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 more 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 please ask your questions in English. Without further ado, I would now turn the call over to Mr. Tang.
Good afternoon, everyone. Thank you for joining our earnings call.
The current macro environment is complex and constantly changing. The semiconductor market has not yet recovered. Hua Hong Semiconductor overcame the tough challenges and achieved revenue of $568.5 million in the third quarter of 2023, with a gross margin of 16.1% in line with guidance.
As the capacity of Hua Hong's 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.
Thanks to years of improvements in specialty technology 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 fields and have been well-recognized by customers.
The company is making all-around 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 three-year ramp up to 83,000 wafers per month, which will lay a solid foundation for the company's medium and long-term development.
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.
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 up by an outlook on revenue and margin for the fourth quarter 2023, and then we will move on to the questions in 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. 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 Non-Volatile 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 Standalone 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....
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 issues 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 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 $1.2 million of lease payments. Now, let's move to the balance sheet. Cash and cash equivalents increased from $1,851 million on June 30th, 2023, to $4,989.5 million on September 30th, 2023. Restricted and time deposits decreased from $167.1 million on June 30th, 2023, to $31.7 million on September 30th, 2023, mainly due to decreased pledged deposits for bank borrowings.
Inventories decreased from $558.3 million on June 30th, 2023, to $492.8 million on September 30th, 2023, mainly due to decreased finished goods and work in progress. Property, plant, and equipment was $3,322.9 million on September 30, 2023, compared to $3,256.6 million on June 30th, 2023. Total assets increased from $6,950.3 million on June 30th, 2023, to $9,974.3 million on September 30th, 2023.
Our total bank borrowings were $1.926 billion on June 30th, 2023, compared to $1.796 billion on June 30th, 2023. Total liabilities increased to $2.642 billion on September 30th, 2023, from $2.555 billion on June 30th, 2023, primarily due to withdrawal of bank borrowings. Debt ratio decreased to 26.5% on September 30th, 2023, from 36.8% on June 30th, 2023. Finally, let me give you a high-level outlook for the fourth quarter of 2023.
We expect revenue to be approximately $450 million-$500 million, and our gross margin to be in the range of 2%-5%. This concludes my financial remarks. Now, we will like to start the question and answer session. Operator, please assist. Thank you.
Thank you. We will now begin the question and answer session. If you'd like to ask question, please press star one one on your telephone and wait for your name to be announced. If you would like to cancel your request, you can press star one one again. Please stand by while questions are being collated. One moment for the first question. First question comes from the line of Leping Huang from Huatai. Please go ahead.
Okay, thank you to take my question. So my first question is about your fourth quarter gross margin guidance. I think 2%-5% is a quite low numbers. 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, SP decline, and depreciation. Thank you.
Thank you for the question. The dropping gross margin is largely due to the following reasons. First of all, I think probably the most critical way is because the ASP drop, okay? That accounts for, you know, when you compare with Q3, you know, it, the price actually dropped. That probably account for 7 percentage points-8 percentage points. And then we also look at the inventory, inventories, and we also marked down some inventory. So that give you another 3 percentage points-4 percentage points. And on top of that, you know, there'd be some, you know, other things, just small items here and there. But the two most critical reasons were because of, you know, basically lower ASP and inventory write down.
Okay. Okay, thank you. The second question is about the market environment. If you look into 2024, I think my question actually can separate from both the supply and the demand side. So we saw a very strong equipment import data from the customs data, for example, September, China import around $5 billion equipment abroad. And what is the... Since I believe most of them were using the mature process, what do you see the environment on the some, on these, since so many equipment, the new capacity 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 they are- they remain strong? Thank you.
Thank you for your question. So the Hua Hong Wuxi phase II project is on schedule. The capacity expansion is based on the market demand on our five major specialty technology platforms. So customers' investment in our new products on Power Discrete, Analog, and e Flash and some Logic is still on schedule. According to our construction plan, we will complete our tools move-in in the fourth quarter next year. The purchasing, the procurement plan for the relevant tools is accelerating according to this plan. Thank you.
Questions. One moment for the next question. Next up, we have the line from Sunny Lin, from UBS. Please go ahead.
Good afternoon, Junjun Tang, Daniel Wang. Thank you for taking my questions. 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%-8% sequentially. So, where are you seeing most pricing competitions? 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%-8% drop, it is not the ASP drop. It is, you know, when you look at, you know, our gross margin at, for Q3 was at 16.1%. Now, we give a guidance from, you know, anywhere in the range of 2%-5%. So out of that drop, you know, anywhere from, you know, 10%-13% drop, percentage points drop, that there was, like, maybe 7 percentage points-8 percentage points on margin drop is related to the decrease in ASP. So what I, basically, what I said was 7%-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 of all, 2024? Is there more downside, or do you think, pricing should start to stabilize, because of the improving cycle?
You know, 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 a inventory adjustment, okay, you know, in Q3 and in Q4. So hopefully, you know, we all the bad elements has been eliminated. We're hopeful that, you know, 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 start to do that in Q1, Q2.
Now you see, you know, finally see the effect that is really affecting our performance in Q3 and into Q4, okay? But, you know, we're expecting this is, you know, this is the end, okay? This is the, basically, the lowest point that we're gonna see, and we hope that's gonna 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 what? In Q4?
In volume. Yeah.
Sorry, in what?
Volume.
Oh, in volume.
Yeah. And so if... Right. Right, right.
Volume. You know, I just, you know, I think it's mostly ASP drop. I think volume has been stabilized, and we also have seen some, you know, POs, quick orders, that has been coming in during the past two months, okay? And these are pretty high volume orders, but, you know, 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 part of 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? And then any initial planning for 2024?
For this year, for this year, for 2023, we're looking at... Just a second. For 2023, our capital expenditures, we're looking at, for the three 8-inch fabs, total is, you know, around $130 million. And for, you know, for the 12-inch, for both 12-inch fabs, okay? The first one, I think, you know, on cash flow basis, it's gonna be around $600 million. And for the second fab, which is under construction at this point, is about, you know, anywhere from $400 million-$500 million, okay? So total, it's close to $1 billion. But, you know, for the first 12-inch fab, basically, you know, we're close to the end of the investment cycle.
For the second fab, we're virtually at the stage is just in the construction phase.
Got it. Any initial target for 2024 CapEx and depreciation?
For 2024, I think the 8-inch fabs are gonna be pretty stable. I'd say anywhere $50 million-$100 million, okay? $50 million-$100 million. I think, for the second 12-inch fab, I would say, you know, 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 8-inch fabs, it would be around $120 million, okay? And for the first 12-inch fab, I would say for next year, it would be maybe around $450 million per year for 2024. And the second fab, you know, we're not gonna have any depreciation, because it's still gonna be in the construction stage. By end of next year, you know, we're gonna basically, the CapEx, you know, the fab will be fab building will be complete for the second fab, and then we'll start to basically move in the equipment.
Got it. Thank you. That's very clear. I have one last question on your 12-inch expansion. And so for the first part, for the first fab, would you remind us the current major products that that's with more significant revenue contribution? What kind of new platforms are you 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 two fabs?
Thank you for your question. Actually, the 12-inch fab is an extension of our 8-inch specialty technology platform. So the Power Discrete of accounts for about 30%-40%. Analog and Power Management close to 30%. And the rest are the Logic and other sensors. So for the capacity expansion, it may be around the similar percentage allocation. Currently, we are putting more efforts on technology development. Focusing on some highly, the Power Management and Analog and Power Management, and some differentiated Logic. Thank you.
Got it. Thank you very much.
Thank you for the questions. One moment for the next question. Next question comes from the line of Szeho Ng from China Renaissance. Please ask your question.
Oh, hi, afternoon, gentlemen. My first question regarding the CapEx. This time you have broken it down into three parts, one for the 8-inch, one for Wuxi, and the other one, the Hua Hong Manufacturing. What is it about?
That's the second 12-inch fab.
Oh, I see. All right. Thank you. Yeah, and then-
Still in the very initial stage.
Oh, I see. I see. Yeah, and, and I remember for Wuxi, we are planning to have around 94,500, right, capacity, in the initial phase. When will we turn on the remaining, 14,5 00? Because right now we have 80,000 in production.
It's the plan is to, you know, ramp to 94,500 by basically, you know, first half next year.
I see. All right.
I mean, there are some challenges at this point. I mean, overall, the market is weak, okay?
Mm.
You know, I mean, our original plan was, you know, by end of this year.
Right.
There's a slight delay on that. I think, you know, hopefully by first half, second half next year, we'll get to 95,000. But, you know, we see some, you know, basically, strong orders lately. Hopefully, they will become, you know, more stable going forward. Let's see how things are, you know, going.
I see. But can you characterize which areas you are seeing a strong order?
I think, you know, we, you know, for all these, you know, quick orders largely coming from Discrete products.
Mm-hmm.
Okay, largely, for example, IGBT and a Super Junction, that sort of products.
Mm, I see. And last question, regarding the 8-inch, 12-inch. Can you talk about the pricing dynamics between the two?
The what? I'm sorry, Szeho Ng.
The pricing environment between 8-inch and 12-inch.
The pricing environment. Is that what you're saying?
Yeah.
Pricing?
Yeah. Just, yeah, yeah. Right, 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 are, you know, at this point, is higher in terms of utilization rate compared to the 12-inch. You know, the 12-inch just has, you know, much, a pretty big capacity, huh? We're talking about 95,000. So right now, the loading is around 75,000 wafers, 75,000 wafers. You know, I'm pretty confident we should be get to around 80,000 by end of this year, and then, and continue to move to 95,000, 95,000.
Mm-hmm.
But the price pressure is on both, okay?
Got it.
Is on both.
I see. All right. Okay. Thank you, Daniel.
Thank you.
Questions. As a reminder, to ask questions, please press star one one on your telephone. At this time, there are no further questions from the line. That's all the time we have for questions. I'll 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.