© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
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 2022 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 2022 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 all for joining our second quarter 2022 earnings conference. Today, we will first have Mr. Junjun Tang, our Executive Director and President, make some 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. The call will be conducted in English. So please ask your questions in English. I will now turn the call over to Mr. Tang.
[Foreign Language]
[Interpreted] Good afternoon, everyone. Thank you for joining our earnings call.
[Foreign Language]
[Interpreted] We are pleased with Hua Hong Semiconductor's performance in the second quarter of 2022, facing the unexpected pandemic, we implemented the emergency reaction plan immediately. 2,600 employees stay now at fabs and office to ensure that the impact on the supply chain was under control, and our production lines operated in a stable way. In May, our 3 8-inch production lines hit record highs for both wafer start and wafer out.
[Foreign Language]
[Interpreted] Benefiting from persistent demand for all our specialty technology platforms, Hua Hong Semiconductor continued to operate our 12-inch fab and 3 8-inch fabs, as capacity utilization. The Company's revenue in Q2 reached a record USD620.8 million, an increase of 79.4% year-on-year and an increase of 4.4% quarter-on-quarter. Gross profit margin was 33.6%, 8.8 percentage points above a year ago and 6.7 percentage points over the previous quarter.
[Foreign Language]
[Interpreted] In order to continue solidifying the Company's position as a specialty technology provider and seize opportunities in emerging markets, such as automotive, electronics and new energy, we will persist in high-quality development of our specialty technologies and keep focusing on furthering technology developments were a non-volatile memory, power discrete, analog and power management IC, logic & RF and other specialty technology platform, providing superior product solutions to our global customers. Although, the current economic environment has been enduring still uncertainties, opportunities will benefit those who are prepared.
[Foreign Language]
[Interpreted] Now I would like to hand the call over to our CFO, Mr. Daniel Wang, for his comments.
Thank you, Mr. Tang for your comments. Now, let me begin with the summary of our financial performance for the second quarter, followed by our outlook on revenue and margin for the third quarter 2022, then we will move on to the question-and-answer session. First, let me summarize our financial performance, as of the second quarter. Revenue reached an all-time high of $620.8 million, up 79.4% year-over-year and 4.4% above the prior quarter. Cost of sales was $412 million, 58.2% over Q2, 2021, largely due to increased wafer shipments and depreciation costs and 5.2% below Q1, 2022, mainly due to decreased bonus and wafer shipments. Gross margin was 33.6%, 8.8 percentage points above Q2, 2021 and 6.7 percentage points over Q1 2022, primarily due to improved average selling price. Operating expenses were $70.7 million, 54% over Q2 2021, mainly due to increased labor expenses and increased government grants for research and development and 6.1% under Q1 2022, mainly due to decreased bonus. Other loss net was $56.7 million, primarily due to foreign exchange losses in Q2, 2022 versus foreign exchange gains in Q2, 2021 and Q1, 2022. Income tax expense was $28.3 million, 95.2% over Q2 2021, primarily due to increased taxable income. Profit for the period was $53.2 million, 43.2% above Q2, 2021 and 47.8% below Q1 2022, largely due to foreign exchange losses in Q2 2022. Net profit attributable to shareholders of the parent company was $83.9 million, 90.4% above Q2 2021 and 18.5% below Q1, 2022. Basic earnings per share was $0.064, 88.2% over Q2 2021 and 19% below Q1, 2022. Annualized ROE was 11.5%, 4.7 percentage points over Q2 2021 and 2.6 percentage points below Q1 2022. Now I will discuss the operating results for both the Hua Hong 8-inch wafer fabs and the Hua Hong Wuxi 12-inch fab. First, let's have a look at the Hua Hong 8-inch wafer fabs. Revenue was $354 million, 35.1% over Q2, 2021 and 6.4% above Q1, 2022. Gross margin was 44.2%, 12.6 percentage points above Q2 2021 and 5.6 percentage points over Q1 2022, largely due to improved average selling price. Operating expenses were $35.2 million, 68.7% over Q2 2021, largely due to increased labor expenses and 13.4% under Q1 2022, primarily due to decreased bonus. Profit before tax was $141.9 million, 115.8% over Q2, 2021 and 50% above Q1, 2022. Now let's have a look at the performance of the Hua Hong Wuxi wafer fab. Revenue was $266.8 million, 217.1% over Q2, 2021 and 1.8% above Q1, 2022. Gross margin was 19.6%, 16.3 percentage points above Q2, 2021 and 7.6 percentage points over Q1, 2022, largely due to improved average selling price. Operating expenses were $35.5 million, 41.7% above Q2 2021, primarily due to decreased government grants for research and development and increased labor expenses and 2.4% over Q1 2022, primarily due to decreased government grants for research and development, partially offset by decreased bonus. EBITDA was $28.6 million, 4.2% below Q2, 2021 and 67.6% under Q1 2022, largely due to foreign exchange losses in Q2 2022. Now I will provide more detail on our revenue from Q2 2022. From a geographic perspective, revenue from China was $450.4 million, contributing 72.6% of total revenue and an increase of 76.5% over Q2 2021, mainly due to increased demand for all technology platforms. Revenue from the United States was $73.2 million, an increase of 147.9% over Q2, 2021, mainly due to increased demand for other power management IC and MCU products. Revenue from Asia was $57.9 million, an increase of 50.4% over Q2, 2021, mainly due to increased demand for logic, general MOSFET and MCU products. Revenue from Europe was $28.6 million, an increase of 75.4% over Q2, 2021, mainly due to increased demand for general MOSFET, smart card ICs, and IGBT products. Revenue from Japan was $10.6 million, an increase of 62.4% over Q2 2021, primarily due to increased demand for MCU and super junction products. With respect to technology platforms, revenue from embedded non-volatile memory was $175.2 million, an increase of 69.2% over Q2, 2021, mainly due to increased demand for MCU and smart card ICs. Revenue from standalone non-volatile memory was $69.6 million, an increase of 279.8% over Q2 2021, primarily due to increased demand for NOR Flash products. Revenue from discrete was $188.9 million, an increase of 57.8% over Q2, 2021, mainly due to increased demand for IGBT, general MOSFET and super junction products. Revenue from logic and radio frequency was $77 million, an increase of 35.1% over Q2 2021, mainly due to increased demand for logic and CIS products. Revenue from analog and power management IC was $109.4 million, an increase of 133% over Q2, 2021, mainly due to increased demand for other power management IC products. Now let's take a look at the cash flow statement. Net cash flows generated from operating activities was $212.3 million, 114.1% over Q2, 2021, primarily due to increased revenue, partially offset by increased payments for payrolls and materials. Capital expenditures were $112.4 million in Q2 2022, including $95.2 million for the Wuxi fab and $17.2 million for the Hua Hong 8-inch fabs. Other cash flow generated from investing activities was $2.3 million in Q2, 2022, including $1.8 million of interest income and $0.5 million of receipts of government grants for the equipment. Net cash flow used in financing activities was $30.1 million, including $54.5 million of repayment of bank borrowings, $12.5 million of interest expense for bank borrowings and $0.5 million of lease payments, partially offset by a $37 million proceeds from bank borrowings and $0.4 million proceeds from share option exercise. Now let's move to the balance sheet. Cash and cash equivalents was $1,707.7 million on June 30th, 2022, compared to $1,694.9 million on March 31st, 2022. Current -- other current assets increased from $182.2 million on March 31st, 2022, to $198.4 million on June 30th, 2022, mainly due to increased deductible value-add tax and receivables from related parties. Power, plants and equipment was $2,955.5 million on June 30th, 2022, compared to $3,053.1 million on March 31st, 2022. Total assets was $6,240.7 million on June 30th, 2022, compared to $6,316.1 million on March 31st, 2022. Our total bank borrowings was $1,578.3 million on June 30th, 2022, compared to $1,594.8 million on March 31st, 2022. Total liabilities increased to $2,608.9 million on June 30th, 2022 from $2,531.6 million on March 31st, 2022, primarily due to increased trade payables and payables for capital expenditures. Debt ratio increased to 41.8% on June 30th, 2022, from 40.1% on March 31st, 2022. Now finally, let me give you a high-level outlook for the third quarter 2022. We expect revenue to be approximately $625 million, and our gross margin to be in the range of 33% and 34%. This concludes my financial remarks. Now, we would like to start the question-and-answer session. Operator, please assist. Thank you.
[Operator Instructions] Our first question is from Randy Abrams from Credit Suisse.
Good result and also good on the gross margin as well. First question, I wanted to ask just to go into [ get some ] more details on the guidance for the sales, which is up almost 1%. For that outlook, how much is it from limitation on capacity, where you've been running at the high utilization? And then is there any factor on the demand side or inventory side, limiting shipment if you go into second half?
Randy, it is virtually -- I mean, it's all limited by capacity because we -- both the 8-inch fabs and the 12-inch fabs currently are running at 110% -- 110%. There's very little room to maneuver, okay? So we're -- I mean, normally, we have always been conservative on these things. So this [ extra percent or 2 ], hopefully, we can do better, okay? This is -- it's -- we continue to run at extremely tight capacity with the very diverse technology platforms, virtually all of them are running very, very tight.
For the pricing, I know you've had a big move in second quarter, which I think some is mixed, but also like-for-like pricing. Do you still see the upward pricing environment just factoring the capacity full, but could you get some further lifts on [indiscernible] price?
Yes. I mean for us, demand continues to be very, very strong at this point. I don't think there's any change at this point with the bookings. The orders are fully booked for the rest of the year, okay? So I mean, with this kind of demand, we have never really stopped improving price throughout the year since last year. So I would expect we will continue with this effort as long as -- I mean, we're doing this sort of ongoing basis. We'll continue to look at opportunities to improve price. As I said, we're not going to be just drastically up like 10%, and then -- then flat next -- just flat next quarter. It's not how we operate it. So I mean, we want to do this steadily on a sort of growing fashion gradually. So if I said we can do this on a quarterly basis, 6% a quarter, I mean, I think this will be very, very significant for a year.
So -- yes, more steady versus that type of huge magnitude, again. For the new capacity, the 30,000, if you can give an update, the timing for that coming on and then how you see the shipments ramping up into that capacity, just there's a lot of fear in the market on concerns, I know you're still seeing the strength. But do you still see -- like how are you seeing the shipment ramp up with your application mix into that new capacity, as it comes on.
We're supposed to have all the additional 30,000 wafers to be installed, tested, ready for production by end of this year. So we're currently doing that. A lot of tools are -- have arrived at the fab currently. We will continue to do the installation. I would expect in Q3, Q4, you're going to see slight up on capacity in the 12-inch fab. So we want to have the entire 30,000 wafers capacity ready by end of this year. So we can use it for next year. We want to have entire 95,000 wafers ready, including the 30,000 wafers, the new capacity. So that starting from January 1st next year, we're going to have 95,000. We still expect that would be very quickly filled and ramp up very, very quickly.
I'll just ask one last question. The new filing, [ you mean ], it has mentions the Wuxi fab early 2025 for start or I think construction 40,000 by second quarter '26. Could you clarify, is there a capacity in between, like before that Wuxi fab, is there the interim or another project after you do this 30,000 because it looks like a little bit longer gap to get the fab financed by the IPO up.
Well, I mean, let's see how it goes, okay? I mean, I think we're going to have -- next year, definitely, we're going to have the additional 30,000 wafer capacity. That's going to start next year. So that's the transition period. I think hopefully, we can start building the fab, as fast as soon as we can. So hopefully, next year. I don't expect cash would be a problem for us. There are always different ways of [ gap ] money. Investors are pretty hot with a new investment. So hopefully, it takes a year or 2, go to fab. And then a year later, we can start to ramp up work. I mean, that also depending on how fast we could get the tools.
So this is the -- in the filing, it was just a bit conservative, just factoring tool constraints, time to do it, but I could pull in from that 2026 time line.
What? Sorry, I didn't get.
No, no, I was just talking like -- It sounds like if the fab is coming up, the filing had 2026, but it sounds like you'll try to accelerate that time line?
No. It shouldn't be that long. I expect to build the fab. It is only probably take a year. And then, we can hopefully start production sometime in 2024. I mean, yes, we -- that -- certainly, there are things we have to do get through the government approving process, all of that.
Our next question comes from the line of Szeho Ng from China Renaissance.
I have 2 questions. The first one regarding Q2, you guys [ booked ] a pretty big FX loss. Could you elaborate what is behind that loss?
There are 2 parts. You're talking about FX loss, right? So yes, it's a combination. It's a net loss -- it's FX net loss. So for the 3 -- for the HHGrace, the 3 8-inch fabs, we actually are -- that our dollar-based assets were actually greater than our dollar-based debt for the [ 3 8-inch ] fabs, okay? So in Q2, there is a U.S. appreciation -- dollar appreciation by 5.7% roughly. So literally, we have a gain on that, okay, about $14.4 million -- $14.4 million. Now for the 12-inch fab, it's opposite, okay? We have actually a pretty big dollar-based debt. The loan was about $1.3 billion. If you take that times by 5.7%, a dollar appreciation, it has actually created a loss of about $70.1 million. So the net was about $56 million. So that was the loss. That is a one-time thing. It's largely because -- it's a result if -- of -- the -- because of FX dollar appreciation, dollar appreciation.
So basically, non-recurring. Yes. And second question, I am not sure you could...
No, I mean, without that, it was -- it's going to be a fantastic quarter.
Yes. Exactly. Yes, yes. Given without -- [ that is with that ] loss, I think that the numbers look great. Yes. And second one on the Asia listing? Any update you can share with us on the call?
Everything is moving according to the plan smoothly, successfully. I have nothing to say too much. We have to submit. Our application has been accepted by the stock exchange, local stock exchange, so which has to go through the process. But other than that, we will let the bankers to handle that. I think they're doing great job at this point. I would expect a very smooth sailing, okay? But we are now, as management, we are focusing on our -- focusing on operations.
True. Is it fair to assume that everything would be completed by end of this year?
Well, let's see how it goes. Normally, depending on the reviewing process, it goes from anywhere from 5 months to 9 months. Let's see how that goes. It's a -- it is a big deal, even for the reviewing committee. I mean, I think they're going to -- I'm sure they're going to be looking at it very, very carefully. But it's a great company.
5 months to 9 months starting from -- you guys got the approval from the local exchange, right?
Well, I don't know. I mean it's -- that is the normal process. It varies from company to company. Well, do you have a different opinion on that?
No, no, I'm just tapping your brain because I haven't heard from you for a while regarding the Asia listing. So I'm not sure it's a incremental information you can share with us.
The question -- our next question comes from the line of Leping Huang from Huatai Securities.
So the first question is that the -- we heard a lot of negative news on the weakness of the smartphone on the consumer electronics end demand. But from your results, consumer electronics still account for 65% of total sales, but you still deliver a very, very strong second quarter result. Can you share some kind of how you achieve this? And do you see whether the end demand especially on consumer electronics are weakening or how this will affect your performance.
[Foreign Language]
[Interpreted] Yes. We see some weaker demand on the consumer market, but it's overall under control.
[Foreign Language]
[Interpreted] So [ Hua Hong ] is keep focusing on our specialty technology platforms. We have 5 major specialty technology platforms and very well accepted by customers in the market.
[Foreign Language]
[Interpreted] From our business structure, you can see we have 1/3 eFlash, 1/3 power discrete, and another 1/3 for logic and RF and analog.
[Foreign Language]
[Interpreted] So under such a business structure, we can still keep around or above 100% capacity utilization.
[Foreign Language]
[Interpreted] So we are still very confident on our specialty technology platforms.
The second question is about your EBIT margin between Wuxi fab and your Shanghai fab. We see a roughly the -- 10% jump on your -- increase on your 8-inch fab in Shanghai, but on the other hand, we see 20% decline on the EBITDA margin in Wuxi fab. So are there any -- what's the reason behind? Is it due to product mix or any other special reason? How we should model your EBITDA margin for these 2 fabs going forward?
So [ Randy ] -- I mean -- [ Leping ], so you're talking about EBITDA margin, a big increase on EBITDA margin for 8-inch business. Very simple. I mean, for the -- it is actually happening to both, okay? I mean you see a big jump on our gross margin from -- the prior quarter was at 38.6%, now is out at 44.2%. That's the gross margin. The increase in margin, whether it's gross margin or EBITDA, it's largely because of the increase in --increase in share price, I mean, in the average selling price. I'm sorry, increase the average selling price. So this is something we have been focusing on throughout last 2 quarters or 3 quarters. So that is paying off. I mean the Wuxi fab is also -- I mean, the price has also gone up quite a bit, the selling price, okay, just between prior quarter to this quarter, overall, the ASP has gone up quite a bit, okay, quite a bit. So I think this is largely as a result of a strong demand with all the -- for all the technology platforms, we're able to basically raise price on all platforms. Therefore, we have pretty good results.
But your EBIT margin in Wuxi fab declined by 20%. Any special reason?
Oh, you're talking about EBITDA?
EBITDA margin declined from [ 20% ]...
Okay. That's because, again, that's because there was an FX loss included in Q2. It's a -- I'm sorry, that the FX loss, $70.9 million FX loss, so which is a big thing.
[ Including ] the Wuxi fab.
Yes, yes, yes, yes. That is largely because from -- that was result -- that was from the Wuxi fab. [ We had ] a big loan there, $1.3 billion. If you take the FX impact, 5.7%, that is close to about $71 million.
So if we take out this one, the EBITDA margin going up for both Wuxi fab -- and Wuxi and Shanghai fab.
Yes. Otherwise, this thing will be at a -- close to -- I think we'll be at $100 million of EBITDA just for the quarter.
[Operator Instructions] At this time, there are no further questions from the line. I'd like to hand the call back to the management for closing remarks.
Again, we want to thank you all for joining us today and asking all the questions. We hope you'll join us again next quarter. Please continue to stay safe and healthy, which we could meet in person very, very soon. Thank you very much.
Thank you. Ladies and gentlemen, that does conclude today's conference call. Thank you for your participation. You may now disconnect your lines. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]