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Edited Transcript of 1347.HK earnings conference call or presentation 14-Feb-20 8:00am GMT

Q4 2019 Hua Hong Semiconductor Ltd Earnings Call

SHANGHAI Feb 21, 2020 (Thomson StreetEvents) -- Edited Transcript of Hua Hong Semiconductor Ltd earnings conference call or presentation Friday, February 14, 2020 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Junjun Tang

Hua Hong Semiconductor Limited - President, CEO & Executive Director

* Kathy Chien

Hua Hong Semiconductor Limited - Deputy Director of the IR

* Yu-Cheng Wang

Hua Hong Semiconductor Limited - Executive VP & Secretary of the Board

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Conference Call Participants

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* Leping Huang

China International Capital Corporation Limited, Research Division - Analyst

* Sebastian Hou

CLSA Limited, Research Division - Research Analyst

* Yu Sang Lee

Jefferies LLC, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to Hua Hong Semiconductor's Fourth Quarter 2019 Earnings Conference Call.

Today's host -- today's call is hosted by Mr. Junjun Tang, President and Executive Director; and Mr. Daniel Wang, Executive Vice President and Chief Financial Officer. (Operator Instructions) The earnings press release and fourth quarter 2019 summary slides are available to download at our company's website, www.huahonggrace.com.

Further ado, I would like to introduce you to Mr. Daniel Wang, Executive Vice President and Chief Financial Officer. Mr. Wang, you may now go ahead, please.

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Yu-Cheng Wang, Hua Hong Semiconductor Limited - Executive VP & Secretary of the Board [2]

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Thank you, April. I think there's still a lot of people can't dial in, okay? I think there is -- they were asking if there is a different conference ID. So I think the one they're using is 789450#, but I think the right number is 789540.

I think let's just get started. Good afternoon, everyone. Thank you all for joining our fourth quarter 2019 earnings conference. Today, we will first have Mr. Tang, our Executive Director and President, make some remarks on our fourth quarter performance. President Tang will address in Chinese, and then Kathy Chien, our Deputy Director of Investor Relations, will be the translator. After that, I will discuss our financial results and provide guidance for the next quarter. This will be followed by our question-and-answer session.

I will now turn the call over to our Executive Director and President, Mr. Tang.

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Junjun Tang, Hua Hong Semiconductor Limited - President, CEO & Executive Director [3]

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(foreign language)

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Kathy Chien, Hua Hong Semiconductor Limited - Deputy Director of the IR [4]

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[Interpreted] Good afternoon, everyone. Thank you for joining our earnings call.

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Junjun Tang, Hua Hong Semiconductor Limited - President, CEO & Executive Director [5]

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(foreign language)

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Kathy Chien, Hua Hong Semiconductor Limited - Deputy Director of the IR [6]

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[Interpreted] It's my pleasure to share with you our company's 2019 fourth quarter results. As most of you are probably aware, management set a very challenging revenue target of USD 242 million for the fourth quarter. We knew it was not going to be easy. Our actual revenue of USD 242.8 million was a great accomplishment in a challenging market environment, which our team worked very hard to achieve. Especially important for our future was meeting our commitment for wafer shipments valued at USD 7.4 million from our new 12-inch fabrication facility in Wuxi.

Gross margin was 27.2%. The margin decline was largely due to lower capacity utilization and an increase in labor costs. The new facility started production in Q4. We are very proud of accomplishing our initial startup of production in Wuxi.

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Junjun Tang, Hua Hong Semiconductor Limited - President, CEO & Executive Director [7]

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(foreign language)

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Kathy Chien, Hua Hong Semiconductor Limited - Deputy Director of the IR [8]

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[Interpreted] Our embedded flash, power discrete RF-SOI and Power Management IC technologies are being used to support overseas and domestic leading customers in growing 5G smartphone market, using the 8-inch fabs now. Our technology development team has been working on more advanced technologies for the 5G smartphone market to be produced in the 12-inch Wuxi fab this year. We see tremendous opportunities for production of products such as smart card ICs, MCU, power discrete, CIS, logic and RF devices in this newly built facility. Interest from customers has been exceptional. For the management team, our priority is to ensure a smooth and timely production ramp-up for this 12-inch facility, so that it will quickly contribute to revenue and margin growth for the company.

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Junjun Tang, Hua Hong Semiconductor Limited - President, CEO & Executive Director [9]

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(foreign language)

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Kathy Chien, Hua Hong Semiconductor Limited - Deputy Director of the IR [10]

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[Interpreted] 2019 was an incredible year for Hua Hong Semiconductor. In addition to building a brand new state-of-the-art 12-inch facility for capacity expansion, the company's business performance was strong and respectable, given the challenging environment of the semiconductor industry in 2019. I am very proud of our achievements. While the global semiconductor market declined 12% in 2019 according to SIA, our overall revenue achieved USD 932.6 million, representing a 0.2% increase compared to the prior year. The strong revenue performance was largely attributable to the increased demand for MCU, super junction, IGBT and general MOSFET products, particularly in China, other parts of Asia and Europe.

Gross margin was 30.3%, 3.1 percentage points lower than a year ago, primarily due to decreased capacity utilization, increased labor costs and increased unit costs of raw materials. Partially offset by an increase in average selling price, net profit as a percentage of revenue was 16.6%.

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Junjun Tang, Hua Hong Semiconductor Limited - President, CEO & Executive Director [11]

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(foreign language)

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Operator [12]

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Hello. This is the operator. We are currently experiencing some technical issue. Please continue to stand by. Thank you.

(technical difficulty)

Hello, speakers. You may now go ahead.

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Kathy Chien, Hua Hong Semiconductor Limited - Deputy Director of the IR [13]

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[Interpreted] So sorry about the technical issue just now. So I continue to be excited leading this exceptional group of people. I look forward to the challenges ahead of us as we continue ramping up the production facility in Wuxi. I'm confident with the support of our shareholders and the Board of Directors, we will take the company to a new level.

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Junjun Tang, Hua Hong Semiconductor Limited - President, CEO & Executive Director [14]

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(foreign language)

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Kathy Chien, Hua Hong Semiconductor Limited - Deputy Director of the IR [15]

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[Interpreted] In response to the outbreak of the novel coronavirus pneumonia, the company is taking every effort to protect the safety and health of each and every one of our employees.

In accordance with the requirements of the government and Hua Hong Group, we have formed an epidemic emergency reaction team, established a prevention and control system, taking various measures strengthening the safety of environment and mills, completed a thorough screening control on travel history, temperature checks, health condition registration, field disinfection, et cetera. So far, those epidemic prevention and control systems have worked out well. No confirmed sick cases have been found. And our operations are stable and smooth.

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Junjun Tang, Hua Hong Semiconductor Limited - President, CEO & Executive Director [16]

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(foreign language)

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Kathy Chien, Hua Hong Semiconductor Limited - Deputy Director of the IR [17]

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

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Yu-Cheng Wang, Hua Hong Semiconductor Limited - Executive VP & Secretary of the Board [18]

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Thank you, Mr. Tang, for your inspiring comments.

Now let me begin with a summary of our financial performance for the fourth quarter and a recap of the whole year 2019, followed by a outlook on revenue and the margin for the first quarter of 2020. And then we will move on to the question-and-answer session.

Now first, let me summarize financial performance as of the fourth quarter. Revenue reached $242.8 million, 2.5% lower than the prior year, primarily due to decreased wafer shipments, but 1.6% above Q3 2019.

Cost of sales was $176.8 million, 7.4% above Q4 2018, mainly due to increased labor costs, unit costs of raw wafers and depreciation expenses. And 7.1% above Q3 2019, largely due to increased labor costs and depreciation expenses.

Gross margin was 27.2%, 6.8 percentage points below Q4 2018, mainly due to lower capacity utilization and the increased labor costs, unit cost of raw wafers and the depreciation expenses. And a 3.8 percentage points below Q3 2018, primarily due to lower capacity utilization, increased labor cost and the depreciation expenses.

Operating expenses were $71.4 million, 83.8% above Q4 2018 and 77.6% over Q3 2019, largely due to increased labor, engineering wafers and the depreciation expenses for Wuxi fab.

Other income net was $24.1 million, 107.8%, up year-over-year, primarily due to: one, increased general subsidies; two, decreased foreign exchange losses; and three, increased share of profit of an associate.

Profit for the period was $14 million compared to $48.6 million in Q4 2018 and $44.4 million in Q3 2019.

Net profit attributable to shareholders of the parent company was $26.2 million compared to $49 million in Q4 2018, and USD 45.2 million in Q3 2019.

Basic earnings per share was $0.02 compared to $0.042 in Q4 2018, and $0.035 in Q3 2019.

Annualized ROE was 4.8%. This is the first time our 12-inch fab in Wuxi made contribution in revenue. So we also provide the operating results by segments.

First, let's have a look at the Hua Hong 8-inch business. Revenue was $235.4 million, 5.5% below Q4 2018 and 1.5% lower than Q3 2019, primarily due to decreased wafer shipments.

Gross margin was 28.2%, 5.8 percentage below Q4 2018 and 2.8 percentage points below Q3 2019, primarily due to lower capacity utilization, increased wafer cost and depreciation expenses.

Operating expenses were $38 million, 15% above Q4 2018, largely due to increased labor and research development expenses. And a 41.3% over Q3 2019, primarily due to increased labor expenses and the impairment provisions.

Profit before tax was $43.6 million, 26% lower than Q4 2018 and 26% below Q3 2019.

Now let's have a look at Hua Hong Wuxi. Revenue was $7.4 million. Operating expenses were $33.4 million compared to $5.8 million in Q4 2018 and $13.3 million in Q3 2019, mainly due to increased labor, engineering wafers and depreciation expenses.

Now out of that $33.4 million, $17 million of the fixed costs, including depreciation, were a reclass from cost of the goods sold. So out of that $33.4 million, so there was a reclass from COGS of $17 million.

Profit before tax was minus $24.8 million. EBITDA was minus $17.6 million. We'll pay a lot of attention to EBITDA in the next 2 years for Wuxi. We expect EBITDA should quickly turn positive as our revenue starts to grow.

Now please let me provide you with more details on our revenue from Q4 2019. From geographical perspective, revenue from China was $153.5 million, contributing 63.2% of our total revenue, an increase of 12.6% compared to Q4 2018, mainly driven by increased demand for MCU and the super junction products.

Revenue from Asia was $32.5 million, a decrease of 5.2% compared to Q4 2018, chiefly due to decreased demand for MCU and general MOSFET products.

Revenue from the United States was $31.9 million, a decrease of 22.6% compared to Q4 2018, chiefly due to decreased demand for super junction and general MOSFET products.

Revenue from Europe was $16.8 million, a decrease of 11.8% compared to Q4 2018, chiefly due to decreased demand for smart card ICs, partially offset by increased demand for general MOSFET.

Revenue from Japan was $8 million, a decrease of 55.7% compared to Q4 2018, largely due to decreased demand for logic, super junction and MCU products.

With respect to technology platform, revenue from Embedded Nonvolatile Memory was $98 million, a decrease of 1.4% compared to Q4 2018, primarily due to decreased demand for smart card ICs, partially offset by increased demand for MCU products.

Revenue from discrete was $87.8 million (sic) [$87.9 million], an increase of 1.2% compared to Q4 2018, mainly driven by increased demand for IGBT and super junction products, partially offset by the decreased demand for general MOSFET products.

Revenue from analog and power management IC was $30.3 million, a decrease of 3.4% compared to Q4 2018, mainly due to decreased demand for analog and LED lighting products, partially offset by the increased demand for power management IC products.

Revenue from logic and RF was $23 million, a decrease of 16.6% compared to Q4 2018, mainly due to decreased demand for logic and the RF products.

Revenue from Standalone non-volatile memory was $3.3 million, a decrease of 7.2% compared to Q4 2018, primarily due to decreased demand for flash products.

Now let's now take a look at the cash flow statement. Net cash flows used in operating activities was $7.3 million, 107.9% lower year-over-year and 110.3% lower quarter-over-quarter, primarily due to decreased receipts from customers and increased payments to suppliers and increased labor expenses.

Capital expenditures were $129.2 million in Q4 2019, including USD 96.3 million for Hua Hong Wuxi and $32.9 million for Hua Hong 8-inch business.

Other cash flow generated from investing activities were $133.2 million, including, one, payout of $105.1 million of investment in financial assets at fair value through profit or loss; two, $94.5 million of receipt of government grants; three, $2.9 million of interest income offset by $70 million invest in time deposits.

Net cash flows used in financing activities were $1.6 million, including, one, $2.1 million of repayment of a bank loan -- bank borrowings; two, $0.6 million of lease payment; and three, $0.1 million payment of interest expenses for bank borrowings, offset by $1.2 million of proceeds from share option exercise.

Now let's move to the balance sheet. Cash and the cash equivalents was $476.3 million on December 31, 2019 compared to $474.7 million on September 30, 2019.

Restrict and time deposits increased from $0.8 million on 30 September, 2019 to $70.8 million on December 31, primarily due to investment in time deposits.

Trade and notes receivables increased from $140.4 million on September [23rd] (sic) [30] of '19 to $165 million on December 31, 2019, primarily due to stronger revenue in both Q3 and the Q4.

Other current assets increased from $110 million on September 30, 2019 to $122.7 million, primarily due to increased VAT deductible tax. Property, plants and equipment was $1.558 billion on December 31, 2019 compared to $1.563 billion as of September 30, 2019.

Total assets increased from $3.576 billion on September 30, 2019 to $3.613 billion on December 31, 2019.

Our total bank borrowings decreased from $27.6 million on September 30, 2019 to $25.8 million on December 31, 2019, primarily due to $2.1 million repayment of bank borrowings.

Total liability decreased to $530.7 million on December 31, 2019 from $556.1 million on September 30, 2019, primarily due to decreased government grants for the investment in fixed assets.

Our debt ratio decreased to 14.7% on December 31, 2019 from 15.5% on September 30, 2019.

Now I would like to give you a recap of our performance for the entire year of 2019.

Revenue was $932.6 million, a all-time high and an increase of a 0.2% over the prior year. This was incredible and a major achievement. While the global semiconductor market declined 12% in 2019 according to SIA, our company revenue even had a small increase.

Gross margin was 30.3%, 3.1 percentage points lower than 2018, mainly due to decreased capacity utilization, increased labor costs, unit costs of raw materials and depreciation expenses.

Operating expenses were $178.6 million, 37.3% above 2018, largely due to increased labor, engineering wafers and depreciation expense for Wuxi fab.

Other income net was $77.7 million, up 94.4% from 2018, primarily due to, one, increased general subsidies; two, decreased foreign exchange loss; three, increased fair value gains on financial assets at fair value through profit or loss; and four, increased interest income.

Net profit was $155 million compared to $185.6 billion (sic) [$185.6 million] in 2018.

Net profit attributable to shareholders of the parent company was $162.2 million compared to $183.2 million in 2018.

Basic earnings per share was $0.126 compared to $0.171 in 2018. ROE was 7.4%.

Finally, let me give you a very high-level outlook for the first quarter 2020. We expect revenue to be approximately $200 million. And our gross margin to be between 21% and 23%.

The Q1 guidance is relatively conservative, largely for 2 reasons. First, the actual impact of the coronavirus is not clear for now. Not all of our employees have returned to work due to quarantine requirements, which is also the situation for our customers and suppliers. The logistics situation has now returned to normal. Although, our orders are looking good and our business operations are moving smoothly, we cannot accurately estimate the impact of the coronavirus. It is very dependent on when the epidemic can be thoroughly controlled.

To be prudent, we will give conservative guidance for now. Secondly, we have 2 fabs conducting annual maintenance in Q1, January 10 through January 14, that was for Fab 1, and January 6 through January 8, it was for Fab 3, which will cause some loss in overall fab utilization for the quarter.

This concludes my financial remarks. Now I would like to open the call for question and answer. Operator, please assist. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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Yu-Cheng Wang, Hua Hong Semiconductor Limited - Executive VP & Secretary of the Board [2]

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Operator, operator, operator.

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Operator [3]

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Yes?

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Yu-Cheng Wang, Hua Hong Semiconductor Limited - Executive VP & Secretary of the Board [4]

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Once the investor type up a question, can you read it to us?

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Operator [5]

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Yes. We have one question in the Q&A box. Would you like me to read this to you?

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Yu-Cheng Wang, Hua Hong Semiconductor Limited - Executive VP & Secretary of the Board [6]

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Yes. Please do. Please do. So we can verbally answer.

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Operator [7]

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So our first question from the webinar comes from Donnie Teng of Nomura. What is our capacity expansion plan now for Wuxi fab, Hua Hong 8 and Huali in 2020 F and 2021 F?

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Yu-Cheng Wang, Hua Hong Semiconductor Limited - Executive VP & Secretary of the Board [8]

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Can you repeat it one more time? I'm sorry. Can you just see it one more time? The fab capacity for...

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Operator [9]

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Okay. Not a problem. I'm also sending it to you in our Team Chat. So the question is, what is our capacity expansion plan now for Wuxi fab, Hua Hong 8, and Huali in 2020 F and 2021 F.

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Yu-Cheng Wang, Hua Hong Semiconductor Limited - Executive VP & Secretary of the Board [10]

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Well, let me answer the question, please. So for our Wuxi fab, currently, we have 10,000, we expect. We would get to about 20,000 by mid of next -- this year, okay? And let's look at the market condition. If things are doing well, we can continue to ramp up the capacity. And for our 8-inch fab, we still have some room there. We can potentially add another 10,000 weight to 20,000 of the power discrete capacity. Huali, we can't really tell because we're not running Huali.

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Operator [11]

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Okay, great. We have several questions in -- on the webinar. Would you like to answer one from the webinar or would you like us to select one from the audio line?

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Junjun Tang, Hua Hong Semiconductor Limited - President, CEO & Executive Director [12]

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(foreign language)

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Kathy Chien, Hua Hong Semiconductor Limited - Deputy Director of the IR [13]

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[Interpreted] We can just let the one from the audio line.

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Operator [14]

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So let's start with Leping Huang of CICC.

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Leping Huang, China International Capital Corporation Limited, Research Division - Analyst [15]

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(foreign language)

First, I really thank you that the Hua Hong can separately disclose the detail of the Hua Hong Wuxi and Hua Hong Shanghai. So I would like to know -- so how much revenue still you need to reach EBITDA level breakeven?

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Yu-Cheng Wang, Hua Hong Semiconductor Limited - Executive VP & Secretary of the Board [16]

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Leping, thank you very much for the question. The design capacity, the current $2.5 billion investment, is really for 40,000-wafer capacity. We expect, at 25,000-wafer capacity, we should be able to break even, okay? Depending on, of course, the price at the point, but I would say 25,000 or if the price was a little bit lower, then we might have to get to 30,000. And then we have to basically improve the price over time. But that would be the range. I would say, 25,000 wafer capacity.

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Leping Huang, China International Capital Corporation Limited, Research Division - Analyst [17]

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(foreign language)

So the second question is that we see a shortage of the mature 12-inch [in internal] process in the market, especially in China market. And Hua Hong, historically, is very strong in power-related products. So considering these market conditions. So what's your latest plan? And what's your latest capacity plan, the CapEx plan to capture these business opportunities?

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Junjun Tang, Hua Hong Semiconductor Limited - President, CEO & Executive Director [18]

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(foreign language)

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Kathy Chien, Hua Hong Semiconductor Limited - Deputy Director of the IR [19]

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[Interpreted] So Wuxi 12-inch fab is just catch the great opportunities with the growth of 12-inch markets. And our investment plan is just moving smoothly according to the original -- with R&D report. And we just plan for IC plus power discrete. According to the investment plan, we will reach 20,000 capacity by the end of 2020. And this investment plan is pushed, is et cetera -- accelerated according to plan.

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Junjun Tang, Hua Hong Semiconductor Limited - President, CEO & Executive Director [20]

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(foreign language)

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Kathy Chien, Hua Hong Semiconductor Limited - Deputy Director of the IR [21]

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[Interpreted] And we take the advantage of our 3 8-inch production lines, communicate to the -- thoroughly with our customers and put a lot of effort in our R&D research for the new products. We are targeting to start the mass production as early as possible.

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Operator [22]

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We have another question, from the audio line, from Robert [Chu] of JPMorgan.

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Yu-Cheng Wang, Hua Hong Semiconductor Limited - Executive VP & Secretary of the Board [23]

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Hey, Robert?

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Operator [24]

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Hello, Robert. You are now on the line. Okay. As we are not hearing any response. I will just mute your lines right now. (Operator Instructions)

So I'm going to move on to another person. So that is Mr. Sebastian Hou of CLSA.

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Sebastian Hou, CLSA Limited, Research Division - Research Analyst [25]

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So my first question is to follow-on the Q1 guidance, the revenue side. So I understand that Daniel explained the two reasons. But I'm curious about the first reason regarding the coronavirus impacts. I thought that semiconductor fabs is quite automated, running 24/7 except for maintenance. So -- and you have life cycle time for 2 months. So basically, for the March revenue, probably represent, yet, your wafer in -- wafer starting in January. So I'm not sure. So supposedly, there shouldn't be much impacts, because any order comes from customers, it would probably more reflect in second quarter. So I'm just curious, are you just to be -- more just trying to be more conservative? Or are you already seeing some customers revising down order forecast already?

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Yu-Cheng Wang, Hua Hong Semiconductor Limited - Executive VP & Secretary of the Board [26]

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Thanks, Sebastian. That was a good question. I know you had asked that question. I mean, as I said, I'm going to repeat that. We are -- everything is going smoothly. Our orders looking good at this point. In fact, all 3 8-inch fabs are operating at the very decent level. We're talking all about above 90%, okay? Now to realize the -- literally, the consumer spending has been -- has stopped, okay, because the virus for the past 2 or 3 weeks. And probably for the next few weeks as well. So literally, there's nobody is buying things, including electronics, okay? So we can't really -- I mean, at this point, although, we -- everything is moving smoothly. But you know, I mean, in reality, it's going to eventually affect us, okay, in the supply chain. I don't know when this is going to happen. Hopefully, things are going to recover. Hopefully, we're going to be recovered from the virus soon, okay? That will be -- it'd be great. I think there will be -- I believe there will be a strong rebound when that is over, okay? But for now, we're just being very, very conservative. Because we're dealing with a lot of design houses. With the way it is going, I'm sure they're under a lot of financial stress.

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Sebastian Hou, CLSA Limited, Research Division - Research Analyst [27]

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Okay. Got it. And my second question is on the Wuxi fab. Just want to clarify one thing. So the 20,000 wafer per month, this capacity plan is going to be reached by mid this year or end of this year?

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Yu-Cheng Wang, Hua Hong Semiconductor Limited - Executive VP & Secretary of the Board [28]

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The mid of this year. It will be mid of this year. Yes. Well, basically, since Mr. Tang joined the company, we have already accelerated the pace of capacity expansion, okay? So basically, the orders were all out last year. Most of the -- I mean, I would say 60% of the equipment is already in. So I think by mid of this year, we should have all the 20,000 capacity -- the additional 10,000 capacity installed.

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Sebastian Hou, CLSA Limited, Research Division - Research Analyst [29]

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Got it. Got it. So that's actually like 6 months earlier or 6 months ahead of the original schedule, so...

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Yu-Cheng Wang, Hua Hong Semiconductor Limited - Executive VP & Secretary of the Board [30]

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Yes.

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Sebastian Hou, CLSA Limited, Research Division - Research Analyst [31]

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So I'm curious about -- this is driven by the committed customer demand or tape out?

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Yu-Cheng Wang, Hua Hong Semiconductor Limited - Executive VP & Secretary of the Board [32]

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Yes. We actually have quite a number of things that are going on there at this point. I mean, as President Tang said earlier, that we actually -- the interest from customers for the Wuxi fab, the Wuxi capacity has been enormous, exceptional. A lot of -- more and more people are interested in building products there. So we're looking at 4 or 5 things that are currently under qualification. We're talking about 90-nanometer technology or 55-nanometer technology as well as power discrete for various products. So things that Mr. Tang has already mentioned in his earlier remarks.

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Sebastian Hou, CLSA Limited, Research Division - Research Analyst [33]

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Got it. And just a follow-up on the Wuxi fab, the operating -- the financial metrics so if I look at the breakdown you offer, things you're offering that on the Page 5 of your press release. And Daniel, you just mentioned, among your operating expense, about $33 million. You say that $17 million of that is actually depreciation. But I'm curious about the -- what's the normalized operating expense for this fab going forward?

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Yu-Cheng Wang, Hua Hong Semiconductor Limited - Executive VP & Secretary of the Board [34]

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Yes. Sebastian, absolutely. I'd love to answer the question. You have to realize, we're looking at this $33 million. Out of that $33 million, we basically have reclassed about $17 million that was reclassed from the COGS. Out of the $17 million, part of that were depreciation expenses, okay? And then part of that were related to just other things, labor, facility and others. The reason we did that according to accounting policy for the part of idle capacity, okay? If you don't use them, you can actually reclass them to your OpEx, so that's what we did. So this will probably happen early this year, let's say, for the first part of this year. And then when once we start to ramp up the capacity and you're basically going to see normalized operating expenses. I mean, am I making myself clear?

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Sebastian Hou, CLSA Limited, Research Division - Research Analyst [35]

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Yes. Yes. Yes. Okay, sure. So what is the estimate? Do you have an estimate about the OpEx level when it normalize?

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Yu-Cheng Wang, Hua Hong Semiconductor Limited - Executive VP & Secretary of the Board [36]

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Yes. It is -- in my view, it will be around -- once we -- let's say, when we start get to 20,000, 30,000 wafer capacity, up to 40,000, I would say, that Wuxi -- the operating expenses will be around $30 million a quarter, okay? Mostly, will be, I think, maybe, $10 million will relate to administrative and about $20 million will relate to R&D. Because we have to do engineer wafers, masks, that sort of stuff.

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Sebastian Hou, CLSA Limited, Research Division - Research Analyst [37]

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Okay. So this $30 million per quarter is based on the 20,000 to 30,000 wafer per month capacity, that kind of scale?

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Operator [38]

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Sebastian, this is the operator. Apologies for the inconvenience. It appears that our speaker has just disconnected. Please stand by.

(technical difficulty)

Hello, everyone. Thank you so much for standing by. Please continue to stand by. We're just getting our speakers connected.

Sorry for the inconvenience.

(Operator Instructions)

Excuse me speakers, are you there?

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Kathy Chien, Hua Hong Semiconductor Limited - Deputy Director of the IR [39]

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Yes.

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Operator [40]

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Okay. We still have Mr. Sebastian on the line.

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Yu-Cheng Wang, Hua Hong Semiconductor Limited - Executive VP & Secretary of the Board [41]

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Sorry, Sebastian.

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Sebastian Hou, CLSA Limited, Research Division - Research Analyst [42]

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No worries. No worries. Okay, yes, I think I just have another 2 questions, very quick, the housekeeping question. So I will just go back to the queue to let others ask questions. So my question is, do you have an outlook for initial outlook for 2020? I know it's hard given the virus theme. But what's your initial take out in 2020 revenue outlook and margin outlook?

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Yu-Cheng Wang, Hua Hong Semiconductor Limited - Executive VP & Secretary of the Board [43]

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Yes. It is difficult. I think I probably would give you better -- will have a better picture in about sometime in Q4 when things become more clear and evident. But we had a great plan initially. We were hoping that, clearly, the market was coming back. So you know what, let's discuss that maybe in a few weeks from now. Another 3, 4 weeks.

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Sebastian Hou, CLSA Limited, Research Division - Research Analyst [44]

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Sure. Sure. Okay. So let me ask some...

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Yu-Cheng Wang, Hua Hong Semiconductor Limited - Executive VP & Secretary of the Board [45]

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I thought that's probably fair for everyone. I just don't want to give any bogus numbers.

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Sebastian Hou, CLSA Limited, Research Division - Research Analyst [46]

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Okay. Okay. So that's understandable. But let me ask something that is more controllable, for example, like can you give us some of the cost side? What's your depreciation guidance and cash flow guidance?

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Yu-Cheng Wang, Hua Hong Semiconductor Limited - Executive VP & Secretary of the Board [47]

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Yes. That I can give you. For depreciation expenses, I think, for the Wuxi fab, I think, we're talking about somewhere around $110 million for the year. With the capacity ramping up to 20,000 to 30,000. And then for the Shanghai side, it's probably going to be around $130 million for the 8-inch business.

And the -- I mean, I don't know if you're interested in the capacity spending. But...

So for capacities. For capacity spending, we're thinking about -- on a cash basis, I think, Shanghai is about $150 million overall, including some improvements, upgrades, smart expansion plus maintenance. And then for Wuxi, last year, we're talking about, overall, was around $791 million on cash basis. And I think this year, we're probably around $800 million.

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Sebastian Hou, CLSA Limited, Research Division - Research Analyst [48]

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Okay. Okay. So what's your -- my last question. So what's your best estimate or even a wider range of the estimate about the total revenue contribution from Wuxi fab for this year, full year?

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Yu-Cheng Wang, Hua Hong Semiconductor Limited - Executive VP & Secretary of the Board [49]

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This year?

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Sebastian Hou, CLSA Limited, Research Division - Research Analyst [50]

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Yes.

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Yu-Cheng Wang, Hua Hong Semiconductor Limited - Executive VP & Secretary of the Board [51]

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I think we expect -- we're doing a lot of qualification for various products. I think the ramp-up probably really, the true ramp-up, we're talking about significant revenue probably is going to be in the second half. We're going to be having some small revenue in the first, second quarters. And I think, let's see, somewhere around $100 million.

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Sebastian Hou, CLSA Limited, Research Division - Research Analyst [52]

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USD 100 million?

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Yu-Cheng Wang, Hua Hong Semiconductor Limited - Executive VP & Secretary of the Board [53]

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Yes. Yes. But all these things can change, yes?

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Operator [54]

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(Operator Instructions) We have a question coming from Edison Lee of Jefferies.

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Yu Sang Lee, Jefferies LLC, Research Division - Equity Analyst [55]

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Hello. Hi. You hear me?

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Yu-Cheng Wang, Hua Hong Semiconductor Limited - Executive VP & Secretary of the Board [56]

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Yes. Yes, yes, Jefferies. Yes.

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Yu Sang Lee, Jefferies LLC, Research Division - Equity Analyst [57]

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Yes. The first question is about your comment on increases in raw material costs. I think you mentioned that one of the reasons for lower margin last year was due to higher unit raw material cost. Maybe can you give us a little bit more details on that, your outlook for 2020? And number two is based on your comment that the revenue contribution from Wuxi can be $100 million for 2020, and you're expanding capacity to 20,000 to 30,000 wafers by midyear. What sort of utilization rate is that $100 million based on? Can you give us some rough idea? And number three, is the end demand. In 2020, where do you think the weakness or the risk could be on the different types of products in terms of end demand?

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Yu-Cheng Wang, Hua Hong Semiconductor Limited - Executive VP & Secretary of the Board [58]

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For increased raw materials. I mean, raw materials, actually, I think we expect the raw materials should be able to -- coming down because we went back last year twice. We renegotiated with our vendors. We're able to get it down compared to 2019. So it should benefit us throughout 2020. As far as for the utilization for the Wuxi fab, I think, we'll do our best to make sure we're going to keep that fab as much utilized because it's in the ramping-up process. We're doing a lot of qualification for various products. So I would say, if it's anywhere between 60% to 70%, will be decent.

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Yu Sang Lee, Jefferies LLC, Research Division - Equity Analyst [59]

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Okay. And on end demand?

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Yu-Cheng Wang, Hua Hong Semiconductor Limited - Executive VP & Secretary of the Board [60]

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Yes. End demand. I think power discrete, MCU continues to be very, very strong. I think pretty soon we can be -- if we're going to recover from this virus thing, I think, we should expect the smart card IC business should also be able to recover.

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Yu Sang Lee, Jefferies LLC, Research Division - Equity Analyst [61]

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And a follow-up question. How much exposure do you have to smartphones, especially 5G smartphones? Because a big upgrade cycle should be coming.

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Yu-Cheng Wang, Hua Hong Semiconductor Limited - Executive VP & Secretary of the Board [62]

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Yes. I mean, that's a good question. I think that's -- I think it's smart cards, it's the things with MCUs and then some logic devices like optical image stabilizer, power amplifiers. These are the things we have been making in the past. I can't -- I would say, it would be great if we can get to 15% to 20% of our overall revenue.

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Yu Sang Lee, Jefferies LLC, Research Division - Equity Analyst [63]

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So that's the target for 2020. And what was the contribution in 2019?

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Yu-Cheng Wang, Hua Hong Semiconductor Limited - Executive VP & Secretary of the Board [64]

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I think, it's small. It's probably around 10%.

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Operator [65]

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Speakers, so our next question is coming from the web from Mr. Randy Abrams.

So the question is, "Is there a way to quantify how much you discounted your 1Q shipments for the virus? If production is getting resumed, do you expect a strong rebound in 2Q?"

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Yu-Cheng Wang, Hua Hong Semiconductor Limited - Executive VP & Secretary of the Board [66]

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We have given the conservative number, okay, because the virus, as I said. I would not comment on a -- a reduction. That was the previous question. What was the discount here for the Q1 shipment. If it's in a normal case, I think, we could easily have a -- get a 10% to 15% upside, okay? In fact, as I said earlier, as soon as we are recovered from this virus, I think, there could be a very sharp spike for the business. And I certainly look forward to have that in Q2 2020.

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Operator [67]

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Okay. And just another question, again, from Mr. Abrams.

"So what is your expectation for growth in 12-inches Wuxi shipments in 1Q? And what is the utilization trends for Hua Hong 8-inches? Also second question, how should quarterly OpEx trend from here through 2020 relative to $33 million for Wuxi in 4Q '19?"

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Yu-Cheng Wang, Hua Hong Semiconductor Limited - Executive VP & Secretary of the Board [68]

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For the 12-inch fab, as far as the growth of those, we expect that we get -- the growth is really coming from, as I said, it's mostly -- it's going to be -- we expect it will mostly be in the second half, okay? As far as the 8-inch utilization, I think, it should soon stabilize, okay. Initially, when we had the 12-inch fab, some of the products where we migrate from the 8-inch to 12-inch. That was also the reason why there was a lower utilization in Q4, okay. And we expect, once it becomes stabilized in the next 3 -- several quarters, I think our utilization rate would get back to above in the high 90s.

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Operator [69]

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That's all the time we have for questions. I will now hand back to Mr. Daniel Wang for closing remarks.

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Yu-Cheng Wang, Hua Hong Semiconductor Limited - Executive VP & Secretary of the Board [70]

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Can you still hear me?

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Operator [71]

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Yes. You're still online. Go ahead, sir.

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Yu-Cheng Wang, Hua Hong Semiconductor Limited - Executive VP & Secretary of the Board [72]

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Okay. Well, thank you all for joining us today. And we certainly had another wonderful conversation. We hope you'll join us, again, next quarter. I wish you all stay safe and healthy. Certainly, I wish you all have a very happy Valentine's Day.

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Operator [73]

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