[0 -> 25] Ladies and gentlemen, thank you for standing by, and welcome to the Fohung Semiconductor Second Quarter 2023 Earnings Conference Call. The call is hosted by Mr. Junjun Tang, President and Executive Director, and Mr. Daniel Wang, Executive Vice President and Chief Financial Officer. Please be advised that your dial-in is in a listen-only mode.
[26 -> 52] 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 2023 summary slides are available to download at our company's website, www.fuohonggrace.com. Without further ado,
[53 -> 77] I would like to introduce you to Mr. Daniel Wang, Executive Vice President and Chief Financial Officer. Thank you. Thank you. I want to thank you all for joining our second quarter 2023 earnings conference. Today, we will first have our Executive Director and President make some remarks on our second quarter performance.
[77 -> 104] President Tan will address in Chinese and Kathy Chan, our Deputy Director of Investor Relations, will be the translator. After that, I will discuss our financial results and provide guidance for the next quarter. This will be followed by our question and answer session. The call will be conducted in English, so please ask your questions in English. Without further ado, I will now turn the call over to Mr. Tan.
[107 -> 137] Good afternoon, everyone. Thank you for joining our earnings call.
[137 -> 164] Despite the fact that the semiconductor market has not yet recovered from the downward cycle, Fahong Semiconductor weathered the storm in Q2 2023 and delivered a remarkable performance. By the end of the second quarter, the company's 8-inch equivalent monthly production capacity increased to 347,000 wafers
[164 -> 194] leveraging our technology capabilities and business skill in diversifying specialty technology platforms, the company's four production lines remain fully utilized. In this quarter, the company's revenue is $6.34 billion, which is 1.7% higher than the previous quarter. The net profit is 27.7%, which is 5.9% lower than the previous quarter.
[194 -> 224] Second quarter revenue was US$631.4 million, up 1.7% year-over-year and a flat quarter-over-quarter. Gross margin was 27.7%, exceeding our previously announced guidance, down 5.9 percentage points year-over-year and 4.4 percentage points quarter-over-quarter.
[225 -> 248] primarily due to higher depreciation and utility costs and a lower average selling price.
[249 -> 274] On August 7, 2023, Fahong Semiconductor successfully completed its initial public offering of eight shares on the stock market, raising more than RMB20 billion, demonstrating the recognition and support of investors and fueling our rapid growth in the future. As the world's leading test process supply and delivery enterprise, our company will continue to optimize our test process technology,
[275 -> 302] As the world's leading specialty technology foundry, the company will continue to optimize specialty technologies, further consolidate our leading position, and reward investors with even better performance. Now I would like to hand the call over to our CFO, Mr. Daniel Wang, for his comments. Thank you, Mr. Tan.
[303 -> 328] Now let's begin with the summary of our financial performance for the second quarter, followed by an outlook on revenue and margin for the third quarter of 2023. And then we will move on to the question and answer section. First, let me summarize financial performance as of the second quarter. Revenue reached $631.4 million, up 1.7% over a year ago, and a flat to prior quarter.
[329 -> 358] Growth margin was 27.7%, 5.9 percentage points lower than Q2 2022, primarily due to decreased average selling price, increased depreciation and utility costs, and 4.4 percentage points lower than Q1 2023, primarily due to decreased average selling price. Operating expenses were $76.7 million, 8.5% over Q2 2022,
[358 -> 388] mainly due to increased engineering wafer costs and flat to Q1 2023. Other loss net was $54.7 million, 3.5% lower than Q2 2022, mainly due to increased government subsidies and interest income, partially offset by increased financial costs and foreign exchange losses. Other income net gain was $6.1 million in Q1 2023.
[388 -> 417] mainly due to foreign exchange gains in Q1 2023 versus a $54.7 million net loss in Q2 2023, mainly due to foreign exchange losses. Income tax expenses was $35.9 million, 26.8% above Q2 2022, primarily due to increased taxable income
[417 -> 441] The income tax credit of $8.9 million in Q1 2023 was mainly due to a reversal of dividend withholding tax accrued for the prior year. Profit for the period was $7.8 million compared to $53.2 million in Q2 2022 and $140.9 million in Q1 2023.
[442 -> 469] Net profit attributable to shareholders of the parent company was $78.5 million, compared to $83.9 million in Q2 2022, and $152.2 million in Q1 2023. Basic earnings per share was .06 compared to 6.4 cents in Q2 2022,
[470 -> 498] and 11.6 cents in Q1, 2023. Annualized ROE was 10%, compared to 11.5% in Q2, 2022, and 19.6% in Q1, 2023. Revenue. Now I will provide more details on our revenue from Q2, 2023. From a geographical perspective, revenue from China was $489.3 million,
[499 -> 527] Contributing 77.5% of total revenue and an increase of 8.6% over Q2 2022, mainly due to increased demand for IGBT, MCU, and superjunction products. Partially offset by decreased demand for NOR Flash, CIS, and other power management IC products. Revenue from North America was $48.5 million.
[527 -> 552] a decrease of 33.7% compared to Q2 2022, mainly due to decreased demand for other power management IC and MCU products. Revenue from Asia was $45.2 million, a decrease of 22% compared to Q2 2022, mainly due to decreased demand for Logic, General MOSFET, and other power management IC products.
[553 -> 578] Revenue from Europe was $40 million, an increase of 39.7% over Q2 2022, mainly due to increased demand for smart car ICs and IGBT products. Revenue from Japan was $8.4 million, a decrease of 20.7% over Q2 2022, primarily due to decreased demand for MCU products.
[580 -> 609] With respect to technology platforms, revenue from embedded non-volatile memory was $208.3 million. The increase of 18.9% over Q2 2022, mainly due to increased demand for MCU and smart car ICs. Revenue from standalone non-volatile memory was $33.74 million. A decrease of 52.1% over Q2 2022.
[609 -> 629] primarily due to decreased demand for raw flesh products. Revenue from Discreet was $251.4 million, an increase of 33% over Q2 2022, mainly due to increased demand for IGBT and superjunction products.
[629 -> 650] Revenue from logic and RF was $57.2 million, a decrease of 25.8% compared to Q2 2022, mainly due to decreased demand for CIS and logic products. Revenue from analog and power management IC was $80.5 million.
[650 -> 677] a decrease of 26.4% over Q2 2022, mainly due to decreased demand for other power management IC products. Now, let's take a look at the cash flow statement. Net cash flows generated from operating activities was $161.2 million in Q2 2023, 24.1% below Q2 2022,
[677 -> 701] primarily due to decreased receipts from customers, partially offset by decreased payroll payments. Capital expenditures were $165 million in Q2 2023, including $148.3 million for the Wuxi fab and $16.7 million for the Huahong 8-inch fabs.
[702 -> 729] Other cash flow generated from investing activities was $14.3 million in Q2 2023 from receipts of interest income. Net cash flow used in financing activities was $300.2 million in Q2 2023, including $167.7 million pledged deposits for bank borrowings.
[730 -> 759] $85.6 million of bank principal repayments, $52.7 million of interest payments, $3.3 million of lease payments, and $0.4 million of listing fees, partially offset by $8.1 million per fee of bank borrowings, and $1.4 million proceeds from share option exercise. Now let's move to the balance sheet.
[759 -> 788] Cash and cash equivalents were $1,851,000,000 on June 30th, 2023 compared to $2,218,500,000 on March 31st, 2023. Restrict and time deposits increased from $1.1 million on March 31st, 2023 to $167.1 million on June 30th, 2023
[789 -> 811] mainly due to increased project deposits. Inventories decreased from $593.9 million on March 31st, 2023 to $558.3 million on June 30th, 2023, mainly due to decreased work in progress and finished goods.
[812 -> 834] Property, plants and equipment was $3,256,600,000 on June 30th, 2023, compared to $3,436,700,000 on March 31st, 2023. Total assets decreased from $7,378,300,000
[834 -> 858] on March 31st, 2023 to $6,950,300,000 on June 30th, 2023. Our total bank borrowings were $1,796,300,000 on June 30th, 2023 compared to $1,905,100,000 March 31st, 2023.
[859 -> 884] Total liabilities decreased to $2,555.2 million on June 30th, 2023 from $2,747.7 million on March 31st, 2023, primarily due to repayments of bank borrowings and payments for income tax for 2022 in Q2, 2023.
[886 -> 911] That ratio decreased to 36.8% on June 30th, 2023, from 37.2% on March 31st, 2023. Finally, let me give you a high level outlook for the third quarter. We expect revenue to be approximately $560 million to $600 million.
[911 -> 941] and our gross margin to be in the range of 16% to 18%. This concludes my financial remarks. Now we would like to start the question and answer session. Operator, please assist. Thank you. Thank you. If you wish to ask a question, you will need to press star one and one on your telephone and wait for your name to be announced. To withdraw your question, please press star one
[941 -> 968] and one again. We will take our first question. And the first question comes from the line of Liping Huang from Huaitai. Please go ahead, your line is open. Okay, thank you to take my question. So, and congratulations for the very successful Asia IPO. So my first question is about your third quarter guidance. So
[969 -> 997] we see a quite significant decline of your gross margin in third quarter versus the second quarter. Can you share some, can you break down the reason of this decline between the ASP of your products and the rising depreciation costs? Thank you. Leping, that is a very, very good question. It's,
[997 -> 1019] basically, you know, over the past two quarters, we've been releasing capacities from the 12 inch fab. So currently, the capacity at the wafer capacity at the 12 inch fab is, you know, in total, it's about 95,000 wafers. Okay.
[1019 -> 1046] Currently, we're running at $75,000, $75,000 to $80,000, depending on the month. So our goal is to get to $95,000, $95,000. That's one thing. Certainly, the depreciation cost has been well basically going up throughout this year.
[1047 -> 1068] And for the 12-inch fab, the depreciation cost, well, basically around, probably around, for the whole year, it is going to be about $380 to $390 million for the year.
[1068 -> 1095] And the 3H fab is going to be pretty stable. It's just going to be about $130 million for the year. So the release of the capacity that certainly will increase the, you know, cause the increase of the depreciation cost. At the same time, there are, you know, some pressures for certain technology platforms, in particular for,
[1095 -> 1125] embedded non-volatile memory, and also power-managed by IC. I think these two technology platforms are facing some pricing pressure, but you know what? We are still pretty confident. We give a range from $560 million to $600 million for Q3. Our goal is to do better, to do better, even though we believe we're still in the sort of
[1125 -> 1151] sort of low point at this point, I think that the semiconductor market globally still has not fully recovered, has not been recovered, okay? You know, we're hopeful things will start to do that in the second half of 2023, 2023. But the main reason for the, you know, for the declining margins, largely because of the ASP drop,
[1151 -> 1175] and also the additional increased depreciation costs. Okay, so a related question is that if you look at the presentation material, if you look at page nine, that basically in the second quarter,
[1175 -> 1204] the non-volatile memory and the power discrete account for, each account for one third of your revenue. So how is the market demand is changing? What's the outlook? Especially, I think you are doing very well in the MCU and the power discrete product line, not only in China, but globally. So what are the outlook
[1204 -> 1229] for these two product lines, and what's the impact which translates to your ASP. If you can, it would be very helpful to, if you have a more clear guidance on the ASP trends. Your ASP decline, if I calculated correctly, declined Q1, Q6 percent in second quarter, whether the decline will be larger in third quarter or not. Yeah, thank you.
[1230 -> 1255] You know, I mean, if you look at the, you know, I've talked about this with various investors recently, especially during our IPO process, during the roadshows. You know, I talk about overall the ASP drop is going to be somewhere, for the year, is going to be somewhere 3 to 5%. Our ASP really, you know,
[1256 -> 1281] hasn't changed that much for the first half, okay? But we did, you know, most of the ASP adjustment we did was in end of last year in Q1, end of last year in December, sometime in December in Q1, 2023. So most of that would become, start to, you know, hit the P&L sometime in Q2 and Q3, Q2 and Q3.
[1282 -> 1308] So we expect overall, the company's, you know, the ASP drop is gonna be, for the year, is gonna be anywhere between three to 5%. That is our anticipation, okay? So when you look at the Q3, the, you know, I think the power discrete will continue to be very, very strong, in particular for IGBT and superjunction.
[1309 -> 1338] logic and RF, particularly the RF, will continue to be strong, continue to be strong, and the logic and power management IC also will be strong. I think it's going to be a good quarter, but we got some pressure from the, you know, from the embedded non-battle memory area and also from the no-flash products, okay? For these two segments, you know, we see
[1339 -> 1361] pricing pressure, at the same time, you know, I think the demand is also not as strong. Okay, thank you. Thank you. We will take our next question.
[1363 -> 1391] The question comes from the line of Randy Abrams from Credit Suisse. Please go ahead, your line is open. Okay, yes, thank you. I wanted to follow up on that last question from Leping. Just for those areas under more correction, the embedded flash microcontrollers and also the NOR flash, could you just give some visibility or some feel
[1391 -> 1421] where you think we are in the correction as far as do you expect it to extend a couple more quarters or see any signs of bottoming out in these areas? Randy, Randy, thank you for the question. You know, I think we have the experience in some, as I said, pressure.
[1422 -> 1452] and also just overall demand from these two areas, embedded in particularly for smart cards and MCU. So demand for these two products at this point are, in general, it is low at this point. So I think just over the next quarter or so, I think there's gonna be a drop on revenue
[1452 -> 1480] compared to Q2 and Q1. But I think, hopefully, this is going to be, I think, temporary, okay, temporary. And we're hoping that things will start to pick up in the start somewhere in Q4 this year. And for standalone, for the NOAA products, I think it's the same, just in general.
[1481 -> 1509] Flash, whether it's embedded or no Flash, I think the demand is slow. I think they're going through a correction stage. I think there's some inventories out there for these products. But things will, I think, will change. We expect things will change towards the end of the year. But other platforms will continue to be very, very strong.
[1511 -> 1539] Okay. And maybe two follow-ups to that. At this stage, do you think third quarter marks your low point, or we should still see the seasonality? And do you see any risk on the other areas that have actually held up? Logic, IGBT, or that still looks to see good demand continuing in those areas?
[1540 -> 1569] We're hoping that Q3 it is a low point and that things will start to recover in Q4. At this point, we still have a good chance. We'll be able to do well in Q3. We give a range from $560 million to $600 million. We're looking at many different ways to make sure we can definitely hit
[1570 -> 1599] the high end of that number at the range. And, you know, hopefully we can even exceed. Okay. So this is only a guidance at this point, if there's any change within the next few weeks or month. And I think we can definitely, you know, adjust that guidance. Okay. If, if I could ask you just on the cost side depreciation,
[1599 -> 1629] Uh, the level you're at in second half this year, are you fully depreciating the, um, the capacity you brought on for Lucy or, or would there be a further, uh, ramp up from second half levels into next year? Just try to understand the, um, headwinds into 2024. Right. Right. You know, the, uh, that's a, that's a, that's a good, good question. Uh, basically I think at this point we're looking at.
[1630 -> 1659] For WUSHI, we're looking at about $380 million to $390 million for depreciation costs for 2023. I think if we fully ramp it to 95K, I think the depreciation expenses will get up to $450 million. So there's another still $50, $60 million additional depreciation costs can
[1659 -> 1681] you know, can add on to next year. So our plan is to run the fab at 95K fully for next year. If at that stage, I think the depreciation expense would get to about $450 million for the whole year. For the whole year.
[1682 -> 1712] Okay. And the last question, just to get to 95K, how do you feel the application mix will change? We're now at MCU Endure. It looks like that's the gap. But as you target next year for application, is it recovery of these areas that have corrected, or how do you see mix evolving into next year? I think, you know, for the 95K, I think one-third would definitely go to
[1713 -> 1741] part discrete, in particular, IGBTN superjunction. Okay. And I would say at least, you know, I would say 40% will be shared. Most of that will go to embedded nonvolatile memory, MCU smart cards. And somewhere around 10% will go to no flash, no flash, but that also can potentially increase
[1742 -> 1767] grow, continue to grow in the next few years, because, you know, there's great demand for more. Okay. And if you were to get back to that... Yeah. Oh, go ahead. Sorry. And Randy, so, you know, we're talking about a third going to discrete, or maybe even slightly more than a third,
[1767 -> 1797] I would say even we could get to like 40% going to discrete. And then maybe 30% between embedded and NOR, standard long NOR. And then the rest, another 20 to 30% would be anywhere between, you know, the power management IC and RF. Okay. And if you, how do you think about the profitability, like fully loaded,
[1798 -> 1821] If we get back to recovering utilization, fully depreciated, where do you think a reasonable gross margin, just after we've gone through a downturn with a bit lower pricing now? Good question. If we're in a fully recovered mode, I would say, you know, we can, for the three-inch fabs, we'll get
[1822 -> 1844] to very close to 50% gross margin, three-inch fats. The 12-inch fat, our goal is to get to 30% gross margin, when the depreciation expense is still at its prime. Okay. Thank you. Okay. Thank you. Great. Thanks. We'll take our next question.
[1850 -> 1877] Your next question comes from the line of Zhou Engyi from China Renaissance. Please go ahead. Your line is open. Hi, gentlemen. Congratulations on the IPO. I have two questions. The first one regarding the proceeds that we got. Right now, we are sitting on a huge remedy process. Do we have any plan to pay down the US dollar bank borrowing? Because right now the finance cost seems to be a bit on the high side.
[1879 -> 1902] Good question. You know, the finance cost is high for the interest, especially, we're talking about the interest rate is high for borrowing the U.S. dollars. No, I mean, the money that we just raised, it's mainly going to be used to expand capacity. It's going to be most of that were used to
[1902 -> 1930] build our next FAP, okay? The money's pretty much all secured. It's the first phase, you know, the 83,000 wafer, the next 83,000 wafer capacity are, you know, first phase of our second FAP will be around $6.7 billion, okay? So the money is all committed, okay? So we're, you know, it's fully,
[1930 -> 1954] prepared to, you know, to move forward with that project. And then the rest of the money we're going to be using for R&D and some, you know, continue to improve our product mix for the 3H VAPs. I see, I see.
[1954 -> 1982] And second question, in the IPO prospectus, the company actually mentioned the plan to acquire Huali, right, within the three years after the IPO. So basically, what are the reasons behind and also why is this the need to set a timeframe? During the IPO process, we made a commitment to the local stock exchange
[1983 -> 2010] that we will acquire the fab within the next three years. Just to make sure that there's no competing business between us and our brother company. I see. So basically, we are going to acquire within three years, right? Within the next three years. Oh, okay. All right. Okay. All right. Thank you, Daniel. Thank you.
[2010 -> 2040] Once again, if you wish to ask a question, please press star one and one on your telephone and wait for your name to be announced. Once again, if you wish to ask a question, please press star one and one. There seems to be no further questions at this time. I would like to hand back to Mr. Daniel Wang for closing remarks.
[2044 -> 2064] Again, thank you all for joining us today and asking all the meaningful questions. We hope you will join us again next quarter. Please continue to stay safe and healthy. Looking forward to meeting you in person in the near future. Thank you. Ladies and gentlemen, thank you for your attendance. You may disconnect now.