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Operator: 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.
Yu-Cheng Wang: 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.
Bai Peng: 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?
Yu-Cheng Wang: 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: [Operator Instructions] The first question is from the line of Leping Huang of Huatai.
Leping Huang: 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?
Yu-Cheng Wang: 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.
Leping Huang: 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?
Yu-Cheng Wang: You know what? Excellent question. I'll let Dr. Bai answer the question.
Bai Peng: 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.
Leping Huang: 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?
Bai Peng: 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.
Operator: Our next question comes from Ziyuan Wang from Citic Securities.
Ziyuan Wang: [Technical Difficulty].
Yu-Cheng Wang: Operator...
Bai Peng: Can you help?
Yu-Cheng Wang: We couldn't hear the question clearly. So can you please ask him to repeat?
Operator: Ziyuan, would you be able to dial again or change to another better connection to repeat your question, please?
Ziyuan Wang: Sorry, can you hear me now?
Yu-Cheng Wang: I'm afraid the line is bad. Would you like to dial back, and we will take your question.
Operator: [Operator Instructions] The next question is from Jian Hu from Guosen Securities.
Jian Hu: [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.
Bai Peng: 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.
Jian Hu: 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?
Bai Peng: 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.
Jian Hu: 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?
Bai Peng: 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.
Jian Hu: 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.
Operator: Once again, we will take the question from Ziyuan Wang from Citic Securities.
Ziyuan Wang: 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?
Bai Peng: 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.
Ziyuan Wang: Okay. And these kind of customers also benefit from the AI, especially the AI power, right?
Bai Peng: 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.
Ziyuan Wang: 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?
Yu-Cheng Wang: 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.
Operator: Our next question comes from the line of Tony Shen of SPDBI.
Tony Shen: [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.
Bai Peng: 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.
Tony Shen: 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.
Bai Peng: 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: [Operator Instructions] Our next question comes from the line of [ Scarlett Ker ] from BNP Paribas.
Unknown Analyst: [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?
Yu-Cheng Wang: 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.
Operator: Our next question comes from Qingyuan Lin from Bernstein Research.
Qingyuan Lin: 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?
Yu-Cheng Wang: 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.
Bai Peng: 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.
Qingyuan Lin: 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?
Bai Peng: 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.
Qingyuan Lin: Very clear. Maybe last question quickly on any updates on Fab 5 consolidation, time line impact, synergy, et cetera?
Yu-Cheng Wang: 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.
Bai Peng: 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.
Yu-Cheng Wang: 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.
Bai Peng: 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.
Yu-Cheng Wang: And also with the additional -- the specialty technology platform under Dr. Bai's leadership, I think it's going to be more profitable.
Operator: 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.
Bai Peng: 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.
Operator: Ladies and gentlemen, thank you for your attendance. You may all now disconnect.