Ladies and gentlemen, thank you for standing by, and welcome to Hua Hong Semiconductor's Q3 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 lines are in a listen-only mode. However, at the conclusion of the management's presentation, there will be a question-and-answer session, at which time you will receive instructions on how to participate. The earnings press release and Q3 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, and thank you all for joining our Q3 2021 Earnings Conference. Today, we will first have Mr. Junjun Tang, our Executive Director and President, make some remarks on our Q3 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. Please pay attention. The call will be conducted in English, so please ask your questions in English. I will now turn the call over to Mr. Tang.
Good afternoon, everyone. Thank you for joining our earnings call. Q3 2021 was the strongest quarter in company's history. Almost all market segments have strong demand, in particular MCU, power management IC, IGBT, superjunction, CIS, and logic and RF. Revenue hit a record high of $451.5 million, an increase of 78.5% year-on-year, and a quarter-on-quarter increase of 30.4%. Gross profit margin rose steadily to 27.1%, an increase of 2.9 percentage points year-on-year and 2.3 percentage points quarter-on-quarter. Such outstanding performance is mainly attributed to the increase in selling prices for virtually all technology platforms and extremely high utilization. Thanks to all employees of Hua Hong Semiconductor for their dedication and unremitting efforts. Both of our revenue and gross profit margin has once again surpassed our guidance.
We are full of confidence in the company's future. Judging from the current market demand, we expect the company to usher in unprecedented opportunities and growth with highest sales ever. In 2022, we will continue to grow at a high rate and make brilliant achievements. Therefore, we are advancing the next expansion of Wuxi fab at full speed. We plan to reach a 12-inch monthly production capacity of 95,000 wafers by the end of next year to better fulfill customers' needs and expectations. A further expansion plan is being developed, and we will share it with you as soon as it becomes ready. Now, I would like to hand the call over to our CFO, Mr. Daniel Wang, for his comments.
Thank you, Mr. Tang, for the wonderful comments. Now, let me begin with a summary of our financial performance for the Q3 , followed by an outlook on revenue and margin for the Q4 . Then we will move on to the question-and-answer session. First, let me summarize financial performance as of the Q3 . Revenue reached an all-time high of $451.5 million, 78.5% over the prior year, and 30.4% above the prior quarter. Cost of sales was $329.2 million, 71.8% above Q3 2020, and 26.4% over Q2 2021, mainly due to increased wafer shipments and depreciation costs.
Gross margin was 27.1%, 2.9 percentage points over Q3 2020, and 2.3 percentage points above Q2 2021, mainly due to improved average selling price, partially offset by increased depreciation costs. Operating expenses were $72.3 million, 2.5% below Q3 2020. It was 57.5% above Q2 2021, mainly due to increased labor expenses and decreased development grants for research and development. Other income net was $7.5 million, 68.9% below Q3 2020, primarily due to foreign exchange losses versus foreign exchange gains, decreased share of profit of associates, decreased government subsidies, and increased finance costs, and 37.1% below Q2 2021, primarily due to foreign exchange losses versus foreign exchange gains, partially offset by increased government subsidies.
Income tax expenses was $21.8 million, 117% over Q3 2020, and 50.5% over Q2 2021, primarily due to increased taxable profit, including an intercompany IP transfer transaction of $45.7 million. Profit for the period was $35.6 million, more than 30 times over Q3 2020, and 4.2% below Q2 2021 due to tax on a one-off intercompany transaction. Net profit attributable to shareholders of the parent company was $50.8 million, 187.1% over Q3 2020, and 15.3% above Q2 2021. Basic earnings per share was 3.9 cents, 2.5% over Q3 2020, and 0.5 cents above Q2 2021.
Annualized ROE was 7.6%, 4.4 percentage points over Q3 2020, and 0.8 percentage points above Q2 2021. Now I will discuss the operating results for both the 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 reached a record high of $314.8 million, 33.2% over Q3 2020, and 20.2% above Q2 2021. Gross margin was 35.2%, 8 percentage points over Q3 2020, and 3.6 percentage points above Q2 2021, primarily due to improved average selling price.
Operating expenses were $42.6 million, 30.4% over Q3 2020, and 104.5% above Q2 2021, primarily due to increased labor expenses and R&D expenses. Profit before tax was $81.6 million, 81.2% over Q3 2020, and 24% over Q2 2021. Now let's have a look at the performance of the Hua Hong Wuxi wafer fab. Revenue was $136.7 million, 723.3% over Q3 2020, and 62.5% above Q2 2021. Gross margin was 8.5%, 5.2 percentage points above Q2 2021, mainly due to improved average selling price, partially offset by increased depreciation costs.
Operating expenses were $29.7 million, 31.5% lower than Q3 2020, mainly due to decreased engineering wafer costs, partially offset by increased labor expenses and service expenses, and 18.5% above Q2 2021, primarily due to decreased government grants for research and development. EBITDA was $29.9 million, flat compared to Q2 2021, mainly due to increased gross profit, partially offset by foreign exchange losses versus foreign exchange gains in the prior period and increased labor expenses. Now I will provide more details on our revenue from Q3 2021. From a geographical perspective, revenue from China was $331.3 million. Contributing 73.4% of total revenue, an increase of 100.5% over Q3 2020, mainly due to increased demand for nearly all platforms.
Revenue from United States was $47.9 million, an increase of 40.4% over Q3 2020, mainly due to increased demand for other power management IC and MCU products. Revenue from Asia was $44.3 million, an increase of 45.5% over Q3 2020, mainly due to increased demand for MCU, discrete and logic products. Revenue from Europe was $20.9 million, an increase of 27.1% compared to Q3 2020, mainly due to increased demand for discrete and smart card ICs. Revenue from Japan was $7.1 million, flat compared to Q3 2020.
With respect to technology platforms, revenue from embedded non-volatile memory was $126.5 million, an increase of 44.8% over Q3 2020, mainly due to increased demand for MCU and smart card ICs. Revenue from standalone non-volatile memory was $19.9 million, an increase of 611.3% over Q3 2020, primarily due to increased demand for NOR flash products. Revenue from Discrete was $153.1 million, an increase of 59.1% over Q3 2020, mainly due to increased demand for general MOSFET, superjunction, and IGBT products. Revenue from Logic and RF was $80.1 million, an increase of 145.2% over Q3 2020, mainly due to increased demand for CIS and the logic products.
Revenue from Analog and Power Management was $71.1 million, an increase of 112.2% over Q3 2020, mainly due to increased demand for other power management IC products. Now, let us have a look at the cash flow statement. Net cash flows generated from operating activities was $151.7 million, 69.7% over Q3 2020, primarily due to stronger collection from customers' receivables, partially offset by increased payments for materials and payables and decreased receipts of VAT refunds. Capital expenditures were $252.8 million in Q3 2021, including $224.5 million for the Wuxi fab and $28.3 million for the Hua Hong eight-inch fabs.
Other cash flow used in investing activities was $11 million in Q3 2021, including $6.3 million of investment in a equity instrument and $5.9 million of investment in associate, offset by $1.2 million of interest income. Net cash flows generated from financing activities was $558.9 million, including $605 million proceeds from bank borrowings and $300 thousand proceeds from share option exercises, partially offset by $19.4 million of repayment of bank borrowings, $700 thousand of lease payments and $300 thousand of interest expenses for bank borrowings. Now, let's move to the balance sheet.
Cash and cash equivalents was $1,444.3 million on September thirtieth, 2021, compared to $974.5 million on June thirtieth, 2021. Inventories increased from $355.9 million on June thirtieth, 2021, to $395 million on September thirtieth, 2021, primarily due to increased customer demand. Other current assets decreased from $175.6 million on June thirtieth, 2021, to $169.3 million on September thirtieth, 2021, primarily due to decreased VAT refund receivables. Property, plant and equipment was $3,026 million on September thirtieth, 2021, compared to $2,710 million dollars on June thirtieth, 2021.
Total assets increased from $4.991 billion on June 30, 2021, to $5.8776 billion on September 30, 2021. Our total bank borrowings increased to $1.3403 billion on September 30, 2021, from $754.9 million on June 30, 2021. Total liabilities increased to $2.389 billion on September 30, 2021, from $1.5394 billion on June 30, 2021. Primarily due to increased payables for capital expenditures and bank borrowings. Debt ratio increased to 40.7% on September 30, 2021 from 30.8% on June 30, 2021.
Finally, let me give you a high level outlook for the Q4 of 2021. We expect revenue to be approximately $490 million and our gross margin to be between 27% and 28%. This concludes my financial remarks. Now we would like to start the question and answer session. Operator, please help. Thank you.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to withdraw your request, please press the pound or hash key. The first question comes from the line of Randy Abrams from Credit Suisse. Please go ahead.
Okay. Yes, thank you. A good result. I wanted to ask the first question, just if you could give an update on the Wuxi, the shipment ramp, where in the quarter, I think you averaged about 42,000 wafer per month. How you see that ramping up to the 65K? Then if you see a bit of limitation actually, like as you hit 65K, do you need to wait a bit of time to get to the next additional phase, the additional 30,000?
Thank you, Randy. We currently have 65,000 wafer capacity. The loading at this point is at 65K. You know, from the beginning of the year, we were at 20,000 in terms of loading. It has basically been ramped up from that point to, you know, we reached 45, you know, 42 to 48K right around some time in Q2. In April, we're already at 42. At the end of June, we're already at 48K. Now we're running at 65K. Basically we're gonna have 65K capacity, monthly capacity for the, you know, as a base for next year.
Okay. The follow-up to that, I guess one is, if you're at that run right now, for Q4 , is there a timing like where we could see actually above seasonal Q1 where some of it is just the timing on shipment, like already reaching 65K, so you actually see another, sequential growth even though normally Q1 , fewer days, but you have more wafer out. Then, with it staying 65K, I guess from that level, through the year, maybe if you could talk to the growth, would you have additional eight-inch de-bottlenecking and then also some further mix in ASP expansion?
Well, Randy, basically, you know, I mean, we are the, you know, we have about close to 180,000 wafers, you know, from the three-inch fabs, okay? The running, we're pretty much running at close to 115% at this point, okay? It's extremely high. I mean, it is very difficult to do any further, you know, product mix, in that sort of tightness. I think for next year, we continue to expect that, you know, the three-inch fabs will run, you know, at the current rate, you know. I mean, with 180,000, 178,000 wafer capacity, we're running at, you know, 110% and, you know, even above, you know, utilization rate %.
Okay. Could I clarify the 12-inch though? The, like, potentially from the shipment ramp if you're already at 65, would there be? I guess it's a timing, but I'm just trying to think of the growth next year. Is it front-end loaded, and then you need to wait for the new capacity? I know it's coming off a huge base.
Right.
Is that the profile?
Yeah, I can, you know. I mean, it's gonna be not easy, huh? I mean, it's gonna be, you know, we're talking about 170,000 running at about 100% utilization rate throughout the year. We have the twelve-inch at 65K, running at that rate or even a little bit higher. Then we expect we'll continue to continue the expansion. You know, I can have Mr. Tang talk about expansion plan for next year. It will, you know, potentially, hopefully we can, you know, get the tools earlier, but basically we'll have 65K for the entire next year. If we get equipment early, maybe Q4, we can have some additional capacity. That would be the scenario for next year.
On the demand outlook, the China business is doubling. You've had, I mean, impressive, I think, because you've had a big twelve-inch fab to expand into and the localization is really kicking in. When you look at the China customer base, I guess the two elements were how you see the demand momentum, and if you see any areas where they've like how you're seeing the inventory levels, like if they put into more inventory factoring, geopolitical or supply concerns.
You know, I mean, that is, you know, let me first address your question on customer profile. You know, we want to run a balanced revenue. You know, if you look at our Q3, basically all regions are growing, including the U.S., Europe, and also Japan, okay. You know, at this point, our revenue from China exceeds 70%. I think we want to keep it, you know, at the current level, you know, with the 70% and 30%, you know, excluding China, that would be, you know, always want. It's the ratio we want to have. You know what, let me pass this to Mr. Tang, and he can talk about customers.
Thanks to all employees' efforts, we achieved 48K. We first started in May, and we completed the whole phase one construction plan of Hua Hong Wuxi in the first half. Maybe we can remember in the last year-end earnings call, we mentioned we have capacity expansion to 65K wafer per month this year. Through all the efforts for all employees and support from all customers, we achieved this target in October two months faster than the original plan. We all know the market demand is very strong this year. We visited some customers in early this year, and our customers have very strong demand for our specialty technologies. In Q1 , we have made a plan to expand our capacity to 94.5K wafer per month. Now it's just in progress.
Just as what Daniel mentioned just now, our capacity will be above 65K, and we'll keep at a very high level of the utilization rate. According to the capacity expansion plan of 94.5K per wafer per month, by the end of Q4 next year, we will achieve that target. As we all know, we work together and always take challenges through the construction progress. We believe we can give you surprising achievements by the end of next year. Thank you.
Hey, one final question, Daniel. For OpEx, without the grant this quarter, the $72 million, is that the run rate now to think about going forward? Or are we running a bit above, like, or just how you think about the OpEx now.
You're talking about $72 million. You know, I think it is. I mean, I think it can be lower, you know, this quarter, there, you know, additional engineering wafers that are going into R&D. I would expect, you know, I think, probably a normal rate will be around $60-$65 million. I think, I expect next quarter should be slightly lower.
Okay. Slightly lower than 72.
Yeah. You know, I mean.
Okay. Thanks a lot.
The reality is, you know,
Go ahead.
I mean, in order to be comfortable with that capacity, we need to have more tape outs, more, you know, we have to do more engineering wafers in order to qualify products, especially for the 12-inch fab. It is very, very critical. I mean, the engineering and we know, I mean it is very high, it is the engineering lots are difficult to get into the fab, but we still expect that we have to do more in order to, you know, just to be able to qualify more products.
Okay. Okay. No, that's helpful that if you have a lot in a quarter, it could take it above 60-65. Okay.
Right. Right. You know what? The revenue is also going up, huh?
Yeah. Yep. I understand. Okay. No, thanks a lot. A good result.
Thank you.
The next question comes from the line of Andrew Lu from Sinolink Securities. Please ask your question.
Thank you, CEO Tang and Daniel taking my questions. I have a couple of questions to ask. First one is regarding the tax rate. Earlier, Daniel mentioned something because of some intercompany transaction, that's why we have a higher tax. Can we know what's the Q4 tax rate we should be factoring into our model in the next year on average?
Andrew, I mean, I'm glad you asked that question, and I want to clarify, you know, at this point. You know, there was an intercompany transaction of IP transfer between Hua Hong Grace, which is HHGrace Shanghai, and Hua Hong Wuxi. Okay? The IPs covered, you know, basically all the technology platforms that we're doing in Shanghai. Basically, there are nine technology platforms which would be transferred from HHGrace to Hua Hong Wuxi. Okay? And the value of the transaction was $45.7 million. It is a great value. I mean, you can see the speed we actually have ramped for that Wuxi fab during the past, you know, year and a half, okay?
Without you know that sort of IP assisted by the HHGrace in Shanghai, this sort of success would not be accomplished. The value of the transaction, 45.7. You know we have if there is a transaction, then you have to pay for tax. Okay? You have to pay for tax. The tax rate is about 15%, so that is about $6.8 million. Okay? If there was no such transaction, our profit will be up by $6.8 million, you know, which will be the basic will be the best, you know, it would be much higher.
In other words, it would probably get to, you know, and I'm looking at we are at $35.6 million. So we'll add another $7 million on top of it. It get to about $42 million-$43 million. Okay. So that is what happened. It's a one-time thing, one-off.
the Q4, what kind of tax rate should we factor in?
Q4? Q4 will be normal.
Yeah.
Q4 will be, you know, 50% tax rate plus 5% accrued for, you know, any, you know, dividend tax.
total about 20%.
I would say 19% effectively.
Okay. Thank you. My second question is regarding Q3. You can see the eight-inch wafer shipments increased about 14% sequentially, but the capacity you reported in Q2 and Q3 is pretty much exactly the same. The utilization rate you reported in Q2 and Q3 is pretty much the same as well. I wonder how the company can increase 14% shipment without increased capacity, without increased utilization of eight-inch wafer fab?
Andrew, can you repeat the first part of the question? You know, I mean, I was not, I didn't get all the numbers.
Yes. In your reported numbers, Q2 and Q3, 8-inch capacity pretty much the same, and utilization rate for the whole company pretty much the same at 110%.
Right.
In Q2 and Q3, you reported the wafer shipment in 8-inch in Q2 and Q3 increased 14% sequentially. I wonder how can you increase your wafer shipment without increasing your capacity, without increasing your utilization rate?
Well, it's very simple. I mean, you know, we basically ASP has gone up from Q2 to Q3 for the eight-inch business.
No, no. Daniel, I'm asking the wafer shipment only, not consider-
Right.
the revenue.
Right. The wafer shipment from the three 8-inch fabs was 545,000 wafers in Q2. This time it got to 622,000. Yeah. The shipment actually gone up. Okay, you're asking why revenue is going up, but without-
No.
your capacity has-
I'm asking why wafer shipment going up without increasing utilization, without increased
Capacity.
The capacity.
Right. You know, I think, you know, some of that still was, you know, contribution from the inventory.
Thank you for your question. Our 8-inch capacity is about 178K per month. It's based on a comparatively ideal model. In the factual progress, according to the market demands change and the product mix, the change of product mix, we will wafer some certain products more or some certain products fewer according to customers' demand. Our actual capacity will have some certain variance from 178K wafers per month. The 178K will be adjusted a bit according to market demand and the product mix optimization going forward. We'll adjust this number when things ready. Thank you.
Thank you. Daniel, can I ask my last questions?
Yeah.
I actually do a lot of research on your customers. Based on the inventory situation, revenue growth, whatever, all these, most of these customers combined, we see the revenue, your customers grow slower than your revenue in Q3 and Q4 guidance. I actually see some of your customers' inventory coming out sharply in Q3 of your CIS customers and some other customers as well. I think the investors all have more concern, even your Q3 guide, Q4 guidance is strong. While your Q1 comes down sequentially, just like in the past few years, have some annual maintenance and some customer adjustment based on your current visibility.
Excellent question. You know, let me be very simple, Andrew. It's an excellent question, but we are extremely confident in what we're doing, okay? I mean, you may talk to some of our, you know, top customers, but you have to remember, we're dealing with, you know, more than 400 customers. They are, I mean, literally in production. Some are small. I mean, we're talking about some of the MCU customers, we have many, okay? So all of them want capacity. I mean, you can't possibly be able to, you know, talk to, you know, all our customers. That's one thing. Let me tell you, I think, you know, we're very, very confident with this Q4 guidance, okay? I'm also extremely confident with our gross margin.
I think they will continue to improve. I think as I said, you know, our pricing strategy is very, very different from other people. You know, we do this very consistent, you know, I mean, we're doing this on a quarterly basis. You're gonna continue to see that trend throughout next year. I can be pretty, you know, very, very confident that our Q1 will be also a strong quarter as well. Okay? Unlike many other years. Okay? That is what I want to tell you. In fact, we're gonna be doing the maintenance even earlier this year. We're gonna be doing it in some of the fabs, most of fab, you know, we get it done in Q4. That's what we want to do. That Q1 will be all the capacity will be free for production.
Thank you. I think the only way to explain this is, are we gaining share from our competitor in China?
Well, I mean, competitors. I mean, I never thought we have competitors, because we're the only guy in the town that are doing what we're doing. Okay? You know, let me say something else. I mean, if you can see how we actually ramp this fab from 20K to 48K to 65K, even at this point, the fab is running at more than 100% on the 12-inch fab. Okay. I mean, I don't know about market share, but I can see the new customers, their old customers, I mean, we can't get enough basically capacity, and customers want to try more new tape out basically with us. You know, Mr. Tang can testify. I mean...
Thank you for your question. It's a very good question. We accumulated a very strong and solid customer base through our more than 20 years development history. Both 8-inch platform and 12-inch platform, our customer diversify very reasonable and competitive, easy to back up each other. We do not have a dominant customer in either 8-inch or 12-inch fabs. We have very solid customer platforms in our specialty technology platforms. We have plenty of orders to support our customers. Our customer may have some inventory, but I think the inventory is very healthy to support their operations. We can see the customer demand is still very strong from the orders. I think for our future business, the most important thing is to give our customers more capacity to satisfy customers' demand. Thank you.
Thank you for your answer. Excellent result. Thank you. Joe. How about Joe?
Thank you. Our next question comes from Sunny Lin from UBS. Please ask your question.
Hi.
Sunny, we cannot hear you. I'm sorry, Sunny, your line is distorted. Maybe you can redial. I'll move to the next question. Our next question comes from Szeho Ng from China Renaissance. Please go ahead.
Oh, hi. Good afternoon, gentlemen. My first question regarding the Q4 revenue guidance, how much is driven by ASP, and how much is driven by volume?
For the eight-inch?
I think overall, yeah, or maybe you can break it down into 8-inch and 12-inch.
Okay. Compared to quarter to quarter, right?
Yes. Yes.
Yeah. Well, let me look at the number, huh?
Sure. No problem.
Yeah. Okay. I mean, just on, just overall, Q3 compared to Q2.
Mm.
I think it's.
Yeah. The Q4 guidance is record high guidance for us.
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The first thing comes from the stable capacity support from 8-inch fabs.
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From our capacity, product mix optimization.
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We will keep our 12-inch fab wafer start at 55K wafers per month at this level.
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This capacity support our revenue growth. At the same time we have some ASP growth.
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Second question, on the eight-inch operation. The gross margin actually pick up quite a lot in Q3. I just wonder how much more margin upside we can go from here.
Szeho Ng, very good question.
Yeah.
I think we are gonna see some continued improvement on gross margin, on margin expansion going forward, okay? This is not it. I think we're gonna continue to see some quick nice ASP increase for both 8-inch and 12-inch in the future quarters, including Q4. Therefore, our margin should continue to improve over time. We expect Q4, especially 8-inch, you know, I mean, I think we're gonna do better. For Wuxi, I think we also will see nice increase.
Yes, definitely. How, let's say 40%, a realistic target sometime next year for the eight-inch?
I will hand that question to Mr. Tang.
Okay.
We will try our best.
Okay, good. How about that? Last question regarding the IP transfer. Daniel mentioned that is one-off. Going forward, would there be some recurring, let's say, the IP royalty income relating to these IPs?
No, I don't see anything in the near future. It's
Oh.
It's a one-time, one-off intercompany transaction. That is something we have to do. You know, we have to help these Wuxi guys. They need to wrap up quickly, you know, hopefully soon with a complete set of our specialty technology platforms.
Mm-hmm. Okay. Why did we do it in Q3 but not earlier? Yeah, because since Wuxi has been in production for over a year, almost two years.
Why it's not then instead of now?
Yeah, yeah. I mean, why in Q3 this year, but not earlier? Yeah.
You know, because this is probably a good time because we have done that. We have been doing that in the past, you know, 12 months. I think this is a good time to send them a bill.
Okay. All right. Okay. Thank you.
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As Mr. Tang said, we are a very, very stable and growing company, so we do that kind of deal. You know, there's no rush. It's just intercompany. When we become, you know, things are ready. When things are ready, we would do that kind of stuff.
Okay. All right. Great results. Congratulations.
Thank you.
Gotcha.
Next question comes from the line of Leping Huang from Huatai Securities. Please ask the question.
Thank you for taking my questions. The first question is also about the capacity expansion plan, 2022. I think you have various platform like MCU power, NOR flash, et cetera. When you plan your capacity in 2022, what will be the focus you plan to expand considering the current market condition? Thank you. Hello?
Just a second.
Okay.
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Thank you for your question. For our capacity expansion plan, what we do from 48k to 65k, our capacity expansion covers all major specialty technology platforms.
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We pay special attention to the market demand, market expectation for our specialty technologies.
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Including our embedded flash, power management ICs and sensors. We communicate very deep and broad with our customers during the progress.
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We keep the same strategy to the next step expansion to 94.5K wafer per month. We just further enhance our special technologies.
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IC plus power discrete will be our ongoing strategy.
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We have a very good communication with our customers. We just satisfy the market demand and we have very good relationship with our customers. They stick with us.
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They stay with our specialty technologies and that's the base of our cooperation.
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It's also the base of our further expansion, be stronger and bigger.
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Thank you.
The second question is about the end demand outlook. We see a relatively mixed signal about the end demand. Some application is very strong, some tend to be very weak. Based on your discussion with your customers, I think you have roughly, if I look at your Q3 numbers, roughly 60% is consumer, 20% is smartphone, 20% is industrial and autos. Based on which application, can you share some color on, based on the customer type now? If you look forward one year by the end of 2022, what is your mix by customer type will be? Thank you.
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Actually all the end markets have very strong demand for our product specialty technologies, no matter NOR flash, embedded flash, or the BCD or the CIS.
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Start from Q2, we put more efforts on the automotive.
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As you know, many of our products in our specialty technologies can be applied to the automotive like the new energy vehicles.
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For us, the first thing is to do the quality control to satisfy the requirements of automotive.
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We do further communication with the end customers to know their 3-year to 5-year mid- and long-term plan. We make our own 3-year to 5-year plan.
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Thank you.
Thank you. Next question comes from Yiyan Luo from TF Securities. Please ask your question.
Okay. Okay, thank you for taking my question. The first question is about your selling price. We noted the ASP sequentially increased in Q3, both in 8-inch and the 12-inch. I wonder how much the ASP change contributed by the selling price increase and how much contributed by the product mix improve. Can you share some view about your selling price plan for the next two quarters? Thank you.
Thank you, Yiyan. It's an excellent question. You know, we're running extremely tight fab. Utilization rate is, you know, at the historical high. You know, we're talking about more than 110%, okay? You know, there's virtually very little room to do, you know-
Any significant product mix improvement. It is mostly because of ASP increase that, you know, drove the growth.
Okay. Thank you, Daniel. How do you think the selling price trend for the next two quarters?
I think, you know, we're extremely positive. I mean, I have looked at the forecast for the next few quarters. Demand continues to be extremely strong into Q1 and Q2, even the entire next year. We expect, you know, with that strong demand we will continue, you know, we'll continue to improve our, you know, product ASP and product mix over time.
Okay. Okay.
I, you know, I
And, and-
As I said, you know, we want, we don't want just, hey, all of a sudden we have a, you know, huge increase in our ASP. We're gonna be doing this quarter by quarter. When you look at the whole year, it is very, you know, respectable. It is very significant for the company.
Okay. My second question is about your material price. We see due to the political environment, some material seems to be in short supply in Q3, such as photochemical and the wafer. Do we see any trend of semi material rising price in Q3? Do you think this will put pressure on Hua Hong's future margin? Thank you.
Well, you know, if you're in the semiconductor business, rising costs, it is always something you have to deal with. I think, there are some challenges for next year, especially on, you know, substrates, on electricity, on, you know, on even on indirect materials. Okay? We're working extremely closely with our equipment vendors and, you know, just in general with vendors. You know, we've done that, you know, every year in the past. We continue to make sure that we're gonna get, you know, a good deal. You know, basically, it's gonna be a fair price, okay? We expect the price will continue to go up. You know, that will offset some of the increase on costs, but that will still give us significant room for margin expansion.
Okay. Thank you. Congratulations to the Q3. Thank you.
Thank you. Our next question comes from Sunny Lin from UBS. Please ask your question.
Hi. Can you hear me okay?
Sure.
Hi, Sunny.
Hello?
Hi, Sunny.
Yeah. Thank you very much. Hi, Mr. Tang, Daniel, and Kathy. Thank you for taking my questions, and congrats on the solid performance. My first question is on your 12-inch fab. I wonder, when your capacity get to 95K wafer per month end of next year, how should we think about the spending for OpEx per quarter?
Excellent question. I think in terms of operating expenses, I think for the whole year, for the 12-inch fab, I would expect, you know, that's gonna be pretty much maintained at, you know, about $130 million-$140 million a year, okay, just overall, even when we get to 95K. Okay? Most of that will be going to R&D. I would say two-thirds will go to R&D and one-third will go to, you know, administrative and sales and marketing.
Got it. If I remember, previously you mentioned that for eight-inch, normal OpEx for the business is also about $140 million per year.
For the eight-inch business? You know, I think we can probably even do better, you know. I'm hoping that.
Yeah.
The operating expenses for the eight-inch business would definitely be very stable. I think depreciation, I mean, if we don't invest in CapEx, okay, I mean, the depreciation expenses will go down from, you know, manufacturing perspective. Okay? Even from operations expense perspective, I think, you know, the operating expenses will pretty much, you know, very stable. It'll be around $120 million-$130 million a year. Slightly lower than the twelve-inch business.
Got it. Thank you. Another follow-up for 12-inch. As you continue to migrate to 55-nanometer, what kind of ASP should we expect to achieve for Q4 and also 2022?
You know, I mean, for even at this point, the ASP for the, you know, between 90 and 55, you know, just we're talking about the ICs. It is somewhere, you know, can again, go anywhere from, you know, 1,200, 1,300 even to 1,600. A few things is already at the 1,600 for some of the, you know, parts that are running at 55-nanometer technology. I think longer term, you know, we really want to see that the ASP for this fab for the IC excluding power discrete, it should be anywhere between $1,500-$1,800 a wafer. Okay. That is something we want to achieve.
I think if we have an average ASP at $1,300 overall including power discrete, and the power should get to over $1,000, okay. That would give us a very, very nice model. We can have, you know, run around 20% on that, you know, 15%-20% even with depreciation expenses at its peak. We can run around 15%-20% on, you know, operating, you know, operating profit.
Got it. Thank you for the color. Very helpful. Maybe one last question for your Q4 revenue guidance. Sorry if this has already been asked. Your guidance is for total revenue to grow by 10% quarter-on-quarter. Can you give us a breakdown by 8-inch and 12-inch?
Well, I mean, you know, the eight-inch should be pretty stable overall, okay, maybe with slight growth because, you know, we're really running at its extreme. I think the twelve-inch will, you know, continue to grow. I think most of the growth will come from the twelve-inch fab. You can see the twelve-inch, the eight-inch, these three eight-inch fabs are, you know, doing a fantastic job. If you look at our numbers for the past three quarters plus the guidance for next quarter, I think, you know, we're, you know, this is a fantastic year for the eight-inch, for the three eight-inch fabs. You know, it's a historical achievement.
Got it. Thank you. That's very clear. Congratulations.
Thank you.
Great. Thank you. Ladies and gentlemen, that's all the time we have for questions. I'll now hand back to Mr. Daniel Wang for closing remarks.
Well, thank you. Thank you very much. I think we had a great call. We look forward to talk to you again next quarter. We're hoping that, you know, things will open up. I heard things will open up, especially for people that, you know, currently in Hong Kong or other places. Hopefully soon we can meet but, you know, in the meantime, continue to be very excited about Hua Hong. Thank you.
Ladies and gentlemen, thank you for your attendance. You may all disconnect.