Ladies and gentlemen, thank you for standing by, welcome to Hua Hong Semiconductor's First 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 balance is in listen-only mode. At the conclusion of the management presentation, there will be question and answer session. At which time, you will receive instructions on how to participate. The earnings press release and first quarter 2023 summary slides are available to download at our company's website, www.huahonggrace.com. Without further ado, I'd like to introduce you to Mr. Daniel Wang, Executive Vice President and Chief Financial Officer. Thank you.
Good afternoon, everyone. Thank you all for joining our first quarter 2023 earnings conference. Today, we will first have Mr. Tang, our Executive Director and President, make remarks on our first quarter performance. President Tang will address in Chinese. 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. Please ask your questions in English. I now turn the call over to Mr. Tang.
Good afternoon, everyone. Thank you for joining our earnings call. Despite the current downturn in the chip sector and high inventory levels at some customers, the company has been able to maintain high capacity utilization by adjusting our product mix and the business strategy to better meet market demand by strengthening business synergies with customers through the industry chain, such as new energy vehicles, and to expand our supply of the non-volatile memory and power semiconductor platforms. Revenue for the first quarter of 2023 was $630.8 million, up 6.1% year-over-year and a flat quarter-over-quarter. Gross margin for the quarter was 32.1%, up 5.2 percentage points year-over-year and down 6.1 percentage points quarter-over-quarter due to seasonality, annual maintenance, and increased depreciation.
During 2023, the company's 12-inch production line in Wuxi will gradually increase monthly capacity to 95,000 wafers and will start construction of new production lines in due course to provide capacity support for the medium and long-term development of the company's specialty processes and to better meet market demand for advanced specialty ICs plus power discrete technologies. Relying on our diversified specialty process platforms, profound R&D strength, and a long-term global customer base, Hua Hong Semiconductor will build on its strengths and reach new heights. Now, I would like to hand the call over to our CFO, Mr. Daniel Wang, for his comments.
Thank you, Mr. Tang, for your inspiring comments. Let me begin with the summary of our financial performance for the first quarter, followed by the outlook on revenue and margin for the second quarter 2023. We will move on to the question and answer session. First, let me summarize financial performance as of the first quarter. Revenue reached $630.8 million, up 6.1% year-over-year and flat to the prior quarter. Gross margin was 32.1%, 5.2 percentage points higher than Q1 2022, primarily due to improved average selling price, partially offset by increased depreciation costs. 6.1 percentage points lower than Q4 2022, primarily due to increased depreciation, material and utility costs.
Operating expenses were $76.3 million, flat to Q1 2022, and 28% over Q4 2022, mainly due to decreased government grants for research and development. Income net was $6.1 million, 42.1% below Q1 2022, primarily due to increased finance costs, partially offset by increased foreign exchange gains and interest income, and 82.9% below Q4 2022, primarily due to increased finance costs, decreased share of profit of associates and foreign exchange gains. Income tax credit was $8.9 million, 29.6% above Q1 2022, primarily due to a reversal of increased dividend withholding tax accrued for the prior year. Profit for the period was $140.9 million, 30% above Q1 2022, and 24.2% lower than Q2 2022.
Net profit attributable to shareholders of the parent company was $152.2 million, 47.9% above Q1 2022, and 4.3% below Q4 2022. Basic earnings per share was $0.116, 46.8% above Q1 2022, and 4.9% below Q4 2022. Annualized ROE was 19.6%, 5.5 percentage points higher than Q1 2022, and 2.4 percentage points below Q4 2022. Now I will provide more details on our revenue from Q1 2023.
From a geographical perspective, revenue from China was $477.2 million, contributing 75.7% of total revenue and an increase of 5.6% over Q1 2022, mainly due to increased demand for MCU, IGBT, smart card ICs and super junction products, partially offset by decreased demand for CIS, NOR Flash, logic and other power management IC products. Revenue from North America was $70.8 million, an increase of 21.9% over Q1 2022, mainly due to increased demand for MCU products. Revenue from Asia was $39.1 million, a decrease of 28.8% compared to Q1 2022, mainly due to decreased demand for logic and discrete products.
Revenue from Europe was $37.3 million, an increase of 69.1% over Q1 2022, mainly due to increased demand for smart card ICs and IGBT products. Revenue from Japan was $6.5 million, a decrease of 18.3% compared to Q1 2022, primarily due to decreased demand for MCU products. With respect to technology platforms, revenue from the 55 nanometer and 65 nanometer technology nodes was $58.5 million, a decrease of 43.2% compared to Q1 2022, mainly due to decreased demand for NOR Flash, logic and CIS products, partially offset by increased demand for analog and MCU products.
Revenue from 90-nanometer and 95-nanometer technology nodes was $119.3 million, a decrease of 4% compared to Q1 2022, mainly due to decreased demand for other power management IC and CIS products, partially offset by increased demand for smart card ICs and MCU. Revenue from the 0.11 micron and 0.13 micron technology nodes was $128.9 million, an increase of 55.6% over Q1 2022, mainly due to increased demand for MCU products. Revenue from the 0.15 micron and 0.18 micron technology nodes was $43.9 million, a decrease of 9.7% compared to Q1 2022, mainly due to decreased demand for logic products.
Revenue from 0.25 micron technology node was $4.1 million, an increase of 9% over Q1 2022. Revenue from the 0.35 micron and above technology nodes was $276 million, an increase of 19% over Q1 2022, mainly due to increased demand for IGBT and super junction products. Let's take a look at the cash flow statement. Net cash flows generated from operating activities was $131.9 million in Q1 2023. 32.6% below Q1 2022, primarily due to increased payments for materials and maintenance. CapEx were $216.6 million in Q1 2023, including $191 million for the Wuxi fab and $25.6 million for the three 8-inch fabs.
Other cash flow generated from investing activities was $13.3 million in Q1 2023 from receipts of interest income. Net cash flows generated from financing activities was $263.2 million in Q1 2023, including $296.2 million of capital contribution from non-controlling interests. $13 million proceeds from bank borrowings and $1.4 million proceeds from share option exercises, partially offset by $42.5 million of bank principal payment, $3.8 million of interest payments, $800,000 of lease payments and $300,000 of listing fees. Now let's move to the balance sheet.
Cash and cash equivalents was $2,218.5 million on March 31, 2023, compared to $2,008.8 million on December 31, 2022. Property, plant and equipment was $3,436.7 million on March 31, 2023, compared to $3,367.7 million on December 31, 2022. Total assets increased from $7,055.4 million on December 31, 2022 to $7,378.3 million on March 31, 2023. Our total bank borrowings was $1,905.1 million on March 31, 2023, compared to $1,908.3 million on December 31, 2022.
Total liabilities decreased to $2,747.7 million on March 31, 2023 from $2,919.9 million on December 31, 2022. Primarily due to the payments for capital expenditures and bonuses paid in Q1 2023. That ratio decreased to 37.2% on March 31, 2023 from 41.4% on December 31, 2022. Let me give you a high level outlook for the second quarter 2023. We expect revenue to be approximately $630 million and our gross margin to be between 25% and 27%. This concludes my financial remarks. We would like to start the question and answer session. Operator, please help. Thank you.
Thank you. We will now begin the question and answer session. To ask a question, please press star one one on your telephone. You would hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. First question comes from the line of Randy Abrams from Credit Suisse. Please ask your question, Randy.
Yes. Hi, thank you. The first question, wanted to ask if you could expand on the gross margin. If you could go through in the first quarter, I think some of the impact was maintenance and bonus, which may come out in the second quarter, it should be an improvement from those factors. Could you go through the decline into second quarter, just factors between pricing mix and other things like depreciation?
Thank you, Randy. That was, you know, I guess that would be your first question. The overall, you know, I mean, the overall semiconductor market continues to be weak and slow. Hua Hong Semiconductor has been very resilient. Are we impact by the general slowness? Of course we are. Far our performance has been strong, stronger and better, thanks to our specialty technology platforms. We have price pressures for some of our segments, such as CIS and NOR Flash. Price and volume have been, you know, challenging for those segments. We have to make price concessions for these, you know, products in order to get volume and keep the fab loaded. Okay? For MCU, we have been able to keep its, you know, manufacturing corridor at very high level utilization rate.
Okay? High voltage products such as IGBT and super junction continue to be in high demand and are extremely profitable. Okay? As for depreciation expenses, I mean, you're, you know, very much aware of the fact that we actually put additional 30,000 wafer capacity in 2022. As we have started to release capacity, the depreciation expenses will start to catch up. Okay? Now let me address the drop in gross margin. Okay? Basically, it is about 6 percentage points. It is a pretty much 50/50% split between price concession and additional depreciation expenses. We expect, you know, the depreciation, the capacity will, you know, eventually get to 95,000 wafer capacity by end of this year. Additional depreciation expenses will start to incur.
Okay? The rest, the other half is pretty much from, you know, price concessions, in particular for things like NOR and CIS. There are also some impact on, you know, power management IC, MCU, even MCU. You know, I mean, in order to make sure it is stay in the extremely high, you know, volume, and even MCU has, you know, we have to make certain concession. Randy.
Okay. No, I understand. If I could follow up then for the pricing. I mean, do you view it's a concession that brings volume for the next few quarters? Or, now that we have the high inventory and slow demand, what's your view, initial view for how pricing, like whether we might have quarterly discounts? I guess what we're getting at is also margin. Do you think this is kind of a step down to the new level that we maintain, or are you nervous about pricing pressure that it may still be challenging in the coming quarters?
I, you know, I think, at this point, the price impact, it is about 3%-5% at this point compared to a quarter ago, okay, just overall. Okay? I mean, certainly there is a number for 8-inch, there's also a number for the 12-inch business, but I think that overall it is about 3%-5%. I mean, I think, you know, let's see how we're doing throughout the quarter, okay? Depending on the mix and also, depending on, you know, there's a lot of discussions going on at this point, between us and the customers. We continue to be very strong. You know, we want to make sure that, you know, the fab is still fully loaded.
As you can see, the 12-inch fab is around, you know, continue to be very close to 100% in terms of utilization rate. The 3-inch fab is above, still above 100%. You know, I mean, we have to make sure that, you know, as we continue to release the capacity, that, you know, we have to, you know, make some sort of concession with our customers. I think, you know, hopefully, this will be a something that we will have to go through in the next, you know, this quarter, next quarter. Okay? You know, as far as, you know, the price is concerned, I think, you know, this is how much we're, you know, willing to let it go.
I think we're gonna continue to be very strong on, you know, on loading and on price.
Okay. I'll just ask one final clarification, and I'll get out back in the queue later. Because you mentioned depreciation about half the impact. If you could give an update how that ramps up for the full year, how much we should consider to see the drag on that side?
You know, I think overall, I think. I mean, you're, you know, you'll know the story very well. I mean, you're familiar with the company. The three-inch fabs will continue to run around $130 million a year. For the 12-inch fab, you know, I initially said is about $380 million for the year. That's what I said, $380 million for the year. Okay? Yes, around $380 million-$390 million. I would say for the year, I think it's gonna be probably around $400 million for the 12 -inch fabs.
Okay. Hey, Akshat, if I could fit one in. Sorry. The new fab, is that sensitive on timing for macro? As far as I would think later this year, you'll have to start ordering tools for like to bring that up late next year. Is it the sense, the demand's there, like it's likely to go forward? I'm just curious the flexibility in that project if we stay in a bit slower environment for a while.
Well, you know, let me address that first, and I'm gonna pass this down to President Tang. I think he will have more to say on that, on that topic. I think, you know, it is important. I mean, if you're familiar, you've been covering this business for a long time. You know, for most of, you know, big players in the industry, you want build capacity when you go through a downturn. This happens to TSMC and also the big guys, okay? The demand for our type of business, you know, the special technology platforms, I think will continue to be very, very strong, okay? Particularly in China. It is that we're just going through a, you know, sort of downturn at this point. We still need more capacity.
Look at how quickly we loaded our first 12-inch fab, okay? It is critical, it is imperative that we will continue to have more capacity going forward, okay? This is not gonna slow down our progress in terms of building more capacity. For that next fab, we're gonna start sometime in the next few months. I mean, you know, we just have to go through the logistics, okay? And then we're gonna, you know, start to build the new fab. I think it's gonna take a year to build, okay? And at the same time we're gonna figure out exactly what sort of tools we're gonna be acquiring from various vendors.
From now on, until sometime second part of next year, okay, second half next year, we're gonna build that fab. Hopefully by end of, you know, sort of next year, we can start to ramp the second fab.
Okay. Great. Thanks a lot, Daniel.
Thank you.
Right. Thank you. Our next question comes from the line of Leping Huang from Huatai. Please ask your question, Leping.
Okay. Thank you to take my question. The first question is about this supply-demand relationship about your major product lines. You did very well in some, especially the power discrete and the MCU product line last few years. Can you share, or you mentioned the price concession issues in the market. Can you share some color, especially on the power discrete MCU? Is it due to the weaken of the demand or is it due to any change on the supply-demand relation in this product line? Thank you. Hello?
Yeah, yeah. Just a sec.
Thank you for your question. Yeah. As a matter of fact, when we build our Fab 7, our 12-inch fab in Wuxi, we extend our specialty technology platforms from our 8-inch fabs. Throughout the whole process, all our specialty technology platforms achieved very good R&D research results and build a solid base for our current 60,000- 70,000 wafer out. We got a decent market share no matter embedded Flash or BCD or logic or power discrete. Though the overall market is slow now, but even under this situation, our R&D result and our customers' confidence is still very strong. Actually, we are putting more efforts into the R&D for the embedded Flash and the specialty technology, including power discrete, and this R&D will cause some cost increase.
We did some pricing adjustment, but this adjustment is for keeping our marketing share for our specialty technologies and even to increase our market shares. Thank you.
Okay. The second question is about the progress of your the Wuxi fab expansion. I noticed that your capacity stay in the 324,000 wafer per m onth for more than one years. You spent roughly $200,000-$300,000 per quarter in CapEx. What will be the curve of your ramp-up process in next few quarters? Especially considering this weak market demand, do you still expect that you will reach the full capacity, the 95,000 per wafer per month by end of this year? Thank you.
We are still undergoing the process to release all our 95K wafer capacity till the end of the year. We'll gradually release some capacity in Q2, Q3, and Q4. As we mentioned earlier, we are escalating our R&D progress for some advanced or for market demand some technologies. We have mutual understanding with those customers. We are escalating our new tape out. It may need some time, but we still keep our plan and target. Thank you.
Thank you.
All right. Thank you. Our next question comes from the line of Sze Ho Ng from China Renaissance. Please ask your question, Sze Ho.
Hi. Good afternoon. I have two questions. The first one, regarding the next phase of capacity expansion. Could you share with us the capacity breakdown by process node?
As for the Wuxi, the second step in Wuxi, we are undergoing some of the regular process and achieve many the results. We have already got the national approval from the relative governments departments, and we also got the environment approval. We will plan to kick off the whole project in middle of this year, and all the preparatory work is undergoing according this target. We will announce to our investors at a suitable time. If we kick off the project, we plan to complete the construction of the fab in one year, and we will have contribute some capacity the, in the early 2025. For the technology platform and the applications, we are focusing on the new energy, for the solar system and energy.
How to say the?
Reserve energy.
The reserve energy. We have the technology roadmap, and we will have a good match for the customer demand in the future. Thank you.
I see, I see. Can we assume that most of the capacity will be focusing on 55 nano, while 40, 45 nano will be a small portion of the overall capacity planning?
That is not even... Look, this is gonna be a fab of
40 nanometer and 55 nanometer. Okay? It's gonna be, you know. Of course, we're also gonna be, you know, allocate a pretty important portion of that to things like IGBT power discrete. You know, it's gonna be a split between the rest. As far as the IC is concerned, it's gonna be a split between 40 nanometer and 55 nanometer.
Okay. All right. Yeah. Next question may be for you, Daniel. Yeah, for Q1, actually the company booked a pretty big finance cost. I'm not sure if it's something one-off or if it would be recurring going forward.
Finance cost is largely because it's the interest expense. You know, our, you know, we have a pretty large size of debt incurred in Wuxi. Okay? I mean, you know, you certainly you're aware of the fact that, you know, the U.S. interest rate has been also, dollar interest rate has been going up. That's the interest expense.
I see. It's kind of recurring, right? Yeah, at that level.
Yeah.
Okay, I see. All right. Okay. Thank you.
Energy storage.
Okay, energy storage.
What Tangzong mentioned earlier is the new energy vehicle, wind power, and also energy storage. That's gonna be the three major areas that we're gonna be focusing on for the new fab.
Our next question comes from the line of Sunny Lee from UBS. Please ask your question, Sunny.
Sure. Thank you very much for taking my question, Tangzong, Daniel, and Kathy. Good afternoon. My first question is on CapEx. Daniel, I just want to follow up, if you could remind us of your current target for full year. Now, as you are becoming even more committed for the second 12-inch fab expansion into 2024, would you consider raising the CapEx target a bit, just to secure more 12-inch tools within this year?
Good question, Sunny. Basically what I described earlier, the $700 million for the Wuxi fab, that is only for the first fab. Basically the $700 million is something that we have to make all the payments complete for the entire 95K, okay? For the 8-inch space, I think just overall on cash flow basis, it is about $185 million. That's our budget for this year, okay? It is basically $700 million for the first 12-inch fab, and then you have the $185 million for the 3-inch fabs.
We're not gonna be spending $185 million. We probably will only spend $50-$100, not even $100. I think we have been very thrifty, you know, careful with our spending on CapEx. For the next fab, okay, I mean, you're, I've talked about this before, it's a $6.7 billion investment in the first phase, okay? You know, this is gonna be, you know, I mean, the first phase is gonna be approximately 83,000 wafer capacity. This is only half of the, you know, the overall capacity that eventually we're gonna build. You know, potentially this will, you know, the CapEx for this entire fab work can exceed $10 billion, okay? The first phase is gonna be $6.7 billion.
That is the budget, okay. It would be done in two stages. The first stage, we're probably around $40 million-$50 million, and then we do another $30,000-$40,000, $40,000-$50,000, and then another $30,000-$40,000. In that sort of, two different stages. I would expect this year, you know, we're gonna be building the fab. It's gonna be a huge fab. It'll be anywhere from $700 billion-$900 billion. We're gonna put together a budget for that. Once that is finalized, you know, I'd be very happy to, you know, announce to the world.
Sounds good. Thank you, Daniel. Just want to make sure, that I understand. CapEx for the current fab, may be below $1 billion. If we add the second, 12-inch fab, that may add up to $700 million-$900 million?
That is correct. All that, I mean, most of that will be paid probably in 2024.
Got it. For your CapEx, is that cash cash based?
Yeah.
Got it. Perhaps the CapEx increase will not come through until 2024.
That is correct. You know, we, and, you know, Miss, you know, President Tan has already talked about that earlier, huh. It's gonna take about a year to build the fab. We're gonna start very, very quickly. That fab will be ready by second half next year. By end of next year, we can start, you know, make certain contribution on capacity.
Got it. Thank you very much, Daniel. My second question is somehow related to the China investment in the overall foundry CapEx. As we could see from the recent comments from the equipment vendors, like ASML, Lam Research, the industry is seeing a pretty meaningful uptake of the China projects on the equipment. Would you be concerned about the intensifying industry competition, especially for trailing at foundries within China for next coming few years?
I mean, I'm not exactly sure what you're asking, Sunny. Are you talking about the concern on what?
Concern on oversupply, by the China mature foundry.
I'll let Mr. Tang address your question. How's that?
Thank you.
Uh,
There do have some, like, suppliers have some restrictions on some certain tools, but from our point of view, those restrictions doesn't have material impact on us. We can procure our tools normally, and the tools can be on site on schedule. All our eight-inch fabs are always on the full utilization, and our 12-inch fab, we refer out level is around 68,000 wafers per month. It also reflects the market demand for our specialty technologies, including embedded Flash and BCD, and power discrete. The demand is still very strong. When we fix our development plan for the overall Hua Hong Wuxi project, we also visit and discuss with some customers, including some new customers.
From the market feedback, we can see the market demand for our specialty technologies is still very positive and strong. From current market, new energy vehicles, energy storage and wind power, some carbon neutral and digital economy, the specialty technologies occupies a decent portion in these platforms. Including those new growth potential, the market is still there, and the original market is still very stable. As we mentioned earlier, our R&D work is always adjusting according to the market change. Along with those adjustments, our R&D is also moving forward. Those development on the new technologies is discussed and anticipated with our customers together. It's from our more than 20 years experience in specialty technologies, and it's our anticipating for... On the market.
我 们 对 未 来 还 是 充 满 着 信 心 。
We are still very confident on the future.
谢 谢.
Thank you.
Thank you very much, Tang Song and Kathy. Maybe one last question, if I may. I wonder if any updates on your Asia listing?
Well, you know, I think, yeah, I mean, certainly there's some good news out there. We have been officially invited by the Shanghai Stock Exchange next week for a official hearing for the IPO. Hopefully, you know, we can make this happen within the next few months. I'm talking with, you know, the listing.
Got it. Thank you very much.
Thank you.
Our next question comes from the line of Nicolas Baratte from Macquarie. Please ask your question, Nicolas.
Yes, hello.
Hello, Nicolas.
Yes. Hi, Daniel. Nice talking with you. Thanks for taking my question. We have a little bit of margin weakness in 1Q, 2Q. I heard you clearly, price concession and D&A. Do you think, you know, if we assume that inventories in the, you know, with your customer and/or in supply chain, that inventory level improve in the second half or beginning of next year, should we expect your pricing to go back up to normalize? Should we expect gross margin to go back up to 30% or 35%, or is there a risk that it could take a bit of time because of the higher amount of D&A that should also happen after, you know, due to the high CapEx of the past few years?
You know, Nicolas, I would let Mr. Tang to address your question, and I would give you my point of view on that later on.
Thank you.
从 您 提 的 问 题 来 看, 实 际 上 客 户 的 库 存, 那 么 我 想 我 们 这 个 行 业 客 户 的 库 存 始 终 是, 所 具 有 一 定 的 量 的.
As for the inventory level of customers, I think, for this industry, customer will always build some inventories.
那 么 从 去 年 ， 呃 ， 所 有 的 客 户 对 我 们 产 能 的 旺 盛 的 需 求 ， 这 在 行 业 内 是 一 个 普 遍 现 象 。 大 家 为 了 这 个 应 对 产 能 紧 缺 的 一 个 状 况 ， 确 实 是 积 压 了 一 些 库 存 。
Yeah. From last year on, it is very common. The customers will build some inventories to get the capacity allocation.
随着 国内 经济 的 复苏, 我们 也 看到 我们 的 客户 现在 不断 地 在 给 我们 下 一些 订单. 从 这些 需求 来看, 客户 的 库存 越来越 趋向 于 一个 合理 的 位置.
Yeah. Along with the domestic economy recovery, we can see our customers is increasingly giving out new orders. From these orders, we can see their inventory level is becoming very reasonable.
从 整 个 市 场 的 形 势 来 看 ， 我 们 相 信 ， 市 场 会 越 来 越 好 ， 客 户 的 库 存 会 越 来 越 优 化 ， 达 到 一 个 合 理 的 范 围 来 保 持 大 家 共 同 的 这 个 业 务 的 稳 定 的 推 进 。
From the overall trend, we believe the market will be better and better. The customer inventory levels will be optimized, and we will have a mutual win situation.
哦, 谢谢。
Thank you.
Nicolas, let me just talk about this. Basically, we continue to be very strong in high voltage power discrete, such as IGBT and super junction. Extremely strong price, strong loading, and strong demand from our customers. Okay? In fact, I think, you know, if the momentum continues, I would expect we still have room to improve price. Some other segments, as I mentioned earlier, for example, CIS, NOR Flash, and, you know, some areas related to, you know, LED lighting, power management IC. For these products, I think we, you know, are experiencing some, you know, just overall weakness. I think, you know. I'm hoping that they will recover in the second half, okay? Then we can go back to the, you know, recovery mode.
At this point, overall, you know, market as you know, it is slow and weak, okay? The good thing is, you know, we are very diverse. We have, you know, five strong technology platforms that have done us wonders in the past years. You know, just keep our fingers crossed. I think, you know, we're hopeful that, you know, second half, that a strong recovery will be on the way.
Thank you.
Thanks, Nicolas.
Thank you very much.
Right. Next, the follow-up question from Randy Abrams from Credit Suisse. Please go ahead, Randy.
My follow-up question, I wanted to ask actually on your filing on the listing. It mentioned that relative to Huali, I think the non-volatile memory standalone flash would be redirected to Hua Hong, and then some of the RF and logic would go to Huali. Could you discuss if there's, like, timing on that and if there would be any netting out, like a positive or negative impact from that transition?
Hey, Randy. Yeah, it's very good. You know, I'm glad you actually went through that is a lot of reading there, huh? Yeah, I mean, basically it is the non-competing clause, okay? You know, there is a little bit overlap business between us and our brother company, Huali Microelectronics, that, you know, just between 65 to 55 nanometer technology node. On that node, basically, or nodes, 65 and 55, that's how they start initially. You have to remember, all along, Huali is focusing on logic products. Their goal, their mission, their, you know, overall company mission is to move into the advanced technology node. For example, you know, 40 nanometer, 20 nanometer, okay? Our products are virtually very different, very different, okay?
They're focusing on, you know, pretty much on large products. They do not do specialty technology like we do, okay? In terms of technology, node, there's some overlapping business. We have to be, you know, pretty clean and clear about this. We're gonna be doing virtually from now on, embedded. They're not gonna be having any business in that area. We're not gonna be touching any, you know, things like advanced logic business. That is a commitment we have to make, you know, basically to the local stock exchange, Randy.
Is there much shift or is, or is most of that overlap taken care of?
Not really. I think, you can still work on your, you know, existing business. That is also a, you know, understanding, between us and the exchange. As long as we don't, you know, for example, get into the logic business, especially the more advanced node, on the more advanced node, particularly the advanced node.
Okay. What I was trying to ask, is there business that you need to transfer or you could get transfer in, like additional embedded Flash? Is most of that, like we probably won't see that much impact either way?
It won't have much impact at all. I mean, it won't. It won't. If you look at, you know, if you look at the paragraph, we also made a commitment that, you know, within the next three years, that particular fab will be injected into the listing entity.
Right.
Which is Hua Hong Semiconductor.
Okay. When the fab is injected.
Yep.
Oh, okay. I was just gonna ask, like, so when it's subjected, I assume you'd spend. There'd be a incurrence. You'd essentially buy the asset into your group and then it would be... I don't know if it's early to talk if there would be accretive, like, additional revenue and profitable but.
Absolutely. Absolutely. I think that is the goal, you know? You know, in a way you make a commitment that this, you know, that particular fab will be injected into the listing entity, and then, you know, it's gonna be good for Hua Hong Semiconductor.
Okay, great. If I could ask on the 55, 65, because that's the area with NOR on the CIS, has come down quite a bit since middle of last year. For the recovery, is it more we need to get those applications up? Because your focus, it feels like it's moving toward those nodes like 55. Do you see, or maybe it's with the price moves, there's some rebound for the 55, or is it new tape out, new application that we'd see driving that part to fill up or start ramping up again?
Well, you know, the 65 and 55 node actually covers many applications. In that first 12-inch fab we just built, we actually built product based on the technology for things like, you know, logic, radio frequency. Standard Logic slash radio frequency, power management IC, MCUs, as well as smart cards. CIS. There are many applications rely on 65/55 nanometer technology node.
Great. The last one, just to clarify, it sounds like your view, it seems like you're not uncomfortable with inventory or demand that you're still looking at, I guess, sequential ramp in applications and loading. It sounds like at this time, I guess that could change, but directionally revenue improving and margin, we could say similar levels, like could at least hold here rather than a step lower.
Well, Randy, that is certainly not our goal to let it continue to slide, huh? You know, I mean, you know, as I said, the impact is about 3-5 percentage point on price, okay? You know, as long as the demand continues, okay? We're also doing a lot of, you know, adjustment on product mix. For example, we're doing a lot more, you know, with regards to discrete, we're doing a lot more IGBT super junction than the regular DMOS. That actually, you know, basically, will damper the impact quite a bit, okay? There are many things that we're doing. It's good that we're fully, you know, very much diversed, as I said.
A certain area is not doing that well, for example, CIS and NOR and some, you know, some other areas that we still feel pressure on pricing. I think in general, I think, you know, we're holding well. I mean, our utilization rate is still very high. It is just we have to work very, very hard to get, you know, fab loaded, okay? Sometimes we have to make some sort of concessions, as I mentioned earlier, okay? This is something we have to do, get through this period. I mean, we still have not seen the end of the tunnel, but I'm, you know, pretty sure. I mean, you have gone through this so many years, you know, you've gone through this thing and so many different cycles before. You know, I mean, it will come back.
I appreciate that. Okay. Thank you, Daniel.
Thank you.
Thank you. Next follow-up question comes from Leping Huang from Huatai. Please go ahead, Leping.
Thank you to take my question. I just have one question about the... Where is the cycle of the power discrete business in your view, since power discrete was very well for, I think, multiple years. We just heard that you also have a price adjustment. Where is the cycle and where you see the supply, demand will change in the coming few quarters? Thank you.
From the applications, the power discrete is everywhere. We accumulate many customers and products, technologies through our more than 20 years experience in this area. We can see we need IGBT in new energy vehicles, wind powers, and many other aspects. As long as we can develop some new technologies to meet some new growth demands for the market, I think the overall life cycle of this technology will be extremely long. Our existing customers still have very strong demand on our power discrete technologies. As though some new applications require higher performance, our technology meet the requirement very quickly. From the mutual cooperation and our technology development, our advanced specialty technologies on power discrete is exceeding our original ability. We can release more capacity along with our new project, and can meet our customers' demand better.
Thank you.
Do you have further question, Leping?
No. Yeah, thank you very much.
Right. Thank you. As a reminder, to ask a question, please press star one one on your telephone keypad. Again, to ask a question, please press star one one on your telephone keypad. We have a question from the line of Edison Lee from Jefferies. Please ask your question, Edison.
Hey. Hi. I got a question for Daniel, just a simple one. On the interest cost, you mentioned earlier that it's because of rising U.S. rates. Does it mean that you have a floating rate structure? Can you maybe share a little bit more color on how we should forecast the interest cost going forward?
It is basically the interest for the dollar loan. It is LIBOR plus a fixed rate, okay? I mean, actually, our rate is very, very low compared to a commercial, a normal commercial rate. It is LIBOR plus something less than 2%. That's something we negotiate very, very hard with the various banks. It is just the LIBOR has gone up quite a bit recently, which is difficult to sort of, you know, get into fix, right? Yeah, I mean, it is basically LIBOR plus, you know, a fixed percentage, Edison.
Okay. Is there any plan to hedge that?
It is very difficult. Very difficult. I mean, you know, it's, you know. The overall rate is already very low. I mean, we're borrowing a lot of money. There's only one thing we can do is perhaps instead of borrowing dollars, we can borrow the RMB. That would be one thing we can consider because the overall RMB interest rate is also lower compared to the, you know, just overall interest rate for the dollars. That would be something we can consider.
Okay.
You know what I'm saying, Edison?
Okay.
That was a good question, good suggestion.
Yeah. I got it.
I, I, I-
Right.
You know, we'll definitely look into it.
Okay. I got that. Maybe a follow-up question on the CapEx. Can you remind us whether you have made any change to the CapEx guidance for 2023? Also, a related question is the delivery of the semi equipment, because I do think that there is still some talk of delay in the equipment delivery. I don't know whether that will affect your eventual spending on the equipment this year.
Just on the CapEx, I think I already talked about that earlier. Overall, I think we're gonna be spending about $700 million for the first 12-inch fab on cash flow basis, okay. Then for the 3-inch fab, this would be $185 million, $185 million. That would be, you know, close to $900 million, okay. Now you... The other question is about equipment tools, right. In terms of delivery schedule.
Yeah.
There's not gonna be any delays for us, you know? I mean, we know these vendors. We worked with them for a long time, many, many years. Excellent credibility, excellent reputation, good relationship. You know, if, you know, between us and other, you know, peers, I think we definitely have the priority. I think there'll be no delays.
Okay. On the new fab, when will you actually start having to put down deposits for the equipment?
Yeah. making down payment towards the equipment?
Yeah.
Not, you know, not for a while. At least this probably won't happen until 2024. I mean, I would say first half, second, you know, 2024, we're gonna start purchasing, issue POs for the equipment. Normally you don't have to pay right away. You pay it, you know, normally with when the tool is delivered.
Right. Because I. We heard that some of your peers are putting down a lot of deposits for certain equipment because there's a very long delivery lead time.
Yeah.
You haven't seen that from your perspective.
That, Edison, that is our peers, not us.
Okay. Good to know.
Thank you.
Thank you, Daniel.
Thank you. Once again, to ask a question, please press star one one on your telephone. All right. I'm showing no further question, ladies and gentlemen. That's all the time we have for questions. I'll now turn the call back to management for closing remarks.
You know, thank you all. I think we had a fantastic call. It was a fantastic discussion. I appreciate all, between Mr. Tan and I. We really appreciate all your suggestions, your comments, and your all wonderful remarks. I look forward to have you know, talking to us again. Please continue to stay safe and healthy. You know, we finally for the first time, Mr. Tan and I together, we came to visit Hong Kong today, though we had a great board meeting today. We're looking forward to meeting you in person very, very soon. Thank you very much.
Ladies and gentlemen, thank you for your attendance. You may now disconnect.