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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 Fourth Quarter 2018 Earnings Conference Call. Today's call is hosted by Mr. William Wang, President and Executive Director; and Mr. Daniel Wang, Executive Vice President and Chief Financial Officer. [Operator Instructions] The earnings press release and fourth quarter 2018 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. William Wang, President and Executive Director. Thank you.
Good afternoon, everyone. Thank you for participating in our conference call. We are extraordinarily pleased with Hua Hong's fourth quarter 2018 performance.
Despite a general weakness in the market, our momentum continued to strengthen. Revenue once again climbed to a new high, reaching USD 249.1 million, an increase of 14.8% over 2017's final quarter and a 3.3% over the third quarter 2018, driven largely by the increased demand for bank card ICs, MCUs, super junction and the general MOSFET products. As a result of high factory loading, increased selling prices on certain products and an ever-improved product mix, our gross margin continued at a respectable 34%.
We feel a great sense of accomplishment for 2018. Overall revenue achieved USD 930.3 million, an increase of 15.1% over 2017, driven by strong demand for our specialty technology offerings, in particular for embedded nonvolatile memory, discrete technology platforms.
Gross margin continued to be strong and grow to 33.4%, attributable to consistently high utilization and improved average selling prices. Our net profit as a percentage of revenue rose to 20%, 2 percentage points over the prior year. Return on equity increased to 10.2%, an improvement of 1.1 percentage points. We owe this exceptional success entirely to the support of our shareholders, our board and to the hard work, creativity and dedication of our employees. The Wuxi fab is moving forward smoothly according to plan. We expect to complete the construction of the building and the clean room by the end of second quarter, to start moving equipment in during the second half of the year and to begin production of 12-inch wafers in Q4 this year.
Engineering activities started a few months ago, and our technology development and marketing people have laid out plans for customers, technology and products for the initial ramp-up.
As the Wuxi fab comes online, it will certainly provide a great relief for our constrained capacity and provide us with the enhanced means to meet overall customer demand. It will move the company to the next level. I love our team very much, which is always present with relentless energy and dedication, never resting on its laurels, always pursuing excellence. And I believe in our strategy of specialty technologies that has been proven many time ago. We -- these 2 elements work together nicely and will take us far. Now I would like to hand the cell over to our CFO, Mr. Daniel Wang, for his comments.
Thank you, William, for your wonderful and generous comments. Good afternoon, everyone. Thank you for joining us today. Let me begin with a summary of our financial performance for the fourth quarter and a recap of the whole year 2018 followed by our outlook on revenue and margin for the first quarter 2019. We then move on to the question-and-answer session. First, let me summarize financial performance as of the fourth quarter. Revenue reached another new high of $249.1 million, an increase of 14.9% from prior year and a 3.3% over Q3 2018. Cost of sales was $164.5 million, 14.4% above Q4 2017, primarily due to increased wafer shipments and depreciation expenses and 3.3% higher than Q3 2018, primarily due to an accrual of year-end bonus. Gross margin was 34%, 0.3 percentage point higher than Q4 2017, mainly due to increased selling prices of certain products and an improved product mix and flat to Q3 2018. Operating expenses were $38.8 million, 5.6% above Q4 2017, largely due to increased labor expenses and a 22.1% over Q3 2018, primarily due to an accrual of year-end bonus. Other income net was $11.6 million, 4.8% lower year-over-year, mainly due to: One, decreased share of profits from an associate and decreased general subsidies; two, increased foreign exchange loss partially offset by increased fair value gains on financial assets at fair value to a profit or loss and increased interest income; and 18.9% down quarter-over-quarter, primarily due to foreign exchange loss after a gain in the previous period, partially offset by increased share of profits from an associate and increased interest income. Income tax expense was $8.8 million, 25.4% over Q4 2017 due to increased taxable profit and 34.9% lower than Q3 2018, primarily due to an end-of-year adjustment of income tax deductibles.
Profit for the period was $48.6 million, 17% above Q4 2017 and 4.6% lower than Q3 2018. Net profit margin was 19.5%, 0.4 percentage points up by Q4 2017 and a 1.6 percentage points below Q3 2018. Basic earnings per share was USD 0.042, was USD 0.002 above Q4 2017 and $0.004 lower than Q3 2018. Annualized ROE was 9.6%. Now please let me provide you with more details of our revenue from Q4 2018. From geographical perspective, revenue from China was $136.3 million, contributing 54.6% of our total revenue and an increase of 11.4% compared to Q4 2017, chiefly driven by increased demand for general MOSFET MCU products.
Revenue from Asia was $34.3 million, an increase of 54.4% compared to Q4 2017, mainly driven by increased demand for MCU and general MOSFET products.
Revenue from Europe was $19.1 million, an increase of 22.4% compared to Q4 2017, mainly driven by increased demand for bank card ICs and the general MOSFET products.
Revenue from Japan was $18.1 million, an increase of 16.3% compared to Q4 2017, primarily driven by increased demand for logic and super junction products, partially offset by decreased demand for flash and MCU products. With respect to technology platform, revenue from embedded nonvolatile memory was $99.4 million, an increase of 15.7% compared to Q4 2017 mainly driven by an increased demand for MCU and bank card ICs. Revenue for -- from discrete was $86.9 million, an increase of 39.4% compared to Q4 2017 mainly driven by increased demand for general MOSFET, super junction and IGBT products. Revenue from analog and power management IC was $31.4 million, a decrease of 22.6% compared to Q4 2017, mainly due to decreased demand for LED lighting, analog and other power management IC products.
Revenue from logic and RF was $27.6 million, an increase of 43.9% compared to Q4 2017, mainly driven by increased demand for logic and RF products. Revenue from stand-alone nonvolatile memory was $3.6 million, a decrease of 57% compared to 2017, primarily due to decreased demand for flash products. Let's now take a quick look at the cash flow statement. Net cash flows generated from operating activities were $91.9 million, up by 4.1% year-over-year, primarily due to increased collection of trade and notes receivables.
Capital expenditures were $61 million in Q4 2018, including $32.9 million of Hua Hong Wuxi. Other net cash generated from the investment activities was $111.3 million, one payout of USD 98.5 million from investment in financial assets at fair value through profit or loss to $12.8 million of interest income.
Net cash flows generated from financing activities were $341.7 million, including $400.5 million proceeds from issue of shares, partially offset by $58.3 million of repayments of bank borrowings and $500,000 payment of the interest expenses. Balance sheet. Let's now move to the balance sheet. Cash and cash equivalents increased to $777 million on December 31, 2018, compared to $284.3 million on September 30, 2018. Financial assets at fair value through profit or loss decreased from $775.3 million on September 30, 2018, to $667 million on December 31, 2018, primarily due to payout from investment in financial products. Trade and notes receivables increased from $124.9 million on September 30, 2018, to $176.8 million on December 31, 2018, primarily due to increased revenue and accounting reclasses from due -- from related parties. Other current assets decreased from $57.4 million on September 30, 2018, to $23.3 million on December 31, 2018, primarily due to accounting reclasses to trade and notes receivables.
Property, plants and equipment increased from $752 million as of September 30, 2018, to $773.2 million as of December 31, 2018. Total assets increased from $2,641,200,000 on September 30, 2018, to $3,078,300,000 on December 31, 2018.
Our total bank borrowings decreased from $88.9 million on September 30, 2018, to $30.6 million on December 31, 2018, due to repayments of bank borrowings. Total liabilities decreased to $373.9 million on December 31, 2018, from $396.4 million on September 30, 2018. Our debt ratio decreased to 12.1% on December 31, 2018, from 15% on September 30, 2018. Now I would like to give you a recap of our performance for the entire year of 2018. Revenue rose to an all-time high of $930.3 million, an increase of 15.1% over 2017. Cost of sales was $619.1 million, an increase of 14.4% over 2017 primarily due to increased wafer shipments and increased depreciation and labor expenses.
Gross margin was 33.4%, 0.3 percentage points above 2017, mainly due to consistently high utilization and increased average selling prices, partially offset by increased depreciation and labor expenses.
Operating expenses were $130.1 million, 12.2% over 2017, mainly due to increased labor, professional expenses and impairment provisions. Other income net was $40 million, 88.5% over 2017, mainly due to: one, fair value gains of financial assets at a fair value through profit or loss; and two, increased interest income partially offset by increased foreign exchange loss. Income tax expenses was $35.3 million, 30.2% over 2017 mainly due to increased taxable profit. Profit for the year was $185.6 million, 27.8% above 2017. Net profit margin was 20%, 2 percentage points over the prior year. Basic earnings per share was $0.171, is $0.031 above 2017. ROE was 10.2%, an improvement of 1.1 percentage points. Finally, let me give you a very top-level outlook for the first quarter 2019. We expect revenue to be approximately $220 million. Year-over-year revenue is expected to grow approximately 4.7%. As you know, in Q1, we have -- it's largely -- the quarter-to-quarter decline is largely due to seasonality and the annual maintenance of our 2 fabs. And we expect our gross margin to be approximately 32%. We also plan to decide our dividend distribution plan for the accounting year 2018 during the Annual General Meeting in May 2019. This concludes my financial remarks. Now I would like to open up the call for question and answers. Operator, please assist. Thank you.
[Operator Instructions] The first question comes from the line of Leping Huang from CICC.
First, congratulations on the very good results. The first question is about the Wuxi fab. So in the quarter, in the statement, you said that you will start equipment moving from, I think, December of 2019. So can you elaborate further which tool or which application you plan to migrate from the current Shanghai fab to Wuxi? And should we model any revenue for the Wuxi fab in the fourth quarter this year?
Hello, Leping. So our plan in the summer, we're moving the tools and the first products, as usual, will enlarge the base to help our product lines and then to use Wuxi. We hope all of this kind of plan and with our customers' help, this year we can balance some risk reduction and some product mass production for Q4 this year. Our order seems dependent on the help of a customer and right now, the qualification of the proposed large products.
Okay, yes. So the second question is can you -- we -- in first quarter, we see that the -- your ASP, the wafer ASP, a good change for me that the ASP started to go up again after 2 quarter of decline. So can you comment on the reason behind? And also, I think the reason we see the 12-inch or especially the mature process of 12-inch fab, the utilization rate was quite weak. Can you comment on the -- your view on this 8-inch supply demand relating in 2019?
Leping, so at this point, I think with -- overall, I mean, the market is weak. We all understand that. For us, I think we're very fortunate. I think our fab continued to perform at very, very high utilization rate. We're literally talking about above 95%, okay? Now given the fact that we're going to be doing some annual maintenance in Q1 for Q1-- for Fab1 to Fab3, so we expect 2 of these fabs will be taken down. Each will be taken down for about 4 to 5 days. That will affect our overall utilization rate for the quarter, okay? But I think it still can be comparable, in terms of utilization rates, still going to be comparable to first quarter of last year. So therefore, I would expect we're going to generate more revenue. We're going to ship more wafers in this coming quarter -- in this quarter.
So can we expect from -- how we should model in your -- the 8-inch fabs ASP for this year? So should we still expect the ASP up this year or because of that [indiscernible]?
Yes, I mean, our ASP has been growing pretty strong. If you look at the past 2 years, 2017, we went up by 7.4%, as you remember. Last year was 6.8%, okay? So I think the trend will continue, plus I will not give you a projection on that. But I'm pretty confident -- I will not give you a projection on that. We still expect some growth, good growth for this year. Apart from capacity -- increased capacity, part of that will come from ASP improvement, okay? So I will not give you a projection on that, but I can tell you that the ASP, I'm pretty confident ASP would not come down.
The next questions comes from the line of [ R. Flu ] from Crédit Suisse.
This is [ Hanz ] on behalf of [ Randy ] . So my first question is regarding the slowdown in first quarter. Your guidance is pretty similar to your aim here. Could you please provide more color on the main factors leading to the slowdown and sales trend by segment?
I mean, as I state earlier, I mean, it's the primary reason for the drop is due to seasonality and new maintenance of our 2 fabs, okay? So we when you look at our overall technology platforms, I think it's in a way -- it's going to probably going to be across all technology platforms. But I think MCUs and discrete will continue to be very, very strong, okay? So I expect discrete will continue to grow. But for some other technology platforms, for example, smart card ICs, logic and RF, power management IC, I think there probably will -- slightly down compared to last quarter, okay? But I think discrete is still going very strong for us. We expect our Fab2 will continue to be running at a very, very high utilization. It's good that we actually have that fab running annual maintenance in December. That will really help us.
Okay, that's very clear. So should we expect that Fab1 and Fab3 will start recovering from second quarter? And how should we think about the forward outlook?
Hey, we're still looking for growth this year, as I said. Overall, the market is weak, but I think we're doing better than a lot of other people. We're still going strong for us. Things are still going strong for us. So we expect there'll be growth for us this year, okay? So yes, we expect that Q2 will be stronger -- definitely would be a much stronger quarter than Q1.
Yes, I have to say more is costs. So actually, our Fab1 and Fab3 is under planned seasonal annual maintenance. So right now, Fab1, the post fab is already being very smoothly finished, their maintenance. And all the engines have been polished awaiting for the recovery before the end markets.
Okay, that's very clear. So my second question is regarding your gross margins. So your margins hold up better in the slowdown. How did you manage margins at 32%? And should we expect the gross margin in 1Q to be in the bottom of the year? Or it will be pretty similar through the year with depreciation from 12-inch gradually comes down the line?
I think our margin has been holding pretty well for the past several quarters. So Q1's largely because it's slightly lower utilization. And it's just a lower revenue, okay? So therefore, the fixed cost -- you expect the fixed costs will all slightly go up a little bit. And plus the depreciation expense overall is going to go up this year even for the 8-inch fabs. I think, we're -- our total -- I mean, the depreciation [ defense philosophy ] was $120 million for all 3- -- 8-inch fabs, okay? We expect that would go up by probably around $10 million for the 8-inch fabs -- for all 3- and 8-inch fabs. There will be additional depreciation expenses for the Wuxi fab in Q4 as well. So overall, we're looking at -- yes, sorry?
Can you quantify the depreciation from Wuxi fab?
Wuxi would be very strong. I would say around maybe $20 million a year for this year.
So full year, the gross margin...
So roughly, roughly, roughly, it's still very -- it's a ballpark number. We're very conservative with these numbers. It's about $150 million. But I don't expect Wuxi will go more than $20 million this year.
Yes. Regarding the CapEx and capacity expansion plan, could you please update your plan if there's anything changed [ in timing Q1 '19 ] ?
For the -- you are talking about for the CapEx plan?
CapEx and capacity expansion.
Well, our -- for our CapEx, we expect this year, okay, for the 8-inch fab, this total is around -- going to be about $170 million. $120 million, we're going to use that for capacity expansion. About $50 million, we're going to use for maintenance, okay? So that's about $170 million. And we have planned to add another 10,000 wafer capacity, mainly for discrete for this year. We can still add in total maybe 20,000 wafer capacity in our Fab3. But this year, we probably will add 10,000, okay? It's going to cost $120 million and then $50 million for annual maintenance. Now as far as the Wuxi fab, I just said, it's going to run around $600 million, maybe slightly more than that in terms of budget, not really the cash flow. The cash flow is going to be a little bit slower because you basically is -- the budget is around -- approximately about $600 million a year. That's what we had last year. But it's also going to be the number for this year for the 12-inch fab.
Okay. So just on the MDA side, here, you recently announced 8-inch fab acquisition to support the growing 8-inch demand. So for Hua Hong, will you consider to build or seek opportunity to acquire existing [ in standing ] in the market in addition to your current 12-inch fab plant?
Actually, we have put our eye on the market. So we are looking for good opportunity to maintain a gross margin of this company to balance the capacity expansion. At the same time, we are consider our internal bottleneck tools expansion. I think the area sector, we have put our eye on -- eye out.
Okay. So my last question was regarding your share count. Could you clarify how the share count will change over time from the equity funding?
Well, we only did once, which happened in October last year. It increased by 240-plus million dollars, okay? It's largely -- we raised $400 million from the National IC Fund for our Wuxi project. The total proceeds from that was $400 million, and was at the -- the price was around 12 -- I think HKD 12.90. HKD 12.90 per share. At this point, we don't expect to issue any more shares, at least not for 2019.
Okay, so the share count will be pretty similar to current level?
Yes, it's about -- we're starting with $1.2 billion, slightly over, right? Well -- I'm sorry, slightly over 1.2 billion shares.
Your next questions comes from the line of Szeho Ng from China Renaissance.
Firstly, could you comment about your order visibility right now compared with, let's say, from a quarter ago or 2 quarters ago?
Yes, it's very clear, so as just now Daniel mentioned. So we see very clear market demand of our focus for technologies in the embedded and volatile memory and also the power-related products. Here, we also see the weakness on our end market of our smartphone. Hope these kind of scenes can be more clear in the second quarter of this year. So we will continue to strengthen our presence, focus on technology. But we also didn't skip any opportunity in a market recovery, especially smartphone-related products.
Okay, all right, yes. And second question, Daniel, maybe it's a question for you. Can you give some idea about the tax? How we should model the tax for this year?
It will be approximately -- so the normal tax rate is about 15%, right?
Yes.
But then there's also the dividend part. So in the past, we pay around 30% after profit. So that part, you have to pay 10% on tax. So roughly around 20%, 21%, used to be 5%, but now it's 10%.
The next questions comes from the line of [ Matt Coven ] from BlackRock.
I wanted to ask about the capital intensity. I noticed that just looking year for year, 2017 CapEx as a percentage of sales went from just under 17% to last year were kind of close to the 26%. And I'm just wondering how you think about the business going forward with our capital intensity. That's my first question. The second question is if you have any comment on the Vanguard acquisition of the GLOBALFOUNDRIES' fab. It sounds like they're getting 40,000 additional wafers. Those are wafers that are producing today. And I think it's around USD 250 million acquisition. And I'm not sure of the [ notes ], you probably know much better than I do. But I guess they're giving an equivalent capacity addition that we're getting with the Wuxi fab at around half the cost. Now I know they're different technology platforms and end markets. But just wanted to kind of get your idea on how you view that deal. So just those 2 questions.
Hi, Mike -- Matt. So I'm going to leave the second question to William. I will answer your first question in terms of capacity intensity. We have been doing pretty well. I mean, we're very, very thrifty with the capacity expenditures. Last year, we -- overall, we -- in terms of cash out, we only -- look, I'm going to separate Shanghai and Wuxi because Wuxi is still in the construction stage. So roughly, Wuxi is going to be -- last year, the budget was about $800 million for Wuxi, okay? But in terms of cash out, we only spent $114 million because most of -- in terms of cash, we always pay later. We expect it will happen this year. So roughly, Wuxi is going to be around $600 million a year, okay? You should really take that CapEx out because it's really during the construction stage. But when you look at the 8-inch last year, total budget for 8-inch was $95 million. Overall, we only spent -- the [ PRPO ] is $94 million, but the cash out was $200 million because -- I'm sorry, it's $124 million, okay? So part of that from the year before. So overall, our ratio CapEx versus revenue is somewhere 10% to 15%. That's then the ratio. This year, I said we're going to be spending about -- the budget is about $170 million. We're looking at potentially, it could be anywhere above $930 million, just what we have done for 2018. So it's going to be anywhere north of $930 million plus, hopefully a nice percentage, okay, depending on the market. So I would say we'll still be looking at around 17%.
So I have to remind the second question. So we also found the news yesterday that Vanguard purchasing 35,000 facility and the output deal there were is pending to be 40,000 wafer. And this kind of tools and the MEMS-related IP will help Vanguard to do the expansion to relieve their capacity's constraints. It's very good news. It means 8-inch still has it's opportunities for the customer. And we also have to remind that last month, TSMC also released a similar information, saying they will continue to expand their 8-inch. So it will help us to continue to deliver our strategy as we did 4 years before. We're continuing to find our business opportunity on 8-inch wafer fabrication and to find more customer in China and around the world to continue to deliver more dividend and more profit to our shareholders. It's very good news for us.
Matt, the other thing is you see it, that TSMC has recently decide moving to the 8-inch business. They're going to add more capacity for 8-inch. And then now, we just heard Vanguard has decided to just close this deal with GLOBALFOUNDRIES, okay? I mean, that says a lot about the 8-inch strategy. I think 8-inch business will continue to grow, okay? I think there's a lot of demand for that globally, and particularly in China. So we're very happy to see that. I think we're on the right path, and I think we're going to really benefit from this, especially when the market is getting weak. It's the best time, people. That's just my personal view at expanding capacity. Hopefully, you can get a low-cost equipment.
Sure. If I could ask a follow-up, I've heard and I could be totally wrong, but I've heard that SMIC is also transitioning some of its 8-inch equipment to do more types of wafers that we do, particularly in the discrete and MCUs that they've historically been a bit underrepresented in. Do we worry about domestic supply coming online that we haven't perhaps budgeted for 6 to 12 months ago?
I mean, certainly, there's a big market for MCU, okay? I mean there's also a big market for discrete. Last year, our discrete business grew more than 40%, okay? Our MCU grew more than 20%, okay? So you see great demand there. At the end of the day, it is about what you have, what can you offer, okay? So we've been doing this embedded nonvolatile memory business technology for a long time. It's been 20 years now, smart card ICs, MCUs. So we have a very strong technology platform with many technology partners, okay? And these people have been working from day 1 for a long time. We have built a very, very strong technology partnership. So we will continue that business. We see strong need for that, in particular in China. So I'm sure there are a lot of other people looking at that area. And I think it would be great. Enjoy the party.
The next questions comes from Sebastian Hou from CLSA.
I have 3 questions. The first one is that can you talk about like the book-to-bill ratio you have so far? Is it roughly above 1 or below 1?
Sebastian, we have been -- it's been strong. I mean, I -- it's kind of -- this is a pretty confidential question because this is a lot about the business, right? We have been pretty healthy. I think we're always above 1.
Okay, okay. As...
Yes. You know what, it is very healthy still. Very, very healthy.
Okay. And the second question is, is it possible to offer a full year growth outlook for this year at this point?
So Sebastian, I don't think that right now is a very good time because as just mentioned, our 12-inch capacity will begin the risk production end of this year. We hope we can see more bright future with our Wuxi fab together with our 8-inch fab strategy. More customers with migration to 12-inch of [ datas ] I think it will broaden our 8-inch custom portfolio. Maybe, I think the end of this year, we'll be more clear.
Okay, okay. But I remember the last year, they mean the first half of last year, I think the company was pretty confident to give a guidance that the year-over-year growth for '18 will be higher than the year-over-year growth in '17. So I just wonder, is this -- is the Wuxi fab customer migration is the only reason behind your not giving the full year guidance right now? Or is there anything else that we missed?
Sebastian, I mean, our 8-inch fabs are growing very strong. We have a very healthy booking orders. So -- and that firstly, the demand for our platforms are still strong. The only reason that some of the minor sort of technology platforms were sort of -- growth was not there because of capacity limitation for us. So yes, I mean, look. I mean, look. Once the Wuxi fab is ready, we are talking about 25% kind of CAGR growth for the next 3 or 4 years. But yes, overall, I think we are still very positive about this year.
Okay, great. The last question from me is I think last year, because -- or it seems the second half 2017, because the row wafer substrate cost has increased. So including -- I think, most of the -- not all but most of the 8-inch foundries, including Hua Hong, has also negotiated with customers to share the cost burden. So you're -- some of the wafer price increase last year was because of the cost increase. So I just wondered about this -- in this year, it seems like the wafer -- row wafer is not so tight as before. My first part of this questions will be how's your outlook of that? Is there any chance for you to see some cost saving from that? And my second half of that question will be that if there is a possibility of some cost saving, then would you be able to save or pass some of the cost-saving benefit or give this benefit back to the customers?
So Sebastian, I think we have to read definition, just now you understand. So actually, we have very good relationship with our wafer vendor. We have very long time, very good relationship with them. We didn't do any -- we didn't find any wafer supply congestion or shortage in the previous 2 years. And actually, you are right. We shared the wafer cost change because of the market price change with our vendor and also with our customer and also [ sworn ] by ourself. But right now, I don't think it's very good time to say it's time to cut our major wafer fabrication partners price to maintain the future's continuous growth. We will renegotiate with our partner, no matter the vendor and our customer, to see the future's wafer supply. So we hope this company will continue to keep this kind of good relationship no matter the vendor or the customer.
Okay, okay. Is it possible -- can I squeeze in another questions? Is that -- I mean, earlier, I think that Daniel mentioned so first quarter of this year, 2 fabs are under maintenance. So what was the schedule like in 1Q '18 and 1Q '17? Back then, we all saw like 2 fabs under maintenance?
Well, I, in fact, have been -- we're currently doing that right now, okay? They're pretty much getting very close to finish. Each fab takes about 4 to 5 days.
Okay, all right. I'm just wondering that the -- in first quarter 2018, did you also do maintenance on the 2 fabs back then?
Yes, yes, yes. We did that.
I have to emphasize. These 2 fab, previous 2 years capacity is different than this year. So you can find that the change is quite different.
Okay, okay. Got it.
So you have [ low ] capacity.
The next questions comes from [ Tony Teng ] from Nomura Securities.
So my first question is relating to CapEx. So Daniel mentioned about the CapEx for 8-inch is like $170 million and another $600 million for Wuxi fab. So that in the model, how much CapEx should we book in the cash flow?
Sorry, [indiscernible] I didn't get what you're saying.
No -- so we have $170 million CapEx for 8-inch foundry and another $600 million CapEx for Wuxi fab. How much CapEx exactly we should book into the cash flow in Hua Hong financial...
In terms of cash flow? Cash flow?
Yes.
Roughly, that should be the number you put in there. It's about $800 million.
Okay. So basically, like $780 million per fab?
Yes, just put $800 million in there. That's a pretty close number because some of that, we still have to catch up with some of the payments for last year.
Okay, got it. Follow-up question is for the Fab3 expansion. So you mentioned about another 10K wafer per month capacity this year. So have we already secured the equipment?
Yes. So we already found the enough tools. And also, we found the lead time for this time, too.
And my second question is related to Wuxi fab. So we should see some sales contribution from Wuxi fab in fourth quarter this year, right? And -- but I think Wuxi fab, one thing about Wuxi fab is we should have some government subsidy. But I'm not sure how should we recognize the government subsidy because in the past, subsidy mostly go to R&D expense or nonoperating income. But due to the depreciation cost will rise, I'm not sure whether if our subsidy can directly goes into cost of goods sold or not.
Well, that's a complicated question. I would prefer to not answer that question at this point because it is our -- basically, we have an agreement with the government in terms of the total amount in terms of how much we're [ assure ] we're going to be amortized, that subsidy. So I would just -- I think over the next 2 quarters, once we start production, that's when we're going to start to utilize that subsidy. I would work with when things getting -- get a little more close to Q4.
Got it. But should we expect we will see some gross margin dilution into fourth quarter when Wuxi fab enter into mass production?
This year, there shouldn't be really -- shouldn't be much because we're only going to start in Q4. So I think if you see anything, we try to keep it as little as possible, minimal.
Okay, got it. And my third question is related to second quarter outlook. And maybe we don't have that long visibility yet. But if -- I'm just wondering if you are still seeing some growth in second quarter. What product lines or what kind of a patience can contribute more? And also, do you think -- when do you think customer's inventory correction will be ended?
So actually, I cannot say what kind of product line is recovery. But we already found nearly all inventory in the distributed channel has been dropped very low. We hope after Chinese New Year, many fab will find this kind of indicate soon.
Got it. My -- sorry, my one last question is regarding your other competitors' capacity expansion. So previously, some areas already asked about 8-inch peers' activities. But actually, for some IDM companies like Alpha and Omega and Infineon, they are all spending new 12-inch capacity for discrete products. Wondering if the management can have some comment on that? I mean, what kind of products maybe they're going to do? And will they have any impact to Hua Hong's current discrete products?
Yes, it's very good question. I think this competitor, also somewhat then is our customer, already found a huge opportunity in the future for much bigger demand on power discretes, no matter the present products or the new products. It's a very good indicator to see power MOSFET and the power-related products have very huge demand especially with related with electronic vehicle and the other products. So we didn't see huge pressure on our product power line, but we scan more opportunity in the future's product line.
The last questions comes from [ Aaron Bloom ] from Chase Global.
Just want a bit of clarification. I didn't hear very clearly what Daniel mentioned about the receivables in the quarter. It seems you have taken a bit more than usual. Can you comment on that?
Well, there's virtually -- it's accounting reclass. So what happened was we have these connected parties. So some of them have actually -- what happened was one of our -- the full Hua Hong Group, one of the shareholders at the group level have sold their shares recently. So all the companies that relate to that shareholder will be -- their transactions will be reclassed from a connected party transaction to a regular transaction. That's why there was -- in total, there was about around $40 million. That's the dollar amount.
I see. So it's really just accounting reclassification and...
That's it. What did you think it was?
Well, just -- so it's really not a reflection of trouble collecting or anything like that?
We never had that issue, okay? Never had that issue. It's purely accounting reclass. Well, yes, it's okay. So operator?
Ladies and gentlemen, that's all the time we have for questions. I will now hand back to Mr. Daniel Wang for closing remarks.
Well, again, thank you for -- thank you all for joining us today. We hope you would join us again next quarter. We wish you have a happy and very wonderful lunar new year. Thank you.
Ladies and gentlemen, thank you for your attendance. You may now disconnect.