Ladies and gentlemen, thank you for standing by, and welcome to the Hua Hong Semiconductor's First Quarter 2024 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's presentation, there will be a question-and-answer session, at which time you will receive instructions on how to participate. The earnings press release and First Quarter 2024 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. Thank you all for joining our First Quarter 2024 Earnings Conference. Today we will first have Mr. Junjun Tang, our Executive Director and President, make some remarks on our First Quarter performance. President Tang, we're addressing 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 questions-and-answer session. The call will be conducted in English, so please ask your questions in English, and I will now turn the call over to Mr. Tang.
[Foreign language]
Good afternoon, everyone. Thank you for joining our earnings call.
[Foreign language]
Hua Hong Semiconductor reported First Quarter 2024 revenue of $460 million, in line with our guidance. For the gross margin, we achieved 6.4%, slightly exceeding our guidance.
[Foreign language]
The overall semiconductor market has not yet emerged from the downturn. In addition, the First Quarter is usually the off-season for foundries due to seasonality and the impact of annual maintenance. However, Hua Hong Semiconductor achieved quarter-over-quarter growth in utilization rate, sales revenue, and gross margin, which confirms that market demand for our specialist technologies is improving.
[Foreign language]
For the full- year of 2024, our first 12-inch production line will be operating on the basis of a monthly capacity of 94,500 wafers. Our second 12-inch production line is under construction and expected to be put into operation by the end of this year.
[Foreign language]
We will keep up with the market trends and seize opportunities, enhancing our advantages in specialty technologies by continuously promoting development of new technologies and optimization of existing technology platforms. Hua Hong Semiconductor will be focusing on the new quality productivity goals and the promotion of industrial-ecological synergy, rewarding our investors with better operational efficiency and investment returns through faster improvements in quality.
接下来请我们的财务长王鼎先生介绍财务情况。
Now I would like to hand the call over to our CFO, Mr. Daniel Wang, for his comments.
Thank you, Mr. Tang, for your wonderful comments. Now let me begin with a summary of our financial performance for the First Quarter, followed by an outlook on revenue and margin for the Second Quarter 2024, and then we will move on to the question-and-answer session. First, let me summarize financial performance as of the First Quarter. Revenue was $460 million compared to $630.8 million in Q1 2023, primarily due to decreased average selling price and increased by 1% over Q4 2023. Gross margin was 6.4% compared to 32.1% in Q1 2023, primarily due to decreased average selling price and capacity utilization, and increased 2.4 percentage points over Q4 2023, mainly driven by increased capacity utilization. Operating expenses were $78.5 million, 3% over Q1 2023, primarily due to increased engineering wafer costs, and 17.4% lower than Q4 2023, mainly due to decreased bonus expenses.
Other income net was $3.8 million, 37.9% lower than Q1 2023, primarily due to foreign exchange losses versus foreign exchange gains, partially offset by increased interest income, and 95.7% lower than Q4 2023, mainly due to decreased government subsidies and foreign exchange losses versus foreign exchange gain. Income tax credit was $19.8 million, 122.8% over Q1 2023, primarily due to decreased taxable income. Loss for the period was $25.3 million compared to profit for the period of $140.9 million in Q1 2023 and $3.5 million in Q4 2023. Net profit attributable to shareholders of the parent company was $31.8 million compared to $152.2 million in Q1 2023 and $35.4 million in Q4 2023. Basic earnings per share was $0.019 compared to $0.116 in Q1 2023 and $0.021 in Q4 2023. Annualized ROE was 2% compared to 19.6% in Q1 2023 and 2.4% in Q4 2023.
Now we will provide more details on our revenue from Q1 2024. Revenue from China was $365.7 million, contributing 79.5% of total revenue and a decrease of 23.4% compared to Q1 2023, mainly due to decreased average selling price and a decreased demand for Smart card ICs , IGBT, and superjunction products, partially offset by increased demand for MCU, logic, and CIS products. Revenue from North America was $46.2 million, a decrease of 34.7% compared to Q1 2023, mainly due to decreased demand and average selling price for MCU products, partially offset by increased demand for other power management IC products. Revenue from Asia was $23.6 million, a decrease of 39.7% compared to Q1 2023, mainly due to decreased demand for MCU, general MOSFET , and other power management IC products.
Revenue from Europe was $21.7 million, a decrease of 41.8% compared to Q1 2023 due to decreased demand for Smart card ICs , IGBT, and general MOSFET products. Revenue from Japan was $2.7 million, a decrease of 57.9% compared to Q1 2023, primarily due to decreased demand for MCU products. With respect to technology platforms, revenue from embedded non-volatile memory was $119.2 million, a decrease of 50.2% compared to Q1 2023, mainly due to decreased average selling price and demand for MCU and Smart card ICs . Revenue from standalone non-volatile memory was $31.1 million, a decrease of 2.3% compared to Q1 2023. Revenue from Discrete was $143.3 million, a decrease of 38.4% compared to Q1 2023, mainly due to decreased demand and average selling price for IGBT, superjunction, and general MOSFET products.
Revenue from logic and RF was $64.2 million, an increase of 63.8% over Q1 2023, mainly due to increased demand for CIS and logic products. Revenue from analog and power management was $101.5 million, an increase of 15.9% over Q1 2023, 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 $40.7 million in Q1 2024, decreased by 69.2% compared to Q1 2023 and 79.3% compared to Q4 2023, primarily due to decreased receipts from customers and government subsidies. Capital expenditures were $302.6 million in Q1 2024, including $199.4 million for Hua Hong Manufacturing, $71.4 million for Hua Hong Wuxi, and $31.7 million for Hua Hong Grace.
Other cash flow generated from investing activities was $3.6 billion in Q1 2024, including $21.2 million interest income, offset by $17.6 million investment in equity instrument. Net cash flows generated from financing activities was $789.9 million, including $689.4 million capital contribution from non-controlling interests, $103.4 million proceeds from bank borrowings, and $100,000 proceeds from the share option exercise, partially offset by $2.1 million interest payments and $900,000 lease payments. Now let's move to the balance sheet. Cash and the cash equivalents was $6,108,000,000 on March 31, 2024, compared to $5,585.2 million on December 31, 2023. Inventories decreased from $449.7 million on December 31, 2023, to $431.2 million on March 31, 2024. Property, plant and equipment was $3,587.4 million on March 31, 2024, compared to $3,519.3 million on December 31, 2023.
Equity instruments designated at fair value through other comprehensive income increased from $270.5 million on December 31, 2023, to $287.1 million on March 31, 2024, due to new investment in an equity instrument. Other non-current assets increased from $445 million on December 31, 2023, to $492.8 million on March 31, 2024, primarily due to increased advance prepayments for construction and equipment for Hua Hong Manufacturing. Total assets increased from $10,943.4 million on December 31, 2023, to $11,640 million on March 31, 2024. Our total bank borrowings increased to $2,225.7 million on March 31, 2024, from $2,099.6 million on December 31, 2023. Total liabilities increased to $2,980.8 million on March 31, 2024, from $2,928.9 million on December 31, 2023, primarily due to increased bank borrowings. Debt ratio decreased to 25.6% on March 31, 2024, from 26.8% on December 31, 2023.
Finally, let me give you a high-level outlook for the Second Quarter 2024. We expect revenue to be approximately $470 million-500 million, and our gross margin to be in the range of 6%-10%. This concludes my financial remarks. Now, we would like to start the question-and-answer session. Operator, please help. Thank you.
Thank you. If you wish to ask a question, you will need to press star one and one on your telephone and wait for your name to be announced. To withdraw your question, please press star one and one again. Please stand by while we compile the Q&A roster. We will take our first question. Your first question comes from the line of Ziyuan Wang from CITIC Securities. Please go ahead. Your line is open.
Hi, Mr. Tang and Mr. Wang. Congrats on our continuously Q-on-Q growing performance. I have two questions. The first question is about our pricing. I have calculated our ASP, and there was a slightly decreased Q-on-Q in Q1. Has there been any price adjustment in the first quarter, and how do you view our price trend in Q2 and further? Is there any price turning point? When will be the price turning point, and is there any possibility of price increasing in the future? That's my first question. Thank you.
Ziyuan, I think that was a very valid question, a good question. There is a defining overall average pricing in Q1. Overall, I think it was down by approximately 7% overall between Q1 2024 and Q4 2023. Basically, it's part of the overall price adjustment, all you can call concession, that we did in 2023. I think we are at the basically, when you look at pricing, it is at the bottom at this point. We expect price should gradually recover in the next several quarters. As you can see, our utilization rate has gone up quite significantly in the past quarter. The 12-inch fab is virtually pretty much at 100% utilization rate, and the 8-inch fabs overall, it is at the 95%-100%. So we expect the price declining is at the end.
I mean, these things in the next quarter, I mean, from here and there, there might be some price adjustment again, but we expect overall in the next several quarters, things should recover, should improve. Overall pricing should improve within the next several quarters.
Okay. Thank you, Daniel. Glad to hear there's a gradual increase in pricing. The second question is about our power discrete. We see there on Q1, the power discrete platform is the only weak point in Q1. Is there any tendency that the demand of power discrete is improving? Is there any difference between low-end and high-end products? We just hear that some low-end power discrete products in the market are likely to increase their pricing. So is there any better demand that we can see at this point? Thank you.
Overall, power discrete demand, especially for the high-voltage discrete products, the demand continues to be weak at this point, but I expect things will probably start to improve starting Q2. Discrete has a huge demand, especially for IGBT and superjunction. For Hua Hong Semiconductor, where there's no question, this is a very strong area for the company. We have the biggest market share in China for IGBT and superjunction, but the market has been slowing down for the past two and three quarters. So we expect things will start to recover, as I said, starting, I think, in Q2. So I expect overall, the demand will come back for IGBT as well as superjunction.
Okay. Thank you, Daniel. We are also optimistic about the company's future development. Thank you.
Thank you.
Thank you. We will take our next question. Your next question comes from the line of Leping Huang from Huatai Securities. Please go ahead. Your line is open.
Thank you for taking my questions. The first question is about your revenue mix. So if you look at this quarter result, you see that there are two applications actually grow sequentially. So it's the embedded logic and RF, and another is analog and the PM, so power management. I would like to know what you are doing to fill the capacity and improve the utilization rate of your fab in the last few quarters, and what will be the impact on this product mix. I think you have a nearly 50% decline in your embedded non-volatile memory, and also discrete decline a lot. But on the other hand, you have a very large jump on the logic and analog. Should I expect this will be a new product mix for you in the coming quarters? Thank you.
Let me just start first, and then we'll hand it over to Mr. Tang. I mean, overall, I mean, several areas have been very, very strong. When you talk about logic, mainly because of CIS. CIS, it has been extremely strong for us since Q4 last year. It seems to me that demand will continue for, I mean, throughout this year. And so the only area at this point that it continues to be weak is discrete, particularly for IGBT and superjunction. But other than that, I think the other technology platforms have been strong. Embedded non-volatile memory, it was a 6% growth compared to Q4 2023. For smart card, we also had a nice jump, about 7%. MCU was up by 6.2%. So we see signs of recovery. As I said earlier, capacity utilization rate is up, and the 12-inch fab at this point, it's fully loaded.
It is more than 95,000 wafers in terms of loading. The 8-inch fabs, the average utilization rate is around 95%-100%. So yeah, I mean, it is a good sign, but price is still not up. Once I think the market starts to have a sign of strong recovery, that is the point I think it would start to adjust the price upwards at that point. So that's what I'm telling you. It is basically the current situation, and we're also hoping that things will get better, hopefully quickly.
Okay. Just want to clarify. So since your first quarter, the utilization rate, the 8-inch is reaching the 100%, and the 12-inch is reaching the 84%. So the additional application you got in the 8-inch is the power management IC, and the additional for the 12-inch is CIS. Is my understanding correct?
For the 12-inch fab, it is Power Management IC. It's basically BCD. That is used in the AI server for the AI server. And then we have CIS and Embedded Non-Volatile Memory, flash. So flash, CIS, and BCD. They've been very, very strong. And also for the regular MOSFET business, that also have been very, very strong.
Okay. So the second question is about this year. So considering this recent, how do you say, the oversupply situation in the market, so what's your but you still spend around $300 million this quarter. So what's your current CapEx plan? Do you have any adjustment, or what's your especially the new fabs, your CapEx plan? Thank you. Do you have any change?
Well, we're expanding the capacity for the second 12-inch fab. The fab will be the construction will be complete by the end of third quarter this year. And then starting Q4, we're going to start pilot production. So basically, starting from next year, hopefully, the market will come back at that point. We plan to ramp up the second 12-inch fab.
What's your latest CapEx plan for this year? Yeah.
Well, for the CapEx for this year, from a PR/PO perspective, overall, I mean, for the three 8-inch fabs , it's probably going to be around $200 million-$300 million. And then for the new 12-inch fab, it's going to be around about $2 billion, basically the construction of the fab and the equipment cost for the first 40,000 wafers.
Okay. Thank you very much.
Thank you. We will take our next question. Your next question comes from the line of Jiangyi Hu from CICC. Please go ahead. Your line is open.
Good afternoon, Daniel and Mr. Tang. It is very happy to see that the revenue and gross margin of Hua Hong is increasing in the first quarter 2024. My first question is about embedded memory. I have seen that in the first quarter 2024, the revenue from embedded memory increased a little bit compared with the past quarter. Does it mean embedded memory products like smart card or MCU have reached the bottom and will get better in the next few quarters? Thanks.
Well, that is certainly our hope, and we feel that things start to come back to us, markets start to recover, especially for embedded non-volatile memory. But I think it's still at the very early stage. I think this should be at a very as I said, a very early stage. I think we expect things should get better and better in the third quarter and fourth quarter.
Got it. My second question is about.
Okay. Go ahead. Go ahead.
Okay. Thanks. My second question is about downstream or application. You know that Hua Hong made some chips to vehicle class, to the vehicle industry like car-class MCU. And we've seen that the whole car industry is under pressure this year. Leading foundries like TSMC also said the auto semiconductor will decline this year. So I'm curious, what is Hua Hong's view about the car industry, especially auto semiconductor this year?
[Foreign language]
Thanks for your question. Actually, the overall auto market is still very strong.
[Foreign language]
Yes. Currently, they're facing some adjustment, but I think this adjustment is just temporary.
[Foreign language]
From Hua Hong's perspective, the automotive products just involve a very low digit, is under a very reasonable range.
[Foreign language]
Actually, through producing the automotive chips, we improve our specialty technology capabilities and improve our reliability.
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We expect to improve our overall specialty technology platform capabilities. From the current trend, the whole company's IC and power discrete, the overall wafer start is very stable growth.
[Foreign language]
To develop automotive chips is our strategy because it's very positive.
[Foreign language]
Thank you.
[Foreign language] Okay. My last question is about AI because we all know that Hua Hong produced some kind of chip like power management IC. It may have some relationship with AI server or maybe in the future AI PC or AI smartphone. Will Hua Hong do something different to grab the AI opportunity in these terms? Thanks.
The power management IC business has been going very, very strong for us. So yes, that's the product that we're making for our customer, that will eventually go to the motherboard of an AI server. We have been doing that business for quite a while already. It's been several years. Things have been going very, very strong for this type of business at this point. It is both international and domestic business. So we expect it will continue to be a good segment for the company.
Thanks so much, Daniel. That's all of my questions. Thanks again.
Thank you. Once again, if you wish to ask a question, please press star one and one on your telephone. We will take our next question, and your next question comes from the line of Dai Chen from SPDB International Securities Limited. Please go ahead. Your line is open.
Thanks management for taking my questions. So I have two questions here. The first of all is about the revenue trend of 8-inch and 12-inch. I've noticed that revenue from 8-inch in the first quarter declined, but the revenue of 12-inch in the first quarter increased. Can the management share about the reasons behind it and to give us some color any product or any applications lead to the difference? Thanks.
Well, overall, I think the business for both the 8-inch and 12-inch business have been getting stronger. Things start to recover compared to last year. As I said earlier, the 12-inch business at this point, the loading for 12-inch fab is very strong. It is at nearly 100% utilization rate. We have 95,000 wafer capacity. It is fully loaded. The product for that fabs are CIS, BCD, embedded non-volatile memory, plus some power discrete products. So it's a very good sign. I think things are improving, overall loading. And I think the next step is to make the products mix continue to make the products better. And hopefully, at some point, we can make some price adjustment. I mean, overall, the 8-inch business is also improving. The loading now, it's at 95%-100%. It is also better than the second half 2023.
With that said, I think for both the 8-inch business and the 12-inch business, I think things overall are improving and getting better.
Okay. Got it. Got it. It's clear. And my second.
Yeah. Maybe. Yeah. Go ahead. Sorry.
Yeah. My second question is about the second 12-inch fab. It looks like that we plan to start our ramp-up capacity in the next year. May I get a sense of how much capacity we will put into use in the first stage in 2025? And do we have any other commitment from our customers at the moment? And do we have any products or applications we can share for the second 12-inch fab in Wuxi? Yeah. Thank you.
[Foreign language]
The second 12-inch production line is under construction. For the current plan, we will start moving first in about September.
[Foreign language]
The technology platforms of Fab 9 is overall extension of Fab 7 technology platforms.
[Foreign language]
Yeah. We communicate frequently with our major customers to confirm our technology platforms and products for the Fab 9.
[Foreign language]
Yeah. From the communication results, the new technology platforms and the technology nodes we have prepared, the capacity release is well accepted by our major customers.
[Foreign language]
We are very confident that the utilization rate of Fab 9 will be very reasonable and very decent.
[Foreign language]
Thank you.
Okay. Thank you very much.
Thank you. We will take our next question. Your next question comes from the line of Qingyuan Lin from Bernstein. Please go ahead. Your line is open.
Thank you for taking my question. Thanks for sharing, Mr. Wang and Mr. Tang. My question is around the industrial and automotive. Looks like there is 22% of our total revenue. May I ask how much is from industrial and how much is from automotive?
I think, yeah, let me look at the number. 22%, is that for Q4? I mean, Q1 2024?
Yes. That's 22.3% for 1Q 2024.
Well, I mean, I don't have these data with me, but I would assume industrial and automotive, the 22%, I think 6 percentage points associated with automotive. And then the other 16%, it is related to industrial for things like just overall related to industrial.
Clear.
Things related to.
Sure. Sure. So I think.
Yeah.
Yeah. I guess the follow-up question on that is kind of we saw that MCU or embedded non-volatile memory, it's in general kind of weak. And also the discrete, right? So it looks like this has impacted the industrial segment quite a bit. Do we have a view from our discussion with the customers? When do you think their demand will start to pick up in terms of the cycle? And have they solved their kind of inventory issue from the industrial customers?
It's a good question. It's a good question. I think just overall, things have been slow throughout 2023. I think this pretty much extends to Q1 2024. I would expect for things like MCUs, it's basically still at the very early stage, but it will come back to us because there's great demand for MCUs in many different applications: in cell phone, in IoT, in smart home, smart meter, automotive applications. It's just 2023 has been a slow year for MCUs. And we see some good signs that things are recovering. Hopefully, now is a turning point. Again, for things like IGBT and superjunction, overall, I think the market is still a little bit weak. I would expect it's going to start to recover probably sometime in the end of Q2.
We're going to see a pretty good recovery in the second half for high-voltage discrete products. Yeah.
I see. That's very clear. Another question is around the consumer electronics. I think it's pretty clear that power management IC and CIS product has been very strong. But besides those two kind of products or two customers, have we seen the customer on the mobile semi side start to recover?
Well, I mean, CIS has been a pretty strong application at this point. We have currently for the 12-inch fab, basically, we have about 20,000 wafer capacity is basically designated for CIS products. And at this point, we don't see any sign that for that business, things will slow down. It's basically fully booked throughout the year.
I see. I see. I mean, beyond that customer, the CIS product, do we see other portion of the consumer electronics start to have early signs of recovery, or 2024 will remain to be a weak year on the customer side?
Just being very direct on this, I don't think 2024 is going to be a strong year as 2022. I think the demand will come back to us. It's just the pricing will still not at the most desirable level.
I see.
Say.
I see. Very helpful.
Overall, I think the utilization rate is up. In terms of demand, I mean, it is strong, but pricing is still, I think, it will take some time to recover. I would expect sometime by this time next year, if we can go back to 2022 level, we would be very, very happy.
Thank you very much. Do we have any guidance on utilization for next few quarters?
Well, I think we're going to have to make sure that the 8-inch Fabs and the first 12-inch Fab will be fully loaded throughout this year because right now, it is almost close to 100%. The 12-inch Fab, it is at 100% utilization rate. And the 8-inch Fabs are very close to that number. And so we are building the second Fab, as we mentioned earlier. We expect we're going to start to release some capacity starting from beginning of next year.
Gotcha. Thanks so much for taking my question. That's all for me.
Thank you. Once again, if you wish to ask a question, please press star 1 and 1 on your telephone. There are no further questions at this time. I will now hand back to the management for closing remarks.
Again, I want to thank you all for joining us today and asking all the very valuable questions. We hope you'll join us again next quarter. Please continue to stay safe and healthy. We're looking forward to meeting you in person, hopefully, very soon. Thank you.
Ladies and gentlemen, thank you for your attendance. You may now disconnect.