Ladies and gentlemen, thank you for standing by, and Welcome to Hua Hong Semiconductor's second quarter 2020 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 you are dialed in 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 second quarter 2020 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. Please go ahead.
Good afternoon, everyone. Thank you all for joining our second quarter 2020 earnings conference. Today, we will first have Mr. Junjun Tang, our President and Executive Director, present his remarks on our second quarter performance. President Tang will address in Chinese, and Kathy Chien, our Deputy Director of Investor Relations, will be the translator. After that, I will discuss our financial results and provide guidance for the next quarter. This will be followed by our question and answer session. I will now turn the call over to our President and Executive Director, Mr. Tang.
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Good afternoon, everyone. Thank you for joining our earnings call.
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We are very pleased with Hua Hong Semiconductor's performance in the second quarter of 2020, where both sales and gross margin exceeded guidance. The trough in the first quarter is now behind us. The global semiconductor market continues to exhibit signs of recovery, especially in the Chinese market, driven by market demand for IGBT, super junction, MCU, and CIS products. Revenue increased to $225.4 million in the second quarter with double-digit growth quarter-over-quarter. At the same time, our gross margin increased 4.9 percentage points quarter-over-quarter to 26%, thanks to a higher utilization rate and improvement in product mix.
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Due to the tremendous interest and support for our Wuxi 12-inch project from our customers and partners and the emergence of excellent domestic design companies, the plan for our new 12-inch fab has been accelerated. While ensuring high-yield shipments of existing products, we are advancing certification of multiple technology platforms, offering diversified and comprehensive solutions to our customers. Smart card ICs, power discrete, and CIS products were delivered to customers first. In the second half, IGBT, super junctions, and other products will be shipped in succession to meet the needs of emerging markets, such as new energy vehicles.
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The pandemic has not been contained. Guided by "protect yourself, protect family members, protect Hua Hong people, and protect Hua Hong," we are committed to prevention measures, maintaining close communication with our domestic and foreign suppliers. We continue to expand our markets and increase cooperation ensuring the company's long-term development. I would like to thank our shareholders, customers, and suppliers for their support, and our employees for their unremitting efforts to overcome challenges. Looking forward, we hope the pandemic will be over soon.
We are confident in our ability to take advantage of every opportunity and are working hard for another successful half.
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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 your wonderful comments. Now, let me begin with a summary of our financial performance for the second quarter, followed by an outlook on revenue and margin for the third quarter 2020. Then we will move on to the question and answer session. First, let me summarize financial performance for the second quarter. Revenue reached $225.4 million, 2% lower than the prior year, primarily due to decreased average selling price, partially offset by increased wafer shipments, but 11.1% over Q1 2020, mainly due to increased wafer shipments. Cost of sales was $166.8 million, 5.2% above Q2 2019, mainly due to increased wafer shipments, and 4.2% over Q1 2020, primarily due to increased wafer shipments, partially offset by lower labor expenses.
Gross margin was 26%, five percentage points below Q2 2019, mainly due to decreased average selling price and a change in product mix, and 4.9 percentage points above Q1 2020, mainly due to improved capacity utilization and lower labor costs. Operating expenses were $62.5 million, 76.8% above Q2 2019, largely due to increased development costs and depreciation expense for Hua Hong Wuxi Fab, and 12.5% below Q1 2020, primarily due to lower labor cost and development cost. Other income net was $12 million, 51.3% lower year-over-year, primarily due to, one, foreign exchange loss versus a gain in Q2 2019, and two, decreased fair value gains of financial assets at fair value through profit or loss and interest income, partially offset by increased share of profit of associate, and 40.1% lower quarter-over-quarter, mainly due to decreased government subsidies.
Income tax expenses was $6.7 million, 37.6% lower than Q2 2019, primarily due to decreased taxable profit. Profit for the period was $1.3 million compared to $49.9 million in Q2 2019, and $2.7 million in Q1 2020. Net profit attributable to shareholders of the parent company was $17.8 million, compared to $43.4 million in Q2 2019, and $20.3 million in Q1 2020. Basic earnings per share was $0.014 compared to $0.034 in Q2 2019, and $0.016 in Q1 2020. Annualized ROE was 3.2%. Now, I will discuss the operating results of both the Hua Hong 8-in wafer fabs and Hua Hong Wuxi 12-in wafer fab. First, let's have a look at the Hua Hong 8-inch wafer fabs.
Revenue was $215.9 million, 6.2% below Q2 2019, primarily due to decreased average selling price, partially offset by increased wafer shipments, and 7.6% over Q1 2020, mainly due to increased wafer shipments. Gross margin was 27.7%, 3.3 percentage points below Q2 2019, mainly due to decreased average selling price and change in product mix, partially offset by improved capacity utilization, and 6.6 percentage points above Q1 2020, mainly due to improved capacity utilization and lower labor cost. Operating expenses were $26.3 million, 5.9% below Q2 2019, primarily due to RMB depreciation and decrease to development expenses, and 9.5% lower than Q1 2020, primarily due to lower labor and development costs. Profit before tax was $41.8 million compared to $47.7 million in Q2 2019, and $27.2 million in Q1 2020. Now, let's have a look at the performance of Hua Hong Wuxi wafer fab.
Revenue was $9.5 million, four times more than the prior quarter. Operating expenses were $36.2 million compared to $7.4 million in Q2 2019, largely due to increased development and depreciation expenses, and $42.4 million in Q1 2020, mainly due to decreased development and labor expenses. Profit before tax was minus $33.8 million. EBITDA was minus $18.5 million, $4.3 million more favorable than Q1 2020. Now I would provide more details on our revenue from Q2 2020. From a geographical perspective, revenue from China was $137.6 million, contributing 61% of the total revenue and an increase of 8% compared to Q2 2019, mainly driven by increased demand for logic products. Revenue from U.S. was $33.8 million, a decrease of 19.7% compared to Q2 2019, mainly due to decreased demand for general MOSFET and super junction products, partially offset by increased demand for MCU products.
Revenue from Asia was $28.6 million, an increase of 1.9% compared to Q2 2019, mainly driven by increased demand for MCU products, partially offset by decreased demand for general MOSFET and logic products. Revenue from Europe was $19.1 million, an increase of 4.6% compared to Q2 2019, chiefly driven by increased demand for smart card ICs. Revenue from Japan was $6.4 million, a decrease of 55.6% compared to Q2 2019, mainly due to decreased demand for logic and MCU products. With respect to technology platforms, revenue from embedded non-volatile memory was $76.9 million, a decrease of 3.4% compared to Q2 2019, primarily due to decreased demand for smart card ICs, partially offset by increased demand for MCU products. Revenue from discrete was $86.8 million, a decrease of 6.2% compared to Q2 2019, mainly due to decreased demand for super junction, partially offset by increased demand for IGBT products.
Revenue from logic and power management was $31.6 million, a decrease of 5.4% compared to Q2 2019, mainly due to decreased demand for LED lighting and analog products, partially offset by increased demand for other PMICs. Revenue from logic and radio frequency was $26.7 million, an increase of 23.6% compared to Q2 2019, largely driven by increased demand for logic products, partially offset by decreased demand for RF products. Revenue from standalone non-volatile memory was $3.2 million, an increase of 16.5% compared to Q2 2019, primarily due to increased demand for EEPROM products. Now, let's move on to cash flow statement. Net cash flows generated from operating activities were $101.8 million in Q2 2020 compared to $20.7 million in Q2 2019, largely due to receipt of VAT tax return.
Capital expenditures were $178.1 million in Q2 2020, including $144.8 million for the Hua Hong Wuxi fab and $33.3 million for Hua Hong 8-in fabs. Other cash flow generated from investing activities were $259.6 million in Q2 2020, including one payout of $187 million in investment in financial assets at fair value through profit or loss. Two, payout of $70 million in investment in time of deposit. And three, $2.6 million of interest income. Net cash flows used in financing activities were $3.2 million in Q1 2020, including $2.1 million of repayment of bank borrowings, $1.1 million of lease payment, and $0.1 million of interest expense for bank borrowings, partially offset by $0.1 million proceeds from share option exercise. Now let's move to the balance sheet. Cash and cash equivalents was $699 million on June 30th, 2020, compared to $518.3 million on March 31st, 2020.
Financial assets at the fair value through profit or loss decreased from $270.2 million on March 31st, 2020 to $84.8 million on June 30th, 2020, due to payout from the investment in financial products. Other current assets decreased from $143.7 million on March 31st to $77.8 million on June 30th, 2020, primarily due to receipt of VAT tax return. Property, plant and equipment was $1,790.9 million on June 30th, 2020 compared to $1,659.8 million on March 31st, 2020. Total assets increased from $3,540.3 million on March 31st, 2020 to $3,575.9 million on June 30th, 2020. Our total bank borrowings were $23.3 million on June 30th, 2020. Total liabilities increased to $526.1 million on June 30th, 2020 from $498.1 million on March 31st, 2020, primarily due to increased payables for capital expenditures. Debt ratio increased to 14.7% on June 30th, 2020 from 14.1% on March 31st, 2020.
Finally, let me give you a top-level outlook for the third quarter 2020. We expect revenue to be approximately $236 million, and our gross margin to be between 20%-24%. This concludes my financial remarks. Now, we would like to start the question and answer session. Operator, please help. Thank you.
Ladies and gentlemen, we will now start the question and answer session. If you wish to ask questions, please press star one on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. We have the first question, comes from the line of Randy Abrams from Credit Suisse. Please go ahead.
Okay. Yes, thank you. The first question I wanted to ask on the 8-in, where it's now running pretty much 100%. Could you talk about, I guess, two things, if you have plans to add any capacity on that side? And also the pricing environment on 8-in. I think also factoring in that you have the Hua Hong Wuxi fab, if you're able to see some of the pricing that other foundries are or if by having that capacity it might be limiting that opportunity.
Hi. Thank you, Randy, for your question. Well, first of all, yes, you're right. 8-in is running at virtually, I mean, all three fabs are virtually running at either 100% or above 100%. Okay. So, it's a wonderful case. We still have some space in our fab three, as I said to the investors in the past. We will look at the timing for that. We can potentially add another 20,000 power discrete products into our capacity, 20,000 wafer capacity into the fab. At this point, if you look at our 8-in fab, we're still doing a lot of upgrades and resolving some of the bottlenecks, even in the past six months. But we're doing that so that it would be able to constantly upgrade the improved product mix and upgrade the operation, basically just the tools. Okay. The other question is about the 12-in, right?
Yeah. Well, actually, I'll get to that. I guess I was going to ask also on the pricing, since you're tight there, how pricing it is, but also balancing that you have capacity on 12-in to move applications. So how you're seeing the pricing on that side of the business.
Yeah, that is something we have to balance. It's always not an easy task because we are moving some of the stuff from 8-in- 12-in, for example, the smart card ICs. We're also doing a lot of R&D work on smart card ICs as well as other products, okay? We are doing that. We have to be extremely careful with pricing increase, okay? I think this is something we normally would consider at this point. But at the same time, we're moving the products from 8 in - 12 in. As you can see, the revenue from our 8-in is low compared to last year, largely because of the pricing. Price has come down, compared to a year ago. Compared to last quarter, it's virtually flat.
We have not increased price yet, but that would be something that we definitely would consider in the second half, when things continue to be very tight.
Okay, great. On the 12-in, I am curious on the ASP. I think based on the revenue and the shipments, it looks like it is about $1,000 per 12-in. I am curious, it looks more similar to the pricing you are getting on 8-in initially. I was just curious if it is a factor of maturity of the fab or the type of products or technology node on the 12-in, and maybe how you see the pricing trend for the 12-in fab.
Again, Randy, we are still in the early stage. The utilization rate, at this point, is above 50%. For Q2, overall, it is 38.3%. For Q2, most of the products are actually CIS, for that quarter. The assumption you had was pretty close, the price. That was the price. You know what? Initially, that is what you have to do. You want to make sure the fab gradually will be fully loaded over time. That is the most important thing. At that point, we will improve the product mix. At this point, it is a lot of CIS products for Q2, some embedded, some smart cards and some discrete, but we expect smart cards will start to take off. We believe discrete, even the IGBT and super junction, will start to take off in the second half. Overall, price will improve over time.
It is the process we have to go through. It is something that you guys are going to watch us very closely.
Okay, great. The last question on the 12-in, if you could just give an update on the capacity. It is showing the 10K now. Maybe the timing, the capacity would then ramp to 20 and 40,000. I think the second part, because you did say in the prepared remarks about continuing that acceleration plan. I guess, is it the view with these applications next year, the way you are qualifying applications with that capacity, it feels like there should be a lot of growth if the applications come through. I am curious to get both views, the capacity ramp and then how it looks maybe six, 12 months out, from a growth perspective.
Right. At this point, we are running close to 10K. In terms of capacity, we are very close to 20,000 wafer capacity. The second 10,000 has been installed pretty much, except for a few tools maybe. They are still doing the testing. But virtually, the second 10,000 wafers have been installed. We expect by end of this year, hopefully, we get to 40, depending on how we are doing with the acquisition, either end of this year or early next year. But with that said, we have six products that either currently been qualified in that fab, going through R&D work. Embedded non-volatile memory, discrete, and CIS has already started to ramp up. But when you look at other things, for example, talking about NOR flash, we are talking about some of the other stuff. We talked about logic and RF. Power discrete is another thing.
These six technology platforms have been basically going through R&D work and qualification process. Once they are ready, we will have the 40,000 wafer capacity to fill these products. Probably not even enough. That is something we have to consider maybe next year, late next year.
Okay, great. I will get back in the queue. Thanks a lot, Daniel.
Thank you. We have the next question, comes from the line of Szeh o Ng from China Renaissance. Please go ahead.
Hi, good afternoon, gentlemen. My question is also regarding the 12-in ASP. Q2, I think is kind of low, right? Below 1,000 of the wafer. But medium to long term, how should we.
About 100. I cannot even get very close to it. It is going to be around 132 million for the part that was a fixed asset that was not being utilized with actual fixed costs. Depreciation. I mean, you have to realize in the early stage of the fab, the ASP tend to be a little bit volatile because of the. You guys realize, overall, the price has come down in Q1 because COVID-19. Just overall, the business demand came down. It impact us, impact many people. Therefore, the price came down. I mean, Q1 was a very low quarter for us. So the price overall hasn't really changed. But the demand came back. We were able to fill the fab, so the utilization rate for 8-in really came back. Now it is at 100% utilization rate. So it is a combination of both.
I think overall, the COVID-19, and then plus product mix change. At the same time, we moved some of the stuff from the 8-in - 12-in. So all of that play are factors of the ASP degradation, the pricing degradation. Okay. Yeah, I got it.
Thank you. We have the next questions, comes from the line of Yiy ang Luo from Founder Securities. Please go ahead.
Okay. Thank you. Thank you, Tang and Daniel. Thank you for taking my question. Two questions about the power discrete segment. You just mentioned the IGBT and super junction will take off in second half, right? I wonder how much these two segments contribute to the second quarter's revenue. How much is IGBT and how much is super junction, respectively, for 8-in and the 12-in fab? The second is, can you share some view about the domestic IGBT industry in second half of this year? Thank you.
IGBT and super junction for second quarter?
Yeah.
We talked about the overall discrete was about 39% of the revenue, off that $225 million. Super junction was about 9.5%. 9.4%.
9.4%. IGBT was close to 5%, 4.6% of the overall revenue. There are some regular MOSFET business coming out from the 12-in fab. The total revenue is very small. It was at about $100,000. Still small, but we expect this will go up in the second half.
Okay. The second is, can you share some view about the domestic IGBT industry in second half of this year?
The domestic what?
IGBT.
IGBT industry in second half.
Along with some emerging markets such as 5G and new energy vehicles, we believe that the domestic IGBT market will be stronger and stronger. Our IGBT technology platform has a broad application range, and we have technology development work in both 8-in and 12-in processes. Due to the specialty of IGBT technologies, the verification process will be a bit longer than compared to other technologies. But in general, we think the IGBT demand will be extremely strong. Thank you.
Okay. Thank you. It is clear. Thank you.
Thank you. The next questions come from the line of Sebastian Hou from CLSA. Please go ahead.
Hey. Thank you for taking my question. First question I want to ask about gross margin. If I look at your 8-in foundry business, the gross margin is actually down a full percentage point year-over-year. But your utilization rate on 8-in actually increased from 93% - 100% within a year. So what is the.
For that three 8-in fabs, our gross margin, I think it would be around 24%. The high utilization rate, virtually, it was at the very high rate for that three fabs. I think it will continue. We have been running at 100% for the past, basically, a month and a half. Even in our last call, we talked about the fab one was still underutilized, slightly lower. Fab two and three were strong, but right now all three fabs are going strong. Now what we have to do is improve the ASP. But at the same time, we also have to fill the 12-in fab, because the capacity right now, the utilization rate for 12-in fab, it's still underutilized. We have to face the reality. We're doing many things.
To answer your question, the reason is because the ASP has come down, and I have addressed the question before. It was basically the question from Leping earlier. The ASP has came down since Q4 last year, and many factors, largely because of COVID-19 in Q1. That affect us. I think that probably affect many, many other fabs as well. So I expect we're going to have a very strong second half. It's going to be good second half for us. I think we will do better. We're still small, but we'll do better than some of our colleagues. So that's what I think. To answer your question, yeah, it could be better.
If the price were still at the same level as last year, I think we should be able to have another 2 percentage points, maybe at 20% or even 29%, which is unfortunate, but that's just part of the reality. We have to deal with it. But the good thing is we're moving towards a good direction, which is a fab is fully utilized at this point. We're focused on the 12-in fab, and then price is the next thing we have to work on. But we have to be careful because we still have a 12-in fab that is still underutilized at this point.
Thank you, Daniel. I think if we step out a little bit from the bigger picture, if we compare our 8-in foundry gross margin, the past few years has been pretty consistent, about 30%-35% level. And theoretically, what we see development age is getting more favorable for us and our competitors, given that 8-inch demand is strong, and most of the time we are running a high utilization rate, and the industry has been on this tight constraint of a supply for some time. So that actually gave us some flexibility and privilege to prioritize the product mix. So even we are not raising price like to like basis, but we can still prioritize to improve our product mix. So theoretically, that should be a good setup for our pricing and gross margin for our 8-inch business.
But it looks like our numbers are showing the opposite direction, so I'm just wondering what the structural profitability outlook for our 8-inch business in the long term.
For the 8-in bus iness?
Yeah.
I think as long as the demand is strong for us. You have to realize, even though they're 8-in business, even though the business is very, very strong, but we have a very diverse technology platform, and our products are many, basically. In our fab one, we're working on many different products. It is not easy to keep all the manufacturing corridors at 100% at all time. That is the challenge we have to face all the time. But still, it's not easy for us, actually, was able to run even fab one at this point at a very, very high utilization rate. We're dealing with many different products. We have the MOSFET business. It goes anywhere from 250 - 550, per wafer. We have the BCD business. Sometimes it's good, sometimes it's not that great.
We're also running the 95 nanometer technology in that fab. So, the demand for various products could vary at different time. That also affect ASP as well. So that is something that we have to manage. It's a structure, it's a fab structure that we have. We have to deal with that all the time. But I think overall, as long as the demand is back, I'm very confident we should be able to gradually improve ASP. It's not something that we can do overnight, but that's something that we can gradually improve over time. And I'm pretty confident the demand will come back.
Okay. Noted. Second question is on the third quarter guidance. Gross margin is guided down quarter-on-quarter, but it looks your Hua Hong Wuxi fab actually is improving on the output side. What is the parameters and the factor to affect the sequential lower gross margin? Is it depreciation or what? Thank you.
Yes, you are right. It is depreciation. Because quarter-to-quarter for 12-inch fab, the depreciation expense were up virtually close to $8 million-$9 million. Okay? That was the main reason for that. Okay? On the H side, the depreciation expense will also go up slightly. Okay? About a couple of million dollars because of some of the investments we made. You have to realize, when these things go up, they directly affect your gross margin.
Okay. Understood. Last question is-
It is-
Do we. Yeah. Hello, can you hear me?
I would be very happy if we can continue to maintain 26%. Okay? That is something, it's not easy to achieve. I think a safe range of 22%-24%, but if we continue to maintain the utilization rate, if 12-in can really ramp up pretty fast, we can always have a nice upside.
Got it. The last question from me, a simple one. I wonder if there's any progress or anything in mind about our potential dual listing in Asia with STAR Board. Thank you.
We also pay attention on some new policies on the Asia market. For us, Hua Hong Semiconductor market, we listed in Hong Kong market, and through the hard work these years, our management systems are more transparent and more efficient. We also pay attention to the new policies issued domestically. We haven't made any decisions on that. As what Daniel Wang had just mentioned, the whole company had done a lot of work in the new products technology development and the capacity expansion for all aspects. We all making progress and accelerate the progress. So we can optimize our operations through our own efforts. Thank you.
Thank you. Our next question comes from the line of Andrew Liu from China Link Securities. Please go ahead.
My first question is for Q3 guidance. Do we have any assumption for Q3 wafer shipment from the 12-in fab on monthly basis or quarterly basis, and what kind of product mix will be for the 12-in fab in Q3?
Thank you. If I know something, I should be telling you, but I can give you some hint, because otherwise, I think I would be compromising my job here. I think, we give a guidance. I think our 12-in fab, I am sure we will have a better number next quarter. We improve over time. Roughly, I think we should be able to double the revenue in Q3. Hopefully, the price will be better as well. So that is something I can assume at this point.
Double revenue.
Well, I can't assume. Hopefully we can double the shipment as well, right? I mean, Dan, it doesn't-
No, revenue do more than double.
That's a tricky question you're asking. You're basically trying to figure out if my price went better, huh? But yeah, look, Andrew, the reality is, I think we should be able to double our volume as well as hopefully do better on revenue.
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The CapEx capital expenditure, I don't think I would mention $900 million. I think the number that I last time I mentioned was our cash flow basis. OK.
Cash flow basis.
Yeah, I think $1.4 billion for Wuxi.
Right.
Hua Hong 8- in business is about $150 million. OK. At this point I'm looking at about $1.2 billion for Wuxi and $50 million f or the 8- in business. The first half we have paid over $300 million, actual cash out. $300 something.
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No, we probably pay around $900 million for Wuxi.
OK, cash outflow basis, $900 million.
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Cash out for 8 inch is about 64.7. Second half, we'll probably pay a bit close to slightly under $90 million.
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We are supposed to install all 40,000 wafer capacity by early next year. End of this year or early next year.
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We always purchase our tools according to the requirement of our technology. As long as the technology requirement is filled, we pay equal attention to all the tools on the market.
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Thank you.
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Thank you. The next question comes from the line of Sunny Lin from UBS. Please go ahead.
Hi, Junjun Tang, hi Daniel, this is Sunny Lin. Thank you for squeezing me in. I understand we don't have much time, so I just have one question. I wonder how quickly from your observation is power discrete migrating to 12 in? Because this product has been made at 8 in for quite a long time. I think for customers, how do they evaluate the pros and cons between 12 in and 8 in?
Sunny, can you repeat the first part? We kind of missed your first point.
Sure. I mean for power discrete, this product has been made at 8 in for quite a long time. I wonder from your observation, how quickly is customers migrating power discrete from 8 in - 12 in?
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Thank you for your question. From the demand side, the demand for the power discrete this year keeps very strong.
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We allocate some capacity to power discrete in our 12-inch fab. It is the answer to the market demand.
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We have a lot of communications with our customers. We already have the alpha customers for our DMOS, super junction, and IGBT in our 12-inch fab.
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We are the first 12-in IGBT fab in China. We still doing a lot of work for the overall industry chain.
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We can tell from the first half revenue, we have already made significant progress.
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So we expect further growth in the second half.
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Thank you.
Got it. Thank you.
Thank you. Our next question comes from the line of Leping Huang from CICC. Please go ahead.
Okay. Thank you to take my question. Based on current progress, can you share some color how your 12-in will be when they are fully filled? I remember previously you mentioned that half is for the 12-in, the power discrete, half is for the digital or the logic stuff, but based on current discussion with customer, how your 12-in fab will look like? I think this is quite to help us to how to model your ASP of the fab. Thank you.
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Since last year, we have the mini lines. We do a lot of technology development work for the embedded flash, CIS, power discrete, power management.
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In Q1, during the COVID-19 pandemic period, our Hua Hong Wuxi engineers and the technology development employees stay in Hua Hong Wuxi to do their work.
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They didn't take any rest for 50 days, ensuring our 15 products went into mass production in the first half.
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We still have more products will go to mass production by end of this year or early next year.
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I think we can achieve more than 25,000 wafer output a month in mid next year.
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We would like to thank to our technology team and engineering team, also thanks to our customers.
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Of course, we need to thank to all our investors. Thank you.
Thank you.
Thank you. Our last question comes from the line of Randy Abrams from Credit Suisse. Please go ahead.
Okay. Yes. Thanks for fitting me again. I want to ask on the CapEx to follow up where you will finish the 40K, but I think just mentioned 25K is your target shipments. Should we think about next year more of a year to digest capacity, so it could be low CapEx year? Or will you still have the cash CapEx outlay? I am curious how to think about next year for CapEx. For the next phase, would you start to go ahead to ramp that, or it may be a couple of years between just to fill the first fab?
Hey, you are always thinking ahead. That is great. It is a great question. Basically, we said we will have hopefully 40,000 installed by end or early, probably first quarter next year, okay? To get all the equipment installed. Mr. Tang has mentioned that we are going to get 25K output by mid of next year. That is very good. We talked about these numbers just before the meeting. Yeah, it is 25K installed by mid of next year. At that point, we should reach P&L breakeven. Okay? P&L breakeven. Hopefully, we can quickly get the entire 40,000 wafer capacity installed with all the technology platforms that is currently undergoing, okay, on R&D work. That is something we have to do. Next year, you are right, the $2.5 billion investment will probably be completed by probably first half next year.
Yes, we're going to be absorbing a lot of the capacity that we have built this year and next year, and start make sure they're filled. But as I said to many people, this is a huge fab that we built. It can add another 20,000 - 40,000 wafer capacity. That would probably additional money to fill the rest of space. That's something we would do. We'll do that. We're going to raise some money. We'll probably through some cash proceeds from the operations, from some loan. We're going to make sure that the rest of space is filled, and we can definitely, with that fab, we can build a billion dollars revenue. Basically, be able to build wafers with a billion dollars revenue.
Okay. No, thank you. I want to ask on the OpEx, it was about $62 million. I think from last quarter, you mentioned the 8-in + 12-in would be about, if I have the notes right, $320 million combined, so about $80 million a quarter. But wanted to see how that changes or scales up as you bring up the capacity. Just how we should think about the OpEx line over the next few quarters.
I think that's a very good number. I think when you look combined, it should be around, I would say, it is about $200 million - $250 million without any sort of re-cost of the fixed cost from COGS. You see what I'm saying, Randy?
Okay.
Assume in normal circumstance, about $200 million- $240 million, I think that would be the operating expense combined. The reason we have more right now, because I'm looking at 322 for this year, because virtually we have $100 million that were actually coming from, was reclassed from the COGS. Because the fixed cost as a result of idle capacity.
Okay. Thanks for that. The government subsidy went down quite a bit Q1. It is just timing issue, I know it is lumpy. Are there any step-up that you start to see? It is hard to predict when, but should that start to move up, where that would also be an offset?
The subsidies for the 8-inch fabs, they are pretty stable. Overall, maybe $10 million a year, okay? The subsidies coming out of Wuxi, they normally will disperse it in Q4.
Okay.
It is going to be more than $1 million overall. Most of that, 70% goes to offset the equipment, 30% goes to offset the OpEx. This year it is going to be more. Again, it is going to be roughly 70% offset equipment, 30% offset the cash cost.
Okay. I guess if I could close maybe one last question, I guess liking to think ahead. For fourth quarter, I guess how you are looking at it, still ramping the Wuxi fab, it sounds like with tightness, it should still be another, at least at this stage, looks like another growth quarter, like similar magnitude?
Sorry, I didn't. I mean,
I was just asking if you're thinking kind of similar magnitude like third quarter, where you're guiding up mid-single digits fourth quarter, like at least what you're planning into year-end, still trends similar.
No, Randy, we're going to work very hard. We're looking forward two fabulous quarters. I hope we will overachieve. As always, look at what we did in Q2. I said a very solid quarter. We deliver a very solid quarter.
Okay. No, great.
Under the current circumstance.
Okay. No, great. No, thanks a lot again.
Thank you. Our additional last questions comes from the line of Alan Jiang from Nomura. Please go ahead.
Okay. Thank you for taking my question. Yeah, actually, some of them were already answered, but probably let me kind of double check a number that you mentioned last time. You were saying that 12-in fab revenue for 2020 would be close to $100 million. Do you think that this number still we can still follow this number for the model purpose?
Alan, you know let's assume that's going to be the rate, and hopefully we can continue to do better.
Thank you. When you say double or triple, you mean like for because you already talk about the number in answering the question from another analyst for the quarter. So you were saying that-
No, what I'm saying is, we're hoping every quarter we will do better.
Okay, no problem. So, okay, then in a situation that you now you already gave the support and guidance, and looks like your 4Q, you are going to have another four loading rate for 8-in, and then you are going to have a stronger 12-in fab revenue. So can we assume that your first quarter gross margin will be better than that of third quarter? Is that a pretty easy direction to think about?
Overall, if you look at, you have to realize the depreciation expense also go up, as you ramp up.
Correct. Yes, that's why I asked this question, because I do not know whether the nice ramp of revenue in 4Q can offset pressure from depreciation into first quarter.
Well, let's see how that goes. I can't really answer the question, but I can tell you, we'll do everything we can to make gross margin attractive.
Okay, no problem. Earlier you also ever said operating break-even was like, last time you said it was like $ 400 million-$500 million a year. But earlier in this call you said, after you reach 25K per month output in the middle of next year, you are going to see the operating break-even. Right. So, are these two, say, information the same thing?
Virtually they are the same. At the end of the day, it is the market price. I would say 25,000, it is a very good point. We are confident we are going to achieve break-even.
Okay. No problem. Earlier you were saying that, by middle of next year, you, at least from the current view, you are able to reach this number, right, 25,000?
That is the plan.
Okay.
That is the plan. Yes. Absolutely.
Okay. My last question is just a clarification because you already said it's going to be $1.2 billion CapEx for 12-in fab this year, right? You said that it's between first half and the second half. Could you remind me the number?
Sorry, I didn't get your question. Can you repeat?
I mean, earlier you said CapEx for Hua Hong Wuxi fab this year, cash basis, will be $1.2 billion , right?
Yeah.
Yeah. The first half and the second half split, you mentioned a number, but I didn't remember. Could you say again?
Oh, okay. It is roughly over $300 million in Q1. We will probably spend another RMB 900 million in cash to make the payment for all the tools. $1. 2 billion, that is the total amount we expect that we will spend on Wuxi.
No problem. When we do the model, we should use the seven-year depreciation period for this $1.2 billion CapEx. Is that right?
Yeah.
Okay. No problem.
But not all. Hey, I am sorry. I think some of that probably is related to building or some other thing, but most of that is equipment.
Okay, no problem. Yeah. I got no further questions. Thank you so much for the detailed answer.
Ladies and gentlemen, that is all the time we have for questions. I will now hand back to Mr. Daniel Wang for closing remarks.
Thank you again for joining us today. It was a great call. I think it was really a long call, you know? Longest I have ever had. We hope you will again join us again next quarter. I wish you all well, and continue to enjoy the summer. Please continue to stay safe and healthy. Thank you.
Ladies and gentlemen, thank you for your attendance. You may now disconnect.