Hua Hong Grace Semiconductor Limited (1347) Earnings Call Transcript

Ladies and gentlemen, thank you for standing by. Welcome to Hua Hong Grace Semiconductor Second Quarter 2026 Earnings Conference Call. Today's call is hosted by Dr. Peng Bai, Chairman and President; and Mr. Daniel Wang, Executive Vice President and Chief Financial Officer. [Operator Instructions] The earnings press release of second quarter 2026 summary slides are for available to download at our company's website, www.huahonggrace.com Without further ado, I'd like to introduce you to Mr. Daniel Wang, Executive Vice President and Chief Financial Officer. Thank you.

Good afternoon, everyone. Thank you for joining our Q2 2026 earnings conference. Today, we will first have Dr. Peng Bai, our Chairman and President provide an overview of our second quarter performance. I'll then take you through our financial results in detail and offer guidance for the upcoming quarter. We then open the floor for a question-and-answer session. With that, I'll turn the call over to Dr. Bai.

Thank you, Daniel. Good afternoon, everyone. Thank you for joining our earnings call. We continue to improve our operational performance in the second quarter of 2026 with profitability strengthened further. Revenue hit a record high at USD 717 million, representing a year-on-year increase of 26.8%. Gross margin stood at 16.5%, up 5.6 percentage points year-on-year. Both metrics beat guidance and achieved sequential growth. Net profit attributable to shareholders of the parent company amounted to USD 38.6 million, posting substantial growth both year-on-year and quarter-on-quarter. Hua Hong Grace maintained a high fab utilization rate in Q2 delivered growth across all parts technology platforms, especially the stand-alone and embedded nonvolatile memory products. The improved business performance came as a result of rising volumes and the prices. Since the beginning of the year, the global semiconductor industry has witnessed a strong AI-driven up in demand. First, our memory IC products then spreading to logic and analog IC products that are associated with AI applications. And the specialty technology foundry serving a broad marketplace. We have clearly seen an overall positive impact on our business by the AI way. We have also seen diverting intensity and strength of market demand, depending on end user market segments. Amid rapid evolving industry landscape, our strategy of steady capacity expansion, ongoing specialty technology upgrades and continuous capacity product mix of optimization. will allow us to capture growth opportunity to provide substantial improvement in our business results. Hua Hong Grace has recently obtained registration approval from the Chinese security regulatory commission for our acquisition of Huali Microelectronics. Integration of the acquired assets into a Hua Hong Grace will strengthen our technology portfolio, increase our operational economy of scale and improve our profitability, investing fresh momentum into our future growth. Now I would like to hand the call over to our CFO, Mr. Daniel Wang for his comments. Daniel?

Thank you, Bai for your very inspiring remarks. Now let me walk you through a summary of our financial performance for the second quarter then provide our revenue and the margin outlook for Q3 2026 before opening the floor for the question-and-answer session. First, let's review our financial results for the second quarter. Revenue reached an all-time high of $770.5 million, 26.8% over Q2 2025 and 8.6% above Q1 2026. The primarily driven by increased wafer shipments and improved average selling price. Gross margin was 16.5%, 5.6 percentage points over Q2 2025 and and 3.5 percentage points above Q1 2026, primarily driven by improved average selling price and the cost reduction efforts, partially offset by increased depreciation costs. Operating expenses were $109.1 million, 11.4% over Q2 2025 and and 3.3% above Q1 2026, mainly due to increased labor expenses. Other income net was $2.2 million 79.4% lower than Q2 2025, primarily due to increased finance costs and the decreased development subsidies partially offset by the rising share of profit of associates. The other loss net was $2.4 million, mainly due to increased share of profit of associates. Income tax expense was $7.6 million, 7.5% over Q2 2025. Profit for the period was $3.9 million compared to a loss of $32.8 million in Q2 2025 and and a loss of $17.3 million in Q1 2026. Net profit attributable to shareholders of the parent company was $30.6 million 385.9% over Q2 2025 and 84.6% above Q1 2026. Basic earnings per share was $0.022, which is $0.022 340% over Q2 2025 and 83.3% above Q1 2026. The annualized ROE was 2.4%, 2 percentage points over Q2 2025 and 1.2 percentage points above Q1 2026. Now let's take a closer look at our Q2 2026 revenue performance. From geographical perspective, revenue from China was $563.7 million contributing 78.6% of total revenue, an increase of 20% over Q2 2025, mainly driven by increased demand for MCU, flash, general MOSFET, logic and smart card ICs. Revenue from North America was $93.8 million, an increase of 77% over Q2 2025 and mainly driven by increased demand for other power management IC and MCU products. Revenue from other Asia was $32 million, an increase of 11.6% over Q2 2025, mainly driven by increased demand for super junction and MCU products. Revenue from Europe was $20 million, an increase of 9.1% over Q2 2025, mainly driven by increased demand for MCU and smart card ICs. With respect to technology platforms, revenue from embedded non-volatile memory was $200.1 million, an increase of 41.8% over Q2 2025 mainly driven by increased demand for MCU and smart card ICs. Revenue from stand-alone nonvolatile memory was $68.8 million increase of 149.3% over Q2 2025, mainly driven by increased demand for flash products. Revenue from power discrete was $182.3 million an increase of 9.4% over Q2 2025, mainly driven by increased demand for general MOSFET products. Revenue from logic and RF was $83.2 million an increase of $21.3 million, 21.8% over Q2 2025, mainly driven by increased demand for logic products. Revenue from analog and power management IC was $183.1 million, an increase of 13% over Q2 2025, 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 $330.1 million, 99.3% over Q2 2025 and and 159.2% above Q1 2026, mainly due to increased receipts from customers, Capital expenditures were $356.6 million in Q2 2026, including $325.9 million for the 12-inch facilities, and $30.7 million for the 8-inch facilities. Other cash flow generated from investing activities was $25.4 million in Q2 2026 including a $25.4 million receipt of government grants for equipment, $8.6 million of interest income. $7.3 million dividends and $0.2 million receipts from the disposal and equipment, partially offset by a $16.1 million investment in equity instruments. Net cash flows used in financing activities was $406 million, including $569 million of bank principal repayments. $37.6 million interest payments and $1 million lease payments, partially offset by $201.5 million proceeds from bank borrowings and $100,000 proceeds from share option exercise. Next, moving to the balance sheet. Cash and the cash equivalents was $4.53 billion on June 30, 2026 compared to $4.8679 billion on March 31, 2026. Other current assets increased from $894.6 million on March 31, 2026 to $936.2 million on June 30 2026 mainly due to an increased [indiscernible] tax paid. Property, plant and equipment was $7.2863 billion on June 30, 2026, compared to $7.8059 billion on March 31, 2026, primarily due to capacity expansion. Interest bearing bank borrowings decreased from $2.8972 billion on March 31, 2026, to $3.5675 billion on June 30, 2026, primarily due to repayments of bank borrowings. Total assets increased from $40.9473 billion on March 31, 2026 to $15.2258 billion on June 30, 2026. Total liabilities decreased to $5.5284 billion on June 30, 2026 from $5.663 billion on March 31, 2026. Debt ratio decreased to 36.3% on June 30, 2026 and 37.9% on March 31, 2026. Well, finally, let's discuss our outlook for the third quarter of 2026. We expect revenue to be in the range of $770 million to $780 million, with the projected gross margin of 16% to 18%. This concludes my financial remarks. We'll now begin the Q&A session. Operator, please assist.

[Operator Instructions] Our first question comes from the line of Leping Huang of Huatai.

Dr. Bai, so first congratulate for the very strong results. So my calculation shows that you deliver another 3% Q-on-Q ASP growth this quarter. could you impact what drives this ASP growth? And whether it's from pricing or some mid-change and how do you see this ASP trend in the second half and beyond? Also, we noticed the largest foundry in the world now also say they were reemphasizing these mature and specialty node process to serve their customers. So plus also the domestic peer also want adding capacity. So how -- what's our view? So on this material supply-demand relation in the next few years and how Hua Hong can differentiate from peers and further improve the profitability ahead.

Thank you,. You have a number of questions in there. I try to to cease them all and answer them 1 at a time. In terms of pricing, as you know, in our industry, the pricing is set by market is basically by the balance of the supply and demand. Since the beginning of the year, we have -- we started to see the demand going up and the balance is shifting towards tightness in terms of supply situation. So as a result, that has driven up price increases. Mostly in MCU and memory area, and payment area. Those are the areas that are more associated with the AI applications. Of course, there are also yields in the consumer segment, but there are probably -- the AI demand opportunity is probably more significant, and that's why we've seen the supply/demand balance shifting towards demand and supply being tight. In fact, some of the products we clearly cannot meet the demand. The order we are receiving is anywhere between 1.5x to 2x of our capacity. So as a result, we are doing everything we can to basically optimize our capacity structure and try to produce more across the board which is somewhat difficult right now because we have been pretty much 100% loaded. So it's really for some very hard-working innovation, trading squeeze more. Of course, we had -- we are fortunate to have a fab that was still going through the capacity expansion. So that's why we can still we can still get good capacity increase from the [indiscernible] that we have, that still going to the capacity ramp up. So in a way, if you ask me what is our advantage? We have that advantage, I think it comes on 2 ways. One is our technology capability, clearly is from domestic and industry leading for in many, many areas, and some of them are also on par with our international competitors. So that gives us a strong foundation to basically build our capacity and serve our customers. Another thing is since last year or the last year, we -- nobody predicted this year it's going to go up. But since last year, we were also -- we were quite steady. We were quite determined to continue to increase our capacity, that decision or that strategy of steadily expanding our capacity actually, you can say -- you might say that it has a pay off somewhat as this year come in and the market is turning upward. In terms of the future pricing prediction is really a function of the latest demand wave, how long is it going to last it's a debatable point sort of a discussion or debate amongst the industry people but short term, I think for the second half of this year and as well as 2027, that most we still believe the the demand will continue to be strong. I share that view. So in that sense, I expect our price increases will continue throughout the second half of the year. Some of the pricing actions we have taken over the last quarter, it will start to manifest itself probably in the second half even next year. So I do think that the upside this upturn in demand where we are accompanied by our continued ability to to increase the price a little bit. I don't want to [indiscernible] ensure everybody that we are not like a DRAM market multiple increasing the volumes we're talking about few percentage -- in percentage term. I do think it is a nice turn for the weather, and we should continue enjoy the for the foreseeable future, at least through second half of this year and perhaps through next year. Thank you. .

Okay. It's -- so the second question from me is about the memory -- so the largest China-based DRAM company just listed in Asia recently, and we see very strong investor interest on China's memory industry and at the same time, looking at the global perspective that providing the logic die foundry service to many makers has been -- become a new trend these days. So Dr. Bai, so can you share some -- your view how Hua Hong can benefit from this memory build-out in China and globally? And do you have any view that you plan to finance corporate with the China global memory makers on providing similar logic die service?

Okay. The memory can be different types, like the 1 we are seeing the biggest uptick in memory in the DRAM -- the second [indiscernible], we are not directly participating in DRAM [indiscernible],we do have a substantial business in NOR Flash business, which we have seen demand increases this year, and they're probably going to continue for second half of this year and next year. So we do enjoy the demand uptick there. In terms of how do we -- I think the fact that the memory is going up, it's really representing the overall demand for semiconductor is increasing. So in that sense, you definitely benefit everybody benefits the memory more directly because it probably would go up there faster. But it does also benefit a large foundry. Our -- I would call us as a specialty technology foundry, which is -- we have a lot of [indiscernible] analog and some specialty memory like NOR Flash. So in a way, the fact that DRAM is seeing the biggest demand increase is truly -- it just to represent the fact that the AI has been driving a lot of demand increases for overall in the semiconductor. So in that sense, it's definitely. So we do benefit from the overall semiconductor demand increase. Specifically to DRAM or even NAND because the technology direction there is a [indiscernible] it tends to start to have their product tends to try to tie basically -- is not the right word. [indiscernible] their product, they try to separate the memory elements from the peripheral logic into 2 different bands and to some kind of 3D assembly to put them together as a product. So in that sense, if the memory houses want to spend more time or focus more on the pure memory element. They may basically -- they might let the logic -- the perfect logic die to be manufactured by the larger foundries. In essence, we do see the larger houses probably will start to explore that. Collaboration with logic foundry for us, so we can focus on truly what is their specialty, which is the memory the bid, the memory part of the overall memory product. So -- but that is still probably in the early stages of this technical transition. And -- but overall, it is moving the direction and they might even create some new demand for logic foundries because they are logic large portion of their [indiscernible] they might get separated out in the separate and be able to logic foundry the manufacturers, if I explain that clearly.

It's very clear.

The next question comes from Ziyuan Wang of CITIC Securities. .

Okay. This is [indiscernible] from [indiscernible]. My first question is, could you -- we see a great guidance show the solid growth in Q3 and could you break down the Q3 revenue guidance to show how much is driven by ASP increase? And how much is driven by the capacity expansion? And also regarding on the expansion, approximately how much capacity will be added in Q3 and Q4?

So let me take on the capacity expansion part. The last time we talked about the guidance for Q3 in terms of how it breaks volume increase versus pricing as I think that's what you're asking. So the capacity increase, our 9A, you will see -- it will ramp up to peak to the to the total capacity in Q3 next quarter, you have all the equipment [indiscernible] installed. And so we will start to load the fab focus 100% starting in Q3, but the output probably will start to show up in Q4 or next year. So I think the 2027, you should expect a full fab worth of output from Fab 9A. As you know, we do have a another half that's under construction that started in March of this year. And that we have -- we start having equipment installed in Q3 as well. So we expect there we have -- we've got a complete line in Q1, and we will start to have a small volume coming out. So next year, throughout 2027. We expect we will further capacity ramp up from the next fab, which we will close at [ May 19. ] Now I will let then a total of Q3 revenue breakdown the guidance between volume and the price increases.

Thank you for the question. So we expect the revenue is going to be between $770 million to $780 million that's our projection for Q3. The increase is largely coming from MCUs that whole sector and betterment [ biopremium ] we will continue to grow strong. There will be a double-digit growth. And the stand-alone volatile memory continue to be very, very strong in Q3. And I think this trend will continue throughout the year and into 2027 as well. And our part discrete, especially the low voltage products we're talking about the MOSFET business and also [indiscernible] medium voltage products. They are also going strong. The IGBT super junction virtually flat, virtually flat. And then on the logic and RF side, I think there's going to be a pretty strong momentum from the RF as well. And other than that, I think we see strong momentum coming from power management IC and analog business as well. Even though no is still a small segment, its point, they're also growing pretty strong in Q3. So overall, it is when you look at technology platforms, these are the -- what I just discussed are the major drivers and in terms of revenue increase when you look at ASP and volume, it is really a split, I think, anywhere we're looking to 7% , 8% increase on revenue. I think I would say 60% coming from ASP and also another 40% were coming from increase in volume. Thank you.

My second question is about the capacities transit or switch since our demand is strong, is it possible to flexibly switch our capacity between product can we shift the CIS capacity to memory products and which type of capacities allow this kind of conversion. And also, what impact of such conversion have onto the overall ASP in maybe next quarter or second half? .

First of all, the capacity some was fungible to certain extent they are fungible, meaning that if we build 1,000 privately for certain technology platform, you can also -- you get some conversion rate, you can use that divested to build something else. So there is some fungibility exactly how much it depend on the technology platform we are talking about Specifically, CIS, for example, that's -- the -- is fully close to the larger flow. So if you try to -- in fungible with some technology platform that's close to logic flow, then all of them can be used. For example, we normally group larger products, CIS and driver type of product. It won't go because they are very much mutually fungible to a large degree. If you want to use CRS for BCD type of product -- fungibility still -- is there still some fungibility that will be decreased or if we want to use -- for memory product, there are also some fungibility but you will probably further decreased somewhat because some of the memory products have some you need to that requires. So if you -- a lot of times, your fungibility is limited by those unique tool that you need to each technology platform. When we build a fab, we try to manage the fungibility. You obviously can't be found 100% fungible. We try to maximize the fungibility so that we can react to market demand fluctuations among different technology platforms. So right now, we are certainly exercising that fungibility to a maximum extent. This, of course, is also limited by the fact that we still want to maintain a reasonable volume of -- for each product because we are into a long-term business. We don't want to just look at next quarter or even just 1 year, there is some level of strategic essential making as pain to make sure that we do have a long-term view now to be 100% driven by short-term considerations. That's why -- another 1 is when we do use pricing as a tool to kind of manage demand shift in demand between the technology from some platforms so that the demand at our capacity pattern better. So yes, overall, I think when the overall demand is tight. And in general, we managed to increase prices across the board for more than others. Thank you.

Next question will come from [indiscernible] of [ Gossan Securities. ]

This is [indiscernible] First is about the demand of the consumer electronics -- so the rising memory price may weigh on the demand of the consumer parts. But still, we can see Hua achieved sequential growth in consumer parts. So how do you view the growth of our consumer-related part in the second half of the year? This is the first question.

That's actually a good question. Frankly, at beginning of the year, when everybody knows is hard to know that the AI related the product will have high demand. Another thing was discussed in the industry was the fact that when the DRAM getting to pricing, you're probably going to depress the consumer demand. which is probably true in the end market and some of the end market segments, as cellphone for [indiscernible] clearly, it's going to see a decline this year. So we were expecting actually -- maybe demand decrease on the consumer segment. As I said, a broad from supporting all different market segments. And I think we were a little bit surprised that we actually didn't see as much negative impact, some of the consumer end market demand decrease. It could be that because we're now we are foundry, so our direct customers are design houses, those IC product those goes into different segment of market maybe to because we were not directly providing to the end market. So maybe our direct customers are certainly a good job of managing. So managing between different end markets. That's 1 possibility. And that's why we don't see much of a negative impact on the consumer end market. Another possibility is -- which is also possible, but even short-term consumer market, end market might be having bit of a decrease in demand they also want to -- they don't want their stock level to -- they don't want to -- they still under some inventory level to build on inventory that for probably inevitable upturn in the future. So those are the 2 possibilities. So -- but the NAND result is that we do see strong demand with all the AI-related products. We haven't seen a -- haven't seen that much negative impact on the consumer market from -- at the foundry level. Third possibility could be our product, our technology, as I said earlier, we are pretty strong on -- it could be, if we're in the low end the market, which 1 not were mostly met and is and high-end market, mainly the lower market like seeing a more negative impact.

Thank you. And my next question is about the the progress of the acquisition. So could you update the progress and also the technology road map after the accurate acquisition.

The progress we already updated in the statement that we got the final approval from the exchange to proceed. So we expect the final -- the final step of this long acquisition process is going to take place probably within a month. After that, the whole thing is complete and done. The second part of your question, I probably didn't quite good. We do expect this to be a very positive acquisition for our financial statement. Once the final step gets completed, the probably micro results will be included in our financial results. If there is nothing -- no surprises in Q3. Q3 statement will include the Huali micro. Did I answer your question?

Yes. And also, I have a quick follow-up. So how about the technology road map after the acquisition? So any new yes, yes.

So in terms of what product Huai Micro is doing, there's quite of a synergy with what we have in Hua Hong Grace. So we do achieve quite a bit of savings, quite a bit of synergy in terms of technology sharing. In other words, some of the technology development that we do in Hua Hong Grace or in Huai Micro previously now can be combined. So we basically for any given R&D dollar, we get a bigger manufacturing scale. So that's good for us. So in terms of the improved efficiency. Another thing it helps us is that now we have one more fab. So our manufacturing scale for a given technology platform that effectively are virtually bigger. So we can take on more customers who have a bigger capacity needs that we previously might struggle if we just have 2 separate entities, especially for Huali Micro, they are by themselves. They are not large. So that's another benefit. The third benefit is that now Hui Micro joins the Huahong Grace, the overall manufacturing system that we can optimize the capacity structure, like what kind of a technology place where so that gives us a better ability to respond to market -- changing market demand, especially right now because in short supply that we immediately can start some of the technology platform that we cannot supply in Wuxi, for example, to put it in Hui Micro. So overall, you see it really because of the bigger scale R&D savings and overall improved efficiency because of the large scale and also on the procurement also we have a bigger volume. Everything is basically positive. So we think this is going to be a very, very -- it has been a very good step for us to take.

Next question will come from the line of Qingyuan Lin of Sanford C Bernstein.

Congratulations, Dr. Bai and Daniel for a good results for earnings. My question comes from 2 angles. First one is around the future capacity expansion. Dr. Bai, what's your view on the demand sustainability for '27, '28? You mentioned it was quite clear for the second half. But I was wondering, do we expect this cycle to be -- kind of continue to be stronger even for the next few years? And you mentioned that last year, there was a good decision to continue capacity expansion. With this strong demand, do we continue to see that we might need to further accelerate the capacity expansion even for '27 and '28. So that will kind of lead to, I guess, a question for Daniel, do we have any plan to further ramp up our CapEx? That's my first question.

Yes. Let me -- in terms of capacity expansion, we definitely want to continue the capacity expansion at a steady pace so that we can manage the CapEx expenditure while still we maintain profitability that we have come a long way to establish at this point. We do -- I do think -- I said earlier, the second half of the year, everybody the short-term market demand is strong. And 2027, the consensus is also going to be strong. 2028 is where since people start to have some debate. So it's probably a little bit too early to tell in 2028, but I do think overall, the secular trend is I do see a secular growth story in the marketplace that we participate, which is the specialty technology. So we -- so in that sense, that's the reason that give us confidence that we will continue to expand capacity. So this overall demand increase is based on new application of the semiconductor and also based on the fact that some of the industry players may start to close down some of the 8-inch fabs. As you know, we do have 3 8-inch fabs that also benefit from some of the industry capacity going offline. 12-inch is a different story, but a lot of growth is mostly on 12-inch in terms of the demand side. So I think in terms of the supply side, 8-inch, nobody is spending 8-inch capacity, but the supply side may decrease, but 12-inch, the demand side is probably going to go -- continue to go up. So it's really based on our strategy of steadily expanding our capacity is based on our confidence that the market, even with some fluctuation, the overall direction is still going up. Another -- our confidence is also based on the second factor, which is we believe our technology capability relative to our competitors in the industry is also going to strengthen as we go because we have the scale, we have the people, we have the track record. We have the position in China as well as even worldwide now that we think our capability will increase. So we are not afraid of even the downturn comes. I think we're still going to keep on growing and keep going -- getting more capacity steadily. Thank you.

Daniel, any comment on the CapEx guidance or kind of projection for next 2 years?

I would say we are -- we start to construct the third 12-inch fab early this year. And this fab will start to ramp over the next 3 years to 55,000 wafer capacity. So it's going to be -- it's about -- overall, it's approximately $6 billion CapEx spending. So I would say roughly $2 billion a year for the next 3 years. But other than that, unless we have other new fabs that we plan to build, this is what we -- this is going to be the major CapEx spending.