Hua Hong Semiconductor Limited

Ladies and gentlemen, thank you for standing by, and welcome to Hua Hong Semiconductor's 3rd Quarter 2020 Earnings Conference Call. Today's call is hosted by Mr. Dan Wang, the Vice President and Chief Financial Officer. There are ways that your doubts are in a listen-only mode. However, at the conclusion of the management presentation, there will be a question-and-answer session, at which time you will receive instructions on how to participate. The earnings press release and the quarter 2020 summary slides are available to download at our company's website, www.acquahomegrace.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 third quarter 2020 earnings conference. Unfortunately, Mr. Tan, our President and Executive Director, has a meeting at this time, which required his presence. He has asked me to express his disappointment at missing this call and to cover our third quarter performance on his behalf. Today, I will begin with President's comments on our third quarter performance. 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. We're very pleased with Huahong Semiconductor's performance in the third quarter of 2020. The company's sales revenue hit a new high, achieving double-digit quarter-on-quarter growth for two consecutive quarters. Although COVID-19 has not been fully controlled worldwide, The prosperity of the semiconductor industry has gradually improved as domestic consumption has rebounded significantly and a robust end-user demand has continued. Driven by a strong demand for MCUs, IGBTs, logic chips, and other products, the company achieved historical record revenue of $253 million. 8-inch capacity utilization continued to be strong, exceeding 100% for the three 8-inch plants in the third quarter. 12-inch capacity utilization also increased significantly. Benefiting from high capacity utilization, gross profit margin exceeded our guidance, and profitability has been achieved for 39 consecutive quarters. Introduction of new Huahong Wuxi 12-inch products is progressing steadily in accordance with our process development plan. Yield improvement and production capacity ramping are proceeding much faster than our original plan. Currently, we're in mass production and shipping products from embedded flash memory, logic, and RF, and low-voltage power device platforms. In the fourth quarter, more new products will be delivered for customer verification, such as IGBT and superjunctions. The focus of our next phase of work will be to accelerate capacity expansion in Wuxi to alleviate the current limitation of 8-inch capacity. and to expedite development and improvement of our process platforms to provide a more comprehensive and better product solutions for our customers. In the face of the second wave of COVID-19, we must firmly maintain the results of our pandemic prevention and control measures, keep close communication with domestic and foreign vendors and customers, actively expand our markets and deepen our cooperation with all stakeholders. I would like to thank all shareholders, customers, and vendors for their support, as well as all employees for their relentless efforts. Although the road ahead will always be full of challenges, we're confident we will be victorious with our down-to-earth efforts. We believe we will continue to deliver more outstanding results in the future. Next, let me begin with a summary of our financial performance for the third quarter, followed by an outlook on revenue and margin for the fourth quarter 2020. Then we will move on to the question and answer session. First, let me summarize our financial performance of the third quarter. Revenue hit an all-time high of $253 million, an increase of 5.9% over the prior year and 12.3% over the prior quarter, mainly driven by increased wafer shipments. Cost of sales was $191.7 million, 16.2% above Q3 2019, and 14.9% over Q2 2020. primarily due to increased wafer shipments and depreciation expenses. Gross margin was 24.2%, 6.8 percentage points below Q3 2019 and 1.8 percentage points below Q2 2020, mainly due to increased depreciation expenses and other fixed costs from the new plant in Wuxi. Operating expenses were $74.2 million, $84.7 above Q3 2019, largely due to increased development costs and reclassified fixed costs from the new plan, and 18.7% over Q2 2020, primarily due to increased development costs and labor expenses. Our income net was $24.1 million, 2.3% of an associate, partially offset by decreased fair value gains on financial assets at fair value through profit or loss and interest in income. And 100.5% over Q2 2020, mainly due to increased government subsidies and a foreign exchange gain versus a foreign exchange loss in the previous period. Income tax expense was $10 million, $22.3 million lower than Q3 2019, primarily due to decreased taxable profit. Profit for the period was $1.1 million versus $44.4 million in Q3 2019, and $1.3 million in Q2 2020. Net profit attributable to shareholders of the parent company was $17.7 million compared to $45.2 million in Q3 2019 and $17.8 million in Q2 2020. Basic earnings per share was 1.4 cents versus 3.5 cents in Q3 2019, and flat to Q2 2020. Annualized ROE was 3.2%. Now I'll discuss the operating results of both the Huahong 8-inch wafer fab and Huahong Guishi 12-inch wafer fab. First, let's have a look at the Huahong 8-inch wafer fabs. Revenue was $236.4 million, 1.1% below Q3 2019, and 9.5% over Q2 2020, mainly due to increased wafer shipments. Growth margin was 27.2%, 3.8 percentage points below Q3 2019, mainly due to increased depreciation expenses. partially offset by improved capacity utilization and 0.5 percentage point below Q2 2020. Operating expenses were $30.8 million, 14.5% over Q3 2019, and 16.9% above Q2 2020, primarily due to increased labor and depreciation expenses. Profit before tax was $45 million, 23.7% below Q3 2019, and 7.7% over Q2 2020. Now let's have a look at the performance of Huahong Wuxi Wafer Fab. Revenue was $16.6 million, 75% over the prior quarter. Operating expenses were $43.4 million, compared to $13.3 million in Q3 2019 and $36.2 million in Q2 2020, mainly due to increased development costs. Profit before tax was minus $33.9 million. EBITDA was minus $11.5 million, $7 million more favorable than Q2 2020. Now, I would like to provide more details on revenue from Q3 2020. From geographical perspective, revenue from China was $165.3 million, contributing 65.4% of the total revenue, and an increase of 11.2% over Q3 2019, mainly driven by increased demand for logic products. Revenue from the United States was $34.1 million, a decrease of 3.4% compared to Q3 2019, mainly due to decreased demand for super junction products, partially offset by increased demand for MCU products. Revenue from Asia was $30.4 million, an increase of 2.7% compared to Q3 2019, chiefly driven by increased demand for logic products. Revenue from Europe was $16.3 million, a decrease of 4.9% compared to Q3 2019, mainly due to decreased demand for smart car ICs. Revenue from Japan was $6.7 million, a decrease of 17.2% compared to Q3 2019, mainly due to decreased demand for larger products, partially offset by increased demand for MCU products. With respect to technology platforms, revenue from embedded non-volatile memory was $87.3 million, a decrease of 0.9% compared to Q3 2019, primarily due to decreased demand for smart card ICs, largely offset by increased demand for MCU products. Revenue from Discrete was $96.2 million, an increase of 6.6% over Q3 2019, mainly driven by increased demand for general MOSFET and IGBT products, partially offset by decreased demand for super junction products. Revenue from analog and power management IC was $33.5 million, a decrease of 8.2% compared to Q3 2019, mainly due to decreased demand for analog products. Revenue from logic and RF was $32.7 million, an increase of 48.5% compared to Q3 2019, largely driven by increased demand for larger products, partially offset by decreased demand for RF products. Revenue from standalone non-volatile memory was $2.8 million, an increase of 59.8% compared to Q3 2019, primarily driven by increased demand for flash products. Now let's take a look at the cash flow statement. Net cash flows generated from operating activities were $89.4 million in Q3 2020 compared to $70.7 million in Q3 2019, largely due to receipts of VAT tax return partially offset by increased payments for labor. Capital expenditures were $403.6 million in Q3 2020, including $351.2 million for the HuaHong Wuxi fab and $52.4 million for HuaHong 8-inch fabs. Other cash flow generated from investing activities were $88.2 million in Q3 2020, including one payout of $86.9 million from investment in financial assets as a fair value through profit or loss, and two, $1.3 million of interest income. Net cash flows generated from financing activities were $222.1 million in Q3 2020, including one $219.5 million of proceeds from bank borrowings to $3.7 million of proceeds from share option exercise, partially offset by $1 million of lease payments and $0.1 million of interest expenses for bank borrowings. Now let's move to the balance sheet. Cash and cash equivalents was $716.5 million on September 30, 2020, compared to $699 million on June 30, 2020. Financial assets at a fair value through profit or loss decreased from $84.8 million on June 30, 2020, to zero on September 30, 2020, due to payout from investment in financial products. Inventories increased from $176.9 million on June 30, 2020, to $205.2 million on September 30, 2020, primarily due to increased wafer demand from customers. Property, plants, and equipment was $2,272.5 million on September 30, 2020, compared to $1,790.9 million on June 30, 2020. Total assets increased from $3,575.9 million on June 30, 2020 to $4,022.7 million on September 30, 2020. Our total bank borrowings were $243.7 million on September 30, 2020. Total liabilities increased to $848 million on September 30, 2020, from $526.1 million on June 30, 2020, primarily due to increased bank borrowings and payables for capital expenditures. debt ratio increased to 21.1% on September 30, 2020, from 14.7% on June 30, 2020. Finally, let me give you a top-level outlook for the fourth quarter 2020. We expect revenue to be approximately Excuse me, approximately $269 million, and our gross margin to be between 21% and 23%. 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 bar 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the power or hash key. Again, it is bar 1 if you wish to ask a question. Your first question comes from the line of Le Ping Huang from CICC. Please ask your question.