Hua Hong Semiconductor Ltd
HKEX:1347
Earnings Call Analysis
Q3-2023 Analysis
Hua Hong Semiconductor Ltd
At Hua Hong Semiconductor, the President, Mr. Junjun Tang, and the Chief Financial Officer, Mr. Daniel Wang, spearheaded the third-quarter earnings call of 2023, detailing the company's financial performance and strategic initiatives amidst a challenging semiconductor market.
In an unrecovered semiconductor market, Hua Hong Semiconductor reported third-quarter revenue of $568.5 million, a 9.7% decrease from the previous year, and a 10% decline from Q2 2023. The gross margin was reported at 16.1%, in accordance with previously set guidance. Despite these challenges, the company's total monthly wafer capacity grew, thanks to the ramp-up of the 12-inch production line in Wuxi, increasing to 358,000 8-inch equivalent wafers. With optimism in specialty technologies, the company leveraged its diversified platforms, particularly in the New Energy and Automotive Electronics sectors, to bolster its product offering and competitive position.
Undeterred by the downturn, Hua Hong Semiconductor is committed to propelling its R&D endeavors and nurturing its talent pool. This strategy aims to enhance product quality and performance, ultimately securing the company's stature as a specialty foundry leader.
China remains the largest contributor to Hua Hong's revenue at $441.2 million, accounting for 77.5% of the total, despite a slight 2.4% year-over-year decrease. North America and Asia witnessed more significant declines due to decreased demand, whereas revenue from Europe grew by 28.5%. Embedded nonvolatile memory revenues saw a substantial drop, while discrete products experienced a rise due to increased demand for IGBT and super junction products.
The company's efforts to manage costs were evident, with a 4.1% decrease in net cash flows from operating activities compared to Q3 2022. Capital expenditures reflected ongoing investments in the Hua Hong Wuxi project and other manufacturing facilities, totaling $193.7 million for Q3 2023.
Hua Hong raised significant funds through financing activities, accounting for over $3 billion, primarily from share issuance on the STAR market and bank borrowings. This influx of capital notably strengthened cash reserves, totaling nearly $5 billion by the end of Q3 2023, while the decrease in restricted deposits and a slight reduction in inventories supported a more streamlined balance sheet.
Looking ahead to the fourth quarter of 2023, the company's revenue is anticipated to range between $450 million to $500 million, with gross margins expected to contract significantly to 2%-5%. This projection sets a cautious tone for the company's near-term financial performance amid persistent market pressures.
You don't have any saved screeners yet
Ladies and gentlemen, thank you for standing by, and welcome to Hua Hong Semiconductor Third Quarter 2023 Earnings Conference Call. The call is hosted by Mr. Junjun Tang, President and Executive Director; and Mr. Daniel Wang, Executive Vice President and Chief Financial Officer. Please be advised that your dial-in is in a listen-only mode. However, at the conclusion of the management presentation, there will be a question-and-answer session, at which time you'll receive instructions on how to participate. The earnings press release and third quarter 2023 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. I want to thank you all for joining our Third Quarter 2023 Earnings Conference. Today, we will first have Mr. Junjun Tang, our Executive Director and President make some remarks on our third 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 speak -- please ask your questions in English. Without further ado, I would now turn the call over to Mr. Tang.
[Foreign Language]
[Interpreted] Good afternoon, everyone. Thank you for joining our earnings call.
[Foreign Language]
[Interpreted] The current macro environment is complex and constantly changing. The semiconductor market has not yet recovered. On Hua Hong Semiconductor overcame the tough challenges and achieved revenue of USD 568.5 million in the third quarter of 2023 with a gross margin of 16.1%, in line with guidance.
[Foreign Language]
[Interpreted] At the capacity of Hua Hong Semiconductor 12-inch production line in Wuxi ramped up, the company's total 8-inch equivalent monthly capacity increased to 358,000 wafers by the end of the third quarter. With a larger production scale, the added capacity provides better support for R&D to launch new products.
[Foreign Language]
[Interpreted] Thanks to years of improvement in specialty technologies and our advantages of having diversified process platforms. The company's products, especially IGBTs and super junctions have continued to gain momentum in the New Energy and Automotive Electronics field and have been well recognized by customers.
[Foreign Language]
[Interpreted] The company is making all round efforts to build our second 12-inch production line, the Hua Hong Wuxi Manufacturing Project. The project is currently in the construction stage and expected to be put into operation by the end of 2024, followed by a 3-year ramp-up to 83,000 wafers per month, which will lay a solid foundation for the company's medium and long-term development.
[Foreign Language]
[Interpreted] Regardless of the market downturn, the company will continue to strengthen R&D investment and talent team development and improve product quality and its performance indicators to further consolidate our leading position as a specialty foundry and deliver even more outstanding performance to investors.
[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. Now let me begin with a summary of our financial performance for the third quarter, followed by an outlook on revenue and margin for the fourth quarter of 2023. And then we will move on to the question-and-answer session.
First, let me summarize financial performance as of the third quarter. Revenue was $568.5 million, 9.7% lower than the prior year and 10% below Q2 2023, primarily due to decreased average selling price. Gross margin was 16.1%, 21.1 percentage points lower than Q3 2022 and 11.6 percentage points below Q2 2023, primarily due to decreased average selling price and the capacity utilization. Operating expenses were $85.1 million, 15.6% over Q3 2022 and 11% over Q2 2023, primarily due to increased engineering wafer costs. Other loss net was $19.4 million, down by 66.4% and 64.5% compared to Q3 2022 and Q2 2023, respectively, mainly due to decreased foreign exchange losses, partially offset by decreased government subsidies.
Income tax expenses was $13 million, 65% lower than Q3 2022 and 63.7% lower than Q2 2023, primarily due to decreased taxable income. Loss for the period was $25.9 million compared to profit for the period of $65.4 million in Q3 2022 and $7.8 million in Q2 2023. Net profit attributable to shareholders of the parent company was $13.9 million compared to $103.9 million in Q3 2022 and $78.5 million in Q2 2023. The Basic earnings per share was $0.009 compared to $0.08 in Q3 2022 and $0.06 in Q2 2023. Annualized ROE was 1.2% compared to 14.4% in Q3 2022 and 10% in Q2 2023.
Now I'll provide more details on our revenue from Q3 2023. From geographical perspective, revenue from China was $441.2 million contributing 77.5% of total revenue and a decrease of 2.4% compared to Q3 2022, mainly due to decreased demand for MCU, smart card ICs and other power management IC products, partially offset by increased demand for IGBT, analog and super junction products. Revenue from North America was $48.8 million, a decrease of 39.4% compared to Q3 2022 mainly due to decreased demand for other power management IC and MCU products. Revenue from Europe was $39 million, an increase of 28.5% over Q3 2022, mainly due to increased demand for IGBT and smart card ICs. Revenue from Asia was $34.7 million, a decrease of 37.8% compared to Q3 2022, mainly due to decreased demand for MCU and logic products.
Revenue from Japan was $4.9 million, a decrease of 55.9% compared to Q3 2022, primarily due to decreased demand for MCU products. With respect to technology platforms, revenue from embedded nonvolatile memory was $143.6 million a decrease of 32.8% compared to Q3 2022, mainly due to decreased demand for MCU and smart card ICs. Revenue from stand-alone non-volatile memory was $36.8 million, a decrease of 15.3% compared to Q3 2022, primarily due to decreased demand for NOR Flash products. Revenue from Discrete was $236 million, an increase of 23.3% over Q3 2022 mainly due to increased demand for IGBT and super junction products. Revenue from Logic and RF was $49.9 million, a decrease of 15.6% compared to Q3 2022 mainly due to decreased demand for Logic products. Revenue from analog and power management IC was $100.9 million, a decrease of 17.1% compared to Q3 2022 mainly due to decreased 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 $152.1 million in Q3 2023, 4.1% below Q3 2022, primarily due to decreased government subsidies, partially offset by decreased payments for materials, and 5.6% below Q2 2023, mainly due to decreased government subsidies and increased payments for labor, partially offset by decreased payment for income tax. Capital expenditures were $193.7 million in Q3 2023, including $111.8 million for Hua Hong Wuxi, $59 million for Hua Hong manufacturing, $22.9 million for Hua Hong 8-inch fabs. Other cash flow generated from investing activities was $16.9 million in Q3 2023 from receipts of interest income.
Net cash flows generated from financing activities was $3,176.4 million, including $2,937 million proceeds from issuance of shares in the STAR market, $347.7 million proceeds from bank borrowings, $136.5 million decrease of pledged deposits, and $0.7 million proceeds -- from $0.7 million proceeds from share option exercises, partially offset by $239.1 million of bank principal repayments, $3.8 million of interest payments, $1.4 million of listing fees and a $1.2 million of these payments.
Now let's move to the balance sheet. Cash and cash equivalents increased from $1.851 billion on June 30, 2023, to $4,989.5 million on September 30, 2023. Restricted and time deposits decreased from $167.1 million, on June 30, 2023, to $31.7 million on September 30, 2023, mainly due to decreased pledged deposits for bank borrowings. Inventories decreased from $558.3 million on June 30, 2023, to $492.8 million on September 30, 2023, mainly due to decreased finished goods and work in progress. Property plants in the equipment was $3,322.9 million on September 30, 2023, compared to 3,256.6 million on June 30, 2023. Total assets increased from $6,950.3 million on June 30, 2023, to $9,974.3 on September 30, 2023.
Our total bank borrowings were $1,926 million on September 30, 2023, compared to $1,796.3 million on June 30, 2023. Total liabilities increased to $2,642.1 million on September 30, 2023, from $2,555.2 million on June 30, 2023, primarily due to withdrawal of bank borrowings. Debt ratio decreased to 26.5% on September 30, 2023, from 36.8% on June 30, 2023.
Finally, let me give you a high-level outlook for the fourth quarter 2023. We expect revenue to be approximately $450 million to $500 million and our gross margin to be in the range of 2% to 5%. This concludes my financial remarks. Now we would like to start the question-and-answer session. Operator, please assist.
Thank you. We will now begin the question-and-answer session [Operator Instructions]. First question comes from the line of Leping Huang from Huatai.
So my first question is about your fourth quarter gross margin guidance. I think 2% to 5% is quite low number. Is it possible to give us some reasons for this large margin decline from third quarter to fourth quarter, if you can split between the utilization rate, ASP decline, the depreciation.
Thank you for the question. The drop in gross margin is largely due to the following reasons. First of all, it is I think probably the most critical way is because the ASP drop, okay? That accounts for -- when you compare with Q3, the price actually dropped. That probably accounts for 7 to 8 percentage points. And then we'll also look at the inventories, and we also mark down some inventory. So that gives another 3 to 4 percentage points. And on top of that, there'll be some other things, just small items here and there. But the 2 most critical reasons were because basically lower ASP and inventory write-down.
Okay. Okay. The second question is about the market environment if you look into the 2024. I think from the -- [Indiscernible] can separate from both the supply and the demand side. So we saw a very strong -- the equipment input data from the custom data that [Hua Hong Wuxi] September China import around USD 5 billion equipment abroad. And what seems -- I believe most of them will be used in the mature process. What do you see the environment on the -- since so many equipment, the new capacity are introduced what do you see on this competition landscape between you and your peers. Also on the demand side, since you mainly -- I think you have a lot of industrial and auto customers. Do you see some inventory digestion? Or do you see are -- they remain strong?
[Foreign Language]
[Interpreted] Thank you for your question. So The Hua Hong Wuxi Phase 2 project is on schedule.
[Foreign Language]
[Interpreted] The capacity expansion is based on the market demand on our 5 major specialty technology platforms.
[Foreign Language]
[Interpreted] So customers' investment in our new products on Power Discrete, Analog and eFlash and some Logic is still on schedule.
[Foreign Language]
[Interpreted] So according to our construction plan, we will complete our [Indiscernible] moving in the first quarter next year.
[Foreign Language]
[Interpreted] The procurement trend for the relative tools is accelerating according to this plan.
We have the line from Sunny Lin from UBS.
So my first question is to follow up on the pricing trend. If my calculation was correct. I think Q3 blended ASP could drop by about 10% sequentially. And I think just now you mentioned for Q4, ASP could drop by another maybe 7% to 8% sequentially. And so where are you seeing most pricing competition? And beyond Q4, looking into first half of 2024, how should we think about the pricing trend?
Let me correct you, Sunny. When I said the 7% to 8% drop, it is not the ASP drop. It is -- when you look at our gross margin for Q3 was at 16.1%. Now we give a guidance from anywhere in the range of 2% to 5%. So out of that drop anywhere from 10% to 13% percentage points drop -- there was like maybe 7 to 8 percentage points. Our margin drop is related to the decrease in ASP. So what I -- basically, what I said was 7% to 8% drop on gross margin -- percentage points drop on gross margin is related to the ASP drop.
Got it. Thank you for the clarification. And so maybe first part of the question, ASP has been on a declining trend in Q3 and Q4? How should we think about into first half of 2024. Is there more downside? Or do you think pricing should start to stabilize because of the improving cycle?
We're hopeful that price will become stabilized in Q4 and into Q1, okay? We think this is the bottom, okay? This is the bottom. We even did an inventory adjustment in Q3 and in Q4. So hopefully all the bad elements has been eliminated. We're hopeful that things will improve, start to improve in 2024. But you have to realize, overall, I think the market is still weak at this point, okay? We see price basically has come down on all platforms, okay, on all platforms. This is something we did. As I mentioned, we started to do that in Q1, Q2. Now you finally see the effect that is really affecting our performance in Q3 and into Q4, okay? But we're expecting this is the end, okay? This is basically the lowest point that we're going to see. And we hope that's going to be the case.
Got it. And so if I may follow up, looking at your Q4 revenue guidance, at the midpoint, it could drop by about 17% sequentially. And so how should we think about the decline by ASP and volume?
The ASP drop in -- well, in Q4?
And volume, yes.
Sorry, and what? Volume?
Right, right, right...
I think it's mostly ASP drop. I think volume has been stabilized. And we also have since POs, quick orders that has been coming during the past 2 months, okay? And these are pretty high volume orders. But I mean, just overall price has come down. So I think overall, I think our utilization will probably improve in Q4 in my view. We're hoping that's the case. And the ASP -- but however the ASP will come down.
I see. So my second question is on CapEx and depreciation. Could you remind us what's your latest target for 2023. Is there any initial planning for 2024?
For this year, for 2023, we're looking at -- For 2023, our capital expenditures, we're looking at for the 3-inch, 8-inch fabs total is around $130 million. And for the 12-inch -- for both 12-inch fabs, okay? The first one, I think on a cash flow basis, it's going to be around $600 million. And for the second fab, which is under construction at this point is about anywhere from $400 million to $500 million, okay? So total, it's close to $1 billion. But for the first 12-inch fab, basically, we're close to the end of the investment cycle. And for the second fab, virtually at this stage is just in the construction phase.
Got it. Any initial target for 2024 CapEx and depreciation?
For 2024, I think the 3-inch fabs are going to be pretty stable. I'd say anywhere $15 million to $100 million, okay, $50 million to $100 million. I think for the second 12-inch fab, I would say anywhere around $2 billion as we continue to build the fab and start to issue POs for the for the equipment basically.
Got it. I see. Would you mind providing some color on depreciation as well? How should we model the depreciation increase into 2024?
Depreciation for the 3-inch fabs, it would be around $120 million, okay? And for the first 12-inch fab, I would say for next year, it will be maybe around $450 million per year for 2024. And the second fab, we're not going to have any depreciation because it's still going to be in the construction stage. By end of next year, we're going to basically -- the fab building will be complete for the second fab, and then we'll start to basically move into equipment.
Got it. That's very clear. I have one last question on your 12-inch expansion. And so for the first fab, would you remind us the current major products that was a more significant revenue contribution? What kind of new platforms are looking to expand into 2024, and then as you start to ramp up the second 12-inch fab, would you look to have some product differentiations between the 2 fabs?
[Foreign Language]
[Interpreted] Thank you for your question. Actually, the 12-inch fab is an extension of our 8-inch specialty technology platform.
[Foreign Language]
[Interpreted] So the Power Discrete accounts for about 30% to 40%.
[Foreign Language]
[Interpreted] Analog and Power Management, close to 30%.
[Foreign Language]
[Interpreted] And the rest are the Logic and other sensors.
[Foreign Language]
[Interpreted] So for the capacity expansion, it's maybe around the similar percentage allocation.
[Foreign Language]
[Interpreted] Currently, we are putting more efforts on technology development.
[Foreign Language]
[Interpreted] Focusing on some [Indiscernible] Power Management and Analog and Power Management and some differentiated Logic.
Next question comes from the line of Szeho Ng from China Renaissance.
My first question regarding the CapEx. This time, you've broken it down into 3 parts. One for the 8-inch, one for Wuxi, and the other one for Hua Hong manufacturing. What do you think about?
That's the second 12-inch fab.
Oh, I see. All right. Thank you.
Still in the very initial stage.
Oh, I see, I see. And I remember for Wuxi, we are planning to have around 94,500, right? Capacity in the initial phase. When we turn on the remaining 40,500 because right now, we have 80,000 in production.
It's -- the plan is to ramp to 94,500 by basically first half next year. I mean, there are some challenges at this point. I mean, overall the market is weak, okay? But I mean, our original plan was by the end of this year. There's a slight delay on that. I think hopefully, by first half, second half next year, we get to 95,000. But we see some basically strong orders lately. Hopefully, they will become more stable going forward. Let's see how things are going.
I see. But can you characterize which areas you are seeing a strong order?
I think for all these quick orders largely coming from Discrete Products, okay? Largely, for example, IGBT and super junction that sort of products.
I see. And last question regarding the 8-inch, 12-inch. Can you talk about the pricing dynamics between the two?
What? I'm sorry.
The pricing environment between 8-inch and 12-inch?
The pricing environment. Is that what you're saying, pricing?
Yes, right. The pricing.
Well, I mean, I think both are under pressure at this point, okay? I mean, you have to realize the utilization rate has come down for both the 8-inch and 12-inch fabs, okay? 8-inch at this point is higher in terms of utilization rate compared to the 12-inch. The 12-inch just has much -- pretty big capacity. We're talking about 95,000. So right now, the loading is around 75,000 wafers -- 75,000 wafers. I'm pretty confident we should be get to around 80,000 by end of this year ending and continue to move to 95,000. But the price pressure is on both, okay? Is on both.
[Operator Instructions] At this time, there are no further questions from the line. That's all the time we have for questions. I will now hand back to the management for closing remarks.
Well, again, thank you all for joining us today and asking all the meaningful questions. We hope that you will join us again next quarter. Please continue to stay safe and healthy. We're looking forward to meeting you in person in the near future. Thank you.
Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect your lines.