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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 2022 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. [Operator Instructions] The earnings press release and fourth 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.
Thank you. Good afternoon, everyone, and thank you all for joining our fourth quarter 2022 earnings conference. Today, we will first have Mr. Junjun Tang, our Executive Director and President, make some remarks on our fourth 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. This call will be conducted in English, so please ask your question in English.
And now I'll turn the call over to Mr. Tang.
[Foreign Language]
[Interpreted] Good afternoon, everyone. Thank you for joining our earnings call.
[Foreign Language]
[Interpreted] Despite the impact of the pandemic, geopolitical conflicts and the other extreme multifaceted uncertainties, which have created unprecedented challenges for the overall semiconductor market, Hua Hong Semiconductor maintained a steady growth in the fourth quarter of 2022. Revenues reached USD 630.1 million setting a new sales record for the 10th consecutive quarter and growing 19.3% year-over-year. Annual revenue for 2022 was USD 1.476 (sic) [ 2.476 ] billion, an increase of 51.8% compared to 2021.
[Foreign Language]
[Interpreted] The company focused on our diversified specialty technology, continuing to upgrade technology and expand capacity to meet new market demands in a timely manner. The company has continued to optimize its product mix, maintain high capacity utilization at all fabs and obtain reasonable sales price increases resulting in an improved gross margin of 38.2% in the fourth quarter, an increase of 5.7 percentage points year-over-year. Annual gross margin for 2022 reached 34.1%, up 6.4 percentage points from 2021.
[Foreign Language]
[Interpreted] Return on equity also improved significantly, reaching 22% in the fourth quarter. Return on equity from 2022 reached 15.2%, up 5.5 percentage points from 2021. An excellent, outstanding performance was achieved in 2022. I would like to sincerely thank all our employees and partners for their tireless efforts to this end.
[Foreign Language]
[Interpreted] Looking ahead to 2023, we will continue to strengthen our competitive edge in various specialty technologies and dynamically adjust our marketing strategies in line with market trends to better meet the needs of our domestic and international customers with more extensive and more competitive process solutions.
[Foreign Language]
[Interpreted] In terms of capacity, we will continue to implement the strategy, including continuous optimization of the 8-inch platform, technology upgrade of the 12-inch platform and the 12-inch capacity ramp-up. The first phase of the 12-inch expansion has been fully completed with the 12-inch production line operating at 65,000 wafer per month in 2022. All the equipment for the expansion’s second phase is in place, and the capacity will be increased throughout 2023 to 95,000 wafer per month. Work on the construction of a new fab will start in due course, continuing the progress of our differentiated specialty technology to more advanced nodes.
[Foreign Language]
[Interpreted] The midpoint of an S-curve growth of revenue is the fastest growth rate with the most turbulence and challenges, when our employees must work harder and smarter for success. There will always be challenges as we grow our business, and we must persevere at these critical times. Hua Hong Semiconductor is well prepared and confident to address our new opportunities and challenges in the new year.
[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 a summary of our financial performance for the fourth quarter and the recap of the whole year 2022, followed by an outlook on revenue and margin for the first quarter 2023. And then, we will move on to the question-and-answer session.
First, let me summarize financial performance as of the fourth quarter. Revenue reached $630.1 million, up 19.3% year-over-year and flat to the prior quarter. Gross margin rose to 38.2%, 5.7 percentage points higher than Q4 2021, primarily due to improved average selling price, partially offset by increased depreciation costs and 1 percentage point above Q3 2022, primarily due to improved average selling price.
Operating expenses were $59.6 million, 87% over Q4 2021, primarily due to decreased government grants for research and development, and 19.1% below Q4 2022 mainly due to increased government grants for research and development. Other income net was $35.6 million, 27.9% over Q4 2021, primarily due to increased interest income and share of profit of associates, partially offset by increased finance costs. There was an other loss net of $57.8 million in Q3 2022, mainly due to large foreign exchange losses. Income tax expenses was $30.9 million, 2.3% above Q4 2021.
Profit for the period was $185.8 million, 35.4% above Q4 2021 and 183.9% over Q3 2022. Net profit attributable to shareholders of the parent company was $159.1 million, 19.2% above Q4 2021 and 53.2% over Q3 2022. Basic earnings per share was $0.122, 18.4% above Q4 2021 and 52.5% over Q3 2022. Annualized ROE was 22%, 2.8 percentage points higher than Q4 2021 and 7.6 percentage points above Q3 2022.
Now I will provide more details on our revenue from Q4 2021. From geographical perspective, revenue from China was $456.9 million, contributing 72.6% of total revenue, an increase of 14.5% over Q4 2021, mainly due to increased demand for MCU, IGBT, super junction and the smart card ICs, partially offset by decreased demand for large products. Revenue from North America was $86 million, an increase of 60.6% over Q4 2021, mainly due to increased demand for MCU products. Revenue from Asia was $42.1 million, a decrease of 16.7% compared to Q4 2021, mainly due to decreased demand for discrete and large products. Revenue from Europe was $33.7 million, an increase of 81% over Q4 2021, mainly due to increased demand for smart card ICs, general MOSFET and IGBT products. Revenue from Japan was $11.5 million, an increase of 7.1% (sic) [ 70.1% ] over Q4 2021, mainly due to increased demand for MCU products.
With respect to technology platforms, revenue from embedded nonvolatile memory was $236.3 million, an increase of 75.7% over Q4 2021, mainly due to increased demand for MCU and smart card ICs. Revenue from stand-alone nonvolatile memory was $36.6 million, a decrease of 6.3% over Q4 2021, primarily due to decreased demand for NOR flash products. Revenue from discrete was $213 million, an increase of 21.3% over Q4 2021, mainly due to increased demand for IGBT and super junction products. Revenue from logic and RF was $42.9 million, a decrease of 49.5% compared to Q4 2021, mainly due to decreased demand for CIS and logic products. Revenue from analog and power management IC was $100.9 million, an increase of 7.8% over Q4 2021, mainly due to increased demand for other power management IC products.
Let's now take a look at the cash flow statement. Net cash flows generated from operating activities was $184.4 million in Q4 2022, 10.8% below Q4 2021, primarily due to increased payments for materials and maintenance, partially offset by increased revenue. Capital expenditures were $331.1 million in Q4 2022, including $310.9 million for the 12-inch fab and $20.2 million for the 3 8-inch fabs. Other cash flow generated from investing activities was $27.9 million in Q4 2022, including $24.7 million of receipts of government grants for equipment and $7.3 million of interest income, partially offset by $4 million of investment in associate.
Net cash flows generated from financing activities was $120.1 million in Q4 2022, including $181.5 million proceeds from bank borrowings, $11.1 million of receipts of government grants for finance costs and $1.6 million proceeds from share option exercises, partially offset by $30.8 (sic) [ $39.8 ] million of bank principal payment, $32 million of interest payments, $0.8 million of listing fees, $0.8 million of restricted deposits and $0.7 million of lease payments.
Now let's move to the balance sheet. Cash and the cash equivalents was $2,008.8 million on December 31, 2022, compared to $1,984.2 million on September 30, 2022. Inventories increased from $509.6 million on September 30, 2022, to $575.4 million on December 31, 2022, primarily due to increased manufacturing supplies against potential pandemic risk. Property, plants and equipment was $3,367.7 million on December 31, 2022, compared to $3,140.2 million on September 30, 2022. Total assets increased from $6,660.4 million on September 30, 2022, to $7,052.7 million on December 31, 2022. Our total bank borrowings increased to $1,908.3 million on December 31, 2022, from $1,778 million on September 30, 2022. Total liabilities increased to (sic) [ from ] $2,800.8 million on December 31, 2022 (sic) [ September 30, 2022 ], from (sic) [ to ] $2,917.2 million on September 30, 2022, (sic) [ December 31, 2022 ] primarily due to increased bank borrowings. Debt ratio decreased to 41.4% on December 31, 2022, from 42.1% on September 30, 2022.
Now I would like to give you a recap of our performance for the entire year of 2022. Revenue was $2,475.5 million, an all-time high and an increase of 51.8% over the prior year. Gross margin was 34.1%, 6.4 percentage points over 2021, mainly due to improved average selling price and product mix, partially offset by increased depreciation costs. Operating expenses were $279.1 million, 33.2% over 2021, largely due to decreased government grants for research and development and increased labor expenses. Other loss net was $68.5 million versus other income net of $54.3 million in 2021, primarily due to foreign exchange losses versus foreign exchange gains in the prior year.
Net profit was $406.6 million, 76% over 2021. Net profit attributable to shareholders of the parent company was $449.9 million, 72.1% over 2021. Basic earnings per share was $0.345, 71.6% over 2021. ROE was 15.2%, 5.5 percentage points over 2021.
Finally, let me give you a high-level outlook for the first quarter 2023. We expect revenue to be approximately to $630 million and our gross margin between 32% 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] We'll now take our first question. This is from the line of Randy Abrams from Credit Suisse.
A good result. I wanted to ask actually on outlook for first quarter holding quite firm relative to your peers. If you could go into some of the areas by application continuing to hold up and just in terms of the industry weakness, curious if you expect moving through coming quarters [ enough straight ] from these applications to stay resilient, like to continue to put up this type of outperformance relative to peers or you see potential maybe a delayed correction that they have actually started to impact your business.
Thank you, Randy. Very good question. I think Q1 is going to be a very stable quarter. I think the company will continue to strive. And so we expect, overall, we're going to be flat compared to Q4. Normally, Q1 is always a low year -- a low quarter, and we continue to believe that we're going to hold $630 million for the quarter. So we expect some of the areas continue to be very, very strong. Smart card ICs will continue to grow. MCU will continue to do well. I think most likely, it will be flat. And discrete, overall, will grow again, probably a very good digit -- double-digit growth, expect particularly for IGBT and super junction and the BD voltage products.
So -- and also on stand-alone nonvolatile memory, I think we'll continue to have a nice growth on that. So overall, I think we're going to have a very good quarter. I think the product mix will get better. I think our ASP will continue to hold well for Q1. And I mean we expect -- we're very confident with the entire year 2023. There are going to be some challenges. But I think just in general, I think it's going to be -- we think just, overall, it's going to be a good year for us.
Okay. And the follow-up to that, just on the margin because you mentioned like the improved mix. Just kind of first quarter, I know you usually leave a little bit of conservatism. But for the Q1 decline, is it -- maybe talk about the factors, whether it's pricing or depreciation or seasonal factors like maintenance, but just if you could go into the factors influencing the first quarter lower margin. And do you think through the year, it stays a bit lower or it comes back up to their recent -- like very good margin performance?
Yes. I -- Randy, it's -- I already mentioned, I think, overall ASP will hold well throughout Q1. I think, overall, in general, Q1 is a low quarter, as I mentioned. It's largely because of -- the margin is going to be slightly lower than Q4. It's largely because there's going to be additional depreciation expenses coming out of the capacity expansion from the 12-inch fab and also the additional costs just in general, facility costs. And secondly, we did annual maintenance from fab 1 and fab 3 to 2 8-inch fabs.
So each -- the impact is about 5 days for each fab. So the fixed costs certainly will have an impact on the gross margin. I think approximately, it's about 2 points -- 2 percentage points on margin. And then also, we accrued some annual bonus. That will be basically coming out into the cost of goods sold in Q1. The impact is also going to be about 2 percentage points. So these are the points, I think, will impact the overall margin. So that's why we said the margins is going to be between 32% and 34%, but the company will continue to try our best to make sure that we will do better.
Okay. Helpful color on that. So it sounds like those -- a few of those points are only first quarter impact, the annual bonus and the maintenance. For the expansion of the 12-inch, the additional 30,000, how -- maybe 2 questions to it. How quickly does that capacity come on? And do you see as far as like filling it, like for shipments through the year for the additional 30,000? And then if you think of a view just on implication for this year CapEx and depreciation, like if you have a guidance for 2023 for those.
Yes, very good question. The -- we expect the -- we add 30,000 wafers in 2022, and this additional 30,000 will basically start to be released -- the 30,000 wafers will start to be released into the operations this year we expect by -- I would say, by -- in a sort of gradual fashion. I thought by the end of this year we're going to get to -- Q3 or Q4 we're going to -- the wafer load will get to about 95,000 wafers. When we talk about the depreciation expenses, for the 12-inch fab, I would say, last year, it was about $325 million. We expect this number would go up. I think that we're going to manage that number. It's probably going to get close to $400 million for the year. So you're going to see a gradual increase on depreciation costs throughout the quarters.
This is from the line of Szeho Ng from China Renaissance.
Congratulations on a great result. I have 2 questions from my side. First one regarding the next new fab in Wuxi. When would we start having some capacity coming on board?
Szeho, so you're talking about the second fab?
Right.
Okay. So the plan is to start the construction hopefully soon, sometime this year, definitely within the first half of this year, 2023. It would normally take about a year to build the fab. So we expect as soon as the fab is complete -- construction fab is complete, we're going to start the production ramp-up. So it will be sometime second half next year, I would think so -- imagine, expect.
I see. Right. And upon through completion, a portion of the fab will be allocated for 45, 40 nano production rate? Correct me if I'm wrong.
Yes. It's going to be -- the fab will be between 40 and 55 and some part discrete like IGBT and super junction.
But the 40, 45, it won't be a huge portion, right?
Will be what? Sorry?
It will not be a huge portion for the 40, 45 nano capacity?
I would think for the next fab, it's going to be -- as far as technology nodes, it's going to be between 55 and 40, evenly.
Okay, okay. I see. And second question on the OpEx side. So for this year, we should expect the operating expense to be linear, I think, across the 4 quarters.
Well, yes. We have to -- I think just, overall, the capital expenditures will be -- for Shanghai, it will be around $200 million the most. That's the budget. I don't think it will even go that far. Probably, it's going to be $100 million. And for Wuxi is just to the construction of the fab is going to be around $500 million. This is going to -- something we have to spend this year. As far as the tools, we'll most likely -- expenditures for the tools will happen next year.
Okay, okay. All right. Yes. Actually, my question is on the operating expense side. Maybe you can also elaborate on that part, yes?
For the second part?
Operating expense, yes. And can we assume it's steady and something like $70 million, $75 million the quarter?
For which? For overall or for...
For overall, yes, this year.
Overall, we see our including the 8-inch operations.
And for the group maybe including both, 8-inch and 12-inch?
Yes, you're right. It's around $70 million a quarter overall. So it's -- yes. That was the -- that was for 2022. But I think, overall, the operating expenses should be pretty stable throughout 2023.
This is from the line of Leping Huang from Huatai.
Okay. So congratulations for a very good result. So from your Page 9 of your presentation materials, we see a very big change of your product mix. I just want to clarify. So first, whether the IC capacity and the power discrete capacity is not interchangeable. And if my understanding is correct, can you explain, since the IC side, overall industrial demand is very weak, so how you -- what's the magic you do that you maintain such a high utilization rate? And what are the new applications which fill the capacity? [Foreign Language]
[Foreign Language]
[Interpreted] So thanks for your question. As for our capacity allocation, we always focus on our 5 major technology platforms. From the feedback of the second half last year, our marketing feedback of our all 5 technology platforms are very good. Especially our traditional technology platforms with privileges like IV, IGBT, MCU, flash are well received, especially by our customers. Thanks to the growth of new energy vehicles, green energy and solar energy, they all support our stable growth of our business. In terms of the capacity synergy, the original plan and our actual results are very good. Thank you.
The second question is about your CapEx budget this year. So I can now see you've put a number on your presentation material. So also, the related question is we see the total capacity of your Wuxi plant remain flat since the first quarter last year. So -- and when you expand the capacity, what are the reasons behind? Are there any difficulty to introduce the equipment? And what was your schedule to put the equipment, the near 30,000 wafer capacity this year? [Foreign Language]
[Foreign Language]
[Interpreted] Thank you for paying attention to our work. So our capacity for the past year is about 65,000 to 70,000. There are some reasons. One is pandemic impact and also the delay of the tools. So as for now, we have already installed about 80% or 90% of the tools of 95,000. So all the moving will be complete about by the early third half of this year -- third quarter this year. So the overall 30,000 capacity will be released gradually from the second quarter to the end of the year. So it's a gradually process.
[Operator Instructions] There are no further questions at this time, so I'd now hand back to the speakers.
Well, I think -- well, again, I want to thank you all for joining us today and asking all the good questions. We hope you will join us again sometime in the future next quarter. So please continue to stay safe and healthy. We look forward to meeting you in person very soon. Thank you.
Thank you. Ladies and gentlemen, thank you for your attendance, and you may now disconnect.
[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]