Hua Hongmiconductor-h Aktie

Ladies and gentlemen, thank you for standing by. Welcome to the Hua Hong Semiconductor's First 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 and first quarter 2026 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.

Good afternoon, everyone. Thank you for joining our Q1 2026 earnings conference. Today we will first have Dr. Peng Bai, our Chairman and President, provide an overview of our first quarter performance. I will then take you through our financial results in detail and offer guidance for the upcoming quarter. We'll then open the floor for a question-and-answer session.

With that, I turn the call over to Dr. Bai. Dr. Bai?

Thank you, Daniel. Good afternoon, everyone. Thank you for joining our earnings call. Hua Hong Semiconductor generated revenue of USD 660.9 million in the first quarter of 2026, a year-on-year increase of 22.2%. Gross margin stood at 13%, a year-on-year increase of 3.8 percentage points. Both figures were in line with our guidance.

Net profit attributable to shareholders of the parent company amounted to USD 20.9 million, marking substantial year-on-year growth. Despite the rapid capacity ramp-up, the company maintained high capacity utilization rates, with strong performance across all process technology platforms. MCU, standalone flash and BCD products delivered the highest growth rates.

The company's results were supported by sustained efforts in cost reduction and efficiency enhancement, and by a positive demand signal that started at the beginning of the quarter and became stronger over the course of the quarter.

The global semiconductor industry is undergoing accelerated transformation as AI and related applications play an increasingly central role in market dynamics. The unmistakenly positive impact of AI on worldwide semiconductor market demand, persistent uncertainty in the global supply chain landscape make a more complex market picture that we're facing with.

Hua Hong Semiconductor remains steadfast in pursuit of its key objective of becoming a foundry leader in specialty process technologies, with a core strategy of continuous focusing on market needs, strengthening process technology capabilities and substantially increasing production capacity scale.

In the first quarter, the ramp-up of our 12-inch capacity progressed steadily, with its revenue contribution rising to 62.7%, while our 8-inch production line maintained sound profitability.

Meanwhile, the proposed acquisition of Huali Micro has been accepted by the Shanghai Stock Exchange, entering the substantive review phase. The acquisition is currently progressing according to the established schedule and is expected to be completed in the second half of the year.

Finally, as a veteran of the industry, I remain confident in a bright future for semiconductor industry globally and in China. I'm fully committed to make Hua Hong Semiconductor an increasingly important player in the industry and deliver sustainable value to our shareholders.

Now I would like to hand the call over to our CFO, Mr. Daniel Wang, for his comments. Daniel?

Thank you, Dr. Bai, for your inspiring comments. Now let me walk you through a summary of our financial performance for the first quarter. I will then provide our revenue and margin outlook for Q2 2026 before opening the floor for the Q&A session.

First, let us review our financial results for the first quarter. Revenue was $660.9 million, 22.2% over Q1 2025, primarily driven by increased wafer shipments and improved average selling price, and 0.2% over Q4 2025. Gross margin was 13%, 3.8 percentage points over Q1 2025, primarily driven by improved average selling price and cost reduction efforts, and flat with Q4 2025.

Operating expenses were $105.6 million, 8.8% over Q1 2025, primarily due to increased operating expenses for the new production lines in Wuxi and 18.9% lower than Q4 2025, mainly due to decreased labor costs.

Other loss net was $2.4 million, 70.5% lower than Q1 2025, primarily due to foreign exchange gains versus foreign exchange losses in Q1 2025, partially offset by decreased government subsidies, interest income and increased finance costs. It was other income net of $34.1 million in Q4 2025, mainly due to increased finance costs and decreased government subsidies.

Income tax credit was $4.7 million, primarily due to a reversal of dividend withholding tax for 2025. Net loss for the period was $17.3 million, narrowed by 66.9% compared to Q1 2025 and 7.5% compared to Q4 2025.

Net profit attributable to shareholders of the parent company was $20.9 million, 458.1% over Q1 2025 and 19.9% above Q4 2025. Basic earnings per share was $0.012. Annualized ROE was 1.2%.

Now let's take a closer look at our Q1 2026 revenue performance. From geographical perspective, revenue from China was $525.2 million, contributing 79.5% of total revenue, and an increase of 18.7% over Q1 2025, mainly driven by increased demand for MCU, other power management IC, flash and IGBT products.

Revenue from North America was $85.7 million, an increase of 51.9% over Q1 2025, mainly driven by increased demand for other power management IC and MCU products. Revenue from Other Asia was $28.2 million, an increase of 5.2% over Q1 2025, mainly driven by increased demand for MCU products, partially offset by decreased demand for super junction products.

Revenue from Europe was $21.8 million, an increase of 43.2% over Q1 2025, mainly driven by increased demand for smart card IC, IGBT and MCU products.

With respect to technology platforms, revenue from embedded non-volatile memory was $184.6 million, an increase of 41.7% over Q1 2025, mainly driven by increased demand for MCU and smart card ICs.

Revenue from standalone non-volatile memory was $57.1 million, an increase of 33.2% over Q1 2025, mainly driven by increased demand for flash products. Revenue from power discrete was $170.9 million, an increase of 5% over Q1 2025, mainly driven by increased demand for IGBT and general MOSFET products, partially offset by decreased demand for super junction products.

Revenue from logic & RF was $74.4 million, an increase of 11.4% over Q1 2025, mainly driven by increased demand for logic and CIS products. Revenue from analog & power management IC was $173.9 million, an increase of 25.8% over Q1 2025 mainly driven by increased demand for other power management IC products.

Now let's turn to our cash flow statement. Net cash flows generated from operating activities was $130.4 million, 159.9% over Q1 2025 mainly due to increased receipts from customers. It was 47% lower than Q4 2025, largely due to decreased receipts of government grants and increased payments of labor costs.

Capital expenditures were $924.9 million in Q1 2026, including $886.1 million for Hua Hong 12-inch business and $38.7 million for Hua Hong 8-inch. Other cash flow generated from investing activities was $67.9 million in Q1 2026, including $57.8 million decreased time deposits, $10 million interest income and $100,000 receipt of disposal of the equipment.

Net cash flows generated from financing activities were $638.7 million, including $649.4 million proceeds from bank borrowings and $3.3 million proceeds from share option exercises, partially offset by $12.1 million interest payments and $1.1 million lease payments and $0.8 million of bank principal repayments.

Now let's move to the balance sheet. Cash and the cash equivalents was $4.8679 billion on March 31, 2026 compared to $4.8938 billion on December 31, 2025. Other current assets increased from $787 million on December 31, 2025, to $894.6 million on March 31, 2026, mainly due to increased value-added tax credit.

Property, plant and equipment was $7.1059 billion on March 31, 2026, compared to $6.6764 billion on December 31, 2025, primarily due to capacity expansion in Hua Hong Manufacturing. Interest-bearing bank borrowings increased from $3.1908 billion on December 31, 2025, to $3.8972 billion on March 31, 2026, primarily due to increased drawdowns of bank borrowings.

Total assets increased from $14.4538 billion on December 31, 2025, to $14.9473 billion on March 31, 2026. Total liabilities increased to $5.663 billion on March 31, 2026, from $5.2895 billion on December 31, 2025. Debt ratio increased to 37.9% on March 31, 2026, from 36.6% on December 31, 2025.

Finally, let's take a look at our second quarter outlook for 2026. We expect revenue to be in the range of $690 million to $700 million with a projected gross margin of 14% to 16%. This concludes my financial remarks.

We'll now begin the Q&A session. Operator, please assist. Thank you. Operator?

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

So congratulations for the very strong results. My first question is about the impact of the memory super cycle. So we see the further price hike of the memory in the last 3 months. So Dr. Bai, what's your view on the ripple effect of this trend on the logic foundry investment, especially on your NOR flash business? Can we expect further price hike in memory will drive the ASP and the margin expansion in your logic foundry business in the remaining of this year?

Okay. Thank you, Leping. Good to hear from you. Yes, let me take your question on the NOR flash situation. You are right. First of all, the memory is in short supply, starting with DRAM, and DRAM price, as you know, went up probably like 10x. Then that start -- then they start a spill over into NAND memory. Now it start to spill over a little bit into NOR flash as well. It's not as much spill over as I would like, but definitely, we see the demand going up for our NOR flash memory.

That will translate into a price increase, but not as significant as the DRAM, not nearly as significant as the DRAM, but we should expect to be 10%, 15% price increases on the NOR flash. So that would be the -- also with the tight supply, we won't be able to satisfy all the demand, but we do get the benefit of higher prices.

Okay. So my second question is that can you provide some update on the progress of your Wuxi fab expansion. So I remember you mentioned last time I think you start already construction in March and moving in the October. But these days, we see a very fast expansion of most of the foundry and the memory company in the world.

Do you see any delay of the equipment delivery? So have you -- or furthermore, today with the U.S. President visiting China, which is a very important milestone for the U.S.-China relation. So do you think that this will help your equipment procurement coming in the rest of the year?

Okay. Yes, let me update you on our Wuxi side in terms of the capacity expansion. As you know, Wuxi side, we have 2 operating fabs already. The third one, as you correctly pointed out, started construction in March.

So before I go to the third fab, which we call 9B, the second fab has been on a capacity ramp-up since last year, it is Fab9A. That capacity ramp-up should complete in Q3 this year, which means that we will reach the full capacity in Q3. The output, there's obviously a delay in getting all the output with the full capacity, but we should be getting the full output starting probably by end of this year or beginning of next year.

Now the third fab, Fab9B, we kicked off the construction in March of this year. We are doing all the facility work right now because the shell is already there for the third fab. We expect the equipment start to come in, in the fourth quarter of this year.

To your question about the equipment procurement, we do not see any impact in terms of the export control, from the U.S. export control on the equipment procurement for Fab9B. That has not been an issue for us. Now President Trump is in China, as we speak. And we certainly hope this environment is going to be further relaxed going forward, but we'll see how they come out.

But up to this point, even all the press reports notwithstanding, all the press reports notwithstanding over the last couple of months, we have not been impacted in terms of getting the equipment we need to buy and also the delivery time.

Okay. It's good to see. So final question is, so we see the Hua Hong Group established an advanced packaging subsidiary. Also, the market is very closely watching the next-generation technology like silicon photonics. So my question is that how the Hua Hong Group's advanced packaging subsidiary will coordinate with the Hua Hong ListCo? And how do you -- and what's the technology you have on the silicon photonics? And what's your plan on silicon photonics?

Okay. So let me take your question one at a time. One is the advanced packaging. Yes, there is a newly established effort on advanced packaging. That is not -- it's under the Hua Hong Group, not part of the public company, not part of Hua Hong Semiconductor.

Of course, we are having a lot of coordination at the Hua Hong Group level in terms of the technology road map and as well as capacity planning. So in that regard, certainly are coordinated with the existing Hua Hong Group companies.

The advanced packaging is basically -- is definitely a high growth area in the industry. We expect that effort to substantially add to our offering and also expect to add to our revenue in the future at a group level.

Now the silicon photonics is another area that is growing pretty fast, especially with AI and related application. We are also looking at getting into silicon photonics area, and there's quite a bit of planning activity that's ongoing. And once something gets finalized, I expect that will be soon that we will update you on the details.

But suffice to say that, yes, we will get into silicon photonics since this is a growth area, adjacent to what we already do, so it should have a lot of good synergy with what we already have, and we should expect that to be started pretty soon, right?

And the next question comes from the line of Tracy Cui from CLSA Company.

So my first question is regarding your 2Q '26 revenue guidance. Would you please guide us how much growth may come from the shipment growth and how much is from the ASP increase?

It's roughly -- it's about -- we're talking about quarter-to-quarter around close to 5%, okay? And we're pretty confident with that number. It's coming in combination of revenue -- ASP growth and also volume growth.

Okay. And just following up for the wafer price. Perhaps how you will expect your wafer price trend throughout this year? And which type of chips you may see maybe a higher chance to further for the price lift?

Since we have a diverse portfolio of technology platform, we do see the price changes, price increases vary across different platforms. The ones that are in higher demand, we will see higher price increases. The ones that demand are somewhat muted, we will probably trying to stay where it is or just with a very minor increases.

The net result is that, on average, I do see -- I do think we're going to be consistent with the industry average of about 10% plus/minus some number here and there. You have to realize the price increases, it takes time to get implemented in a sense that even if you increase the prices is the order from that day forward see the new prices so that it will take some time to fully materialize all the increases to have them fully reflected in the financial results.

But during the course of this year, I think we definitely will be seeing above -- on average. Some will increase more, like some of the -- we do this mainly based on market. It's a market-driven methodology. And if you see lot of demand, we can supply, we do tend to increase the prices a little bit more.

So some platform might see up to 20%, 25% even, but some are going to be close to where they are and maybe 5%. On average, I think 10% is a reasonable assumption or 10% to 15% by end of this year, somewhere there.

Got it. And can I please also have a follow-up question on Fab9B. Would you mind remind us how much is our CapEx plan and how much is the design capacity? And any updated time line in terms of the CapEx investment and also the ramp-up and what may be the process node and the type of chips platform?

I think the Fab9B, the overall project, I think we're going to be putting down CapEx-wise about $60 billion, maybe right around there. It will be 60 -- we actually originally said $69 billion. We will try to -- $6 billion, not $60 billion. $6 billion, okay? Take off one 0 there. So originally, we think it's 6-point something, but we will try to control it to be about $6 billion overall investment.

That will be spent this year and next pretty much. And it will start to -- equipment started coming towards the end of this year. So we are talking about it will start to produce output in 2027. Probably going to take 1.5 years to 2 years to get all the capacity in place, to get -- so you are talking about in 2028, the Fab9B will be at a full capacity. So that's the rough schedule I'm giving you.

And what might be the process nodes or type of chips? Any color that you may be able to share?

It will be focused on specialty technologies. We see that it will be a range of nodes, but the bulk will be 40-nanometer. So 40-nanometer plus/minus something.

And the next question comes from the line of Ziyuan Wang from Citic.

This is Ziyuan Wang from Citic Securities. My first question is about, I'm wondering how was the demand trend in analog and power applications over the past quarters. And is there any further plan for the wafer price to increase on Q2? And have there been any price increase in the materials such as silicon wafers?

The analog area, our main product is power management ICs. We do see strong demand there. That's mostly related to AI and AI-related build-out, like the server boxes, they need a lot of power management chips. And that's some partially offset by some of the consumer weakness because of the DRAM increases.

We do see a memory price increases has a small depressing effect on consumer segment. Overall, it's a positive story for us because we obviously have products in both AI-related field as well as consumer. On average, AI-related stronger demand overwhelms -- at least more than compensate for the small weaknesses in consumer.

So in that regard, I think the analog, the PMIC area is a good example where you have one part of the market going strong, another part is a little bit muted, but overall, still a positive demand increasing story for us. So yes, we were -- you will see price increases in this particular platform, reasonable price increases here.

In terms of the supply chain, because of the -- probably mostly because of the war and some of the disruption that it causes, we do see some particular material, raw material, the prices go up. It's not across the board. Across the board, it's not a very significant factor yet, but there's a few items that prices to go up quite high.

And we're managing that and those are manageable, but we don't expect -- I do not expect that it will have a big overall impact. But yes, because of the -- mostly because of the war in the Middle East that is causing some supply chain disruption, in particular, the oil-related or gas oil-related products and some of the items, the prices spiked a little bit, but very few items. So it doesn't have much of a -- and in aggregate, it doesn't have average impact much. All right. Thank you.

Okay. Got it. And my second question is about, does our company have any plan or investments on the compound semiconductor such as the gallium arsenide or silicon carbide or even on indium phosphide. That is my second question.

Thank you for asking. The answer is yes. We are -- we have started efforts in gallium nitride. We already have TD activity going on. So we will get into gallium nitride. And as well as silicon carbide, the compound semiconductor, those 2 that complement our silicon-based power devices that we have decided to get into.

The way we'll get into might be a little bit different. Like silicon carbide, we might have a joint venture with some existing -- joint venture in terms of the capital management. But in gallium nitride, we might seek a partner and when we get into the volume manufacturing phase. So that part is still being kind of a planned or is not finalized.

But the answer to your question, yes, we will get into gallium nitride. We are getting into gallium nitride and silicon carbide effort because we have a large silicon-based power device capacity. We also have a large base of customer, and they are also asking us to get into the compound, so that -- compound semiconductor to complement our existing silicon-based power devices.

Indium phosphide -- we don't hear anybody speaking online.

Okay, that's all my questions. Very clear.

[Operator Instructions] Our next question comes from the line of [ Timothy Wong ] from [ Oriental Asset Management ].

Analyst from Oriental Asset Management. My name is Timothy Wong. My first question would be, I would like to confirm whether we are acquiring 7-nanometers or below to our portfolio since -- through the acquisition of Huali Micro as some news reports suggest? This is my first question.

Sorry, we didn't get the question.

Well, can you repeat that question again or you have not?

Yes. Okay. I would like to confirm whether we are acquiring 7-nanometer or below to our portfolio through the acquisition of Huali Micro as some reports suggested.

A couple of things. One is our Q1 results does not include Huali Micro. That's still outside the Hua Hong Semiconductor because it has now completed the acquisition. Second, Huali Micro we're acquiring -- what are we acquiring from -- for Huali Micro is basically what we call Fab5 asset and the Fab5 asset business. Those are based on 55-nanometer and 40-nanometer IC products, that's what we're acquiring.

Yes. I actually didn't believe such reports. So thank you for your clarification. And my second part of my question is would you mind giving us some color on explosion of CPO, silicon photonics optics, how would these trends will benefit us?

I think right now, in a lot of -- from a technical standpoint of view, a lot of high compute platform, the interconnect become a bottleneck. Therefore, people are looking for ways to speed up the interconnect. Silicon photonics is one way. Now there are some detail there that depending on whether you're talking about the stack to stack, like a box-to-box communication or some chip-to-chip, so you actually require a slightly different silicon photonics technology.

But that's an area that would require silicon photonics type of products. This is consistent with now AI is driving a lot of the market growth. So if you believe in thesis that AI is going to drive a lot of the growth, then you would believe that -- you would say that there is going to be more demand for silicon photonics related products because AI, obviously, at a system level is a high compute.

So that's the -- and from Hua Hong standpoint of view, we -- our technology -- although silicon photonics is a new technology for us, but it's not -- it's also adjacent technology for us. It's not too different, too far away from what we're already doing. We're already doing a lot of CIS, which require VCD -- not VCD, CIS require a lot of back-side processing of getting into advanced packaging area.

So there is quite a bit of synergy from a technology standpoint of view. So that's why we think it's a good area for us to get into because there's going to be market demand, and it also play into kind of our strength or our adjacent area of growth. Thank you.

Congratulations for all the progress.

Thank you.

Next question comes from the line of [ Jen Kuai ] from Orion Securities.

My first question is about the memory price. How do you see the memory price in the next few quarters?

Well, the price is a sensitive topic. In the end, the price will be set by supply-demand balance. As long as we continue to have short supply, then we have a little bit of opportunity to inch up the prices. We actually will stop price increases when the supply/demand balance is reached. So at this point, starting this year, we started to see tightness of the supply, and we continue to see that.

So we are going through one round of price increases. We have gone through one round of price increases. That's not fully reflected in -- it takes a little bit of time to see how it's impacting the order and how is it impacting the overall market, but we will be watching that and then decide whether the balance is reached or if it's not reached, we may inch up a little bit more and be frank and open about this one.

But if the demand is -- supply/demand is more or less at a good balance, we're probably going to pause or going to stop increasing prices. As I said, for the year, we expect, on average, as I said earlier, 10%, maybe if we're lucky, it will be 15%, 10% to 15%. And memory is one of the platform that increases, probably it will be above the average.

Okay. My second question is about the AI server opportunity. As we know, we already are making some like analog for some -- for AI server, and also we can see power discrete, the usage are also increasing in AI server. So from our point, how do we see the opportunity for us? Maybe just now you also mentioned like silicon photonics or maybe combine all this together, how do we see the opportunity?

Okay. The power devices, the overall market actually, you're correct, is actually increasing because of all the AI boxes need power devices, plus some of the new like robotics or the industrial demand is also increasing the demand for power devices. So the issue there probably is not so much our overall market demand. We do see that part as reasonably healthy.

The power devices in terms of -- the issue is probably the supply also increases quite fast, especially the compound semiconductor, like I said earlier, silicon carbide start to contribute a significant portion to power devices. So that here, you have a situation where the supply-demand balance is not off.

Therefore, for us to win business, we have to be -- it's a competitive market. We have to compete with our competitors. Now we do have a good silicon-based power device technology. We have led in that area. I think the part that we need to do more is to get the compound semiconductor as part of offering.

That's why earlier I said we are getting into silicon carbide and gallium nitride, the compound semiconductor, so that we can first provide a more complete solution to our customers and also give our customers more choices, more flexibility in terms of coming up with an optimal combination of the power devices to support increasing demand.

So that's the situation I see. Silicon photonics is a different story. That is -- we are starting from scratch. That is a nascent, a new development that is getting more and more important. I think that we don't have a silicon photonics offering right now. So for us, anything we get there will be a net addition to our business.

Next question comes from the line of Charlie Chan from Morgan Stanley.

So I actually have 2 questions. One is about your PMIC capacity expansion. I'm not sure if it's the right understanding, but could it be like a BCD process? Do you think you can expand that capacity given demand is so strong and also customers are willing to pay higher price? And if they cannot get the capacity from your fab, where they can go to get sufficient supply?

Yes. The power management product does use BCD technology, you're correct, that's the technology platform we're talking about, BCD. So that's number one. Number two, we are expanding the BCD capacity. That is already one of the highest capacity platform we already have, but we are expanding as we speak in both Wuxi as well as maybe in Huali Micro that we are about to acquire. So we will get higher capacity because we're now meeting the customer needs.

Third, you are correct that BCD area is a competitive marketplace. There's many players there, but we have been one of the biggest players in China and partly because we have a good -- we think we have a good technology advantage. And we also have some very valuable strategic customers that work with us. So that -- so we think we can increase the capacity and still be able to get good price on them.

So that's why we are doing capacity expansion. And this is also an area that we are focusing on in terms of technology development to try to get to next generation faster so that we keep that technology edge for us.

And my second part of this question is, so I also cover some Taiwanese foundry. For example, UMC, Vanguard, if I may quote, those are your industry peers. But it seems like their first quarter, second quarter wafer shipment sort of outgrow. I think 1Q they grow single digit. 2Q, like high single-digit Q-on-Q.

So I'm not sure after your capacity expansion, do you feel like you can win back some customers, maybe the consumer side or those non-China customers, maybe the U.S. customers or Taiwan customers, back to your fab for PMIC production?

Our PMIC business has been -- has grown in Q1. If we had more capacity, we probably could have done better. So as our new capacity come online, we do think that we can keep growing that part of the business. We already have customers from overseas, from U.S. and Europe for that matter because for European customer, they have this -- in China for China strategy that we do benefit from.

And the U.S. company, mostly because of their business, is growing very fast. So they need more supply. So in that sense, that we think BCD area or PMIC area, it is one area that is benefiting from the AI and AI-related growth. And also all the other -- like the car also need the PMIC and robotics overall.

The only -- from an end market standpoint, the only place we see some weaknesses is in the consumer segment, that we do see that. So the hope is that the area that's been growing, keep on growing like AI and robotics and the cars, auto and the consumer maybe will come back because they can't keep delaying those -- they can't keep on pushing out the new model forever. So they have to also get some of the growth or stop the decrease a little bit. So that's the overall picture I see.

Great. And my second question is some clarification on your comments. So in your prepared remarks, you sort of talk about, hopefully, some relaxation of the export control on equipment. But I think your Fab9, right, as you just described is more like 40-nanometer. If that is the case, why there's kind of export control? Or you were referring to your -- not your, but Huali's Fab8. So can you clarify your previous comment about the equipment restriction?

I was not talking about Huali. I was talking about just Hua Hong. You're correct. I also said we have not been impacted in terms of the -- by the export control. in terms of the equipment, we really need to buy. When I say if the restriction is more relaxed, in general, we will get more choices. It's always good to have more choice so that I might be able to have a little bit more optimal combination of the tools. It's not an issue if we can...

I see. So it's kind of nice...

Nice, yes, yes.

Okay. So nice to have. So even if it stays as core, it doesn't change your expansion for Fab9. Is that right way to think about this?

Yes. That's right.

And lastly, I think one of the previous callers asked about some potential new business, right? So I think for global AI semi supply chain, I think there are lots of components, for example, interposer, bridge die, silicon capacitors, there's VIC. So do you have any demand for those? I think the previous question was about CPO related, but I wanted to ask about all those kind of CoWoS or 2.5D packaging related components, no matter silicon capacitor, interposer, bridge die or VIC. Do you have any demand for those components?

Good question. We do see demand for high-density capacitor. So we are having an effort there to do the capacitors, changed or otherwise. So those high-density, high density capacitors. So that it looks like it's been there for a while now that we should start to see some revenue coming.

In terms of the other one, can you ask the question -- interposer. Interposer is also something that we are very open to it. I think that we are exploring some options there. That's still in the early stages. That's probably going to go with when we have our advanced packaging coming online. The interposer will also become a significant part of the overall packaging efforts.

Ladies and gentlemen, that's all the time we have for questions. I will now hand back to Mr. Daniel Wang for closing remarks.

Well, thank you very much for joining us today. I mean, you guys had a lot of wonderful questions. All these questions were -- has been very, very helpful, and we look forward to speaking with you again and perhaps seeing you in the next quarter. Thank you very much.

Thank you.

This concludes today's conference call. Thank you for participating. You may now all disconnect. Have a nice day.

Ladies and gentlemen, thank you for standing by. Welcome to Hua Hong Semiconductor Fourth Quarter 2025 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 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. Peng Bai, our Chairman and President, provide an overview of our fourth quarter and 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 2025 sale revenue for Hua Hong Semiconductor reached an all-time high of USD 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 USD 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 the 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 stand-alone 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 Fab9, exceeded expectations for completion. And the Shanghai 12-inch manufacturing base, Fab5 acquisition progressed as planned.

Looking ahead, the company will maintain a 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 seize 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 our 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 (sic) [ Q4 2024 ] and 3.9% over Q3 2025, primarily driven by increased wafer shipments and improved average selling price.

Gross margin was 13%, 1.6 percentage points over Q4 2024, primarily driven by improved average selling price and 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 other loss net of USD 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% (sic) [ 159.5% ] 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 $0.01. 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 2024, mainly 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 (sic) [ Q4 ] 2024, mainly 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 (sic) [ $19.3 million ], 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 card ICs. Revenue from stand-alone non-volatile memory was $56.6 million, an increase of 22.9% compared to Q4 2024 mainly driven by increased demand for flash products. Revenue from power discrete 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 increased 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 Hua Hong 12-inch and $74.5 million for Hua Hong 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 $1.3611 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 billion on December 31, 2025, compared to $3.9047 billion on September 30, 2025. Other current assets increased from $739.7 million on September 30, 2025, to $787 million on December 31, 2025, mainly due to increased value-added tax credit.

Property, plant and equipment was $6.6764 billion on December 31, 2025, compared to $6.162 billion on December 30, 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 30, 2025 to $478.8 million on December 30, 2025, primarily due to fair value gains recognizing equity instruments.

Interest-bearing bank borrowings increased from $2.3975 billion on September 30, 2025, to $3.1908 billion on December 30, 2025, primarily due to increased drawdowns on bank borrowings. Total assets increased from $12.5117 billion on September 30, 2025 to $14.4538 billion on December 31, 2025.

Total liabilities increased to $5.2895 billion on December 31, 2025, from $3.5026 billion on September 30, 2025. Debt ratio increased to 36.6% on December 31, 2025, from 28% on September 30, 2025.

Here is a recap of 2025. Revenue was $2.4021 billion, 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% (sic) [ 17.9% ] over 2024, largely attributable to increased research and development expenses. Other 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 million, 5.6% dip from 2024. Basic earnings per share was $0.032. 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 million with a projected gross margin of 13% to 15%.

This concludes my financial remarks. We'll now begin the Q&A session. Operator, please assist. Thank you.

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

Dr. Bai, congratulations for the robust results and the successful acquisition of Huali. So beyond the contribution to Hua Hong's revenue and profit, could you elaborate the strategic resource Hua Hong got through this acquisition? And what's your plan to leverage this resource to accelerate Hua Hong's future growth?

Thank you. First, basically, we acquired Fab5, what we call Fab5 within the Hua Hong system, is a 12-inch fab. It has 55-nanometer, 40-nanometer based specialty technology, quite a bit of the technology platform have overlap with what we already have at HHGrace in Wuxi.

I think we look at the acquisition from the following points. We think that 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 40,000 capacity, that's already in production with existing customers with -- the scale is one factor.

Another one is with Fab5 joining HHGrace, 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, should also show up in higher efficiency and lower cost for our entire manufacturing base.

So basically, we view this as definitely a strategic acquisition, will accelerate our growth both in terms of revenue and as well as our ability to -- profitability, ability to be more profitable. Thank you.

Okay. My second question is about the -- I want to -- about the supply-demand relation of the 8-inch and 12-inch mature fab business this year. So we noticed some foundry, including the largest one, just recently announced to exit some 8-inch business or sell their -- some 12-inch fab to the memory makers.

So what's your view on this supply demand balance of the 8-inch and the 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 of this ASP trend of Hua Hong this year?

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 you look -- 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 the memory certainly is 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 foundry 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 overall positive. It might show up differently in different market segments. It might show up differently in different technology platform we have our capacity in or our product in. But overall, we 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 across board increase by any means. But surgically for some certain area where we think that 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 (sic) [ grow ], especially on the 12-inch side. 8-inch, the supply/demand is more in balance compared to the 12-inch. So even if we try to -- we would like to increase prices as well in 8-inch, but our room probably is going to be limited. But overall, we do -- we are cautiously optimistic that we might be able to do something in that area as well. Thank you.

Our next question comes from the line of Ziyuan Wang of Citic Securities.

Firstly, I would like to wish you all a Happy Chinese New Year. [Foreign Language] I have 2 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 unbalance on the different platforms? And can our capacity be reallocated between different platforms quickly? That's my first question.

The change is fairly small. It's probably almost a calculating error. 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 they get the equipment installed 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 fab that especially when you ramp very fast, there is a bit of a lag 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. 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?

It's actually -- this is a complex question. Let me try to kind of see whether I can answer very clearly. I think if you look at from end market standpoint of view, clearly, AI-related products are increasing fast. What does it mean for us is that AI-related product actually cut across quite a few of our technology platform.

For example, the AI-related products in power management area is growing fast, is increasing. MCU, not so much, but there'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, is now AI is one growth area. Other areas like autonomous driving, automotive, the car related, all the new robots is also growing, all the green energy-related end market also show growth. All those end markets, the growth area do cut across -- in somewhat a complex manner, cut across different technology platform.

So if I look at our technology platform in that different -- 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 we -- and those 2 areas and plus in addition to the discrete power devices, constitute the 3 largest technology platform that we have from the revenue standpoint of view.

So going forward, I expect the power management area, the BCD platform we have, will continue strong growth. MCU, where Hua Hong HHGrace has a great advantage, has a great competitiveness, very competitive in this area, is also going to be an area that it's 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 you look at our distribution, our revenue distribution, I will still continue to see MCU, probably one of the biggest power management segment, discrete power devices probably going to -- we'll be more stable. Growth is not as fast, but it will remain #3.

The other 2 in terms of logic and RF, we like that to grow a little bit faster. And stand-alone, we actually -- stand-alone memory will also I think will grow reasonably fast.

Some of the memory shortages mostly in DRAM, it's probably going to have some spill over into -- we probably already spilled over into the NAND memory area, but I think it's going to fill a little bit over to the NOR 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 we take?

That's a good question. 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 AI is a different beast, that maybe this cyclical nature of the memory market will be a little bit different.

I don't have crystal ball. I do believe that eventually, it will be going to a cycle. Maybe this time, the boom cycle will last longer. It probably will heavily depend on how the AI -- is 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 2026, there's no sign that's going to slow down. Maybe in year 2 or 3 that if you go by historical pattern, it should start to come 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 -- will come across as a negative for some of our product as well.

But overall, I think the growth area 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.

[Operator Instructions] Our next question comes from [indiscernible] from [ Guosen ] Securities.

[Foreign Language] I have 2 questions. The first question is about the price. So 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 they get to us in the fab, we call that direct material or indirect material, we do see a few areas where the raw material prices start to show up in the semiconductor materials that we use.

I'm trying to think like a copper is probably one area that will add a little bit of a cost to the copper cable, should we happens to be building a fab, which is where we are. We do see that. And we also see some of the other -- some other raw material increases affecting a little bit of our -- 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, and 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 we -- 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 the situation, the material will be a cost increase for us going forward.

Very clear. And my another question is about the utilization. Since we are 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 is some potential order shift of our customers maybe after we increase the price?

Yes. So the fab utilization are affected by a few factors. There are 2, probably one is how competitive is your technology offering. That includes how -- whether you have a complete offering of the solutions to the customer for what a customer needs. That's one factor.

Another one, of course, is pricing. If you price too high your utilization, you will lose customer on one hand. On the other hand, you can -- there's always -- if you use -- if the prices, you are willing to go down the prices, it does tends to increase your loading.

So for those 2 factors, for example, on technology front, HHGrace is well positioned. We are a premier foundry in China. And lot of our technology platform, I would say we are probably #1 domestically and very competitive even internationally, not all of them, but some of them so clearly. So especially in this specialty technology area, which Hua Hong has -- HHGrace has been working on for the last 3 decades almost. That's one factor.

Another factor is that some of our international customers, especially the 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 manufacturing 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 a more stable company, the bigger company. So we are usually being viewed as a first choice many times -- many, many -- in many cases, we're the first choice for their Chinese -- as their Chinese partner.

So we do benefit from that factor as well. I think this trend will probably going to continue giving the whole, the world, this geopolitical situation and the world semiconductor market is evolving. Thank you.

Looking forward to a better performance in the coming year and Happy Chinese New Year.

Thank you.

Next comes from [ Scarlett Ku ] from BNPP. Okay. Otherwise, we will move on to our next questions. One moment, please. We have follow-up questions from Leping Huang from Huatai Securities.

Dr. Bai, I have a follow-up question. What's the current status of Fab9? 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 2 of the Fab9 or the new fab?

Look, let me address the question. Basically, the total capital expenditures for this project Fab9A is at $6.7 billion, okay? So by end of last year, we spent about slightly over $5 billion. So we spent another $1.3 billion. Basically, these are the POs, I mean we have basically issued not completely spend from cash flow perspective, okay?

So I would say, basically, there's another about -- to get to $6.7 billion, there's probably another $1.2 billion to $1.3 billion on cash flow -- from the cash flow perspective, okay? So most of POs have been issued for that project. So I would expect the cash will be spent mostly this year and some probably remaining in 2027.

Mostly this year because this year, we're going to reach the peak capacity for Fab8, the first half of Fab9. Your second part of the question is on Fab9B, which is our next project to fill up the remaining, the other half, the empty half of Fab9. 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 get -- we should be able to start getting the equipment in by end of this year, probably October time frame. The spending obviously is going to be mostly in 2027. So in 2027, we start another capacity ramp on the Fab9B, and we hopefully can complete that ramp even faster, in a velocity that's even faster than Fab9A.

Fab9A we ramped very fast. In 2 years, we pretty much get to the peak. And output will 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 when you get the wafers out and turn that into revenue.

But in terms of the capacity -- construction capacity in place, using that as a milestone, Fab9B will start in 2027, and we should get that done in less than 2 years as well.

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

Correct. That's correct.

Our next question comes from Ziyuan Wang of Citic Securities.

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, yes, you're talking about the fab utilization rate, they are already a little bit above 100. So it's not going to be significantly higher.

I mean on the equipment localization ratio.

Yes. So the answer is yes. The general direction, as the domestic equipment industry become more and more capable every year, that we -- 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 tends to be, not across the board, more attractive, a lot of players dependent on individual equipment, they can be more attractive. Then end result we expect is that the Fab9B project, we will end up with a higher domestic equipment content.

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 the -- for joining us today and for your wonderful valuable questions. The year of 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 holiday season and a healthy and prosperous New Year. [Foreign Language] We look forward to catching up with you very, very soon. Thank you.

[Foreign Language] Happy New Year.

Thank you. Ladies and gentlemen, that does conclude the conference call. Thank you for your attendance. You may now disconnect.

Ladies and gentlemen, thank you for standing by. Welcome to Hua Hong Semiconductor's Third Quarter 2025 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 and third 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 Q3 2025 earnings call. Today, we will first have Dr. Peng Bai, our Chairman and President, share some remarks on our third quarter 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.

All right. Thank you, Daniel. Good afternoon, everyone. Thank you for joining our earnings call. Third quarter 2025 sales revenue for Hua Hong Semiconductor reached a record high of USD 635.2 million, in line with guidance, while gross margin stood at 13.5%, above guidance. Driven by the recovery in global semiconductor demand and the company's lean management practices, our capacity utilization remained high.

Both sales revenue and gross margin showed year-on-year and quarter-on-quarter growth. The enhancements in our core competencies, including process technology, R&D, market development and operation, along with the results of our cost reduction and efficiency improvement initiatives are gradually becoming evident. Our overall profitability is improving, laying a solid foundation for long-term sustainable development.

Hua Hong Semiconductor possesses extensive expertise and exceptional management experience in specialty technologies, facing the rapidly evolving global semiconductor landscape. The company must continuously advance across multiple core dimensions such as technology capability and capacity expansion. The acquisition, which is currently progressing smoothly, will further increase our production capacity and diversify our process platform portfolio while creating synergies with our 12-inch production line in Wuxi to strengthen our profitability.

Furthermore, the company is actively engaged in strategic capacity planning, focusing on technological breakthrough and ecosystem development to continuously enhance our core competitiveness amidst the global industry transformation.

Now I would like to hand the call back to our CFO, Mr. Daniel Wang, for his comments.

Daniel?

Thank you, Dr. Bai, for your exciting remarks. Now let me walk you through a summary of our financial performance for the third quarter, followed by our revenue and margin outlook for Q4 2025 before opening the floor for the Q&A session.

First, let's review our financial results for the second -- for the third quarter. Revenue reached an all-time high of $635.2 million, 20.7%, over Q3 2024 and 12.2% over Q2 2025, primarily driven by increased wafer shipments and improved average selling price. Gross margin was 13.5%, 1.3 percentage points over Q3 2024, primarily driven by improved capacity utilization and average selling price, partially offset by increased depreciation costs and 2.6 percentage points above Q2 2025, primarily driven by improved average selling price.

Operating expenses were $100.4 million, 23.3%, over Q3 2024, primarily due to increased engineered wafer costs and depreciation expenses and 2.6%, over Q2 2025. Other income net was $70.8 million, 65.7% lower than Q3 2024, primarily due to decreased foreign exchange gains and interest income, partially offset by decreased finance costs and 67.4%, over Q2 2024, primarily driven by foreign exchange gains versus foreign exchange losses in Q2 2025.

Income tax expense was $10.4 million, 9.6% lower than Q3 2024, primarily due to decreased taxable income. Net loss for the period was $7.2 million compared to a profit of $22.9 million in Q3 2024 and a loss of $32.8 million in Q2 2025.

Net profit attributable to shareholders of the parent company was $25.7 million, 42.6% lower than Q3 2024 and 223.5%, above Q2 2025. Basic earnings per share was $0.015, 42.3% lower than Q3 2024, and 200%, over Q2 2025. Annualized ROE was 1.6%, 1.2 percentage points lower than Q3 2024, and 1.2 percentage points above Q2 2025.

Now let's take a closer look at our Q3 2025 revenue performance. From a geographical perspective, revenue from China was $522.6 million, contributing 82.3% of total revenue and an increase of 20.3% compared to Q3 2024, mainly driven by increased demand for flash, other power management IC and MCU products. Revenue from North America was $63.8 million, an increase of 36.7% compared to Q3 2024, mainly driven by increased demand for other power management IC and MCU products. Revenue from other Asia was $30.3 million, an increase of 5.6% compared to Q3 2024. Revenue from Europe was $18.4 million, an increase of 12.6% compared to Q3 2024, mainly driven by increased demand for IGBT and smart card ICs.

With respect to technology platforms, revenue from embedded non-volatile memory was $159.7 million, an increase of 20.4% compared to Q3 2024, mainly driven by increased demand for MCU products. Revenue from stand-alone non-volatile memory was $60.6 million, an increase of 106.6% compared to Q3 2024, mainly driven by increased demand for flash products.

Revenue from power discrete was $169 million, an increase of 3.5% compared to Q3 2024, mainly driven by increased demand for super junction products. Revenue from logic and RF was $81.1 million, an increase of 5.3% over Q3 2024, mainly driven by increased demand for logic products. Revenue from analog and power management IC was $164.8 million, an increase of 32.8% over Q3 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 $184.2 million compared to net cash flow used in operating activities of $26.8 million, primarily due to increased receipts from customers. Capital expenditures were $261.9 million in Q3 2025, including $230.7 million for Hua Hong Semiconductor Manufacturing, $19.3 million for Hua Hong 8-inch business, and $11.9 million for Hua Hong Wuxi.

Other cash flow generated from investing activities was $8.6 million in Q3 2025, mainly including $15.6 million interest income and $7 million receipts of government grants of equipment, partially offset by $14 million investment in equity instrument. Net cash flows used in financing activities was $104.2 million, including $99.9 million proceeds from bank borrowings and $14.4 million proceeds from share option exercises, partially offset by $5 million interest payments, $3.2 million of bank principal repayments and $1.9 million lease payments.

Now let's have a look at the balance sheet. Cash and cash equivalents were $3.9 billion on September 30, 2025, compared to $3.85 billion on June 30, 2025. Other current assets increased from $688.5 million on June 30, 2025, to $739.7 million on September 30, 2025, mainly due to increased value-add tax credit. Property, plant and equipment was $6.2 billion on September 30, 2025, compared to $6.1 billion on June 30, 2025. Equity instruments designated at fair value through other comprehensive income increased from $290.5 million on June 30, 2025, to $381.3 million on September 30, 2025, mainly due to an increased fair value of the equity instruments.

Total bank borrowings increased from $2.3 billion on June 30, 2025, to $2.4 billion on September 30, 2025, mainly due to withdrawal of bank loans. Total assets increased from $12.2 billion on June 30, 2025, to $12.5 billion on September 30, 2025. Total liabilities increased to $3.5 billion on September 30, 2025, from $3.4 billion on June 30, 2025. Debt ratio increased to 28% on September 30, 2025, from 27.5% on June 30, 2025.

Finally, let's discuss our outlook for the fourth quarter of 2025. We expect revenue to be in the range of $650 million to $660 million with a projected gross margin of 12% to 14%.

This concludes my financial remarks. We now begin our Q&A session.

Operator, please assist. Thank you.

[Operator Instructions] The first question is from the line of Leping Huang of Huatai.

I have two questions to Daniel and one question to Dr. Bai. So the first question, I noticed there's a very strong beat on the gross margin this quarter. Also, I think ASP up 5.2% Q-on-Q this quarter. So Daniel, can you explain -- break down the reason of this strong margin and ASP beat between the product mix improvement and the price adjustment of the existing products? Also, you gave the guidance for next quarter. So what's the -- your outlook for your ASP in the fourth quarter?

Thank you, Leping. First of all, we had extremely high utilization rate, okay? So the three 8-inch fabs were consistently above 110% utilization rate. And the first -- our first 12-inch fab with 95,000 wafer capacity, the loading was consistently above 100,000 wafers, okay? And then the other -- the fab that is currently ramping, it has about 40-plus thousand wafer capacity, but the loading is above 35,000. And pretty soon it's going to get to about 40,000 wafers in loading, okay? And in terms of that itself helps the margin.

And also, I think the most critical thing is the ASP improvement. We start to raise ASP in the second quarter and start to take effect in the third quarter. So you said, absolutely, is correct, overall, gross margin is about -- the price ASP is quarter-to-quarter or even compared to last year, it was about 5.2%. Basically, the ASP improvement was coming from all technology platforms -- all technology platforms, including embedded non-volatile memory, okay, power discrete and logic and RF, analog and power management IC, okay? So it basically came from all technology platforms.

I would say, if you want to really look at between product mix and ASP improvement, I would say 80% came from ASP improvement. And the other 20% is largely due to product mix. As far as going forward, I think we will continue to improve ASP. I mean we're looking at every order that comes in. We make sure that we -- if there is any opportunity, we can adjust price, okay? So I'm extremely positive about our Q4 in terms of ASP and the gross margin as well.

Okay. The second one is also for Daniel. So you also mentioned the utilization rate of your fab is very high. It's already 109%. So it seems to be -- do you think that -- so first, what are the actions you take to improve your factory utilization rate? And also, what you expect the utilization rate looking forward? It seems to be you are adding more wafer into your Wuxi fab. So do we -- should we expect the utilization rate will further improve in the coming quarters?

You know what? Excellent question. I'll let Dr. Bai answer the question.

Okay. Let me try. There's a few factors playing together. It's kind of -- there's some interplay of a few factors. First of all, utilization number, as you know, is based on standard IE calculation, meaning you're supposed to set up certain capacities and based on that number, if you do better, your utilization can be a little bit above 100%. But clearly, you can be significantly above 100%, otherwise, the number would be incorrect.

In our case, Fab 9A capacity is -- continues to come online. So we can -- there's two benefits. One is Fab 9A itself started to contribute to revenue. It actually adds more pressure to gross margin because all the depreciation also starts to come online. But it does provide some avenue to make our existing capacity a little bit more flexible in the sense that now you have a bigger scale when the product mix shifts that you can kind of use each other's capacity in each factory. That's how we can get the capacity utilization a little bit better above 100% or 105%.

It's -- let me also add a comment to the gross margin. Gross margin also compressed because I always said there's always a balance between how much more depreciation coming online, which is inevitable as the new capacity start to contribute to revenue on one hand. On the other hand, you have -- whether you can manage to increase prices. Daniel already talked about, we did manage to increase our prices by, you already calculated, around 5%-ish in Q3.

Another factor was our general cost reduction effort to make our cost structure a little bit better. That effectively balanced out some of the pressure we get from increased depreciation coming online. In the end, the Q3 story was a very good one. It was -- it also exceeded our expectation. But I do see that momentum in cost reduction as well as the price stabilization, if not increase, also start to take a hold. So that's a good trend for us.

One more add to this is that when the demand is a little bit higher than our supply, which relates to why our utilization is so high, it also gives us a little bit of leeway, a little bit of flexibility in optimizing our product mix, namely, we can choose to focus or give priority -- or give it capacity priority, a little bit more for the product that has a higher margin than the ones that have a lower margin. That also help our price increases.

If I -- I know I said a lot of things, but all those factors are there, and it's really the end result, and net is an interplay of all those factors that gives us the overall Q3 results. Thank you.

Okay. So the final question I want to ask is that I noticed that in Daniel's statement that the flash business is one major driver for your -- especially your China business. And in the investor community, we are talking about the memory super cycle. So Dr. Bai, so what's your view on how Hua Hong can benefit from the coming memory cycle and why the -- is it initial sign we see this quarter that your memory business or your flash business is going very strong? Is it initial sign of this memory super cycle?

Okay. Thank you for the question. First, I want to clarify the memory business that Hua Hong is engaged in is in the NOR Flash, which is one segment of overall flash business.

And that NOR Flash business, there's two parts to it. One is the stand-alone, just the stand-alone NOR Flash product. Another one is MCU that's basically integrated with the logic circuit. We are participating in both, MCU as well as flash memory. You are correct. We see a strong business in Q3 in both, MCU as well as stand-alone flash. I would say overall NOR Flash market has a steady growth. It's probably a little bit different than the overall memory business. The other memory business, like the correlation with the other memory business is not that strong. For example, the NAND might be doing -- has its own dynamics. DRAM, MCM, HBM, DRAM-based HBM, all those related to AI applications, those has its own dynamics.

Our part of the business, we do see steady growth in the NOR Flash business, in both MCU and stand-alone. Our, if you will, Q3 growth rate clearly is faster than the overall market growth. That probably has more to do with our own situation where our 55-nanometer NOR Flash started coming into the mass production phase in the last couple of quarters, that started to pick up volume. And also our 55-nanometer MCU business also is going into the mass production. And in the next year or 2, we're going to have 40-nanometer. In next year, 40-nanometer NOR flash business stand-alone as well as the MCU will come online. That will give us another push.

So in general, we do see that our flash business will have a strong growth over the next few quarters, even next couple of years, mainly based on our new technology -- new technology transitions. I would say the other memory business, their dynamics might be a little bit different. Some of them are also growing strongly. It's probably not correlated with our situation.

Our next question comes from Ziyuan Wang from Citic Securities.

[Technical Difficulty].

Operator...

Can you help?

We couldn't hear the question clearly. So can you please ask him to repeat?

Ziyuan, would you be able to dial again or change to another better connection to repeat your question, please?

Sorry, can you hear me now?

I'm afraid the line is bad. Would you like to dial back, and we will take your question.

[Operator Instructions] The next question is from Jian Hu from Guosen Securities.

[Foreign Language] So I have -- first, I have a quick follow-up. Just now, Daniel also mentioned the growth drivers for the next few quarters, some factors like capacity expansion and also the price increases. So how about the product structure adjustment for the future growth? So could you give us more details? And this is the first question.

Sure. All right. In terms of capacity expansion, we basically -- you will see a continued increase from our Fab 9A because we are still in the capacity expansion phase. Earlier, Daniel mentioned that the Fab 9A reached about 3,000 to 4,000 wafer -- 30,000 to 40,000 wafer per month right now. It's been climbing over the last 3, 4 quarters. That expansion will continue all the way towards till middle of next year. That will reach the peak of, I would say, 60,000 to 65,000. So you -- and those capacity will come online, will continue to give us -- contribute to the revenue growth. So that's on the capacity expansion front.

In terms of the product mix, optimizing the product mix, that's really come down to the technology evolution, how our technology platform will evolve over the next few years. The key technology that we see that it will become better and more competitive. One, starting with the flash related, I talked about earlier, flash is a factor -- a growth sector for us. I think we -- with our 55-nanometer products online and next year, 40-nanometer products online, that will give even stronger position in this sector. So hopefully, that will bring the added value of the prices up with it.

Another significant technology platform is the BCD platform for power management. Now we see a strong growth, and we see -- we are also purposely expanding capacity for BCD and basically skewing our product mix -- capacity mix towards supporting more BCD and BCD technology. BCD platform happens to be one that has a better margin among the technology platforms that we offer. So that will also give us a better product mix in essence.

So then we continue to add -- continue to strengthen our overall technology development. This is one of the areas that is definitely a focus for the company. When I talk about how can we further improve our core competence, it's really talking about our technology capability and associated marketing capability.

So all the key specialty technology platform, we basically will continue to invest heavily. And some of the platforms, we're already the best. We're already #1 in China, also very competitive worldwide. Some of them, we still have a little bit of distance to travel to become world-class, to become the best. In general, we're best in China in most of the technologies we participate in that we were -- then in some of the areas, we still need to improve a little bit to become really truly world-class.

Here, I can also mention that some of the partnerships we have with our mainly European companies to -- in the context of China, their China for China strategy is also a way for us to increase our competitiveness. So I think I will stop right here in terms of answering your question. I don't know if that clarifies for you.

Very clear. My next question is a relatively big one. So driven by the boost from AI, we can see the global semiconductor sales have grown for like 8 quarters. So compared to the previous cycle, it's a relative long growth period. So how do you see the growth momentum in following quarters?

It is a very big question, a broad question. I think the -- I'll give you my personal take on this. AI is still at its infancy. I think the AI will continue to grow. How it manifests the growth -- how does the growth manifest in the different segment of semiconductor, that's a little bit complex. The direct benefit, obviously, is for the advanced technology, advanced node, which Hua Hong Semiconductor is not directly participating.

But there's a lot of supporting technology associated with the Al products. We are a big part of those segments, like power management, because when you have -- you make AI systems, you need a lot of power management, either for training or now the industry seems to switch towards more deduction type of applications from training. So I think we all -- we definitely benefit from overall AI growth through their increased demand for power management, for MCU, for all kinds of -- power discrete products, they all need those. They need those in order to make the AI system work. So we are definitely part of that ecosystem.

So we were -- in fact, some of the power management demand increase -- strong demand increase over the last year and continue -- that seems to continue into next year or 2 is primarily related to AI and plus, some of the new application on the horizon like cars and robots, those type of things. AI definitely is a big factor.

So that's how I see it. I think AI will continue to grow. You might -- the product mix there might go through its own evolution. But overall, I think that bring along the whole -- all the chips that's needed in AI system, that's where we get the direct benefit, is all those associated chips in AI system that we do directly participate.

Yes. So I have a follow-up. So how about the power semiconductors. So compared to last few years, power semiconductors have shown some recovery, but still besides the AI demand, the rest of the part, the demand is relatively flat. So how we increase the pricing following quarters? So how do you see the pricing in this part?

All right. You are a very astute observer. I agree with you, the power discrete platform amongst our technology platform that we participate in probably has the biggest pressure in terms of growth. I think there are a couple of factors. One is, there are increased competition and increased capacity in the power discrete. Because the power discrete area, the barrier to entry is relatively small. So there are -- there has been over the last few years, large capacity coming online. So that's one factor that put some pressure on us.

The second factor is some -- second factor is technological because right now, the compound Semiconductor like silicon carbide, mostly silicon carbide, but gallium nitride also start to become a significant factor. Those compound semiconductor-based devices become a significant factor in the overall power devices market that inevitably take away some of the silicon-based devices, especially, for example, the super junction, that used to be a Hua Hong -- still is a Hua Hong strength. But that is directly -- there is a direct competition for super junction-based product, silicon super junction based product from silicon carbide. And silicon carbide looks like over there, people are willing to cut price very, very drastically. So they start to have some competition with our super junction.

And so this is one of the topic we've been -- inside the company, when we talk about our technology road map and also talk about our market perspective, is one of the focus area that we will come out with some strategy. We already started gallium nitride development. So we will definitely -- we have been a big player in the power discrete, we definitely will not give up this market segment. We will continue to be bigger and stronger by adding all the -- whatever the customer needs.

So there's a few new initiatives in the power area that we will try to meet the challenge. The challenge is mostly a little bit long term. Short term, I don't see a huge problem, but longer term, over the next 3 or 5 years, that, we do need to do something there to make sure that we continue to keep our very strong position historically in this area. Thank you.

Thank you, Dr. Bai. I also agree with you, and we also think gallium nitride on silicon is a good direction for the new power semiconductors. So that's all my questions and looking forward to a better performance in next quarters.

Once again, we will take the question from Ziyuan Wang from Citic Securities.

Sorry for the connection previously. My first question is about the international customer adoption. We can see that this quarter, the proportion of customers in U.S. and Europe increased. And we also know that STMicro previously announced that they plan to produce 40-nanometer MCU in Hua Hong by the end of 2025. So how is it going? And are there any other new developments or new customers that you can share?

You're correct that we have a partnership with ST on MCU, 40-nanometer MCU. That project has been going very smoothly. In fact, it's a little bit ahead of schedule. We already started with production in this quarter. So that's a little bit ahead of schedule. That will continue -- it will start to contribute to our revenue in the next quarter.

In terms of ramp rate, it will take a while to get up to a fairly high volume, but it's definitely a steady and very robust addition to our product mix. So that one is going well. Actually, this is one of the first collaboration projects we have with ST as well as other European companies for their China for China strategy. I think since now that we have worked together for quite a while and with this track record, everybody's confidence level has increased significantly. That's probably going to play a very positive role in terms of expanding our collaboration in the number of the products and also the area of the -- where we can collaborate with each other. So I would say that definitely is a hugely positive start, and that will start -- next year, you will see a multiply of those collaboration projects come to fruition in the next year.

In terms of the international portion of our business, we always like to increase our international business because this is one of our strategy. Ever since I started here, we set a strategy to see how can we increase our international business, in terms of the percentage of international business. We are right now probably 15% to 20% range. I haven't looked at the number exactly, but that's the range we are in. I think Europe and North America, both regions, I still do see strong growth going forward. Asia is a little bit more challenging, but our two biggest international region, North America and Asia, will continue to grow strongly over the next few quarters.

Okay. And these kind of customers also benefit from the AI, especially the AI power, right?

Correct. If you look at our business from North America, a big part of it -- part of it is the power management chips. Indeed, those are the ones that got used in the AI systems.

Okay. Very clear. And my second question is about the CapEx. Is there any outlook for CapEx for next year as we are continuing to expand our capacity in Fab 9? Will there be any increase compared to this year? Or will it be stable?

Thank you, Ziyuan. Let me just give you an update on that. Basically, for the -- for 2025, the three 8-inch fabs, roughly, it's about $120 million overall on a cash flow basis. That is the CapEx spending for the three 8-inch fabs. And then we -- the expected CapEx for Fab 9A is about $2 billion for this year. So we spent about $3-plus billion up to the end of last year. So we're going to be spending about $2 billion this year. So that gets us to about $5-plus billion. The overall project -- the total investment for the project is $6.7 billion. So it will be about $1.3 billion to $1.5 billion for next year for Fab 9, okay? So that is it for basically the CapEx for this year. So it would be $120 million for the [ 8-inch ], plus $2 billion. Next year, it would be just around $1.3 billion to $1.5 billion for the remaining of the CapEx spending that we have to spend for this Fab 9.

And of course, in the future, if we do have -- we want to continue to grow, we want to continue to expand. We have plan to basically build another fab, but that will be a different story, okay? So when that happens, we'll let you know what would be the total capital spending for that new project.

Our next question comes from the line of Tony Shen of SPDBI.

[Foreign Language] Dear management, this is Tony from SPDB International. I've also got two questions here. The first one, can we have some color into the semi cycle, especially for Hua Hong into next year, 2026. In our current stage, it's very good. The cycle is trading up. We have a little bit of tight supply with high demand, and the gross margin is also trading up into third quarter and also into the fourth quarter. Do we still see the tight supply will continue into the next year? And can we continue to raise prices for most of our products into next year? This is my first question.

From the market standpoint, we do see the momentum will go into next year. We think next year should be better than 2025. There's uncertainties and but just from the pure market unless something big happened like some of the geopolitical or otherwise, we do see that the growth will continue into next year. That will give us some opportunity to raise prices or at least keep the prices stable. I think we -- I want to be a little bit cautious in terms of raising too high expectation of how much prices we can raise because we are still in a very competitive industry. And there's many, many factors involved.

But I do see overall, if the demand -- if demand goes up, if nothing else, you give us -- will give us a way to optimize our product mix, I can choose to make more higher-margin products than lower ones. So basically, I have at least that possibility -- that flexibility. And also with our improved technology offerings, we basically add value to our customers' products. We tend to be able to -- in that scenario, we should be able to also share the benefits that come out from those improvements with our customers, have some kind of win-win situation. So in general, I'm cautiously optimistic to use the cliche that 2026 will be better than 2025.

Okay. Perfect. That is very clear. And my second question is still related to AI servers. Can I have a basic sense of how much revenue may come from directly or either indirectly from AI servers? And how do we see the growth potential, especially into next year? Yes. This is my second question.

For AI server, there's -- power management is the obvious product that goes into that. If you look at our power management business, I think it's about 10% to 15% there. And not all of them are going to the AI server, but the growth -- the bigger growth part is related to power server. So look at the numbers here that -- so I would say the power management, we put it into analog and power management category, is about 25% of overall revenue. Probably right now, more than half -- about half of it -- about half of it is related to AI servers. So it's about 10% to 12%. That portion, we believe will continue to grow strongly. Thank you.

[Operator Instructions] Our next question comes from the line of [ Scarlett Ker ] from BNP Paribas.

[Foreign Language] First of all, congratulations on the strong performance. My question is on the -- one of the numbers. So the operating cost is around USD 100 million. Could you share a bit of a breakdown of the wafer engineering cost and the depreciation? And could you also elaborate a bit on what drives the increase of the wafer engineering cost? And going forward, what you expect the trend to be for both, engineering cost and the depreciation?

So out of that $100 million, the depreciation costs related to the R&D. It is about $18 million for this quarter, Q3, okay? And we continue to invest in the R&D. We have a lot of new products, tape-outs. So this number, we expect in the future will continue to be stable and will probably continue to grow as well, okay? So basically, you have to realize the more we invest, that number will go a little bit higher. Compared to a year ago, that number is much higher now. So that is basically the breakdown. But the other, I would say, $80 million is all related to mostly labor, IT and some other stuff.

Our next question comes from Qingyuan Lin from Bernstein Research.

Congrats on the good results. My first question is around the -- one segment around the industrial and auto. How much is auto versus industrial? And do we see stronger growth on the auto segment because we are indeed seeing the auto demand in China are still quite strong?

So the industrial and auto, that part is about -- overall for that segment was about -- it's going to be nearly about -- for Q3, it was about 22%, okay? But going forward, I expect that segment will continue to grow. We have -- we expect this segment will grow -- have a pretty big growth percentage for Q4 quarter-over-quarter, okay? So out of that 22%, about 26% is related to industrial, about 6% is related to automotive. In fact, industrial has been recovering throughout this year compared to a year ago.

Just to add a little bit to Daniel's answer is that the category you call industrial auto, it actually cut across all our product lines. Some of them are in power discrete, some of them are in MCU, some of them are in power management because those end product -- end user products like auto, industrial, they use all kinds of products. And so it's not just about, say, power management or MCU or power discrete. So it's basically a different -- but the number that Daniel gave you is the correct number.

Got it. Got it. It's very clear. And the second question is around the power discrete actually. It looks like the percent of revenue from power discrete coming down a little bit. Is it capacity constraint? Or we're actually pushing out a bit of a demand because we don't see sort of enough demand there?

We talked about this in one of the earlier questions, too, that power management -- the power discrete as a percentage of our revenue is going down a little bit because the other -- it has not grown as fast as the other segments. So that's how the number play out. But in absolute numbers, the power discrete business is still grow a little bit, but as a percentage, because it hasn't grown as fast with others. So relatively speaking, it will have a smaller percentage of our overall business -- our overall revenue. So that's number one.

The second point is that the reason we discussed earlier that this is one segment that we do see more competitive pressure, mostly on pricing. We still have fully loading, and demand is still strong, but the pricing is -- we won't be able to -- we haven't been able to raise price on this area too much. And going forward, it's probably going to be continued, a bit of pressure, just because of the entry barrier to this market segment is relatively low. And plus, we talk about early silicon carbide and start to have a bigger -- to a larger extent and gallium nitride to a smaller extent, start to have added pressure for this market segment.

Very clear. Maybe last question quickly on any updates on Fab 5 consolidation, time line impact, synergy, et cetera?

Well, it has been moving along according to schedule, okay? So we had our first announcement. We basically already announced the price for the deal. We're negotiating almost close to the completion. Pretty soon, we're going to have our second announcement, second Board meeting. And we expect that will happen very, very quickly. So we expect -- we -- literally, we're going to start to take over the operation start beginning of next year, expect the transaction will be closed by August next year, okay? And all of that will happen -- even the shareholder meeting will probably happen in December. So we're moving according to the schedule.

We're working with the shareholders, the other side, very closely to make sure in the end, we're going to have a very fair deal, a fair deal, a fair transaction. And whatever we're going to pay for the value is going to be -- from a company's perspective, we're looking out to the interest of all the independent shareholders, okay? So we want to protect the interest of all shareholders.

Just to add a comment there that the acquisition deal, obviously, is moving along at a pace that's commensurate with the regulatory requirements. We are following all the requirements of both exchanges because we're listed in both Hong Kong and in Shanghai. So we definitely follow all the regulatory requirements and taking all the steps.

Our goal is to have a good deal for all the shareholders. as well as the seller as well as the buyer side of the shareholders. So this obviously require a lot of work to negotiate to kind of get the assessment right. Daniel and Daniel's team has done a great work so far. We're getting close to the second milestone of announcing something very quickly that will set the deal price, I think then we will follow the regulatory requirement of having all the appropriate approvals that we still need to get -- go through.

We hope that in this process, all the people who support our company, support Hua Hong Semiconductor, please do your part to make this thing go through smoothly. Acquisitions are always not an easy thing to do, especially when listed in both places. But we are pretty confident that we will have a very good outcome for everybody, for all the stakeholders as well as all the people who have been cheering for Hua Hong. Thank you.

Right. I mean just one last thing. It's going to be a good acquisition. It's going to basically give us, as I mentioned before, to many investors, $600 million, $700 million revenue addition. The company is profitable. Most of depreciation is behind us. So it's going to be good for Hua Hong Semiconductor. And then long term, consolidation is the way.

Yes. I think Daniel makes a very important point that this acquisition, strategically, is definitely a very, very good deal for the company because it has a lot of synergy. It can -- our growth model is both organic, which we have been doing very aggressively over the last few years as well as inorganic through acquisition. If we think -- you ask if the total 1 plus 1 is going to be larger than 2, we will do that. And this is a good example of having a target -- having an asset that can significantly add to our growth as well as increase our synergy that we're -- it should help our long-term growth and the profitability picture. Thank you.

And also with the additional -- the specialty technology platform under Dr. Bai's leadership, I think it's going to be more profitable.

Thank you. Ladies and gentlemen, that's all the time we have for questions. I'll now hand back to Mr. Daniel Wang for closing remarks.

So this concludes our today's call. Once again, thank you all for joining us today. It's been very exciting. Thank you for all your thoughtful questions. We appreciate your continued support and look forward to speaking and seeing you again soon, next quarter, okay? Thank you.

Ladies and gentlemen, thank you for your attendance. You may all now disconnect.

Ladies and gentlemen, thank you for standing by. Welcome to Hua Hong Semiconductor's Second Quarter 2025 Earnings Conference Call. Today's call is hosted by Dr. Peng Bai, President and Executive Director; and Mr. Daniel Wang, Executive Vice President and Chief Financial Officer. [Operator Instructions]

The earnings press release and second 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.

Good afternoon, everyone. Thank you for joining our Q2 2025 earnings conference. Today, we will first have Dr. Peng Bai, our Executive Director and President, share some remarks on 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 Q&A session.

With that, I turn the call over to President Bai.

Thank you, Daniel. Good afternoon, everyone. Thank you for joining our earnings call. Second quarter 2025 sales revenue for Hua Hong Semiconductor reached USD 566 million, in line with guidance while gross margin stood at 10.9% above guidance. Both sales revenue and gross margin showed sequential growth with capacity utilization hitting a record high for recent quarters. Amidst global trade and foundry market fluctuations, the company focused on enhancing core competencies in products, processes, R&D and supply chain management. The initial progress has been made in cost reduction and efficiency improvement, leading to continuous optimization of key operational metrics.

Facing a semiconductor market with demand fragmentation, we remain anchored to our speciality technology domain, striving for breakthroughs in key technology platforms to diversify our product portfolio. As the new 12-inch production line in Wuxi steadily ramps up capacity, the company will achieve comprehensive upgrades from capacity scale to technology capability.

Regarding market strategy, we are aligned with domestic and international strategic customer needs while embracing an international and open business development approach to expand our global client base. Hua Hong Semiconductor will continue to actively deploy strategic initiatives in the future to solidify the company's leading position in foundry industry.

Now I would like to hand the call over to our CFO, Mr. Daniel Wang, for his comments. Daniel?

Thank you, Mr. Bai for your inspiring remarks. Now let me walk you through a summary of our financial performance for the second quarter, followed by our revenue and margin outlook for Q3 2025 before opening the floor for the Q&A section.

First, let's review our financial results for the second quarter. Revenue was $566.1 million, 18.3% over Q2 2024 and a 4.6% over Q1 2025, primarily driven by increased wafer shipments. Gross margin was 10.9% or 0.4 percentage point over Q2 2024, primarily driven by improved capacity utilization and average selling price, partially offset by increased depreciation costs, and 1.7 percentage points above Q1 2025, primarily driven by improved capacity utilization. Operating expenses were $97.9 million, 8.4% over Q2 2024, primarily due to increased engineering wafer costs and the depreciation expenses, and 0.8% over Q1 2025. Other income net was $10.6 million, 54% over Q2 2024, primarily driven by decreased foreign exchange losses and finance costs and increased government subsidies, and compared to other net loss of $8.3 million in Q1 2025, primarily due to decreased foreign exchange losses and finance costs.

Income tax expenses was $7.1 million, 15.2% lower than Q2 2024, primarily due to decreased taxable income. Net loss for the period was $32.8 million compared to $41.7 million in Q2 2024 and $52.2 million in Q1 2025. Net profit attributable to shareholders of the parent company was $8 million, 19.2% over Q2 2024 and 112.1% above Q1 2025. Basic earnings per share was $0.05, 25% over Q2 2024 and 150% over Q1 2025. Annualized ROE was 0.4%, flat with Q2 2025 and Q1 2025.

Now let's take a closer look at our Q2 2025 revenue performance. From geographic perspective, revenue from China was $469.7 million, contributing 83% of the total revenue and an increase of 21.8% compared to Q2 2024, mainly driven by increased demand for other PMICs, super junction, analog and logic products. Revenue from North America was $53 million, an increase of 13.2% compared to Q2 2024 mainly driven by increased demand for other power management IC products. Revenue from other Asia was $28.6 million, a decrease of 1.2% compared to Q2 2024. Revenue from Europe was $14.7 million, a decrease of 14.2% compared to Q2 2024, mainly due to decreased demand for general MOSFET products.

With respect to technology platforms, revenue from embedded nonvolatile memory was $141.2 million, an increase of 2.9% compared to Q2 2024, mainly driven by increased demand for MCU products, partially offset by decreased demand for smart card ICs. Revenue from stand-alone nonvolatile memory was $27.6 million, an increase of 16.6% compared to Q2 2024, mainly driven by increased demand for flash products. Revenue from power discrete was $166.7 million, an increase of 9.4% compared to Q2 2024, mainly driven by increased demand for super junction and general MOSFET products. Revenue from logic and RF was $86.6 million (sic) [ $68.6 million ] an increase of 8% over Q2 2024, mainly driven by increased demand for logic products. Revenue from logic and power management IC was $161.2 million, an increase of 59.3% over Q2 2024, mainly driven by increased demand for other power management IC products.

Now turning to our cash flow statement. Net cash flow generated from operating activities was $169.6 million, 75.1% over Q2 2024 and 238% above Q1 2025, primarily due to increased receipts from customers. Capital expenditures were $407.7 million in Q2 2025, including $376.4 million for Hua Hong Manufacturing, the second 12-inch fab. $17.6 million for Hua Hong 8 inch and $13.7 million for Hua Hong Wuxi, the first 12 inch fab. Other cash flow generated from domestic activities was $22.2 million in Q2 2025, mainly including $19.4 million interest income and $5.5 million receipts of government grants of equipment, partially offset by $2.8 million investment in an associate.

Net cash flows used in financing activities was $25.2 million, including $125.7 million in bank principal repayments, $38.6 million interest payments and $1.2 million lease payments, partially offset by $138.1 million proceeds from bank borrowings and $2.2 million proceeds from share option exercise.

Now let's move to the balance sheet. Cash and cash equivalents was $3.8469 billion on June 30, 2025, compared to $4.0799 billion on March 31, 2025. Other current assets increased from $648.8 million on March 31, 2025 to $688.5 million on June 30, 2025, mainly due to increased value-add tax credit. Property plant and equipment was $6.102 billion on June 30, 2025, compared to $5.9676 billion on March 31, 2025. Total assets decreased from $12.2868 billion on March 31, 2025 to $12.2371 billion on June 30, 2025. Total liabilities decreased to $3.3634 billion on June 30, 2025 from $3.4061 billion on March 31, 2025, primarily due to decreased payables for capital expenditures. Debt ratio decreased to 27.5% on June 30, 2025, from 27.7% on March 31, 2025.

Finally, let's discuss our outlook for the third quarter of 2025. We expect revenue to be in the range of $620 million to $640 million with a projected gross margin of 10% to 12%.

This concludes my financial remarks. We'll now begin the Q&A session. Operator, please assist. Thank you.

Thank you. We will now begin the question and answer session. [Operator Instructions] We will now take our first question from the line of Ziyuan Wang from Citic Securities.

Okay. Congratulations on very good results of this quarter. And I think the gross margin of Q2 and Q3 guidance beats our expectation. And my first question is we think maybe there is -- there are some impacts from export rushes and inventory replenishment in the second quarter. But based on the downstream demand, how can we assess the sustainability of the subsequent demand in the second half?

Okay. Thanks. Let me try to answer that question. First of all, I think the second quarter, the gross margin indeed exceeded our expectations a little bit as well, primarily driven by a few factors. One is the demand has continued to be robust. I think there are 2 or 3 big internal factors that drove this change because the external demand has been pretty robust over the last few quarters now. I think the Q2 results is probably primarily due to 2 internal factors that have exceeded our expectations. One is our capacity utilization. Capacity utilization has been a little bit better. Another one is our cost reduction efforts is also going pretty smoothly. I should add another third factor, which is the pricing erosion, what we're seeing over the last few quarters has stabilized somewhat. I wouldn't say the prices increased, but definitely has not continued to be low especially on the 12-inch side. And obviously, there's a lot of complexity there because it will depend on different technology platform, some are doing better than others while the power discrete, for example, still under pretty tremendous pricing pressure, but other platforms IT platforms that we have are doing okay.

Now to your second part of your question, second half of this year, the two internal factors I just mentioned for Q2, I think they will continue. But you have to realize in the second half, the fab 9 capacity will continue to come online and will give us more depreciation pressures. So that's the factor that should be taken into count. Overall, I think our view is reflected in our Q3 projection, which is gross margin. I think it's going to be around 10% to 12%. And our visibility into Q4 is obviously less than Q3, but I think it's probably still going to be in that range, but we should wait until we get close to Q4 to give you a more precise projection.

Okay. I want to have a quick follow-up for this question. On the pricing side, we also see the ASP on the second quarter is stable Q-on-Q. And do you think there will be any ASP going up in the second quarter? And if there is any price -- sorry, in the second half -- but -- and is there any price increase or which kind of products will it primarily focus on?

I would say we would like to have a small price movement in the second half of the year and probably in a single-digit type of range, is mostly being focused on 12-inch and IC platforms.

Just to add, we basically start to do all the price adjustment in second quarter. So the -- most of that is going to reflect starting Q3 and Q4. So I think in Q3, Q4, you're going to see a pretty clear price basically lift in the 2 quarters. We expect -- the adjustment we did in Q2 to reflect in Q3 and Q4.

Let me be clear, but not too big. Just make sure you don't overestimate that.

Okay. Got it. Okay. And the second question is, I think about the anti-internalization. The current policies is guiding the industry like some photovoltaics to begin anti-internalizing.

Sorry.

Could you please repeat that question again?

We seem to have lost him. Yes, operator we seem to lost...

Is there any -- sorry, can you hear me?

Yes. We lost most of your question, can you repeat that?

Okay. Okay. Sorry. The current policies is guiding the industry like photovoltaics to begin anti-internalization process. And in the semiconductor industry, especially the mature nodes in recent years, we can see the competition has been intensified. Is there any possibility of similar anti-internalization process in the semiconductor industry? Or is the industry still in a period of unregulated growth?

That's a good question. It's actually a question a lot of people are asking. I would say for semiconductor industry, first of all, the end market, the end market like EV and solar, they are going through their own dynamics and maybe there's going to be less unhealthy competition there. Semiconductor, we certainly hope that will be the case as well. I think my personal take is that there are some market forces that will start to have an effect on that, meaning that -- the second factor is when the market goes for another one is the policy direction, my reading of the policy direction are also pointing to the same direction that you're probably going to constrain some of the capacity increases over the next couple of years, which in turn will reflect into more stability in the semiconductor industry if that's what you're asking. So I do think in next couple of years compared to last couple of years, we will see a more stable, more stability in terms of the capacity increase. Overall, it should be a positive factor for our industry.

We will now take our next question from the line of [indiscernible] from Guosen Securities.

[Foreign Language] I have 2 questions. First, I will follow up the previous questions about the demand first. Currently, we can see the regional differentiation in the demand. The domestic demand is strong, while the overseas demand is weaker. And also the differentiation exists among the manufacturers since our utilization is high, but some foundries are facing challenges. So many investors worry about demand uncertainty of the longer term. So are there any details you can give us, some of the drivers in the following quarter or the longer-term growth maybe from management or other sectors.

Okay. Thank you for asking the question. We got quite a few of them mixed there. Let me try to see if we can tease out each one of them and give you a more comprehensive answer. In terms of demand, let me -- I think we -- as I said, for our -- we have been seeing robust demand actually over the last few quarters now. I think that will continue into near future for as far as we can see. This is hard to explain in simple terms because our end markets are quite complex. There are some end markets probably are not growing as robust, but some others are probably growing pretty fast. So for example, all the AI-related applications are pretty healthy and also growing robustly.

And the consumer sector seems to also be doing okay, probably helped by the stimulus policy that has been going on. And also the consumer electronics I think its after some inventory adjustment seems to be back to normal as per our reading. And EV, that has also has been driving some growth. So although the end market also seems to go through a lot of changes, we'll see exactly how that will translate. So with all the different end markets have different dynamics, but all -- you got them all together that combine them and translate into our business since we do think that the near term the situation, the demand situation is fairly stable and has been similar. probably similar to what we have seen over the last few quarters.

So for Hua Hong, for both near term and long term, you asked about our long-term growth strategy. Many differentiate. The near term, basically, we got to work with the capacity we currently have. And what we will try to do is improve the efficiency, try to get more out of the current asset base and try to get the technology better and also deploy into the areas where we think the pricing are better or the pricing are more and more robust and try to flex from the area where there's a more price erosion to areas where price can hold up a little bit better. Near term is basically what we have been doing over the last 2 quarters with improved efficiency, continue to drive cost reduction, continue to focus on technology development so that we get -- have a better technology and better product offering to our customers.

Longer term, the growth has to come from an increase in our capacity. So we are -- we will be expanding our capacity as -- just like we have been doing continuously over the last few years now. So we'll continue that journey. We will continue to expand our scale, increase our capacity, and we'll do so in a fashion that obviously needs to be efficient. Also, we will target technology in the specialty technology area where we think the growth potential is good and also we have a competitive advantage. So on that particular point, I'm sure in the later quarters as we get some of the growth plan more firmed up then we can give you guys more update.

Understood. And my another question is about the power devices since we can see the market is recovering while the margin is relatively low compared to other products. So what's the target proportion of the power device in our overall capacity planning? I believe maybe there's a trade-off here.

The power device, first of all, it is a large market. I think the overall market is still growing, largely because a lot of new applications -- let me wait until it is over. So I think our view is that the end market is still growing. The market is also large. There's a few growth factors for the end market like EV, maybe eventually robotics. So also become a big growth factor for power devices. So that is not the issue. Another thing that's positive is that the power devices, the technology continue to evolve, some of the technology -- we have a pretty comprehensive technology offering in the power devices. And we also have some specialized areas that we're doing pretty well like Super Junction because Hua Hong has been probably a leader in this area in terms of technology.

So that's one of the factor I want to also say that. The less positive factor for power devices, frankly, is more of a supply-demand balance. I think over the last few years, one can argue that the capacity growth mostly from our competitor has been pretty fast. That might have led to some imbalances between the supply and demand, although the overall demand is still growing, that does -- it does have some pressure on the pricing, especially on the lower end of the market. So we have clearly seen that Hua Hong has a pretty large power device capacity. We have a large base. We have that in 8-inch, and we also have that in 12-inch.

So that we have a pretty large capacity. So we will continue to basically use our competitive advantage there, including the scale we have, which is pretty large in the foundry market for power device -- in terms of the power devices. And we will continue to use our advantages, our competitive advantages to make this market work for us better in the future. All the new capacity planning we are doing in the future, we do not expect to continue to expand the power device capacity. What we have is already pretty large when you put the 8-inch and 12-inch together. I hope I answered your question.

Yes. And we are looking forward to the better performance in the following quarters.

We will now take our next question from the line of Leping Huang from Huatai.

Okay. So first, congratulations for the very strong result and also the guidance. I noticed that the percentage of sales from the analog and power management increased again this quarter by 3.2 percentage. And can you share some kind of what are the end application of this analog you are increasing? And what are the outlook of these analog segment looking forward in the next few quarters? .

Thank you Leping. Good to hear from you. I think you have a very astute observation. Indeed, that particular platform is the one that has grown the most. The biggest segment there is what we call BCD platform, which is used for power management chips. That's the area that's growing the fastest. This is where I think Hua Hong, we have done a pretty good job over the last 2 quarters because, frankly, the demand exceeded our capacity. Originally, we're planning certain number of capacity for that area. Now almost -- the demand almost doubled relative to the original -- what we planned. This is where we did a pretty good job using the capacity flexibility that we have.

This also our large scale in this area also helped us to be able to flexibly deploy the capacity to where the demand is the highest. So in the end, it's a pretty good story there, I would say that we continue to derive quite a bit of increase in revenue from that sector. We expect this trend just from local -- from Hua Hong standpoint of view, this supply-demand imbalance, we should be able to get to a very good point by end of this year or beginning of next year as we continue to increase the capacity in this particular sector.

Okay. It's very clear. So the second question is about your revenue by geometry (sic) [ geography ]. So I noticed that the North America still accounts for 9.4 percentage of your sales. And recently, some news say that U.S. may impose 100% tariff on all the chip import to the U.S. So what are the potential impact of the -- if such policy is implemented, some say this will be implemented this week or next week so...

If it's going to be 100% tariff, that's not going to be good for anybody, that's first point. Second, I hope the impact to us will be manageable or minimum because given a lot of our North America customer their end market can still be outside the U.S. or in China or in rest of the world. So there will be impact for sure, but it's not going to be the all 100% of the business will be impacted if you know -- if you understand what I just said. I think that's the best way I can put it at this point.

So this 9.4% is the -- based on the headquarter of the customer is not based on the destination you ship? Is my understanding correct?

Correct. It's based on our direct customer, whether they are American company or European company or Asian company. Now once they manufacture their product at Hua Hong, they decide where to ship. A lot of them, I believe, don't directly -- some of them probably end up in the American end market, but a lot of them don't. It might end up in China or rest of the world.

We will now take our next question from Tony Shen from SPDBI.

Dear management, [Foreign Language] Tony from SBDBI. I've got 2 questions here. The first question is about the semiconductor cycle. How do we see the semiconductor cycle at the current stage for the whole industry? Do we have momentum to going up for the whole industry? And for Hua Hong, how do we see Hua Hong positions itself in the semiconductor cycle? Because I've noted that our gross margin has been going up from the first quarter into second quarter and slightly up into the third quarter. Can we have a little bit more color into the margin into the fourth quarter, alongside with the semi cycle? This is my first question.

Okay. We got some big questions. First of all, I think I know why you're asking this question. I agree with you that in the past, for those of us within this industry for a long time, we used to have this concept of a cycle -- cyclical growth. Semiconductor has been known to be cyclical. But that cyclical thing seems to have broken down ever since the pandemic. So over the last 5 or 6 years, people haven't been talking too much about the cyclical growth. But I'm sure this particular phenomenon probably is still going to come back to us. It's just very hard to know exactly when. I would say, for me, I would look at some of the secular growth drivers.

I think I would say part of the reason the cyclical nature of the semiconductor industry has diminished over the last 5 years or maybe last decade is the fact that the semiconductor market has grown so big. We're getting close to $800 billion to maybe a few years, we're going to be a $1 trillion industry. And when the market is so large, it's not going to be driven by a single or a few end market dynamics. So the same things tends to average out just like we learned the statistics when you have too many other factors, things tend to average out. They probably reduce some of the swings between the cycle. That's probably the reason that we don't notice so much.

To your second question, Hua Hong's role in this overall market, we are clearly -- there's a few factors that favors Hua Hong. One is -- first of all, the overall market is still growing. Semiconductor as a industry it's still a growth industry. It's still going to get to $1 trillion industry in 4 -- maybe less than 4 years. So it's the CAGR right now, all the forecast still in close to 10% of the overall market. So that will obviously be a positive factor for Hua Hong's growth. Secondly is that even with the supply chain, geopolitical difficulties, maybe the supply chain will separate -- Hua Hong is still very positioned for China domestic semiconductor industry. So that's another factor that I think will favor Hua Hong's growth. So that's how I look at the macroscopic level. I probably missed your third question. Can you -- the third part of your question was...

Gross margin. Gross margin into first quarter.

Yes. Gross margin, I commented earlier. I think the gross margin obviously mathematically come from two things. One is the pricing, another one is the cost. We -- I think we're going to basically try to work very hard on both fronts. For the second half, Daniel already explained, we did some price adjustment in Q2, that should be reflected in Q3 and Q4, will have a positive impact to the gross margin. Another one, will have a positive impact as our efficiency and the cost reduction effort. I think the company has embraced more and more with each passing quarters.

The counterpoint to that gross margin story is our Fab9 capacity is rapidly coming online that will bring into the equation more depreciation. So those are the 3 factors will basically work to give us the story on the second half of this year. And we already gave you the guidance for Q3 and Q4. We think it's not -- we will wait until Q3 ends to look at exactly where it is, but it's probably not going to be too far away from to Q2 and Q3 are, okay.

Okay. Perfect. And I have a quick follow-up. Could you have a quick update on the capacity expansion pace into the second half of 2025 and maybe a little bit more into 2026 and 2027? How do we see the capacity expansion?

Okay. In terms of the net capacity increases by adding, say, more equipment, Fab9 is still in that phase. So right now, I would say half of the Fab9 capacity is online. Another half will be realized over the next 2 to 3 quarters. So I will say by mid of next year, Fab9 will be at full. By end of this year, Fab9 will be close to 80%, 90% full in terms of the capacity expansion. So that basically is one, by middle of next year, you can think that Fab9 capacity expansion is complete. Beyond that, we need the new fab and new capacity. That I think is probably going to be in 2027, we'll start to see some new capacity coming online. That's the current rough schedule.

We will now take our next question from the line of [ Timothy Wong from Oriental Asset Management ].

[Foreign Language]

Yes. Go ahead.

[Foreign Language]

I think our view is that there are certainly some of the early ordering going on, okay? That's for sure. But there are so many other factors. I will say on average, we think the demand will be pretty similar to the first half of the year.

[Foreign Language]

Yes. So for our revenue projection first of all, the revenue is growing because we get more output from Fab9. We also squeeze a little bit more out of existing fabs, especially on 12-inch fab, Fab7. The growth in terms of technology platform will be across the board pretty much because the Fab9 come online and the product mix are fairly similar to Fab7.

[Foreign Language]

That is you have to look at the end markets one by one. I think in terms of the -- I can't say I have 100% visibility into each one of the end market. But I think the consumer incentive, maybe if the incentive stops, maybe it won't grow as fast as the first half, maybe. I think there might be -- I don't think there is much inventory there. I think the consumer -- some of the consumer markets, the inventory might have come down somewhat. So it's a complex picture of the different end markets. But the way we experience all that end market fluctuation, we don't directly experience them. We experience them through our direct customer who are supplier to those end market.

So in the end, when it come to us, it's a fairly averaged out type of phenomenon. So that's why we don't see a -- even if the end market fluctuation might be more drastic, we don't see that drastic changes, partly because we are pretty large. We participate in so many different end markets. Another thing is also it's a function of who our direct customers are and whether they are -- how much they are impacted by the end market. So it's all the end market visibility, you might have a better view of it than actually I do. But they come through to us already kind of filtered out or averaged out through some intermediate mixing. So we normally do not see that drastic of changes when it gets to the fab -- to the foundry. I don't know if that makes sense to you?

We will now take our next question from [indiscernible] from [ Orion ] Securities.

My first question is about the opportunity from AI server of AI server market because we know data center is going to be upgraded to 800 voltage spec. So many of the power device companies are talking about the huge opportunities for the silicon carbide and other compound semiconductor. So because we work with some global companies working on the AI server solutions, so could you please give us more color about the AI server opportunity for Hua Hong. That my first question.

Thank you. You asked a pretty technical question. First of all, the AI server is a huge growth segment. You are absolutely correct about that. By the way, that has driven a lot of our growth as well because our direct customer, a lot of the management -- some of the management chips go into AI servers. So we indirectly participate in this AI growth story. So that's first point.

Second point, you also correctly pointed out in the AI server, there are some standards, I wouldn't say standard changes, but there's a continuous optimization, how to do the power management because for AI server, power management is very important, very critical aspect of the overall server. Obviously, the most important one is the high compute chip. But beyond that, the power because they consume so much power. So all the power management solution inside the AI server is continuously being optimized. That translated to us to Hua Hong is that there's going to be a different type of chips because sometimes you step down from one voltage to another, the level of voltage level might change, might be optimized. They also translate into more power management chip in the AI server. So that second point, I also agree, and that's a positive thing for us.

The third point you'll make is that some of those power management chips will be taken up by compound semiconductor as opposed to silicon. I would say that one, the compound semiconductor has continuous -- has established a position not just in AI server, but the overall power management solution. I think eventually, it has its advantage and its disadvantage relative to silicon-based power management chip. I think that's where it's going to be a balance between silicon-based chips and the compound semiconductor based chip. I don't think -- I think that balance is continuously to be established. We obviously are watching that very closely. I do not think that is too big a factor because there's always going to -- there's going to be a need for some -- for compound semiconductor, there's always going to be need for a lot of the silicon-based power management chips. I think more important factor is the overall growth of the AI server in terms of its needs for power management chips.

Very clear. My second question is about yesterday, GlobalFoundries, they announced they are going to cooperate with a local foundry. And could you comment on the like -- they are working with looks like a competitor. And how do you see the energy behind their new strategy? And also, could you elaborate more about our local for local opportunity? That's my second question.

I haven't seen the announcement. I do know that they have been looking for a local Chinese partner for quite a while now. I would say I obviously can't answer for them. You have to ask them about their thinking and their strategy. What I can say is that I think this is probably part of this overall China for China strategy, a lot of the international companies are trying to deploy. We are actually -- we are collaborating with European companies. As you know, we have a collaboration with ST, with Infineon and others, mostly European companies to serve as their China partner for their China for China strategy. You noticed that most of our China for China partners tends to be IGM.

I think that is, frankly, a little bit easier for us to do that type of collaboration. GlobalFoundries being a pure foundry just like Hua Hong, we are open to collaborate with them, but I think it's -- we are definitely not -- we don't have anything established. So our focus is with our existing. We already have quite a few China for China strategic partner that we're already working. And some of them already started to produce results actually with ST, our second half some of those collaboration projects will start to contribute revenue for us. So that's probably all I can say about your question.

Thank you. Ladies and gentlemen, that's all the time we have for questions. I'll now hand back to Mr. Daniel Wang for closing remarks.

This concludes today's call. Once again, thank you all for joining us today and for your thoughtful questions. We appreciate your continued support and look forward to speaking with you again next quarter. Wishing you all stay safe and healthy. We look forward to meeting you, many of you very soon. Thank you.

Ladies and gentlemen, thank you for your attendance. You may now all disconnect.