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Operator: 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.
Yu-Cheng Wang: 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.
Bai Peng: 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.
Yu-Cheng Wang: 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: [Operator Instructions] The first question comes from the line of Leping Huang from Huatai Securities.
Leping Huang: 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?
Bai Peng: 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.
Leping Huang: 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?
Bai Peng: 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.
Operator: Our next question comes from the line of Ziyuan Wang of Citic Securities.
Ziyuan Wang: 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.
Bai Peng: 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.
Ziyuan Wang: 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?
Bai Peng: 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.
Ziyuan Wang: 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?
Bai Peng: 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: [Operator Instructions] Our next question comes from [indiscernible] from [ Guosen ] Securities.
Unknown Analyst: [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.
Bai Peng: 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.
Unknown Analyst: 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?
Bai Peng: 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.
Unknown Analyst: Looking forward to a better performance in the coming year and Happy Chinese New Year.
Bai Peng: Thank you.
Operator: 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.
Leping Huang: 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?
Yu-Cheng Wang: 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.
Bai Peng: 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.
Leping Huang: So this year, 2026, the CapEx will be slightly down and 2027 will be up significantly? Is my understanding correct?
Bai Peng: Correct. That's correct.
Operator: Our next question comes from Ziyuan Wang of Citic Securities.
Ziyuan Wang: 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?
Bai Peng: 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.
Ziyuan Wang: I mean on the equipment localization ratio.
Bai Peng: 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.
Operator: Ladies and gentlemen, that's all the time we have for questions. I'll now hand back to Mr. Daniel Wang for closing remarks.
Yu-Cheng Wang: 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.
Bai Peng: [Foreign Language] Happy New Year.
Operator: Thank you. Ladies and gentlemen, that does conclude the conference call. Thank you for your attendance. You may now disconnect.