Hua Hong Semiconductor

Ladies and gentlemen, thank you for standing by. Welcome to Huahong Semiconductor Four Quarter 2025 Earnings Conference Call. Today's call is hosted by Dr. Peng Tai, Chairman and President, 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 receive instructions on how to participate. The earnings press release and fourth quarter 2025 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 for joining our Q4 2025 Earnings Conference. Today, we will first have Dr. Pan Bai, our chairman and president, provide an overview of our fourth quarter and the full year performance. I'll then take you through our financial results in detail and offer guidance for the upcoming quarter. We'll then open the floor for a Q&A session. With that, I turn the call over to Dr. Bai.

Thank you, Daniel. Good afternoon, everyone. Thank you for joining our earnings call. Fourth quarter 2020 sales revenue for Hua Hong Semiconductor reached an all-time high of $659.9 million, with a gross margin of 13% for the quarter. both in line with our guidance. For the full year of 2025, the company reported sales revenue of $2.4 billion and a gross margin of 11.8%, both achieving year-on-year growth and meeting management expectations. Against the backdrop of the global semiconductor market being driven by demand for AI and related products, coupled with a recovery in consumer demand led by the domestic market, the company maintained full capacity operations throughout the year at an average capacity utilization rate of 106%, which ranked among the leading levels in the foundry industry. By optimizing product mix, reducing costs, and improving operational efficiency, we achieved strong performance across various specialty technology platforms, especially in standalone NVM, and the power management area, effectively supporting the company's revenue growth and margin expansion. In 2025, the company continued to advance its strategic plan for capacity expansion. The first phase of capacity construction for the second 12-inch production line in Wuxi, we call Fab 9, exceeded expectations for completion, and the Shanghai 12-inch manufacturing base Fab Five acquisition progressed as planned. Looking ahead, the company will maintain strong focus on developing world-class specialty technology platforms with innovation and through rapid generational iteration, while deepening collaborations with strategic customers both domestically and internationally. We remain confident in our ability to size growth opportunities amid changes in the global semiconductor industry and are striving to meet shareholders' long-term expectations. Now, I would like to hand the call over to our CFO, Mr. Daniel Wang, for his comments.

Thank you, Dr. Bai for your inspiring comments. Now let me walk you through a summary of financial performance for the fourth quarter, followed by a recap of our full year 2025 results. I then provide our revenue and margin outlook for Q1 2026 before opening the floor for the Q&A session. Now first, let us review our financial results for the fourth quarter. Revenue reached another all time high of $659.9 million, 22.4% over Q4 2024, and Q4 2025, and 3.9% over Q3 2025. Primarily driven by increased wafer shipments and improved average selling price. Gross margin was 13%, 1.6 percentage point, percentage points over Q4, 2024, primarily driven by improved average selling price and the cost reduction efforts. And a 0.5 percentage point dip from Q3, 2025, primarily due to increased labor costs. Operating expenses were $130.2 million, 17.7% over Q4, 2024, primarily due to increased labor costs and the depreciation expenses, and 29.6% over Q3 2025, mainly due to increased labor costs. Other income net was $34.1 million compared to the loss net of US $40.5 million in Q4 2024, primarily due to foreign exchange gains versus foreign exchange losses in Q4 2024. Decreased finance costs, and increased government subsidies. It was 92.1% over Q3 2025, mainly due to decreased finance costs. Income tax expense was $8.1 million, 22.3% higher than Q4 2024, primarily due to increased taxable income. Net loss for the period was $18.7 million, narrowed by 80.6% compared to Q4 2024, and the widening of 159.9% in loss from Q3 2025. Net profit attributable to shareholders of the parent company was $17.5 million, compared to a loss of $25.2 million in Q4 2024, and a profit of $25.7 million in Q3 2025. Basic earnings per share was 1 cent. Annualized ROE was 1.2%. Now let's take a closer look at our Q4 2025 revenue performance. From geographical perspective, revenue from China was $539.3 million, contributing 81.8% of total revenue and an increase of 19.6% compared to Q4 2020. Merely driven by increased demand for power management IC, MCU, Flash, and CIS products. Revenue from North America was $72.8 million, an increase of 51.3% compared to Q2 2024. Merely driven by increased demand for power management IC and MCU products. Revenue from other Asia was $28.4 million, an increase of 9.1% compared to Q4 2024. Revenue from Europe was $19.3 billion, an increase of 35.6% compared to Q4 2024, mainly driven by increased demand for MCU and IGBT products. With respect to technology platforms, Revenue from embedded non-volatile memory was $180.2 million, an increase of 31.3% compared to Q4 2024, mainly driven by increased demand for MCU and the smart car ICs. Revenue from standalone non-volatile memory was $56.6 million, an increase of 22.9 million compared to Q4 2024, mainly driven by increased demand for flash products. Revenue from PowerDiscrete was $168.9 million, an increase of 2.4% compared to Q4 2024, mainly driven by increased demand for general MOSFET products. Revenue from Logic and RF was $80.4 million, an increase of 19.2% over Q4 2024, mainly driven by increased demand for CIS products. Revenue from analog and power management IC was $173.8 million, an increase of 40.7% over Q4 2024, mainly driven by increased demand for other power management IC products. Now, turning to our cash flow statement. Net cash flows generated from operating activities was $246 million, 29.5% lower than Q4 2024, mainly due to increased payment for suppliers and the decreased receipts of government subsidies, partially offset by increased receipts from customers. It was 33.6% over Q3 2025, largely driven by increased receipts of government subsidies. Capital expenditures were $633.5 million in Q4 2025, including $559 million for Huahong 12-inch and $74.5 million for Huahong 8-inch. Other cash flow generated from investing activities was $61.7 million in Q4 2024, including $36.6 million receipts of government grants of equipment, $13.6 million interest income, and $1.2 million receipts of disposal of equipment, partially offset by $3.6 million investment in the equity instrument. Net cash flows generated from financing activities was $1,361.1 billion, including $919 million proceeds from bank borrowings, $594.6 million from other financing activities, $12.1 million receipts of government grants for finance costs, and $4.7 million proceeds from share option exercises, partially offset by $136.1 million of bank principal repayments $32.8 million interest payments, and $0.4 million lease payments. Now let's move to the balance sheet. Cash and cash equivalents was $4,961,000,000 on December 31st, 2025, compared to $3,904,700,000 on September 30th, 2025. Other current assets increased from $739.7 million on September 30th, 2025 to $787 million on December 31st, 2025, mainly due to increased value-added tax granted. Property, plant, and equipment was $6,676.4 million on December 31st, 2025, compared to $6,162,000,000 on December 30th, 2025, primarily due to capacity expansion in Hua Hong manufacturing. Equipment instruments designated at fair value through other comprehensive income increased from $381.3 million on September 30th, 2025 to $478.8 million of December 30th, 2025, primarily due to fair value gains recognizing equity instruments. Interest-bearing bank borrowings increased from $2,397.5 million on September 30th, 2025 to $3,190.8 million on December 30th, 2025, primarily due to increased growth drawdowns on bank borrowings. Total assets increased from $12,511.7 million on September 30th, 2025 to $14,453.8 million on December 31st, 2025. Total liabilities increased to $5,289.5 million on December 31st, 2025 from $3,502.6 million on September 30th, 2025. That ratio increased to 36.6% on December 31st, 2025 from 28% on September 30th, 2025. Here's a recap of 2025. Revenue was $2,402.1 million, a growth of 19.9% over the prior year, primarily driven by increased wafer shipments. Gross margin was 11.8%, 1.6 percentage points over 2024, primarily driven by improved average selling price and cost reduction efforts. partially offset by higher depreciation costs. Operating expenses were $425.6 million, 7.9% over 2024, largely attributable to increased research and development expenses. Outer income net was $54.2 million, 146.4% above 2024, primarily due to decreased finance costs, and foreign exchange losses and increased government subsidies, partially offset by decreased interest income. Loss for the year was $110.8 million, narrowed by 21.1% compared to 2024. Net profit attributable to shareholders of the parent company was $54.1 million, 5.6% dip from 2024. Basic earnings per share was 3.2 cents. ROE was 0.9%. Finally, let's discuss our outlook for the first quarter of 2026. We expect revenue to be in the range of $650 million to $660 billion. With They project gross margin of 13% to 15%. This concludes my financial remarks. We'll now begin the Q&A session. Operator, please assist. Thank you.

Thank you, Benjamin. As a reminder, at this time, if you'd like to ask questions, you can press star 1-1 on your telephone and wait for a name to be announced. To cancel your request, you can press star 1-1 again. Please hold while we collect the first question. The first question comes from Officer Ping Huang from Huatai Securities. Please go ahead.

Congratulations for the robust result. and the successful acquisition of Huali. So beyond the contribution to Huahong's revenue and profit, could you elaborate the strategic resource Huahong got through this acquisition? And what's your plan to leverage these resources to accelerate Huahong's future growth? Thank you.

Thank you. First, basically we acquired Fab Five, what we call Fab Five, within the Huahong system. It's a 12-inch fan. It has 55 nanometers, 40 nanometer-based specialty technology. Quite a bit of the technology platform have overlap with what we already have in HH Grades in Wuxi. I think... We look at the acquisition from the following points. We think that's going to be favorable to our long-term growth. One is that we certainly grow the scale of our company through this acquisition. We added about 40K capacity. That's already in production with existing customers. with the scale is one factor. Another one is with FAT5 joining HX-GRACE, we can do a better job optimizing the distribution of our different specialty technologies across all the capacity, all the manufacturing capacity. This will show up in higher efficiency for our TD activity. It should also show up in a higher efficiency and lower cost for our entire manufacturing base. So basically, we view this definitely as a strategic acquisition where we accelerate our growth, both in terms of revenue and as well as our ability to be more profitable. Thank you. Thanks.

Okay. My second question is about the supply-demand relation of the 8-inch and the 12-inch mature fab business this year. So we noticed some foundry, including the largest one, just recently announced to access an 8-inch business or sell some 12-inch fab to the memory makers. So what's your view on this supply-demand? demand balance of the 8-inch and 12-inch business globally this year? And what's your impact? What's the impact on your ASP? So I also noticed that there are some reports that you have some price adjustments in the end of last December. So what's your view on this ASP trend of Hua Hong this year?

Thank you. Okay. We also noticed Some of the reports talking about some of our foundry competitors might be selling some of the capacity to other people. If they just change the ownership from one company to another without actually reducing the capacity, then it doesn't really change the supply-demand situation too much. With respect to some of the logic capacity moving to memory, because memory is certainly in high demand nowadays, that certainly will reduce the supply in the logic side. But overall, it's a positive thing for us because we are mostly in the logic-funded business, although we do have some flash memory business as well. But overall, that would be... a positive sign. I think overall, because of the AI-driven growth in the overall semiconductor market, we think we view that as the overall positive. It might show up differently in different market segments. It might show up differently in different technology platforms. We have our capacity in our product, but overall view that as a positive development for us. In that context, if the supply gets tighter, it does give us more opportunity to increase prices. We have been doing that over the course of last year. Surgically, it's not a cross sport. increase by any means, but certainly for some certain area where we think we can really meet the supply, so we take the opportunity to move up the prices a little bit. That also show up in, some of them already show up in 2025 results, and we expect that in 2026, We might still have some room to go, especially the 12-inch side. 8-inch, the supply-demand is more imbalanced compared to 12-inch. So even if we try to, we would like to increase prices as well in 8-inch, but our room is going to be limited. But overall, we are cautiously optimistic that we may be able to do something in that area as well. Thank you.

Thank you very much. Thank you. Thank you.

Our next question comes from the line of Zhiyuan Wang of CITIC Securities. Please go ahead.

Okay. Thank you for taking my questions. Firstly, I would like to wish you all a happy Chinese New Year. I have two questions. And the first one is, as we can see this quarter, the capacity utilization rate declined slightly. And what are the reasons for that? Are there any uneven or unbalanced on the different platforms? and can our capacity be reallocated between different platforms quickly? That's my first question. Thank you.

Oh, the change is fairly small. It's probably almost in the calculation era, but I think the main reason is FAB9 will rapidly bring the capacity online. There's always a little bit of lag between how fast you get the equipment in store and get the capacity online versus when you have the loadings and the order for that capacity. So there's always, as you, that's a typical case in a ramping fast, especially when you ramp very fast. There is a bit of a lack between the capacity. And because the loading is based on, what's the capacity brought online. So that's the reason there's like a couple of percent decrease.

Got it, thank you. That's very clear. And my second question is about our future performance drivers on the demand side. How much of driver will the AI related product be for the company's future revenue growth. And also, as we see the localization trend, do you think any, which kind of product categories will be the most significant boost by the localization? And could you provide a ranking or list, priority list for these products?

Thank you. This is a complex question. Let me try to kind of see whether I can answer very clearly. I think if you look at it from end market standpoint of view, clearly AI-related products are increasing fast. What does it mean for us is that AI-related products actually cut across Quite a few are technology problems. For example, the AI related products, the power management area is going fast, is increasing. MCU, not so much, but it's also a little bit of impact. And power, discrete power devices also have some impact. But the power management is one area we clearly see strong growth related to AI. So in that regard, If you stay at this end market dimension, it's now AI is one growth area. Other areas like autonomous driving, automobiles, the car-related, all the new robots is also growing. All the green energy-related end markets also show growth. All those end markets, the growth area do cut across in somewhat a complex manner, cut across different technology problem. So if I look at our technology problem in that dimension, if you just look at our 2025 results, you already see that the two biggest growth area is power management and MCUs. So those two areas, plus in addition to the discrete power devices, constitute the three largest technology platforms that we have from the revenue standpoint of view. So going forward, I expect the power management area, the BCD platform we have, we're continuing strong growth. MCU, where HHS Grace has a great advantage, has a great competitiveness, very competitive in this area, is also going to be an area that is going to grow fast. And there I will just take this opportunity to do some marketing. We also have new technology problem in 55 nanometer and 45 nanometer all coming on strong. So that should be also a strong growth there. In the end, I think if we look at our distribution, our environmental distribution, I will still continue to see MCU probably one of the biggest power management segment, discrete. discrete power devices probably going to be more stable. Growth is not as fast, but it will remain the number three. The other two, in terms of logic and RF, we like that to grow a little bit faster. And standalone memory will also think will go reasonably fast. Some of the memory shortages, mostly in DRAM, it's probably going to have some split over into, probably already split over into the NAND memory area, but I think it's going to split a little bit over to the no-flash area, so that we should also benefit. So that's how I view the market going forward.

Okay. Can I add a little question on that? How, Dr. Bai, how do you view the sustainability of this current memory cycle? And is there, what's the impact on Hua Hong? And what kind of measures will be taken?

That's a good question. In the, if you look at historical pattern, memory tends to go through boom and bust cycle. Although this time around a lot of people think because the AI is a different beast that maybe this signature nature of the memory market will be a little bit different. I don't have crystal ball and I do believe that eventually it will be going to a cycle. Maybe this time the boom cycle will last longer. It probably heavily depends on how the AI It's mostly driven by AI, this latest cycle. AI, how long this cycle is going to last. But I think in the near future, certainly for 2096, there's no sign that it's going to slow down. Maybe in year two or three, if you go by historical pattern, it should start to calm down somewhat. I should add that right now because of the AI-related area driven up DRAM prices so much, it does have a little bit of a depressing effect on the consumer market because a lot of the consumer product probably can't afford this high DRAM prices. Therefore, they might push out their product refreshment cycle a little bit. So that might come across as a negative. for some of our product as well. But overall, I think the growth areas still outweigh the area that's going to be somewhat impacted, negatively impacted by this super memory cycle that we seem to be in the middle.

Okay. That's all my questions. Thank you, Dr. Tai.

Thank you.

To ask question, you can press star 11. Our next question comes from Ziye from Kosen Securities. Please go ahead.

Thank you for taking my question. I have two questions. The first question is about the price. Considering the rising cost of the raw material, We also can see some products, such as power device, raise the price. But the demand just now, Dr. Bai mentioned, is structural. So how do you see the sustainability of the price hike? So this is the first question.

Okay. In terms of raw material, by the time it gets to us, In fact, we call that direct material or indirect material. We do see a few areas where there is a raw material prices start to show up in the semiconductor materials that we use. I'm trying to think, like copper is probably one area. that were at a little bit of a cost to the copper cable. It happens to be building a farm, which is where we do see that. And we also see some of the other raw material increases affecting a little bit of the material we buy. But I would say, by and large, I do not see this as a significant factor for our cost structure. there's going to be some places that there's going to be increases. There's also going to be some decreases. And overall, I do not think it's going to be a significant increase. Another factor is that over time, we use more and more domestically produced materials. And in general, their costs are better. So overall, I don't think We're going to be looking at that situation. The material will be a cost increase for us going forward.

Thank you, very clear. And my another question is about the utilization. Since we're in good position, but some 12-inch foundries are not yet at full utilization. So, how do you see the cycle? So, can you give us a little bit of your perspective? So, where are we today? And is that possible maybe there's some potential order shift of our customers maybe after we increase the price? Yeah.

The FAB utilization is affected by a few factors. Two, probably one is how competitive is your technology offering. That includes whether you have a complete offering of the solutions to the customer for what the customer needs. That's one factor. Another one, of course, is pricing. If you price too high your utilization, you will lose customers on one hand. On the other hand, you can There's always, if you use, if the prices, you are willing to go down on the prices, it tends to increase your loading. So for those two factors, for example, on technology front, HH Grace is a well-positioned, we are premier foundry in China. And a lot of our technology platform, I would say we are probably number one domestically and they're very competitive even internationally. Not all of them, but some of them so clearly. So especially in this specialty technology area which HHS Grace has been working on for the last three decades almost. That's one factor. Another factor is that Some of our international customers, especially European ones, and now we start to see American company as well that have this China for China strategy that they try to move some of their product that originally were manufactured overseas to be manufactured inside China. So that's another... factor that will help our loading. When those companies looking for a partner in China, they clearly want to have somebody who is technology-wise is in a good position as well as they want most stable company, the bigger company. So we are usually being viewed as the first choice many times, many, many, in many cases, were the first choice for their Chinese, as their Chinese partner. So we do benefit from that factor as well. I think this trade, we're probably going to continue giving the whole of the world The geopolitical situation and the world semiconductor market is evolving. Thank you.

Thank you. That's all my questions. I'm looking forward to a better performance in the coming year. Happy Chinese New Year. Thank you.

Thank you.

This question comes from Scarlett Ge from BNPP. Please go ahead. College Law is open. You can unmute locally. Otherwise, we'll move on to our next questions. One moment, please. We have follow-up questions from Le Ping Huang from Huatai Securities. Please go ahead.

Dr. Ma, I have a follow-up question. What's the current status of VAC9? Is it fully completed? And I noticed the CapEx this year, last year is 1.8 billion, which is down slightly versus 2024. So how we should model the CapEx for 2026 and when you plan to initiate the next phase of the expansion? And what's your plan on this? What should I say? The phase two of the FAB9 or the new FAB, thank you.

Let me address the question. Basically, the total capital expenditures for this project, FAB 9A, is at $6.7 billion. So by end of last year, we spent slightly over $5 billion. So we spent another $1.3 billion. Basically, these are the POs we have basically issued. not completely spent from cash flow perspective. So I would say basically there's another about to get to $6.7 billion. There's probably another $1.2 to $1.3 billion on cash flow from cash flow perspective. So most of the POs have been issued for that project. So I would expect You know, the cash will be spent mostly, you know, this year and some probably, you know, remaining in 2020, 2027.

Mostly this year because this year we're going to reach the peak capacity for FAP9A, the first half of FAP9. Your second part of the question is on FAP9B, which is our next project. fill up the remaining, the other half, the empty half of Fab 9. That project, we got all the approval, all the necessary paperwork. We plan to start the actual engineering construction work after the Chinese New Year, basically in March. So we should be able to start getting the equipment in by end of this year, probably October timeframe. The spending obviously going to be mostly in 2027. So we were, so in 2027, we start another capacity ramp on the FAS9B, and we hope we can complete that ramp Even faster, in a velocity that's even faster than 5.9. In 5.9, we ramped very fast. In two years, we pretty much get to the peak. And output would take a little bit longer because, as I said, there's always a little bit of lag between the capacity in place, being in place, versus whether you give the wafer out and turn that into revenue. But in terms of the capacity... construction capacity in place using that as a milestone. 590 will start in 2037, and we should get that done in less than two years as well.

So this year, 2026, the capex will be slightly down, and the 2027 will be up significantly. Is my understanding correct?

Correct. That's correct.

Okay. Yeah, thank you. Thank you very much. Thank you. I don't have any further questions.

Thank you for the questions. Our next question comes to Yuan Wang of CITIC Securities. Please go ahead.

Okay. I want to have a follow-up question on that. And in terms of our equipment localization rate, Will FAB9B have a higher rate than FAB9A?

The FAB, you know, talking about the FAB utilization rate, they are all already a little bit above 100, so it's not going to be significantly higher.

Sorry, I mean on the equipment localization ratio. Oh, okay. Equipment, yeah.

Yeah. So the answer is yes, the general direction. As the domestic equipment industry becomes more and more capable every year, that every new project we have, we tend to have a higher procurement of domestic equipment. We obviously still going to be making our procurement decision based on what is the best both technically as well as commercially for the company. That's the decision criteria. But the reality is that the domestic produced equipment are becoming more and more capable and commercially they tend to be not across the board more attractive, a lot of place is dependent on individual equipment, it can be more attractive, then end result we expect is that the SAP 9B project will end up with a higher domestic equipment content.

Okay, got it. Thank you, Dr. Dabai.

Thank you for the questions. 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, once again, thank you all for joining us today and for your wonderful, valuable questions. The year of the horse is right around the corner. We would like to take this opportunity to thank you all for all the support and trust you have given to us and wishing you and your family a very joyful, joyful holiday season and a healthy and prosperous new year. We look forward to catching up with you very, very soon. Thank you.

Thank you, ladies and gentlemen.

That does conclude the conference call. Thank you for your attendance. You may now disconnect.