Ladies and gentlemen, thank you for standing by, and welcome to Hua Hong Semiconductor's Q4 2021 Earnings Conference Call. Today's 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-ins are in listen only mode. However, at the conclusion of the management 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 Q4 2021 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, everyone. Thank you all for joining our Q4 2021 Earnings Conference. Today, we will first have Mr. Tang, our Executive Director and President, make some remarks on our Q4 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 question in English. I now turn the call over to Mr. Tang.
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Good afternoon, everyone. Thank you for joining our earnings call.
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Hua Hong Semiconductor's performance in Q4 2021 was admirable, breaking sales records for six consecutive quarters. Q4 2021 revenue reached $528.3 million, an increase of 88.6% compared to Q4 2020 and 17% compared to Q3 2021.
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Net profit and annualized ROE both hit all-time highs. Gross profit margin steadily increased to 39.3%, 3.5 percentage points higher year on year, and 2.2 percentage points higher quarter on quarter. Gross margin for the eight-inch fabs reached 40% for the first time. These outstanding achievements are a new milestone and a successful conclusion to 2021.
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In 2021, total monthly production capacity in eight-inch wafer equivalent increased by about 40% compared to 2020, and the revenue increased by nearly 70% to $1.63 billion. All segments saw double-digit growth, especially flash and power devices. In 2021, 12-inch wafer fab capacity expanded significantly with the corresponding increase in depreciation expense. Thanks to a steady increase in average selling price and a consistently high utilization rate, gross profit margin achieved an increase of 2.3 percentage points year-on-year, and net profit increased by more than 4x compared to 2020.
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The company was able to capitalize on market opportunities with its timely accelerated expansion. These encouraging results confirm our strategy and are the reward for our relentless pursuit of growth and profitability.
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Looking forward to 2022, we will accelerate the pace of expansion for our twelve-inch production line to reach 94.5K monthly capacity. The extra capacity is set to be released gradually in Q4 2022. The company will continue to seize market opportunity, further strengthen our positions in specialty technologies accumulated over the years, optimize our business structure and offer more products in high value added markets. I'm confident that the company will reach a new height in 2022.
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Upon the coming of the Lunar New Year, we congratulate all the friends online very happy Year of the Tiger.
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Now I would like to hand the call over to our CFO, Mr. Daniel Wang, for his comments.
Thank you, Mr. Tang, for the inspiring remarks. Now let me begin with a summary of our financial performance for the Q4 and a recap of the whole year 2021, followed by a outlook on revenue and margin for the Q1 2022. Then we will move on to the question and answer session. First, let me summarize financial performance as of the Q4 . Revenue hit an all-time high of $528.3 million, 88.6% over the prior year, and 17% above the prior quarter. Cost of sales was $373.8 million, 79.8% over Q4 2020, and 13.5% above Q3 2021, mainly due to increased wafer shipments.
Gross margin was 29.3%, 3.5 percentage points over Q4 2020, and 2.2 percentage points above Q3 2021, mainly due to improved average selling price and product mix. Operating expenses were $78.1 million, 27.8% over Q4 2020, mainly due to decreased government grants for research and development, partially offset by decreased engineering wafer costs, and 8.1% over Q3 2021, mainly due to impairment provision for property plant equipment.
Other income net was $27.5 million, 12.1% over Q4 2020, primarily due to increased foreign exchange gains, partially offset by decreased share of profit of associates, and 266.9% over Q3 2021, mainly due to foreign exchange gains versus foreign exchange losses in the previous period. Income tax expense was $15.7 million, 111% over Q4 2020, primarily due to increased taxable profit from the Hua Hong eight-inch fabs. Profit for the period was $88.2 million, 212.8% over Q4 2020, and 147.7% above Q3 2021.
Net profit attributable to shareholders of the parent company was $84.1 million, 92.9% over Q4 2020, and 65.6% above Q3 2021. Basic earnings per share was $0.0465, $0.031 over Q4 2020, and $0.026 above Q3 2021. Annualized ROE was 12.4%, 5.2 percentage points over Q4 2020, and 4.8 percentage points above Q3 2021. Now I will discuss the operating results for both Hua Hong eight-inch wafer fabs and the Hua Hong Wuxi twelve-inch wafer fab. First, let's have a look at the Hua Hong eight-inch wafer fabs. Revenue was $322.6 million, 32% over Q4 2020, and 2.5% above Q3 2021.
Gross margin was 40%, 11.4 percentage points over Q4 2020, and 4.8 percentage points above Q3 2021, primarily due to improved average selling price and product mix. Operating expenses were $43.3 million, 171% over Q4 2020, primarily due to decreased government grants for research and development and increased labor expenses. Profit before tax was $93.2 million, 39% over Q4 2020, and 14.3% above Q3 2021. Now let's have a look at the performance of the Hua Hong Wuxi wafer fab. Revenue was $205.7 million, 4.7x over Q4 2020, and 50.5% above Q3 2021.
Gross margin was 12.4%, 3.9 percentage points above Q3 2021, mainly due to improved average selling price. Operating expenses were $34.8 million, 22.9% lower than Q4 2020, mainly due to decreased engineering wafer costs, partially offset by decreased government grants for research and development, 17.2% above Q3 2021, primarily due to increased R&D expenses. EBITDA was $79 million, 163.8% over Q3 2021, mainly due to increased gross profit and foreign exchange gains versus foreign exchange losses in the previous period. Now I will provide more details on our revenue for Q4 2021.
From geographical perspective, revenue from China was $398.9 million, contributing 75.5% of total revenue and an increase of 102.4% over Q4 2020, mainly due to increased demand for all technology platforms. Revenue from the United States was $53.5 million, an increase of 80.6% over Q4 2020, mainly due to increased demand for other power management IC products. Revenue from Asia was $50.5 million, an increase of 50.4% over Q4 2020, mainly due to increased demand for general MOSFET, MCU and logic products.
Revenue from Europe was $18.6 million, an increase of 29.2% compared to Q4 2020, mainly due to increased demand for general MOSFET product, partially offset by decreased shipments for smart card ICs. Revenue from Japan was $6.8 million, flat compared to Q4 2020. With respect to technology platforms, revenue from embedded non-volatile memory was $134.5 million, an increase of 38.6% over Q4 2020, mainly due to increased demand for MCU and smart card ICs. Revenue from standalone non-volatile memory was $39 million, an increase of 1,239.7% over Q4 2020, primarily due to increased demand for NOR flash products.
Revenue from discrete was $175.5 million, an increase of 86.3% over Q4 2020, mainly due to increased demand for general MOSFET, IGBT and super junction products. Revenue from Logic & RF was $85.1 million, an increase of 85.5% over Q4 2020, mainly due to increased demand for logic and CIS products. Revenue from analog and power management IC was $93.6 million, an increase of 137% over Q4 2020, mainly due to increased 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 $224.5 million in Q4 2021, 165.8% over Q4 2020, primarily due to increased revenue, partially offset by increased payments for materials and payables. Capital expenditures were $382.2 million in Q4 2021, including $352.5 million for the Wuxi fab and $29.7 million for the Hua Hong eight-inch fabs. Other cash flow generated from investing activities was $67.5 million in Q4 2021, including $65.8 million of receipts of government grants for equipment and $1.6 million of interest income.
Net cash flows generated from financing activities was $242.2 million in Q4 2021, including $275 million proceeds from bank borrowings and $400,000 from share option exercise, partially offset by $26.1 million of repayment of bank borrowings, $6.5 million of interest expenses for bank borrowings, and $0.6 million of lease payments. Now let's move to the balance sheet. Cash and cash equivalents was $1,610.1 million on December 31, 2021, compared to $1,444.3 million on September 30, 2021.
Inventories increased from $395.8 million on September 30, 2021 to $433.7 million on December 31, 2021, primarily due to increased customer demand. Property, plant and equipment was $3,116.5 million on December 31, 2021 compared to $3,026 million on September 30, 2021. Total assets increased from $5,874.6 million on September 30, 2021 to $6,203.4 million on December 31, 2021. Our total bank borrowings increased to $1,585.4 million on December 31, 2021 from $1,340.3 million on September 30, 2021.
Total liabilities increased to $2,567.6 million on December 31, 2021 from $2,389 million on September 30, 2021, primarily due to increased bank borrowings. Debt ratio increased to 41.4% on December 31, 2021 from 40.7% on September 30, 2021. Now I would like to give you a recap of our performance for the entire year of 2021. Revenue was $1,630.8 million, an all-time high, an increase of 69.6% over the prior year. Cost of sales was $1,169.1 million, 64.6% over 2020, primarily due to increased wafer shipments and increased depreciation costs.
Gross margin was 26.7%, 2.3 percentage points over 2020, mainly due to improved average selling price, capacity utilization, and product mix, partially offset by increased depreciation expenses. Operating expenses were $255.9 million, 5% lower than 2020, largely due to decreased engineer wafer costs, partially offset by decreased government grants for research and development and increased labor expenses. Other income net was $54 billion, 33% lower than 2020, primarily due to decreased share of profit of a associate and increased finance costs, partially offset by increased foreign exchange gains. Net profit was $181.9 million, 446.1% over 2020.
Net profit attributable to shareholders of the parent company was $212.1 million, 113.3% over 2020. Basic earnings per share was $0.163, $0.086 over 2020. ROE was 7.9%, 3.7 percentage points over 2020. Finally, let me give you a high-level outlook for the Q1 2022. We expect revenue to be approximately $560 million and our gross margin to be between 28% and 29%. This concludes my financial remarks. Now we would like to start the question and answer session. Operator, please assist. Thank you.
Ladies and gentlemen, to ask a question, you will need to press star one on your telephone. To withdraw your question, please press pound or hash key. Please stand by while we poll, the first question comes from the line of Randy Abrams from Credit Suisse. Please go ahead.
Okay. Yes, thank you. Good afternoon and a great result. The first question I wanted to ask, just to start with, the guidance for the 6% growth. If you could discuss how much of that growth is coming from the Wuxi getting up to 65K versus some of the moves you're making up.
Randy, thank you. Very good question. I think I would say we would continue to see, I think overall for the eight-inch fabs, I think we will continue to find some efficiencies and also SE improvement, okay. The volume probably won't be up that much, but there will be. It will be up to some degree, okay. Most of that will come from, you know, the additional revenue would mostly come from Wuxi.
Right. As we go through the year, as we're getting close to the first phase build out, can Wuxi run? Like eight-inch has been running 110%. Can you run over 100%? Or as you look the next few quarters, is most of the growth from mix and pricing? I'm just curious if you can squeeze capacity before the next phase comes on.
For Wuxi or for the three-
Yeah, actually wanna weigh both. I mean, you answered the last question, you can get efficiency at 8-inch. Maybe if you could talk about both for 8-inch and 12-inch after Q1 , if there's much you can get from shipments until the new phase comes on. If you could comment on how you see the like-for-like and blended pricing trending as we go through 2022.
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Hi, Randy. Thanks for your question. Through the one year's time, our capacity utilization rates keep at a very high level, no matter 8-inch or 12-inch. As for the 8-inch fab, we dig more potentials and optimize the product mix. We keep the utilization rate above around 109%. As for Wuxi fab, because our specialty technology privileges and the market acceptance, along with the capacity release, we push up the utilization rate quickly, very quickly and keep it above 100%. That is already reflected in our CFO's report.
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At a such high level utilization rate, we actually still keep optimizing our 8-inch production product mix and can, how to say it? Find a stable capacity mix and improve our utilization rate.
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As for the 12-inch fab, actually we have a phase two capacity expansion this year from 55K to 94.5K. As long for the gradually capacity release, we will still work for the full utilization rate. Of course, they need a perfect market and capacity match. We already work on that. From last year to now, we believe that our strategy is very reasonable, rational. I believe our capacity utilization rate will still keep around and over 100%.
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Of course, we need to thank all our customers for their confidence and support for our specialty technologies.
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Thank you.
Just one last question. Looks like tone of business strong right now. As you go through the application customer base, is it strength across the board? I'm just curious if there's any areas you're seeing, any weakness or inventory that's built up. Or is it your view? I mean, if you can go through your view on how the customer profile looks and strengths, sustaining and continue to keep that capacity full.
Randy, good question. Thank you. The demand continues to be very strong. You see how our Q1 guidance is. This has reflected on our Q1 guidance. We don't get any, you know, slightest idea that there's any weakness at this point, okay? You know, I would just give you a very high level outlook of 2022. I think it's gonna be another very strong year for Hua Hong Semiconductor. I think all our cylinders are gonna be, you know, running full. Okay? So we'll continue to keep the utilization rate at, you know, above 100%. Then, just to, you know, to add some comments on your prior question.
You know, currently for the Wuxi fab, it is running at wafer in at 65,000 wafers per month. The output currently at maybe 56,000 to 57,000 wafers. You know, pretty much by Q1 and Q2, this is gonna be the output, basically wafer out will be at the same level of wafer in. I'm talking about 65,000, even go beyond that. Then this will eventually transition to the next phase, which is the 95,000. Okay. We expect all the orders are very strong. Manufacturing orders can be very full, and all the backend technology platforms are gonna be at this point, they're gonna be basically showing strong demand.
In particular for the next year, it's gonna be for MCU, power discrete. It's just in general power discrete. But I would expect IGBT will continue to be a very, very strong year again. The medium voltage gonna be strong as well. We're not gonna have enough capacity, continue to be short of capacity for, you know, all our customers.
Okay. One last question on the Wuxi for the 94,000, like, or 95,000. When would that actually be available for wafer in? For wafer out, you see a pretty steep ramp up to 95,000 as we go through H1 2023?
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The first two will be moving in March this year, and we expect we can move about 95% of the tools by the end of this year. Along with the tools moving and installation and fine-tuning, we will release our capacity gradually and reach the 94,500 wafer capacity monthly by the end of this year.
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We know that we have the longer lead time of the tools nowadays, but along with our development these two years, we have very strong relationship with the vendors. We will keep an eye on that and get the tools as soon as possible.
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Our technology platforms will release the capacity gradually along with the moving status of the tools. There will be a breakthrough of the capacity by the end of the year, but a gradual process along with the moving progress of the tools.
Great. Yeah, thank you.
Thank you.
Thank you. The next question comes from the line of Leping Huang from Huatai Securities. Please go ahead.
Okay. Thank you to take my question. The first question is about, since your Wuxi fab is already full end of last year, why your new capacity will be only released at the end of this year? So is it due to your more cautious view on the market, or is it due to the difficulty on the equipment sourcing?
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It's a very good question. Thank you. Actually we start the 65,000 capacity from the beginning of last year and some tools move in. The earliest tools will be moving in December 2020. Overall we spent about 10 months for the tool moving for the 65,000 along with more fab are built in China nowadays. The lead time of tools are longer than that time. We still need some time for the tools moving and qualification. We are confident that the overall process will not be longer than a 65,000.
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We are continuing to expand our capacity over these two years. Along with the progress, our technicians' ability and our technology platforms' maturity, our customer support, we have already completed a positive cycle and I'm confident in along with the 94,500 wafer capacity expansion progress, the ability will be further strengthened.
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The 94,500 capacity expansion has a very solid base because we already have a full utilization of the 65,000 along with the tools moving and technology platforms growth. The capacity will be released gradually. Just like what I mentioned last question.
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We will put more effort on that and release the capacity as soon as possible to satisfy both domestic and international customers.
Okay。
Thank you.
The second question about, I think we ask this question a few times. Considering the recent, I think we see some mixed signal on this. Some companies say there is no shortage issue, for example, like smartphone, but like auto chips still complain they are in serious shortage. Considering this situation when you do this additional 35,000 expansion. What will be your latest plan on this additional 35,000? And what's your view on this market supply demand for this year? Thank you.
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Just like our CFO just mentioned in his report. Most almost all of the eventually all the technology platforms such as eFlash, Power Discrete and Analog saw double-digit growth and especially very strong double-digit growth, 20%+. From our demand on hand, our 94,500 capacity is far below customers' demand. We will continue to expand all our mature specialty technology platforms. I believe this capacity expansion will just like our 65,000 capacity expansion, will have a very good estimate.
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Actually, many friends here have already worked with us for many years. We experienced the down cycle of the industry together, and also now we enjoy the market demand up cycle together now. No matter what the conditions, we can see the market demand for our specialty technologies are strong and market acceptance is very good, along with the applications, the growth, the application areas could also grow. The market demand is very strong. Still very strong.
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Along with our efforts in R&D, some high-end technologies such as eFlash, IGBT, BCD, HV has made a great performance progress and well accepted by the market. This demand are growing very rapidly and it's a very solid assurance for our next step, capacity expansion.
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Thank you.
Thank you. The next question comes from the line of Szeho Ng, China Renaissance. Please go ahead.
Hi, good afternoon, gentlemen. My first question regarding the 8-inch gross margin. We did an excellent job in keeping the 40% gross margin. Should we expect more upside, or how should I see the steady state gross margin for the 8-inch business going forward?
Szeho, that was an excellent question. I mean, as you know, we have talked about this in the past, you know, we have certainly done a lot of work. I think this is a very important milestone. From my perspective, we will have to do everything to make sure we protect them, protect this number, make sure that we continue to grow based on that number. I, you know, we'll do everything we can to make sure, you know, this year our growth margin will maintain at this level for eight-inch, for the eight-inch business and even make it better.
Yeah. After the 94,500 capacity expansion, will we take a pause in terms of capacity expansion? Or how should I think about the next round of expansion on the 12-inch?
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Thank you for your question. The 94,500 capacity expansion project is a very important job this year, but for our company's growth, we think we all know, from the communication these years, we all know that the Wuxi area of our Hua Hong plant can offer three fabs altogether. We can still have space for two more fabs.
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We are actually planning for our next step development, and go through our internal process now. We'll share with you, with all our investors after we have a consensus.
I see. Okay. All right. Sorry, my next question is regarding the standalone and non-volatile memory. That line of business actually grew pretty nicely last year. I just wonder how we should model that line of business into 2022 and 2023.
Szeho, very good question. That is a new business line for us. We used to do small NOR flash business, but because of capacity, we had very limited capacity, basically for some very close customers. Since we start this new twelve-inch fab, that become a very important business for us. That capacity can be shared between embedded and the NOR, basically that manufacturing corridor. I would expect that will continue. The NOR flash currently has, this together have, somewhere about 20,000. Eventually with an additional 30,000 wafer capacity, we're gonna have more capacity allocate to this segment. I would say potentially we can do, you know, right now I would say 7,000 to 10,000, but eventually up to 20,000 wafers capacity for this business. Even more once we have the second fab.
Sounds good. Yeah. ASP is actually better than the average, right? For the 12-inch.
Absolutely. It's one of the best ASP products in the 12-inch business.
Brilliant. Maybe last question from me. For the discrete portfolio, can you share with us again the mix between, let's say, IGBT, MOSFET and super junction in the last quarter?
Yeah. Sure. Absolutely. For discrete, for Q4 2021, discrete accounts for 33%, about one-third of the overall revenue. Okay? Out of that, you know, IGBT was basically 7%. 7 percentage points. Super junction was about 8, you know, slightly above 8%, 8 percentage points. Then you have this split-gate trench. It's a medium voltage application. It is about close to 9 percentage points. Then you have the low MOS, regular DMOS low voltage business, which is about, you know, over 9%. Together, I mean, it is 33% of the overall revenue.
Oh, okay. Great. Okay. Thank you very much, congratulations and happy Chinese New Year.
Awesome.
Thank you. The last question comes from the line of Sunny Lin from UBS. Please go ahead.
Hi. Thank you for taking my question. Congrats on the very strong performance. So I just want to have one question on the Wuxi fab. So for Q4 last year, could you give us a breakdown of the revenue by application? Going into the H2 of the year, how would the product mix evolve, and what's the implication for the overall ASP?
Sunny, let me try to understand your question. You're saying that you want to know revenue by technology platform for the 12-inch fab?
That's right.
Overall, the revenue is about $205 million. Out of that, you know, embedded non-volatile memory was 10.6%. Smart card was eight percentage points. MCU was 2%. I mean, as we said, it's mostly smart cards. We migrate all the smart cards from eight-inch to twelve. But MCU is starting, so it has about two percentage points. The standard, standalone non-volatile memory, that NOR flash, it was 17% of the overall revenue from the twelve-inch fab. Discrete was 24%. Within that, IGBT is eight percentage points. Super junction is 5%. Split-gate trench is 5%. Regular DMOS, the low voltage is 6.6 percentage points. Logic RF, it is 29% of the overall.
Of that Logic and RF is 12%, twelve percentage points, and the CIS is 17 percentage points. When you add the two together, it's 20, 28, 29, basically 29 percentage points of the overall revenue. Then Analog and Power Management IC, it's 19%, okay? It's mostly for power management IC, okay, 19%. This adds up to, you know, all these add up to, 100%.
Thank you very much. That's very helpful. How this product mix evolve going to H2 this year as you expand capacity?
Well, Sunny, I mean, it is, you know, we're gonna continue. It's gonna continue. I think the second half, well, you know, it's gonna be running basically at close to, you know, 60,000 to 65,000 wafers capacity in terms of wafer out. I think, you know, with that, it's gonna be mostly, you know, it's gonna be CIS will continue to be very, very strong. NOR flash will be strong. Power Discrete, well, definitely gonna be close to a third, 30%. Okay. Then the rest goes to Logic and RF and BCD.
Got it. If I looked at your Q4, twelve-inch blended ASP was roughly $1,143. How is this ASP improving going to H2 this year? Will it be possible that you get to your target of $1,300 any time soon?
Sunny, that was excellent question. You know, I mean 1,300, yeah, that's a number that I've been talking a lot lately. That is definitely a target, okay? I think, you know, it is not something unrealistic, okay? We'll know if we can get to that level at $1,300, you know, as I said, power discrete somewhere around $1,000, and the rest should be anywhere between $1,500-$1,800. That is certainly the goal. You know what? Let me tell you, we're moving towards that direction, okay? You know, I'm very positive. I think we're, you know, Szeho Ng mentioned earlier, we're gonna have a very, very strong 2020. I think that the eight-inch business will continue to perform at a very strong growth margin, even getting better.
I'm hoping that the 12-inch fab will also be improving quarter-over-quarter. It is not easy because, you know, the depreciation expenses are gonna be huge. It's huge, okay? You know what? We're making a lot of progress with the price improvement. I expect you're gonna continue to see price improvement coming out of both the 8-inch fabs and the 12-inch fab. You know, we have a model there. We want to get there, 1,300.
Thank you very much. Maybe one last follow-up on your depreciation. Any guidance for this year?
Sorry, I missed the question.
Oh, sorry. I was asking about depreciation for this year.
Okay. All right. Depreciation expense. Well, we expect, you know, the discrete twelve-inch fabs will be, you know, last year it was about $147 million, okay? I think that number will probably be slightly lower. It would be around $140 million, $130 million to $140 million, and depending on our new investment. But I expect, you know, if it's anything, it'll be around there. It should be pretty much flat or slightly lower, okay? The depreciation expense for the Wuxi fab will be around, I would say, $380 million, okay? It'd be up by, you know, $180 million. Last year was very close to about $200 million. This year it's gonna be about, you know, $383 million, 380 in that figure. That's pretty much the plan. Yep.
Got it. Thank you very much. Happy Chinese New Year.
Thank you.
Ladies and gentlemen, that's all the time we have for questions. I will now hand back to the management for closing remarks.
I want to thank you all for joining us today and asking all the wonderful questions. We hope you will join us again next quarter. Please continue to stay safe and healthy. We wish all of you and your loved ones a very, very happy Chinese New Year.
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Happy New Year.
Happy New Year.
Ladies and gentlemen, thank you for your attendance. You may now disconnect.