign Language]
[Interpreted] But we haven't made any decisions on that.
[Foreign Language]
[Interpreted] What Daniel had just mentioned, the whole company has done a lot of work in the new products technology development and the capacity expansion for all aspects. We're all making progress and an accelerated progress.
[Foreign Language]
[Interpreted] So we can optimize our operations through our own efforts.
Our next question comes from the line of Andrew Lu from Sinolink Securities.
My first question is for Q3 guidance, do we have an assumption for Q3 wafer shipment from the 12-inch fab on a monthly basis -- monthly basis or quarterly basis? And what kind of product breakdown will be for the 12-inch fab in Q3?
Thank you. I -- this is actually -- if I know something, I should be telling you, but I can give you some hint because otherwise I'd be -- I think I'd been compromising my job here. I think we give a guidance. I think we -- our 12-inch fab, well, I'm sure we'll have a better number next quarter. We improve over time. I think roughly, I think we should be able to double the revenue in Q3. Hopefully, the price will be better as well. So that's something I can't assume at this point.
[Foreign Language] long-haul double revenue, the shipments [Foreign Language]
I mean, I can't assume -- hopefully we can double the shipment as well, right? I mean then...
No. [indiscernible] more than double?
So that's a tricky question you're asking. You're basically trying to figure out what my price were better? But yes, look, look, Andrew, the reality is, I think we should be able to double our volume as well as hopefully do better on revenue.
[Foreign Language]
[Foreign Language]
[Foreign Language]
The CapEx, capital expenditure is -- I don't think I have mentioned $900 million. I think the number that I had mentioned, last time I mentioned was that a cash flow basis, okay? I think $1.4 billion for Wuxi. And Hua Hong, 8-inch business is about $150 million, okay? And at this point, I'm looking at about $1.2 billion for Wuxi and $150 million for the 8-inch business. We probably spend about the first half we have -- we have paid over $300 million actual, cash out...
$378 million? [Foreign Language]
$300-something million.
[Foreign Language] $378 million.
Sorry?
[Foreign Language] USD 379 million? [Foreign Language]
No, no, no. It's about -- we probably pay around $900 million for Wuxi.
Ah, okay. Cash outflow business. Now give me on Wuxi...
[Foreign Language]
[Foreign Language] cash outflow basis?
Cash out for 8-inch is about 64.7%. So we'll probably -- second half, we'll probably pay close to slightly under $90 million.
Okay. [Foreign Language]
We have to -- we're supposed to install all 40,000 wafer capacity by early next year, end of this year or early next year.
Okay, okay. [Foreign Language]
[Foreign Language]
[Interpreted] So we always purchase our tools according to the requirement of our technology. As long as the technology requirement is filled, so we pay equal attention to all the tools on the market.
The next question comes from the line of Sunny Lin from UBS.
This is Sunny, thank you for squeezing me in. I understand we don't have much time, so I just have one question. So I wonder how quickly from your observation is power discrete migrating to 12-inch? Because this product has been made at 8-inch for quite a long time. So I think for customers, how do they evaluate the pros and cons between 12-inch and 8-inch?
Sunny, can you repeat the first part? We kind of missed your first part.
Sure. So I mean for power discrete, this product has been made at 8-inch for quite a long time. So I wonder from your observation, how quickly is customers migrating power discrete from 8 to 12?
[Foreign Language]
[Interpreted] Thank you for your question. So from the demand side, the demand for the power discrete this year keep very strong.
[Foreign Language]
[Interpreted] So we allocate some capacity to power discrete in our 12-inch fab, it just -- the answer to the market demand.
[Foreign Language]
[Interpreted] So we have a lot of communications with our customers. We already have the alpha customers for our demo super junction and IGBT and our 12-inch fab.
[Foreign Language]
[Interpreted] So we are the first 12-inch IGBT fab in China. So we're still doing a lot of work for the overall industry chain.
[Foreign Language]
[Interpreted] So we can tell from the first half revenue, we have already made significant progress.
[Foreign Language]
So we expect further growth in the second half.
Our next question comes from the line of Leping Huang from CICC.
So based on current progress, can you share some color how your 12-inch will be -- when they are fully filled. I remember previously you mentioned that half is for the 12-inch, the power discrete half is for the digital or the logic stuff, but based on current discussion with customers. So how your 12-inch fab will look like? I think this is quite -- to help us to how to model your ASP on the fab?
[Foreign Language]
[Interpreted] Since last year, we have the many lines. We do a lot of technology development work for the embedded flash, CIS, power discrete, power management.
[Foreign Language]
[Interpreted] So in Q1, during the COVID-19 pandemic to period our Wuxi engineers and the technology development employees staying Wuxi to do their work.
[Foreign Language]
[Interpreted] So they didn't take any rest in -- for 50 days, ensuring our 15 products were into mass production in the first half.
[Foreign Language]
[Interpreted] We will have -- we still have more products will go to mass production by end of this year or next year.
[Foreign Language]
[Interpreted] I think we can achieve more than 25,000 wafer output months in mid next year.
[Foreign Language]
[Interpreted] So we would like to send to our technology team and engineering team also thanks to our customers.
[Foreign Language]
[Interpreted] And of course, we need to thank to all our investors.
Our last question comes from the line of Randy Evans from Crédit Suisse.
Okay. I want to ask on the CapEx follow-up where you'll finish the 40,000. But I think just mentioned 25,000 is your target shipments. So should we think about next year more of a year to digest capacity? So it could be low CapEx here? Or will you still have the cash CapEx outlay? So curious how to think about next year for CapEx? And for the next phase, would you start to go ahead to ramp that or it may be a couple of years between just to fill the first fab?
You're always thinking ahead. That's great. It's a great question. So basically, we said we will have, hopefully, 40,000 installed by end or early -- probably first quarter next year, okay? To get all the equipment installed. And Mr. Tang has mentioned that we're going to get 25,000 output by mid of next year. That's a very good -- we talked about these numbers just before the meeting. Yes, it's 25,000 installed by mid of next year. And then at that point, we should reach P&L breakeven, okay? P&L breakeven. So hopefully, we can quickly get the entire 40,000 wafer capacity installed with all the technology platforms that is currently undergoing, okay? On R&D work. So that's something we have to do. Next year, you're right. The $2.5 billion investment will, probably, be completed by, probably, in our first half next year. So yes, we're going to be sort of absorbing a lot of the capacity that we have built this year and next year, and start to make sure they're filled. But this we have built -- as I said to many people, this is a huge fab we built. You can add another 20,000 to 40,000 wafer capacity, okay? And then probably additional money to fill the rest of space. That's something we would do, okay? But we'll do that, we're going to raise some money. We'll probably through some cash proceeds from the operations, from some loan. We're going to measure the rest of space filled, and we can definitely, with that fab, we can build $1 billion revenue. Basically, be able to build wafers with $1 billion revenue.
Okay. And I want to ask on the OpEx, it was about $62 million. I think from last quarter, you mentioned the 8-inch plus 12-inch would be about if I have no choice, $320 million combined. So about $80 million a quarter. But I wanted to see how that changes or scales up as you bring up the capacity. So just how we should think about the OpEx line over next few quarters?
That's -- I think that's a very good number, okay? I mean when you look combined, it should be around -- I would say it is about $200 million to $250 million without any sort of reclass of the fixed cost from COGS. See what I'm saying, Randy? I mean, I assume in a normal circumstance, about $200 million to $240 million. I think that would be the operating expense combined. The reason we have more right now because I'm looking at $322 million for this year because virtually, we have $100 million that we're actually coming from as reclass from the COGS. Because the fixed cost as a result of idle capacity.
Okay. And the government subsidy went down quite a bit in Q1. It's just timing, and I know it's lumpy. Are there any like step-up that you start to see? It's hard to predict when, but should that start to move up where that would also be an offset?
The subsidies for the 8-inch fabs were -- they're pretty stable. Overall, maybe $10 million a year, okay? But the subsidies coming out of Wuxi, they normally -- they will disperse it in Q4. It's going to be more than last year, okay? Last year was around slightly under $16 million overall. Most of that, 70% goes to offset the equipment, 30% goes to offset OpEx. This year is going to be more. Again, it's going to be roughly 70% offset equipment, 30% offset the cash cost.
Okay. I guess if I could close maybe one last question. I guess, like in to think ahead. For fourth quarter, I guess, how you're looking at it still ramping the Wuxi fab. It sounds like with tightness, it should still be another -- at least at this stage it looks like another growth quarter, like similar magnitude?
Sorry, I didn't -- ending?
I was just asking if you're thinking kind of similar magnitude like third quarter where you're guiding up like single -- mid-single-digit fourth quarter. It looks like at least what you're implying into year-end. Still trying to still...
No. I -- Randy, we're going to work very hard. We're looking for 2 fabulous quarters, okay? I hope we will overachieve. Always -- look at what we did in Q2. I said a very solid quarter. We delivered a very solid quarter under the current circumstances.
Our additional last question comes from the line of Aaron Jeng from Nomura.
Actually, some of them were already answered, but probably, let me, kind of -- I would check a number that you mentioned last time. You were saying that 12-inch fab revenue for 2020 will be close to USD 100 million. And do you think that this number still -- we can still follow these numbers for the model purpose?
Aaron, we are always trying to do more, okay? So I expect the second half, we're going to be generating a pretty significant amount of revenue from Wuxi for a new fab, okay? So I would say we expect the revenue should be -- every quarter should be double or hopefully tripled. That's what I can say to you at this point. And let's -- for now, let's assume that's going to be the rate. And hopefully, we can continue to do better.
When you say double or triple, you mean like -- because you already talked about the number in -- answering the question from another analysts for the quarter. And so you were saying that probably in fourth quarter, you target to double or triple further from third quarter, is that what you meant?
No. What I'm saying is we're hoping every quarter, we will do better.
Okay. No problem. Okay. Then in a situation that you -- now you already gave the quarter guidance. And it looks like your 4Q. In 4Q, you are going to have another full loading rate for 8-inch, and then you're going to have stronger 12-inch fab revenue. So can we assume that your fourth quarter gross margin will be better than that of third quarter. Is that a pretty easy direction to think about?
Overall, if you look at -- you have to realize the depreciation expense also go up as you ramp up.
Correct. Yes. That's why I ask this question because I do not know if whether the nice ramp of revenue in 4Q can offset the pressure from depreciation in the fourth quarter.
Well, let's see how that goes. I can't really answer the question, but I can tell you, we do everything we can to make gross margin attractive.
Okay. No problem. And earlier, you also have said the operating breakeven was like -- last time, you said it was like $400 million to $500 million you started a year. And -- but earlier in this call, you say the offset you reached 25,000 per month output. In the middle of next year you are going to see the operating breakeven, right? So are these 2 information the same thing?
Virtually, they're the same. At the end of the day, it's the market price. I would say 25,000, it's a very good point to -- we're confident it's going to -- we're going to achieve breakeven.
And you -- okay. No problem. And earlier, you were saying that by mid of next year, you -- at least from the current period, you are able to reach this number, right, 25,000?
Yes. That is the plan. Yes, absolutely.
Okay. My last question is just a clarification because you already said it could be $1.2 billion CapEx or 12-inch fab this year, right? And you said that the [ numbers ] for first half and the second half. Could you remind me the number?
Sorry, I didn't get your question. Can you repeat?
I mean, earlier, you said CapEx for Wuxi fab this year, cash basis will be USD 1.2 billion, right?
Yes.
Yes. And the first half and the second half, you mentioned the number, but I didn't remember, could you say it again?
Okay. Okay. Yes. Yes. It's roughly -- it's over $300 million in Q1. So we will probably spend another $900 million in cash to pay -- to make the payment for all the tools, so $1.2 billion that's the total amount we expect that we'll spend on Wuxi.
No problem. And when we do the model, we should use a 7-year depreciation period of $1.2 billion CapEx, is that right?
Yes. But not all -- I'm sorry. I think some of that probably is related to building or some other things, but most of that is equipment.
Ladies and gentlemen, that's all the time we have for questions. I will now hand back to Daniel Wang for closing remarks.
Thank you again for joining us today. It was a great call. I think it was really a long call. Longest I've ever had. We hope you again -- join us again next quarter. I wish you all well and continue to enjoy the summer. Please continue to stay safe and healthy. Thank you.
Ladies and gentlemen, thank you for your attendance. You may now disconnect.
[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]