Q2 2026 Hua Hong Grace Semiconductor Ltd Earnings Call

August 13, 2026

Operator: Ladies and gentlemen, thank you for standing by. Welcome to Hua Hong Grace Semiconductor second quarter 2026 earnings conference call. Today's call is hosted by Dr. Peng Bai, Chairman and President, and Mr. Daniel Wang, Executive Vice President and Chief Financial Officer. Please be advised that your dial-in are in a listen-only mode. However, at the conclusion of the management presentation, there will be a question and answer session, at which time you will receive instructions on how to participate. The earnings press release and second quarter 2026 summary slides are available to download at our company's website, www.huahong.com. Without further ado, I would like to introduce you to Mr. Daniel Wang, Executive Vice President and Chief Financial Officer. Thank you.

Operator: Ladies and gentlemen, thank you for standing by. Welcome to Hua Hong Grace Semiconductor Q2 2026 Earnings Conference Call. Today's call is hosted by Dr. Peng Bai, Chairman and President, and Mr. Daniel Wang, Executive Vice President and Chief Financial Officer. Please be advised that your dial-in are in a listen-only mode.

Speaker #2: Ladies and gentlemen, thank you for standing by. Welcome to Hua Hong Grace Semiconductor’s second quarter 2026 earnings conference call. Today’s call is hosted by Dr. Peng Bai, Chairman and President, and Mr. Daniel Wang, Executive Vice President and Chief Financial Officer.

Speaker #2: Please be advised that your dial-in is in listen-only mode. However, at the conclusion of the management presentation, there will be a question-and-answer session, at which time you'll receive instructions on how to participate.

Operator: However, at the conclusion of the management presentation, there will be a question and answer session, at which time you will receive instructions on how to participate. The earnings press release and Q2 2026 summary slides are available to download at our company's website, www.huahong.com. Without further ado, I would like to introduce you to Mr. Daniel Wang, Executive Vice President and Chief Financial Officer. Thank you.

Speaker #2: The earnings press release and second quarter 2026 summary slides are available to download on our company website, www.hua-honggrace.com. Without further ado, I'd like to introduce Mr. Daniel Wang, Executive Vice President and Chief Financial Officer.

Speaker #2: Thank you.

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

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

Speaker #3: Good afternoon, everyone. Thank you for joining our Q2 2026 earnings conference. Today, we will first have Dr. Peng Bai, our Chairman and President, provide an overview of our second quarter performance.

Speaker #3: Our Dan will take you through our financial results in detail and offer guidance for the upcoming quarter. After Dan, we will open the floor for a question-and-answer session.

Speaker #3: With that, I turn the call over to Dr. Bai.

Speaker #4: Thank you, Daniel. Good afternoon, everyone. Thank you for joining our earnings call. We continue to improve our operational performance in the second quarter of 2026.

Peng Bai: Thank you, Daniel. Good afternoon, everyone. Thank you for joining our earnings call. We continued to improve our operational performance in the second quarter of 2026, with profitability strengthened further. Revenue hit a record high of USD 717 million, representing a year-on-year increase of 26.8%. Gross margin stood at 16.5%, up 5.6 percentage points year on year. Both metrics beat guidance and achieved sequential growth. Net profit attributable to shareholders of the parent company amounted to USD 38.6 million, posting substantial growth both year on year and quarter on quarter. Hua Hong Grace maintained a high fab utilization rate in Q2, delivered growth across all process technology platforms, especially the standalone and embedded non-volatile memory products. The improved business performance came as a result of rising volumes and prices. Since the beginning of the year, the global semiconductor industry has witnessed a strong AI-driven uptick in demand.

Peng Bai: Thank you, Daniel. Good afternoon, everyone. Thank you for joining our earnings call. We continued to improve our operational performance in the Q2 of 2026, with profitability strengthened further. Revenue hit a record high of USD 717 million, representing a year-on-year increase of 26.8%. Gross margin stood at 16.5%, up 5.6 percentage points year on year. Both metrics beat guidance and achieved sequential growth.

Speaker #4: With profitability strengthening further, revenue hit a record high of $717 million, representing a year-on-year increase of 26.8%. Gross margin stood at 16.5%, up 5.6 percentage points year-on-year.

Speaker #4: Both metrics met guidance and achieved sequential growth. Net profit attributable to shareholders of the company amounted to $38.6 million, posting substantial growth both year-on-year and quarter-on-quarter.

Peng Bai: Net profit attributable to shareholders of the parent company amounted to USD 38.6 million, posting substantial growth both year on year and quarter on quarter. Hua Hong Grace maintained a high fab utilization rate in Q2, delivered growth across all process technology platforms, especially the standalone and embedded non-volatile memory products. The improved business performance came as a result of rising volumes and prices. Since the beginning of the year, the global semiconductor industry has witnessed a strong AI-driven uptick in demand.

Speaker #4: Hua Hong Grace maintained a high FACTS utilization rate in Q2 and delivered growth across all process technology platforms, especially in standalone and embedded non-volatile memory products.

Speaker #4: The improved business performance came as a result of rising volumes and prices. Since the beginning of the year, the global semiconductor industry has witnessed a strong AI-driven upturn in demand, first on memory IC products, then spreading to logic and analog IC products that are associated with AI applications.

Peng Bai: First, on memory IC products, then spreading to logic and analog IC products that are associated with AI applications. As a specialty technology foundry serving a broad marketplace, we have clearly seen an overall positive impact on our business by the AI wave. We have also seen divergence in the intensity and strength of market demand depending on end user market segments. Amid the rapidly evolving industry landscape, our strategy of steady capacity expansion, ongoing specialty technology upgrades, and continuous capacity product mix optimization, will allow us to capture growth opportunities to provide substantial improvement in our business results. Hua Hong Grace has recently obtained registration approval from the China Securities Regulatory Commission for our acquisition of Huali Microelectronics. Integration of the acquired assets into Hua Hong Grace will strengthen our technologies portfolio, increase our operational economy of scale, and improve our profitability, injecting fresh momentum into our future growth.

Speaker #4: As a specialty technology foundry serving a broad marketplace, we have clearly seen an overall positive impact on our business from the AI wave. We have also observed divergence in the intensity and strength of market demand, depending on end-user market segments.

Peng Bai: Amid the rapidly evolving industry landscape, our strategy of steady capacity expansion, ongoing specialty technology upgrades, and continuous capacity product mix optimization, will allow us to capture growth opportunities to provide substantial improvement in our business results. Hua Hong Grace has recently obtained registration approval from the China Securities Regulatory Commission for our acquisition of Huali Microelectronics.

Speaker #4: Amid the rapidly evolving industry landscape, our strategy of steady capacity expansion, ongoing specialty technology upgrades, and continuous capacity and product mix optimization will allow us to capture growth opportunities and provide substantial improvement in our business results.

Speaker #4: Hua Hong Grace has recently obtained registration approval from the China Securities Regulatory Commission for our acquisition of Huali Microelectronics. Integration of the acquired asset into Hua Hong Grace will strengthen our technology portfolio, increase our operational economy of scale, and improve our profitability, injecting fresh momentum into our future growth.

Peng Bai: Integration of the acquired assets into Hua Hong Grace will strengthen our technologies portfolio, increase our operational economy of scale, and improve our profitability, injecting fresh momentum into our future growth. Now, I would like to hand the call over to our CFO, Mr. Daniel Wang, for his comments. Daniel?

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

Speaker #4: Now, I would like to hand the call over to our CFO, Mr. Daniel Wang, for his comments. Daniel?

Speaker #5: Thank you, Dr. Bai, for your very inspiring remarks. Now, let me walk you through a summary of our financial performance for the second quarter.

Daniel Wang: Thank you, Dr. Bai, for your very inspiring remarks. Now, let me walk you through a summary of our financial performance for Q2, and then provide our revenue and the margin outlook for Q3 2026 before opening the floor for the question and answer session. First, let's review our financial results for Q2. Revenue reached an all-time high of $717.5 million, 26.8% over Q2 2025 and 8.6% above Q1 2026, primarily driven by increased rate for shipment and improved average selling price. Gross margin was 16.5%, 5.6 percentage points over Q2 2025 and 3.5 percentage points above Q1 2026, primarily driven by improved average selling price and the cost reduction efforts, partially offset by increased depreciation costs. Operating expenses were $109.1 million, 11.4% over Q2 2025 and 3.3% above Q1 2026, mainly due to increased labor expenses.

Speaker #5: Dan provide our revenue and the margin outlook for Q3 2026. Before opening the floor for the question-and-answer session, first, let's review our financial results for the second quarter.

Speaker #5: Revenue reached an all-time high of $717.5 million, up 26.8% over Q2 2025 and 8.6% above Q1 2026, primarily driven by increased wafer shipments and improved average selling price.

Daniel Wang: Gross margin was 16.5%, 5.6 percentage points over Q2 2025 and 3.5 percentage points above Q1 2026, primarily driven by improved average selling price and the cost reduction efforts, partially offset by increased depreciation costs. Operating expenses were $109.1 million, 11.4% over Q2 2025 and 3.3% above Q1 2026, mainly due to increased labor expenses.

Speaker #5: Gross margin was 16.5%, 5.6 percentage points over Q2 2025, and 3.5 percentage points above Q1 2026, primarily driven by improved average selling price and cost reduction efforts.

Speaker #5: Partially offset by increased depreciation costs. Operating expenses were $109.1 million, 11.4% over Q2 2025 and 3.3% above Q1 2026, mainly due to increased labor expenses.

Daniel Wang: Other income net was $2.2 million, 79.4% lower than Q2 2025, primarily due to increased finance costs and the decreased government subsidies, partially offset by increased share of profit of associates. The other loss net was $2.4 million, mainly due to increased share of profit of associates. The income tax expenses was $7.6 million, 7.5% over Q2 2025. Profit for the period was $3.9 million, compared to a loss of $32.8 million in Q2 2025, and a loss of $17.3 million in Q1 2026. Net profit attributable to shareholders of the parent company was $30.6 million, 385.9% over Q2 2025 and 84.6% above Q1 2026. Basic earnings per share was $0.022, which is 2.2 cents, 340% over Q2 2025 and 83.3% above Q1 2026. Annualized ROE was 2.4%, two percentage points over Q2 2025 and 1.2 percentage points above Q1 2026.

Speaker #5: Other income net was 2.2 million, 79.4% lower than Q2 2025, primarily due to increased finance costs and the decreased government subsidies. Partially offset by increased share of profit of loss net was 2.4 million, mainly due to increased share of profit of associates.

Speaker #5: Income tax expenses was 7.6 million, 7.5% over Q2 2025. Profit for the period was 3.9 million, compared to a loss of 32.8 million in Q2 2025 and a loss of 17.3 million in Q1 2026.

Daniel Wang: Profit for the period was $3.9 million, compared to a loss of $32.8 million in Q2 2025, and a loss of $17.3 million in Q1 2026. Net profit attributable to shareholders of the parent company was $30.6 million, 385.9% over Q2 2025 and 84.6% above Q1 2026. Basic earnings per share was $0.022, which is 2.2 cents, 340% over Q2 2025 and 83.3% above Q1 2026. Annualized ROE was 2.4%, two percentage points over Q2 2025 and 1.2 percentage points above Q1 2026.

Speaker #5: Net profit attributable to shareholders of the parent company was 30.6 million, 385.9% over Q2 2025, and 84.6% above Q1 2026. Basic earnings per share was 1022, which is 2.2 cents, 340% over Q2 2025, and 83.3% above Q1 2026.

Speaker #5: Annualized ROE was 2.4%, 2 percentage points over Q2 2025, and 1.2 percentage points above Q1 2026. Now, let's take a closer look at our Q2 2026 revenue performance.

Daniel Wang: Now, let's take a closer look at our Q2 2026 revenue performance. From geographical perspective, revenue from China was $563.7 million, contributing 78.6% of total revenue and an increase of 20% over Q2 2025, mainly driven by increased demand for MCU, flash, trench MOSFET, logic, and smart car ICs. Revenue from North America was $93.8 million, an increase of 77% over Q2 2025, mainly driven by increased demand for other power management IC and MCU products. Revenue from other Asia was $32 million, an increase of 11.6% over Q2 2025, mainly driven by increased demand for super junction and MCU products. Revenue from Europe was $28 million, an increase of 90.1% over Q2 2025, mainly driven by increased demand for MCU and smart car ICs.

Speaker #5: From a geographical perspective, revenue from China was $563.7 million, contributing 78.6% of total revenue, and an increase of 20% over Q2 2025, mainly driven by increased demand for MCU/generate MOSFET logic and smart car ICs.

Daniel Wang: Revenue from North America was $93.8 million, an increase of 77% over Q2 2025, mainly driven by increased demand for other power management IC and MCU products. Revenue from other Asia was $32 million, an increase of 11.6% over Q2 2025, mainly driven by increased demand for super junction and MCU products. Revenue from Europe was $28 million, an increase of 90.1% over Q2 2025, mainly driven by increased demand for MCU and smart car ICs.

Speaker #5: Revenue from North America was $93.8 million, an increase of 77% over Q2 2025, mainly driven by increased demand for other power management IC and MCU products.

Speaker #5: Revenue from other Asia was $32 million, an increase of 11.6% over Q2 2025, mainly driven by increased demand for super junction and MCU products.

Speaker #5: Revenue from Europe was 28 million, an increase of 90.1% over Q2 2025, mainly driven by increased demand for MCU and smart car ICs. With respect to technology platforms, revenue from embedded non-volatile manual was 200.1 million, an increase of 41.8% over Q2 2025, mainly driven by increased demand for MCU and smart car ICs.

Daniel Wang: With respect to technology platforms, revenue from embedded non-volatile memory was $200.1 million, an increase of 41.8% over Q2 2025, mainly driven by increased demand for MCU and smart car ICs. Revenue from standalone non-volatile memory was $63.3 million, an increase of 149.3% over Q2 2025, mainly driven by increased demand for flash products. Revenue from power discrete was $182.3 million, an increase of 9.4% over Q2 2025, mainly driven by increased demand for trench MOSFET products. Revenue from logic and RF was $83.2 million, an increase of 21.3% over Q2 2025, mainly driven by increased demand for logic products. Revenue from analog and power management IC was $183.1 million, an increase of 13% over Q2 2025, mainly driven by increased demand for other power management IC products.

Speaker #5: Revenue from standalone non-volatile memory was $68.8 million, an increase of 149.3% over Q2 2025, mainly driven by increased demand for flash products. Revenue from power discrete was $182.3 million, an increase of 9.4% over Q2 2025, mainly driven by increased demand for channel MOSFET products.

Daniel Wang: Revenue from logic and RF was $83.2 million, an increase of 21.3% over Q2 2025, mainly driven by increased demand for logic products. Revenue from analog and power management IC was $183.1 million, an increase of 13% over Q2 2025, mainly driven by increased demand for other power management IC products. Now, turning to our cash flow statement, net cash flows generated from operating activities was $330.1 million, 99.3% over Q2 2025 and 159.2% above Q1 2026, mainly due to increased receipts from customers.

Speaker #5: Revenue from logic and RF was $83.2 million, an increase of $21.3 million, or percent over Q2 2025, mainly driven by increased demand for logic products.

Speaker #5: Revenue from analog and power management IC was $183.1 million, an increase of 13% over Q2 2025, mainly driven by increased demand for other power management IC products.

Speaker #5: Now, turning to our cash flow statement, net cash flows generated from operating activities was $330.1 million, up 99.3% over Q2 2025 and 159.2% above Q1 2026, mainly due to increased receipts from customers.

Daniel Wang: Now, turning to our cash flow statement, net cash flows generated from operating activities was $330.1 million, 99.3% over Q2 2025 and 159.2% above Q1 2026, mainly due to increased receipts from customers.

Daniel Wang: Capital expenditures were $356.6 million in Q2 2026, including $325.9 million for the 12-inch facilities and $30.7 million for the eight-inch facilities. Other cash flow generated from investing activities was $25.4 million in Q2 2026, including a $25.4 million receipt of government grants for equipment, $8.6 million interest income, $7.3 million dividends, and $0.2 million receipts from the disposal of equipment, partially offset by a $16.1 million investment in equity instruments. Net cash flows used in financing activities was $406 million, including $569 million of bank principal repayments, $37.6 million interest payments, and $1 million lease payments, partially offset by $201.5 million proceeds from bank borrowings and $100,000 proceeds from share option exercise. Next, moving to the balance sheet. Cash and cash equivalents was $4,530,000 on 30 June 2026, compared to $4,867,900,000 on 31 March 2026.

Speaker #5: Capital expenditures were $356.6 million in Q2 2026, including $325.9 million for the 12-inch facilities and $30.7 million for the 8-inch facilities. Other cash flow generated from investing activities was $25.4 million in Q2 2026, including a $25.4 million receipt of government grants for equipment.

Speaker #5: $8.6 million in interest income, $7.3 million in dividends, and $0.2 million in receipts from the disposal of equipment, partially offset by a $16.1 million investment in equity instruments.

Daniel Wang: Net cash flows used in financing activities was $406 million, including $569 million of bank principal repayments, $37.6 million interest payments, and $1 million lease payments, partially offset by $201.5 million proceeds from bank borrowings and $100,000 proceeds from share option exercise. Next, moving to the balance sheet. Cash and cash equivalents was $4,530,000 on 30 June 2026, compared to $4,867,900,000 on 31 March 2026.

Speaker #5: Net cash flows used in financing activities was $406 million, including $569 million of bank principal repayments, $37.6 million in interest payments, and $1 million in lease payments, partially offset by $201.5 million in proceeds from bank borrowings.

Speaker #5: And $100,000 proceeds from share option exercise. Next, moving to the balance sheet, cash and cash equivalents was $4,530,000,000 on June 30, 2026, compared to $4,867,900,000 on March 31, 2026.

Daniel Wang: Other current assets increased from $894.6 million on 31 March 2026 to $936.2 million on 30 June 2026, mainly due to an increased value-added tax credit. Property plant and equipment was $7,286.3 million on 30 June 2026, compared to $7,805.9 million on 31 March 2026, primarily due to capacity expansion. Interest-bearing bank borrowings decreased from $3,897.2 million on 31 March 2026 to $3,567.5 million on 30 June 2026, primarily due to repayments of bank borrowings. Total assets increased from $14,947.3 million on 31 March 2026 to $15,225.8 million on 30 June 2026. Total liabilities decreased to $5,528.4 million on 30 June 2026 from $5,663 million on 31 March 2026. Debt ratio decreased to 36.3% on 30 June 2026 from 37.9% on 31 March 2026. Well, finally, let's discuss our outlook for the third quarter of 2026.

Speaker #5: Other current assets increased from 894.6 million on March 31, 2026 to 936.2 million on June 30, 2026, mainly due to an increased value add tax credit.

Speaker #5: Property, plant, and equipment was $7,286.3 million as of June 30, 2026, compared to $7,105.9 million on March 31, 2026, primarily due to capacity expansion.

Speaker #5: Interest-bearing bank borrowings decreased from $3,897.2 million on March 31, 2026, to $3,567.5 million on June 30, 2026, primarily due to repayments of bank borrowings.

Speaker #5: Total assets increased from $14,947.3 million on March 31, 2026, to $15,225.8 million on June 30, 2026. Total liabilities decreased to $5,528.4 million on June 30, 2026, from $5,606.63 million on March 31, 2026.

Daniel Wang: Total assets increased from $14,947.3 million on 31 March 2026 to $15,225.8 million on 30 June 2026. Total liabilities decreased to $5,528.4 million on 30 June 2026 from $5,663 million on 31 March 2026. Debt ratio decreased to 36.3% on 30 June 2026 from 37.9% on 31 March 2026. Well, finally, let's discuss our outlook for the third quarter of 2026.

Speaker #5: The debt ratio decreased to 36.3% as of June 30, 2026, from 37.9% on March 31, 2026. Finally, let's discuss our outlook for the third quarter of 2026. We expect revenue to be in the range of $770 million to $780 million.

Daniel Wang: We expect revenue to be in the range of $770 million to $780 million, with a projected gross margin of 16% to 18%. This concludes my financial remarks. We will now begin the Q&A section. Operator, please assist. Thank you.

Speaker #5: With the projected gross margin of 16% to 18%, this concludes my financial remarks. We will now begin the Q&A session. Operator, please assist. Thank you.

Speaker #1: Thank you.

Speaker #2: We will now begin the question and answer session. If you would like to ask a question, please press star 1-0-1 on your telephone and wait for your name to be announced.

Operator: We will now begin the question and answer session. If you would like to ask a question, please press star 1 and 1 on your telephone and wait for your name to be announced. To cancel your request, you can press star 1 and 1 again. Our first question comes from the line of Leping Huang of Huaxia Bank. Please go ahead. Your line is open.

Speaker #2: To cancel your request, you can press star 101 again. Our first questions come from the line of Le Ping Huang of Hua Tai. Please go ahead, your line is open.

Leping Huang: Oh. Thank you for taking my question. Dr. Bai, first congratulate for the very strong results. My calculations show that you still deliver another 3% Q on Q ASP growth this quarter. Could you unpack what drive this ASP growth and whether it is from pricing or some mix change, and how do you see this ASP trend in the H2 and beyond? Also, we noticed the largest foundry in the world now also say they were re-emphasizing this mature and the specialty node process to serve their customers. Plus also the domestic peer also want adding capacity. What is your view on this mature node supply-demand relation in next few years, and how Hua Hong Grace can differentiate from peers and further improve their profitability ahead? Thank you.

Speaker #3: Oh, thank you for taking my question. Dr. Bai, first, congratulations on the very strong results. My calculations show that you delivered another 3% quarter-on-quarter ASP growth this quarter.

Speaker #3: So, could you unpack what drives this ASP growth, and whether it's from pricing or some mix change? And how do you see this ASP trend in the second half and beyond?

Speaker #3: Also, we noticed that the largest foundry in the world now says they are re-emphasizing this mature and specialty node process to serve their customers.

Leping Huang: Also, we noticed the largest foundry in the world now also say they were re-emphasizing this mature and the specialty node process to serve their customers. Plus also the domestic peer also want adding capacity. What is your view on this mature node supply-demand relation in next few years, and how Hua Hong Grace can differentiate from peers and further improve their profitability ahead? Thank you.

Speaker #3: So, plus also, the domestic peers also want to add capacity. So, what's your view? On this mature node supply-demand relation in the next few years, and how can Hua Hong differentiate from peers and further improve profitability ahead?

Speaker #3: Thank you.

Speaker #1: Yeah, thank you. You have a number of questions in there. Let me try to tease them out and answer them one at a time.

Peng Bai: Thank you. You have a number of questions in there.

Leping Huang: Okay, yeah.

Peng Bai: Let me try to tease them out and answer them one at a time. In terms of pricing, as you know, in our industry, the pricing is set by market. It is basically by the balance of the supply and demand. Since the beginning of the year, we started to see the demand going up and the balance is shifting towards tightness in term of supply situation. As a result, that has driven up price increases, mostly in the MCU and memory area and PMIC area. Those are the areas that are more associated with the AI applications. Of course, they are also used in the consumer segment, but the AI demand upturn is probably more significant. That is why we see the supply, demand balance shifting towards demand and the supply being tight. In fact, on some of the products, we clearly cannot meet the demand.

Speaker #1: In terms of pricing, as you know, in our industry the pricing is set by the market. It's basically determined by the balance of supply and demand.

Speaker #1: Since the beginning of the year, we have started seeing demand go up, and the balance is shifting towards tightness in terms of the supply situation.

Speaker #1: So, as a result, that has driven up price increases, mostly in the MCU and memory area, and the payment area. Those are the areas that are more associated with AI applications.

Peng Bai: As a result, that has driven up price increases, mostly in the MCU and memory area and PMIC area. Those are the areas that are more associated with the AI applications. Of course, they are also used in the consumer segment, but the AI demand upturn is probably more significant. That is why we see the supply, demand balance shifting towards demand and the supply being tight. In fact, on some of the products, we clearly cannot meet the demand.

Speaker #1: Of course, they are also used in the consumer segment, but probably the AI demand upturn is most significant. That's why we've seen the supply-demand balance shifting towards demand, with supply being tight.

Speaker #1: In fact, some of the products clearly cannot meet the demand. The orders we're receiving are anywhere between 1.5x to 2x of our capacity.

Peng Bai: The order we are receiving is anywhere between 1.5x to 2x of our capacity. As a result, we are doing everything we can to basically optimize our capacity structure and try to produce more across the board, which is somewhat difficult right now because we are being pretty much 100% loaded. It is really through some very hard work and innovation, try to squeeze more. Of course, we are fortunate to have a fab that was still going through the capacity expansion. That is why we can still get a good capacity increase from the Fab 9B that we have, that is still going through the capacity ramp up. In a way, if you ask me what is our advantage? We have all the advantage. I think it come from two ways.

Speaker #1: So, as a result, we are doing everything we can to basically optimize our capacity structure and try to produce more across the board, which is somewhat difficult right now because we have been pretty much 100% loaded.

Speaker #1: So it's really due to some very hardworking innovation trying to squeeze more. Of course, we have been fortunate to have a fab that was still going through the capacity expansion.

Peng Bai: Of course, we are fortunate to have a fab that was still going through the capacity expansion. That is why we can still get a good capacity increase from the Fab 9B that we have, that is still going through the capacity ramp up. In a way, if you ask me what is our advantage? We have all the advantage. I think it come from two ways.

Speaker #1: So that's why we can still get good capacity increases from Fab 9A that we have. That's still going through the capacity ramp-up.

Speaker #1: So in a way, if you ask me what is our advantage, Hua Hong's advantage, I think it comes from two ways. One is our technology capability, which clearly is, from a domestic standpoint, industry leading.

Peng Bai: One is our technology capability clearly is, from domestic standpoint, they are industry leading in many, many areas, and some of them are also on par with our international competitors. That give us a strong foundation to basically build our capacity and serve our customer. Another thing is, since last year, although last year, nobody predicted this year it is going to go up, but since last year, we were quite steady. We were quite determined to continue to increase our capacity. That decision or that strategy of steadily expanding our capacity, actually, you might say that it has paid off somewhat as this year come in and the market is turning upward. In terms of future pricing prediction, it is really a function of this latest demand wave, how long is it going to last? There is a debatable point. There is a lot of discussion or debate amongst the industry people.

Speaker #1: Many, many areas. And some of them are also on par with our international competitors. So that gives us a strong foundation to basically build up capacity and serve our customers.

Speaker #1: Another thing is, since last year—although last year nobody predicted this year was going to go up—but since last year, we were also quite steady.

Speaker #1: We were quite determined to continue to increase our capacity. That decision, or that strategy of steadily expanding our capacity, actually—you can say, you might say—that has paid off somewhat, as this year is coming and the market is turning upward.

Peng Bai: We were quite determined to continue to increase our capacity. That decision or that strategy of steadily expanding our capacity, actually, you might say that it has paid off somewhat as this year come in and the market is turning upward. In terms of future pricing prediction, it is really a function of this latest demand wave, how long is it going to last? There is a debatable point. There is a lot of discussion or debate amongst the industry people.

Speaker #1: In terms of future pricing predictions, it's really a function of this latest demand wave—how long it's going to last. That's a debatable point.

Speaker #1: There's other discussion or debate amongst industry people. But in the short term, I think for the second half of this year, as well as 2027, most people still believe the demand will continue to be strong.

Peng Bai: But short term, I think for the H2 of this year and as well as 2027, most people still believe the demand will continue to be strong. I share that view, and so in that sense, I expect our price increases will continue throughout the H2 of the year. Some of the pricing action we have taken over the last quarter, it will start to manifest itself probably in the H2 and even next year. So I do think that this upturn in demand will be accompanied by our continued ability to increase the price a little bit. I do not want to caution everybody that we are now like a DRAM market. There is a multiple increase in the multiples. We are talking about still percentage, in percentage term.

Speaker #1: I share that view, and so in that sense, I expect our price increases will continue throughout the second half of the year. Some of the pricing action we have taken over the last quarter will start to manifest itself, probably in the second half and even next year.

Peng Bai: So I do think that this upturn in demand will be accompanied by our continued ability to increase the price a little bit. I do not want to caution everybody that we are now like a DRAM market. There is a multiple increase in the multiples. We are talking about still percentage, in percentage term. But I do think it is a nice turn for the better, and we should continue to enjoy that for the foreseeable future, at least through H2 of this year and perhaps to next year. Thank you.

Speaker #1: So, I do think that this upside—this upturn in demand—will be accompanied by our continued ability to increase the price a little bit.

Speaker #1: I don't want to caution everybody that we are not like the DRAM market. There's a multiple increasing multiple. We're talking still in percentage terms, but I do think it is a nice turn for the better, and we should continue to enjoy that for the foreseeable future, at least through the second half of this year and perhaps into next year.

Peng Bai: But I do think it is a nice turn for the better, and we should continue to enjoy that for the foreseeable future, at least through H2 of this year and perhaps to next year. Thank you.

Speaker #1: Thank you.

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

Speaker #3: Thank you. Okay, so the second question from me is about memory. The largest China-based DRAM company just listed in Asia recently.

Speaker #3: And we see very strong investor interest in China's memory industry. And at the same time, looking from a global perspective, providing logic die foundry service to memory makers has become a new trend these days.

Speaker #3: So Dr. Bai, can you share some of your views on how Hua Hong can benefit from this memory build-out in China and globally? And do you have any view or plan to, for example, cooperate with the China or global memory makers on providing similar logic die services?

Leping Huang: Dr. Bai, so can you share your view on how Hua Hong can benefit from this memory build-out in China and globally? Do you have any view that you plan to, for example, cooperate with the China global memory makers on providing similar logic die service? Thank you.

Speaker #3: Thank you.

Speaker #1: Okay. The memory comes in different types. The one we're seeing the biggest uptick in demand for is DRAM. Second comes NAND. We are not directly participating in DRAM nor NAND, but we do have a substantial business in NOR flash, which we have seen demand increase this year.

Peng Bai: Okay. The memory comes in different types. The one we are seeing the biggest uptick in demand is the DRAM. The second come the NAND. We are not directly participating in DRAM nor NAND, but we do have a substantial business in NOR flash business, which we have seen demand increases this year, and they are probably going to continue for H2 of this year and then next year. So we do enjoy the demand uptick there. I think the fact that the memory is going up is really representing the overall demand for semiconductor is increasing. So in that sense, it definitely benefits everybody. It benefits the memory more directly because probably it will build up there faster. But it does also benefit logic foundry.

Speaker #1: And that's probably going to continue for the second half of this year and next year. So we do enjoy the demand uptick there. In terms of how do we—I think the fact that memory is going up, it's really representing that the overall demand for semiconductors is increasing.

Peng Bai: So we do enjoy the demand uptick there. I think the fact that the memory is going up is really representing the overall demand for semiconductor is increasing. So in that sense, it definitely benefits everybody. It benefits the memory more directly because probably it will build up there faster. But it does also benefit logic foundry.

Speaker #1: So in that sense, it definitely benefits everybody, benefits the memory more directly because it probably goes up there faster. But it does also benefit logic foundry, or I would call us a specialty technology foundry, which is we have a lot of products in logic, in analog, and some specialty memory like NOR flash.

Peng Bai: I would call us as a specialty technology foundry, which is, we have a lot of product in logic, in analog, and some specialty memory, like NOR flash. In a way, the fact that the DRAM is seeing the biggest demand increase, it just represents the fact that the AI has been driving a lot of demand increases for overall in the semiconductor. In that sense, it is definitely a good thing. We do benefit from the overall semiconductor demand increase. Specifically to DRAM or even NAND, it is the technology direction there. Their product tends to try to basically, bifurcate is not the right word. It is basically their product, they try to separate the memory elements from the peripheral logic into two different die and through some kind of 3D assembly to put them together as a product.

Speaker #1: So, in a way, the fact that DRAM is seeing the biggest demand increase truly just represents the fact that AI has been driving a lot of demand increases.

Speaker #1: For overall, in the semiconductor. So in that sense, it's a definitely good thing. So we do benefit from the overall semiconductor demand increase. Specifically to DRAM or even NAND, because the technology direction there is such that it tends to start to have their product tends to try to basically bifurcate is not the right word.

Peng Bai: In that sense, it is definitely a good thing. We do benefit from the overall semiconductor demand increase. Specifically to DRAM or even NAND, it is the technology direction there. Their product tends to try to basically, bifurcate is not the right word. It is basically their product, they try to separate the memory elements from the peripheral logic into two different die and through some kind of 3D assembly to put them together as a product.

Speaker #1: It's basically their product. They try to separate the memory elements from the peripheral logic into two different dies and use some kind of 3D assembly to put them together as a product.

Speaker #1: So in that sense, if the memory houses want to spend more time or focus more on the pure memory elements, they might—basically, they might let their logic, the peripheral logic, be manufactured by the larger foundry.

Peng Bai: In that sense, if the memory houses want to spend more time or focus more on the pure memory element, they might let the peripheral logic die to be manufactured by the larger foundries. In that sense, we do see the larger houses probably will start to explore that collaboration with the larger foundry. So they can focus on truly what is their specialty, which is the bit, the memory part of the overall memory product. But that is still probably in the early stages of this technical transition. But overall, it is moving in the direction that they might even create some new demand for logic foundries because their logic portion of their monolithic die, they might separate out in the separate die and give it to a larger foundry to manufacture. If I explained that clearly. Thank you.

Speaker #1: So in that sense, we do see the larger houses probably will start to explore that collaboration with the larger foundry, for us to—so we can focus on truly what is their specialty, which is the memory, the bit, the memory part of the overall memory product.

Speaker #1: So, but that is still probably in the early stages of this technical transition. But overall, it is moving in the direction that they might even create some new demand for logic foundries, because their logic portion of their monolithic, they might get separated out into separate die and give it to logic foundries to manufacture.

Peng Bai: But that is still probably in the early stages of this technical transition. But overall, it is moving in the direction that they might even create some new demand for logic foundries because their logic portion of their monolithic die, they might separate out in the separate die and give it to a larger foundry to manufacture. If I explained that clearly. Thank you.

Speaker #1: It's very clear. Thank you for explaining that.

Speaker #3: Thank you. It's very clear. Thank you. Thank you.

Leping Huang: Thank you. It is very clear. Thank you.

Speaker #4: Thank you for the questions. One moment for our next question. The next question comes from Tzuyen Wang of Citi Securities. Your line is open.

Operator: Thank you for the questions. One moment for our next questions. The next question comes from Ziyuan Wang of CITIC Securities. Your line is open. Please go ahead.

Speaker #4: Please go ahead.

Speaker #2: Okay. Thank you for taking my question. This is Tzuyen from Zhongxi and Zhenquan. My first question is: could you give us some guidance to show the solid growth in Q3?

Ziyuan Wang: Okay. Thank you for taking my question. This is Ziyuan from CITIC Securities. My first question is, we see a great guidance show the solid growth in Q3. Could you break down the Q3 revenue guidance to show how much is driven by ASP increase and how much is driven by the capacity expansion? Also, regarding on the expansion, approximately how much capacity will be added in Q3 and Q4? Thank you.

Speaker #2: And could you break down the Q3 manual revenue guidance to show how much it's driven by ESP increase, and how much it's driven by the capacity expansion?

Speaker #2: And also, regarding the expansion, approximately how much capacity will be added in Q3 and Q4? Thank you.

Peng Bai: Sure. Let me take on the capacity expansion part. In our last annuals, we talked about the guidance for Q3 in terms of how it works on the term volume increase versus price increase. I think that's what you're asking. The capacity increase, our Fab 9A in Wuxi, it will ramp up to the peak to the total capacity by Q3. Next quarter, you have all the equipment in that fab install. We will start to load the fab 100% starting in Q3, but the output probably will start to show up in Q4 or next year. I think 2027, you should expect a full fab worth of output from Fab 9A. As you know, we do have another fab that's under construction, that started in March of this year. That fab, we'll start to have equipment installed in Q3 as well.

Speaker #1: Okay. So let me take on the capacity expansion part. Last time, it was a total of the guidance for Q3—how it breaks down between volume increase versus price increases.

Speaker #1: I think that's what you're asking. So, for the capacity increase, our FAST 9A in Wuxi will ramp up to full capacity by Q3, next quarter.

Peng Bai: Next quarter, you have all the equipment in that fab install. We will start to load the fab 100% starting in Q3, but the output probably will start to show up in Q4 or next year. I think 2027, you should expect a full fab worth of output from Fab 9A. As you know, we do have another fab that's under construction, that started in March of this year. That fab, we'll start to have equipment installed in Q3 as well.

Speaker #1: You'll have all the equipment in that fab installed, and so we will start to load the fab, focusing 100% starting in Q3. However, the output will probably start to show up in Q4 or next year.

Speaker #1: So, I think in 2027, you should expect a full fab's worth of output from Fab 9A. As you know, we do have another fab that's under construction.

Speaker #1: That started in March of this year. That fab will start to have equipment installed in Q3 as well. So we expect that we will have a complete line in Q1, and we will start to have a small volume coming out.

Peng Bai: We expect that we've got a completed line in Q1, and we will start to have a small volume coming out. Next year throughout 2027, we expect that we will start the capacity ramp-up from the next fab, which we call Fab 9B. I will let Daniel talk about Q3 revenue breakdown, the guidance between volume and the price increases.

Speaker #1: So next year, throughout 2027, we expect we will start the capacity ramp-up from the next fab, which we call Fab 9D. Now, I will let Daniel talk about the Q3 revenue breakdown.

Speaker #1: The guidance between volume and the price increases.

Daniel Wang: Okay. C. Y. Chan, thank you for the question. We expect the revenue is going to be between $770 million to $780 million. That's our projection for Q3. The increase is largely coming from MCUs. That whole sector, embedded memory, will continue to grow strong. There will be a double-digit growth. The standalone non-volatile memory continue to be very, very strong in Q3, and I think this trend will continue throughout the year and into 2027 as well. Power discrete, especially the low voltage products, we're talking about the MOSFET business and also split the medium voltage products. They are also growing strong. The IGBT and super junction, virtually flat. On the logic and RF side, I think there's going to be pretty strong momentum from the RF as well.

Speaker #3: Hey, Tzuyen, thank you for the question. So we expect the revenue is going to be between $770 million to $780 million.

Speaker #3: That's our projection for Q3. The increase is largely coming from MCUs, MCUs. That whole sector embedded in biofilm memory will continue to grow strong.

Speaker #3: There will be double-digit growth, and the standalone memorial memory remained very, very strong in Q3. I think this trend will continue throughout the year.

Speaker #3: And into 2027 as well. And I'll pause the script, especially the low voltage products we're talking about, the MOSFET business, and also split the medium voltage products.

Daniel Wang: Power discrete, especially the low voltage products, we're talking about the MOSFET business and also split the medium voltage products. They are also growing strong. The IGBT and super junction, virtually flat. On the logic and RF side, I think there's going to be pretty strong momentum from the RF as well.

Speaker #3: They are also going strong. The IGBT and super-junction are virtually flat, virtually flat. And then on the logic and RF side, I think there's going to be pretty strong momentum from RF as well.

Daniel Wang: And other than that, I think we'll see strong momentum coming from power management IC and analog business as well. Even though analog is still a small segment at this point, but they're also growing pretty strong in Q3. So overall, when you look at technology platforms, what I just discussed are the major drivers. And in terms of revenue increase, when you look at by ASP and volume, it is really a split. I think anywhere, we're looking to 78% increase on revenue. I think, I would say 60% coming from ASP and also another 40% coming from increase in volume. Thank you.

Speaker #3: RF as well. Other than that, I think we see strong momentum coming from the power management IC and analog business as well. Even though analog is still a small segment at this point, they're also growing pretty strongly in Q3.

Speaker #3: So overall, when you look at technology platforms, what I just discussed are the major drivers. And in terms of revenue increase, when you look at it by ASP and volume, it is really a split. I think, anywhere, we're looking at a 78% increase on revenue. I think I would say 60% coming from ASP.

Speaker #3: And also, another 40% was coming from an increase in volume. Thank you.

Speaker #4: Okay, thank you. Thank you. Eyes on line one.

Ziyuan Wang: Okay. Thank you. I don't mind. My second question is about the capacity transit or switch. Since our demand is strong, is it possible to flexibly switch our capacity between product? Just like, can we shift the CIS capacity to memory products? And which type of capacities allow this kind of conversion? And also, what impact would such conversion have onto the overall ASP in maybe next quarter or H2? Thank you.

Speaker #2: My second question is about the capacity transit or switch. Since our demand is strong, is it possible to flexibly switch our capacity between products? For example, can we shift the CIS capacity to memory products, and which types of capacities allow this kind of conversion?

Speaker #2: And also, what impact would such a conversion have on the overall ASP in maybe the next quarter or the second half? Thank you.

Peng Bai: First of all, the capacity are somewhat fungible to a certain extent. They are fungible, meaning that if you build 1,000 capacity for a certain technology platform, with some conversion rate, you can use that capacity to do something else. So there is some fungibility. Exactly how much, it depends on the technology platform you're talking about. Specifically, CIS, for example, the flow is pretty close to the logic flow. So if you try to be fungible with some technology platform that's close to logic flow, then a lot of them can be used. For example, we normally group logic products, CIS, and the driver type of product in one group, because they are very much mutually fungible to large degree. If you want to use CIS for BCD type of product, there's still some fungibility, but it will be decreased.

Speaker #1: First of all, the capacity is somewhat tangible to a certain extent. They are tangible, meaning that if you build one 1,000 capacity for a certain technology platform, you can also, with some conversion rate, use that capacity to do something else.

Speaker #1: So there is some fungibility. The exactly how much it depends on the technology platform you're talking about. Specifically, CIS, for example, that's the flow is a close, pretty close to the logic flow.

Peng Bai: Specifically, CIS, for example, the flow is pretty close to the logic flow. So if you try to be fungible with some technology platform that's close to logic flow, then a lot of them can be used. For example, we normally group logic products, CIS, and the driver type of product in one group, because they are very much mutually fungible to large degree. If you want to use CIS for BCD type of product, there's still some fungibility, but it will be decreased.

Speaker #1: So if you try to be fungible with some technology platform that's close to logic flow, then a lot of them can be used for, for example, we normally group logic products, CIS, and driver—the driver type of product.

Speaker #1: It's one group because they are very much mutually fungible to a large degree. If you want to use CIS for BCD type of product, the fungibility is still—there's still some fungibility, but it will be decreased.

Peng Bai: Or if you want to use for memory product, there are also some fungibility, but you will probably further decrease somewhat because some of the memory product have some unique tool that require. A lot of times, your fungibility is limited by those unique tool that's unique to each technology platform. When we build a fab, we try to manage the fungibility. You obviously can't be 100% fungible. We try to maximize the fungibility so that we can react to market demand fluctuations among different technology platforms. So right now, we are certainly exercising that fungibility to maximum extent. This, of course, is also limited by the fact that we still want to maintain reasonable volume for each product because we're into a long-term business. We don't want to basically just look at the next quarter or even just one year.

Speaker #1: Or if you want to use it for memory products, there is also some fungibility, but you will probably see a further decrease somewhat because some of the memory products have some unique tools that are required.

Speaker #1: So, a lot of times, your fungibility is limited by those unique tools—that's unique to each technology platform. When we build a fab, we try to manage the fungibility.

Speaker #1: You obviously can't be 100% fungible. We try to maximize the fungibility so that we can react to market demand fluctuations among different technology platforms.

Peng Bai: We try to maximize the fungibility so that we can react to market demand fluctuations among different technology platforms. So right now, we are certainly exercising that fungibility to maximum extent. This, of course, is also limited by the fact that we still want to maintain reasonable volume for each product because we're into a long-term business. We don't want to basically just look at the next quarter or even just one year.

Speaker #1: So right now, we are certainly exercising that fungibility to the maximum extent. This, of course, is also limited by the fact that we still want to maintain a reasonable volume for each product because we're in this for the long-term business.

Speaker #1: We don't want to basically just, for a short—just look at the next quarter or even just one year. There is some level of strategic decision-making that's going on to make sure that we do have a long-term view, not to be 100% driven by short-term considerations.

Peng Bai: There is some level of strategic decision-making that's going on to make sure that we do have a long-term view, not to be 100% driven by short-term considerations. That's one. Another one is we do use pricing as a tool to manage demand, shift in demand between the technology platforms so that the demand pattern matches our capacity pattern better. So, overall, I think when the overall demand is tight, in general, we've managed to increase prices across the board, some more than others. Thank you.

Speaker #1: That's one. Another one is that we do use pricing as a tool to kind of manage the demand—shifting demand between the technology problems—so that the demand pattern matches our capacity pattern better.

Speaker #1: So yeah, overall, I think when the overall demand is tight, in general, we manage to increase prices across the board—found more than others.

Speaker #1: Thank you.

Speaker #2: Okay. Very clear. Thank you, Doctor. Bye.

Operator: Okay, very clear. Thank you.

Ziyuan Wang: Okay, very clear. Thank you.

Peng Bai: Okay, thank you.

Operator: Dr. Bai, just one moment for our next question. The next questions will come from Bai Ziye of Guosen Securities. Your line is open. Please go ahead.

Ziyuan Wang: Dr. Bai,

Speaker #4: Questions. One moment for our next question. The next questions will come from the line of Mr. Ye of Guosen Securities. Your line is open.

Operator: just one moment for our next question. The next questions will come from Bai Ziye of Guosen Securities. Your line is open. Please go ahead.

Speaker #4: Please go ahead.

Speaker #5: Thank you for taking my questions. This is Yitz from Guosin Zhengchuan. I have—first is about the demand for consumer electronics. So, the rising memory price may weigh on the demand for consumer parts, but still, we can see Hua Hong achieved sequential growth in consumer parts.

Ye Zi: Thank you for taking my questions. This is Ye Zi from Guosen Securities. First is about the demand of the consumer electronics. The rising memory price may weigh on the demand of the consumer parts, but still, we can see Hua Hong achieve a sequential growth in consumer parts. How do you view the growth of our consumer-related parts in the H2 of the year? This is the first question. Thank you.

Zi Ye: Thank you for taking my questions. This is Ye Zi from Guosen Securities. First is about the demand of the consumer electronics. The rising memory price may weigh on the demand of the consumer parts, but still, we can see Hua Hong achieve a sequential growth in consumer parts. How do you view the growth of our consumer-related parts in the H2 of the year? This is the first question. Thank you.

Speaker #5: So, how do you view the growth of our consumer-related parts in the second half of the year? This is the first question. Thank you.

Peng Bai: That's actually a good question. Frankly, at the beginning of the year, when everybody started to know that the AI-related product will have high demand. Another thing was discussed in the industry was the fact that when the DRAM getting to pricing, you're probably going to depress the consumer demand, which is probably true. In some of the end market segments, like a cell phone, for example, clearly is going to see a decline this year. We were expecting, actually, maybe a demand decrease on the consumer segment. For Hua Hong, as I said, we're a broad foundry supporting all different market segments. I think we were a little bit surprised that we actually didn't see as much negative impact by some of the consumer end market demand decrease.

Speaker #1: That's actually a good question. Frankly, at the beginning of the year, when everybody started to know that AI-related products would have high demand, another thing that was discussed in the industry was the fact that when DRAM gets too pricey, you're probably going to depress the consumer demand.

Speaker #1: Which is probably true. And end market—some of the end market segments, I guess cell phones for example—clearly is going to see a decline in share.

Peng Bai: In some of the end market segments, like a cell phone, for example, clearly is going to see a decline this year. We were expecting, actually, maybe a demand decrease on the consumer segment. For Hua Hong, as I said, we're a broad foundry supporting all different market segments. I think we were a little bit surprised that we actually didn't see as much negative impact by some of the consumer end market demand decrease.

Speaker #1: So we were actually expecting maybe a demand decrease in the consumer segment. For Hua Hong, as I said, we're a broad foundry supporting all different market segments.

Speaker #1: And I think that we were a little bit surprised that we actually didn't see as much negative impact from some of the consumer end market demand decrease.

Peng Bai: It could be that because we are now a foundry, so our direct customers are design houses, their product, when to them, those IC product, those seem to different segment of end market. Maybe it's because we're not directly providing to the end market. So maybe our direct customers are doing a good job of managing between different end market. That's one possibility. That's why we don't see much of a negative impact from the consumer end market. Another possibility is, which is also possible, that even short-term consumer market, end market might be having a bit of a decrease in demand. They still want some inventory level, to build some inventory for probably inevitable upturn in the future.

Speaker #1: It could be that because we are a foundry, our direct customers are design houses. Their products, then through them, those IC products, those seem to go to different segments of the end market.

Speaker #1: Maybe it's because we're not directly providing to the end market. So maybe our direct customers are doing a good job of managing between different end markets.

Peng Bai: That's one possibility. That's why we don't see much of a negative impact from the consumer end market. Another possibility is, which is also possible, that even short-term consumer market, end market might be having a bit of a decrease in demand. They still want some inventory level, to build some inventory for probably inevitable upturn in the future.

Speaker #1: That's one possibility. That's why we don't see much of a negative impact from the consumer end market. Another possibility, which is also possible, is that even the short-term consumer end market might be having a bit of a decrease in demand.

Speaker #1: They also want to they don't want to their stock level to they don't want to their they still want to some inventory level. To build some inventory that for probably inevitable upturn in the future.

Ye Zi: Yeah.

Zi Ye: Yeah.

Speaker #1: So those are the two possibilities. So but the net result is that we do see strong demand with all the AI-related products. We haven't seen ways I haven't seen that much negative impact from the consumer market from at the funded level.

Peng Bai: Those are the two possibilities. But the net result is that we do see strong demand with all the AI-related products. We haven't seen that much negative impact from the consumer market at the founder level. It could possibly be our product, our technology, as I said earlier, we are pretty strong on the technology. It could be, if we're in the low end of the market, which we are not. We're mostly in mid and higher market. Maybe the lower market might see a more negative impact. Thank you.

Speaker #1: A third possibility could be our product, our technology. As I said earlier, we are pretty strong on the technology. It could be if we're in the low end of the market, which we're not.

Speaker #1: We're mostly mid- and high-end market. Maybe the low-end market might see a more negative impact. Thank you.

Speaker #5: Thank you. And my next question is about the progress of the acquisition. Could you update us on the progress, and also share the technology roadmap after the acquisition?

Ye Zi: Thank you. My next question is about the progress of the acquisition. Could you update the progress and also the technology roadmap after the acquisition? Thank you.

Zi Ye: Thank you. My next question is about the progress of the acquisition. Could you update the progress and also the technology roadmap after the acquisition? Thank you.

Speaker #5: Thank you.

Peng Bai: The progress we already updated in the statement that we got the final approval from the exchange to proceed. We expect the final step of this long acquisition process is going to take place probably within a month. After that, the whole thing is complete and done. The second part of your question I probably didn't quite get. We do expect this to be a very positive acquisition for our financial statement. Once the final steps get completed, the Huali Microelectronics results will be included in our financial results. If there's no surprises in Q3 statement will include the Huali Microelectronics. Did I answer your question?

Speaker #1: The progress was already updated in the statement that we got to the final approval from the exchange to proceed. So we expect this final step of this long acquisition process is going to take place probably within a month.

Speaker #1: After that, the whole thing is complete and done. The second part of your question, I probably didn't quite get. We do expect this to be a very positive acquisition for our financial statement.

Speaker #1: Once the final steps get completed, the body micro results will be included in our financial results. If there are no surprises in Q3, the Q3 statement will include the quality micro.

Speaker #1: Did I answer your question?

Speaker #5: Yeah. And also, I have a quick follow-up. So, how about the technology roadmap after the acquisition? Any new—yeah. Yeah.

Ye Zi: Yeah. I have a quick follow-up. How about the technology roadmap after the acquisition?

Zi Ye: Yeah. I have a quick follow-up. How about the technology roadmap after the acquisition?

Peng Bai: Oh, okay.

Ye Zi: So, any new. Yeah.

Zi Ye: So, any new. Yeah.

Speaker #1: So the internal—what product quality micro is doing—there's quite a bit of synergy with what we have in Hua Hong Grace. So, we do achieve quite a bit of savings, quite a bit of synergy in terms of technology sharing.

Peng Bai: In terms of what product Huali Micro is doing, it is quite of a synergy with what we have in Hua Hong Grace. We do achieve quite a bit of savings, quite a bit of synergy in terms of technology sharing. In other words, some of the technology development that we do in Hua Hong Grace or in Huali Micro previously now can be combined. We basically, for any given R&D dollar, we get a bigger manufacturing scale. That is good for us in terms of the improved efficiency. Another thing it help us is that now we have one more fab, so our manufacturing scale for a given technology problem that effectively are virtually bigger. We can take on more customer who have bigger capacity needs, that we previously might struggle if we just have two separate entities, especially with Huali Micro.

Speaker #1: In other words, some of the technology development that we do in Hua Hong Grace or in Quality Micro previously now can be combined. So basically, for any given R&D dollar, we get a bigger manufacturing use.

Peng Bai: We basically, for any given R&D dollar, we get a bigger manufacturing scale. That is good for us in terms of the improved efficiency. Another thing it help us is that now we have one more fab, so our manufacturing scale for a given technology problem that effectively are virtually bigger. We can take on more customer who have bigger capacity needs, that we previously might struggle if we just have two separate entities, especially with Huali Micro.

Speaker #1: So in terms of the improved efficiency, another thing it helps us with is that now we have one more fab. So our manufacturing scale for a given technology platform is effectively, virtually bigger.

Speaker #1: So we can take on more customers who have bigger capacity needs that we previously might have struggled with if we just had two separate entities, especially for quality micro, since they are by themselves.

Peng Bai: They are by themselves, they are not large. That is another benefit. The third benefit is that now Huali Micro joins the Hua Hong Grace, the overall manufacturing system, that we can optimize the capacity structure, like what kind of a technology problem, place where. That give us a better ability to respond to changing market demand. Especially right now, because in short supply that, we immediately can start from the technology problem where we cannot supply in Wuxi, for example, to put it in Huali Micro. Overall, you see, because of the bigger scale, R&D saving and overall improved efficiency because of the large scale, and also in the procurement now also we have a bigger volume. Everything is basically positive. We think this is going to be a very, it has been a very good step for us to take. Thank you.

Speaker #1: They are not large, so that's another benefit. The third benefit is that now Quality Micro joins the Hua Hong Grace overall manufacturing system, which means we can optimize the capacity structure.

Speaker #1: Like, what kind of technology platform or place can give us a better ability to respond to changing market demand? Especially right now, because there is a short supply, we can immediately start on some of the technology problems that we cannot supply in Wuxi, for example, and instead put it in Hua Hong Micro.

Peng Bai: Especially right now, because in short supply that, we immediately can start from the technology problem where we cannot supply in Wuxi, for example, to put it in Huali Micro. Overall, you see, because of the bigger scale, R&D saving and overall improved efficiency because of the large scale, and also in the procurement now also we have a bigger volume. Everything is basically positive. We think this is going to be a very, it has been a very good step for us to take. Thank you.

Speaker #1: So overall, you see, really, because of the bigger scale, R&D savings, and overall improved efficiency due to the large scale, and also in procurement, now we also have a bigger volume.

Speaker #1: Everything is basically positive. So we think this is going to be a very, very it has been a very good step for us to take.

Speaker #1: Thank you.

Speaker #5: Thank you. Dr. Bai, that's all of my questions.

Ye Zi: Thank you, Dr. Bai. That is all my questions.

Zi Ye: Thank you, Dr. Bai. That is all my questions.

Operator: Questions. Please hold for our next questions. Next questions will come from the line of Qingyuan Lin of Sanford C. Bernstein. Please go ahead.

Speaker #3: Questions? Please hold for our next questions. The next question will come from the line of Qingyuan Lin of Sanford C. Bernstein. Please go ahead.

Speaker #4: Thanks for taking my question. Congratulations to Dr. Bai and Daniel on the good results for earnings. My question comes from two angles. The first one is around future capacity expansion.

Qingyuan Lin: Thanks for taking my question. Congratulations, Dr. Bai and Daniel, for a good results for the earnings. My question comes from two angles. First one is around the future capacity expansion. Dr. Bai, what is your view on the demand sustainability for 2027, 2028? You mentioned it was quite clear for the H2. I was wondering, do we expect this cycle to continue to be stronger even for the next few years? You mentioned that last year it was a good decision to continue capacity expansion. With this strong demand, do we continue to see that we might need to further accelerate the capacity expansion even for 2027 and 2028? That will lead to, I guess, a question for Daniel. Do we have any plan to further ramp up our CapEx? That is my first question. Thank you.

Speaker #4: Dr. Bai, what's your view on the demand sustainability for 2027 and 2028? You mentioned it was quite clear for the second half, but I was wondering, do we expect this cycle to continue to be strong even for the next few years?

Speaker #4: And you mentioned that last year there was a good decision to continue capacity expansion with this strong demand. Do we continue to see that we might need to further accelerate the capacity expansion, even for 2027 and 2028?

Qingyuan Lin: You mentioned that last year it was a good decision to continue capacity expansion. With this strong demand, do we continue to see that we might need to further accelerate the capacity expansion even for 2027 and 2028? That will lead to, I guess, a question for Daniel. Do we have any plan to further ramp up our CapEx? That is my first question. Thank you.

Speaker #4: So that will kind of lead to, I guess, a question for Daniel. Do we have any plan to further ramp up our CapEx? That's my first question.

Speaker #4: Thank you.

Speaker #1: Yes. Let me—well, in terms of the capacity expansion, we definitely want to continue the capacity expansion at a steady pace, so that we can manage the CapEx expenditure while still maintaining the profitability that we have come a long way to establish at this point.

Peng Bai: Yes. In terms of capacity expansion, we definitely want to continue the capacity expansion at a steady pace so that we can manage the CapEx expenditure while still we maintain profitability that we have come a long way to establish at this point. I do think I said earlier, the H2 of the year, the short-term market demand is strong. 2027, the consensus is also going to be strong. 2028 is where things, people start to have some debate. So it is probably a little bit too early to tell in 2028. But, I do think overall, the secular trend is I do see a secular growth story in the marketplace that we participate, which is the specialty technology. So in that sense, that is the reason that give us confidence that we will continue this to expand capacity.

Speaker #1: I do think, as I said earlier, in the second half of the year, everybody sees that short-term market demand is strong. And for 2027, the consensus is also that it’s going to be strong.

Peng Bai: 2027, the consensus is also going to be strong. 2028 is where things, people start to have some debate. So it is probably a little bit too early to tell in 2028. But, I do think overall, the secular trend is I do see a secular growth story in the marketplace that we participate, which is the specialty technology. So in that sense, that is the reason that give us confidence that we will continue this to expand capacity.

Speaker #1: 2028 is where people start to have some debate. So, it's probably a little bit too early to tell in 2028, but I do think overall the cyclical trend is, I do see a cyclical growth story in the marketplace that we participate in, which is especially technology.

Speaker #1: So, in that sense, that is the reason that gives us confidence that we will continue to expand capacity. So this overall demand increase is based on new applications of the semiconductor, and also based on the fact that some of the industry players might start to close down some of the eight-inch fabs.

Peng Bai: This overall demand increase, it is based on new application of the semiconductor and also based on the fact that some of the industry player may start to close down some of the 8-inch fabs. As you know, we do have three 8-inch fabs that also benefit from some of the industry capacity going offline. 12 inch is a different story, but a lot of the growth is mostly on 12 inch in term of the demand side. I think that in term of the supply side, 8 inch, nobody is spending 8-inch capacity. So the supply side might decrease. But the 12 inch, the demand side is probably going to continue to go up. So it is really based on our strategy of steadily expanding our capacity is based on our confidence that the market, even with some fluctuation, overall direction is still going up.

Speaker #1: As you know, we do have three 8-inch fabs that also benefit from some of the industry capacity going offline. Twelve-inch is a different story.

Speaker #1: But a lot, inch— in terms of demand side. So I think that in terms of the supply side, eight-inch, nobody is spending eight-inch capacity.

Peng Bai: I think that in term of the supply side, 8 inch, nobody is spending 8-inch capacity. So the supply side might decrease. But the 12 inch, the demand side is probably going to continue to go up. So it is really based on our strategy of steadily expanding our capacity is based on our confidence that the market, even with some fluctuation, overall direction is still going up.

Speaker #1: But the supply side might decrease. But for 12-inch, the demand side is probably going to continue to go up. So it's really based on our strategy of steadily expanding our capacity, which is based on our confidence that the market, even with some fluctuation, is still overall moving up.

Speaker #1: Our confidence is also based on a second factor, which is that we believe our technology capability, relative to our competitors in the industry, is also going to strengthen as we go.

Peng Bai: Our confidence also based on the second factor, which is we believe our technology capability relative to our competitors in the industry is also going to strengthen as we go. Because we have the scale, we have the people, we have the track record. We have the position in China as well as even worldwide now that we think that our capability will increase. We are not afraid of even the downturn comes. I think we are still going to keep on growing and keep building, getting more capacity steadily. Thank you.

Speaker #1: Because we have the scale, we have the people, and we have the track record. We have the position in China, as well as even worldwide now, and we see that our capability will increase.

Speaker #1: So we're not afraid even if a downturn comes. I think we're still going to keep on growing and keep gaining more capacity steadily.

Speaker #1: Thank you.

Speaker #4: Thank you. Daniel, any comments on the CapEx guidance, or any kind of projection for the next two years?

Qingyuan Lin: Thank you. Daniel, any comment on the CapEx guidance or projection for next 2 years?

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

Speaker #2: I would say we started to construct the third 12-inch fab early this year. And this fab will start to ramp over the next three years.

Speaker #2: To 55,000 wafer capacity. So it's going to be it's about overall, it's about approximately 6 billion dollars CapEx spending. So I would say roughly 2 billion dollars a year.

Speaker #2: For the next three years. But other than that, unless we have other new fabs that we plan to build, this is going to be the major CapEx spending.

Peng Bai: Just one comment. That USD 60 billion is not all the CapEx. It is roughly less than USD 2 billion per year. 1.5-ish, over 3 years.

Speaker #1: Yeah, just one comment. That $60 billion is not all CapEx, so it's roughly less than $2 billion per year—about $1.5 billion—over three years.

Speaker #4: Got it.

Peng Bai: Got it.

Qingyuan Lin: Got it.

Peng Bai: Over three years, yeah.

Speaker #1: Over three years. Yeah.

Speaker #4: Got it. Got it. Very clear. And my second question is around the earnings. In the earnings, we do call out specifically that we have about $25 million of receipts for government grants for equipment.

Qingyuan Lin: Got it. Very clear. My second question is around in the earnings. In the earnings, we do call out specifically that we have about 25 millions of receipt for the government grants for equipment. May I have a bit more details behind that? Last time when we called that out was Q4 2025. It is about 37 billion. This is kind of related to my question around the plan for the 9B. What is the share of local equipment? Do we plan that to go up and what kind of level we should expect? Thank you.

Speaker #4: May I have a bit more detail behind that? And the last time we called it out was in the fourth quarter of '25. It was about $37 billion.

Speaker #4: And this is kind of related to my question about the plan for the $9 billion. What's the share of local equipment that we plan to have go up, and what kind of level should we expect?

Speaker #4: Thank you.

Peng Bai: Well, that was actually some subsidies grant we got, not in Wuxi, but it was really for Shanghai. Okay? That is the grant we received in Q2 from local government here. The Wuxi part will most likely will be paid, I think in Q4 2026. The second part of your question about the domestic equipment. I think the domestic equipment sector in China has been getting strong year-over-year. We do expect, as a general trend, the newer fabs will have higher percentage of the domestic equipment.

Speaker #2: Well, that was actually some subsidy grant we got not in Fukushi, but it was really for Shanghai, okay? That's the grant we received in Q2 from the local government here.

Speaker #2: The Fukushi part, which will most likely be paid, I think, in Q4— in Q4 2026.

Speaker #1: The second part of your question about domestic equipment: I think the domestic equipment sector in China has been getting stronger year over year.

Speaker #1: We do express, as a general trend, that the newer fabs will have a higher percentage of domestic equipment.

Qingyuan Lin: Very clear. Thank you so much.

Speaker #4: Very clear. Thank you so much.

Peng Bai: Thank you.

Speaker #1: Thank you.

Speaker #4: Thank you for the questions. Our next question comes from Bintoni from Daiwa Securities. Your line is open. Please go ahead.

Operator: Thank you for the questions. Our next question comes from Lin Tuoni from Daiwa Securities. Your line is open. Please go ahead.

Speaker #2: Thank you. Hey, thanks for taking my question, and congrats on the great execution. So, can I ask about your current lead time for products across different technology platforms?

Lin Tuoni: Thank you. Hey, thanks for taking my question and congrats on the great executions. Can I ask your current lead time for products across different technology platform and which segment is expanding and which segment is decreasing? Thank you.

Bintuo Ni: Thank you. Hey, thanks for taking my question and congrats on the great executions. Can I ask your current lead time for products across different technology platform and which segment is expanding and which segment is decreasing? Thank you.

Speaker #2: And which segment is expanding, and which segment is decreasing? Thank you.

Peng Bai: Sorry, lead time in?

Speaker #1: Sorry. Lead time in manufacturing—lead time—how long does it take to get the wafer from start to finish?

Lin Tuoni: Manufacturing lead time.

Bintuo Ni: Manufacturing lead time.

Peng Bai: Oh, how long it takes to manage to get the wafer from start to finish?

Lin Tuoni: Exactly. Yeah. To deliver to your clients.

Bintuo Ni: Exactly. Yeah. To deliver to your clients.

Speaker #2: Exactly, yes. To deliver to your clients.

Speaker #1: Oh, okay. That obviously depends on the technology platform. Some process flows are longer, some are short. Like power and discrete power devices, those don't have too many steps.

Peng Bai: Oh, okay. That obviously depends on the technology platform. Some process flow longer, some are short. The discrete power devices, that does not have too many steps. You can get it in a couple weeks, if we accelerate it. Then some of the MCU products have 50, 60, or 30, 40 mask layers that will take 2 months if we accelerate it. The speed of the wafer moving through a fab is also a function with loading. If you have a very heavily loaded fab, they basically have a longer queue time in front of the equipment, so they tend to go. The average speed will be slower. But we also, usually in the fab, the way we manage it is that we have different tier of the speed.

Speaker #1: You can get it in a couple of weeks if we accelerate it. Then, some of the MCU products have 50, 60, or 30, 40 mask layers.

Speaker #1: That will take two months, if we accelerate it. And the speed of the wafer moving through a fab is also a function of loading.

Peng Bai: The speed of the wafer moving through a fab is also a function with loading. If you have a very heavily loaded fab, they basically have a longer queue time in front of the equipment, so they tend to go. The average speed will be slower. But we also, usually in the fab, the way we manage it is that we have different tier of the speed.

Speaker #1: If you have a very heavily loaded a fab, basically you have a longer queue time in front of the equipment. So they tend to go so the average speed will be slower.

Speaker #1: But we can we also usually in the fab, the way we manage it is that we have a different tiers of the different tier of the speed.

Peng Bai: If some of the things like NTI, the first time you have a new product, we try to give a high priority. They can zip through the fab very fast. But for the volume production, which you are now, we tend to maximize the output versus speed. We let that. Nothing takes more than a quarter. I would say the faster ones can be a month, 2 months, really depend on the type of products you have.

Speaker #1: For things like an NTO, where it’s the first time you have a new product, we try to give it a high priority.

Speaker #1: They can zip through the fab very fast. But for the volume production, which you are not, we tend to maximize the output versus speed.

Speaker #1: So we let that. That still doesn’t—nothing takes more than a quarter. I would say the faster ones can be months—two months. Really depends on the type of products you have.

Lin Tuoni: Great. Thank you. Is there any changes in lead time in terms of when we receive the order until we deliver the product? Is there any changes in lead time? I am trying to understand, is there any.

Bintuo Ni: Great. Thank you. Is there any changes in lead time in terms of when we receive the order until we deliver the product? Is there any changes in lead time? I am trying to understand, is there any.

Speaker #2: Great, thank you. Are there any changes in lead time in terms of when we receive the order until we deliver the product? Are there any changes in lead time?

Speaker #2: So, what I'm trying to understand is, is there any—yeah.

Peng Bai: No significant changes. When demand is high and the supply gets high, one of the effects is to tend to make the delivery time a little bit longer. But that is something we work out with our customers. We will basically, when they place order, we usually have a commitment to say, "This will come out in certain this time." If the customer agrees and it works to their satisfaction, then we just proceed. That is how that works. But if there is something they need it urgently, we can also support that. Not 100% of the time, but a certain percentage of the wafer can come out very fast if we need to.

Speaker #1: No. No significant changes. When the demand gets tight when demand is high and the supplier gets tight, the one of the impact one of the effect is to tend to make the delivery time a little bit longer.

Speaker #1: But that's something we work out with our customers. We will basically, when they place the order, usually have a commitment to say this will come out within a certain time.

Speaker #1: If a customer agrees and it works to their satisfaction, then we will just proceed. So that's how that works. But if there's something they need urgently today, we can also support that.

Speaker #1: Not 100% of the time, but a certain percentage of the wafer can come out very fast if we need to.

Lin Tuoni: Understood. That is very clear. Thank you. My next question is about our investment plans. I think Dr. Dai mentioned $1.5 billion per year, CapEx. What kind of technology platform will we focus more in the coming two to three years? Thank you.

Bintuo Ni: Understood. That is very clear. Thank you. My next question is about our investment plans. I think Dr. Dai mentioned $1.5 billion per year, CapEx. What kind of technology platform will we focus more in the coming two to three years? Thank you.

Speaker #2: Understood. It's very clear, thank you. My next question is about our investment plans. I think Dr. mentioned $1.5 billion per year in CAPEX. So, what kind of technology platform will we focus on more in the coming two to three years?

Speaker #2: Thank you.

Speaker #1: So let's get back to our focus. Our business focus is especially technology. If you look at specialty technology, it is very much application-driven.

Peng Bai: Let us get back to our focus. Our business focus is a specialty technology. If you look at specialty technology, they are very much application driven. We go where the market is, so to speak. The reason we have those four or five large technology platform is because there is a large market demand for those, like BCD for PMIC, power management and power devices for all things electric and a lot of power related. MCU, microcontroller, nowadays, a lot of AI-related applications require microcontroller, or even auto, the new EVs, which have a lot of microcontroller in them. CIS has been there since the cell phone become a large application that drives a lot of CIS because the image sensor.

Speaker #1: So we go where the market is, so to speak. We look at the reason we have those four or five large technology platforms—it is because there is a large demand.

Speaker #1: Market demand for those, like BCD for PMIC, power management, and power devices for all things electric and all of the power related. MCU, microcontroller—nowadays, a lot of AI-related applications require microcontrollers, or even auto, the new EVs, which have a lot of microcontrollers in them.

Peng Bai: CIS has been there since the cell phone become a large application that drives a lot of CIS because the image sensor. CIS is also driven by some security needs and even the auto, the new EV, the autonomous driving car or robots, for that matter, some emerging application or drive a lot of that. There is no short answer to your question.

Speaker #1: CIS has been there since the cell phone became a large application that drives a lot of CIS, because the image sensors are now CIS. It is also driven by some security needs, and even the auto, the new EV, the autonomous driving car, or robots for them.

Peng Bai: CIS is also driven by some security needs and even the auto, the new EV, the autonomous driving car or robots, for that matter, some emerging application or drive a lot of that. There is no short answer to your question. But overall, we look at all the specialty technology we participate in. We look at where the demand is high and combine with where we have our strengths. Like MCU, we are very strong in MCU historically. That is also a growth area. We are going to put a lot of, for example, we are going to put a lot of capacity there. BCD is another area. In general, if you look at our financial, the results over the last couple quarter, the highest growth is really in MCU, BCD, even NOR flash. Those areas we are going to put more.

Speaker #1: There's some emerging application or drive, a lot of that. So, I mean, there's no short answer to your question, but overall, we look at all the specific technology we participate in. We see, we look at where the demand is high and combine it with the work where we have our strengths.

Peng Bai: But overall, we look at all the specialty technology we participate in. We look at where the demand is high and combine with where we have our strengths. Like MCU, we are very strong in MCU historically. That is also a growth area. We are going to put a lot of, for example, we are going to put a lot of capacity there. BCD is another area. In general, if you look at our financial, the results over the last couple quarter, the highest growth is really in MCU, BCD, even NOR flash. Those areas we are going to put more.

Speaker #1: Like MCU, we are very strong in MSCU historically. That's also a growth area. So we're going to pull out of a for example, we're going to pull out of a capacity there.

Speaker #1: And BCD is another area. So, in general, if you look at our financial results over the last couple of quarters, the highest growth is really in the MCU and BCD, even faster.

Speaker #1: Those areas we're going to put more on the CIS logic. It is also an area that very much interest to us. Although the growth rate hasn't been as high as other two technology platform or other three, but we also try to drive up try to get bigger share there.

Peng Bai: On the CIS logic, it is also an area that have very much interest to us. Although the growth rate has not been as high as the other two technology platform or other three, but we also try to drive up, try to get a bigger share there. For us, it might become a growth platform. Those are the areas. It is really the capacity we are putting in where the current technology platforms are. Each technology platform also over time, the technology also evolve, and it goes, MCU probably going to go from 55 nanometer to 40 nanometer MCUs, and we will follow. We will watch for where the sweet spot is in the market and try to build our technology roadmaps to go where the market is, and also to go where we think we have a competitive advantage. That is the complex answer I give to you.

Speaker #1: So for us, it might become a growth problem. So those are the areas that it's really the capacity we're putting in where the current technology platforms are.

Speaker #1: And each technology platform also, over time, the technology also evolves, and MCUs are probably going to go from 55 nanometers to 40-nanometer MCUs. We will follow and watch for where the sweet spot is in the market and try to build our technology roadmaps.

Peng Bai: Each technology platform also over time, the technology also evolve, and it goes, MCU probably going to go from 55 nanometer to 40 nanometer MCUs, and we will follow. We will watch for where the sweet spot is in the market and try to build our technology roadmaps to go where the market is, and also to go where we think we have a competitive advantage. That is the complex answer I give to you. So it is a bit of a complexity because by nature it is complex. We spend a lot of time on those things so that we make sure we get it right so that we can have a good growth.

Speaker #1: To go where the market is, and also to go where we think we have a competitive advantage. So that's the complex answer I give to you.

Peng Bai: So it is a bit of a complexity because by nature it is complex. We spend a lot of time on those things so that we make sure we get it right so that we can have a good growth.

Speaker #1: It's a bit of a complexity because, by nature, it's complex. That's why we spend a lot of time on those things. We make sure we get it right so that we can have good growth.

Speaker #2: That's great. Thank you so much.

Lin Tuoni: That is great. Thank you so much.

Bintuo Ni: That is great. Thank you so much.

Speaker #3: Thank you for the questions. In the interest of time, we will now take the last two questions. Please keep your questions brief so we can address all of them.

Operator: Thank you for the questions. In the interest of time, we will now take the last two questions. Kindly keep your question brief so we can take all the questions. The next question comes from Tracy Cui of CLSA. Your line is open. Please go ahead.

Speaker #3: The next question comes from Tracy Choi of CLSA. Your line is open. Please go ahead.

Speaker #4: Thank you, Dr. Bai, Daniel, and the senior management for giving me this opportunity. So, my question is regarding the depreciations. Is that my AUM path, and also new set coming?

Tracy Cui: Thank you, Dr. Bai, Danny, and the senior management for giving me this opportunity. My question is regarding the depreciations. Fab 9A ramp up and also new fab coming. Wondering how much may be the depreciation in H2 and also in next year. Thank you.

Speaker #4: Wondering how much, maybe, the depreciation will be in the second half and also in next year. Thank you.

Daniel Wang: Good question, Tracy. Look at the H2. Overall, the etched business is maybe around $55 million. I understand you probably, this could be useful for your model. For our first 12-inch fab, it is going to be around $250 million depreciation expense for the H2 of 2026. For second fab, it is going to be at the 210, roughly $210 million for the H2. These are the forecast numbers. For the third fab, we are just starting. There is virtually not going to be any. If there is anything, it would be minimal for this year. Then for my Hua Hong Grace, we are projecting about $30 million for the H2. For that fab, the depreciation expense is pretty much behind them.

Speaker #1: Good question, Tracy. So, look at the second half. Overall, the AGE business will be around $55 million, okay? I understand this could be useful for your model.

Speaker #1: And for our first 12-inch fab, it's going to be around $250 million in depreciation expense for the second half of 2026.

Speaker #1: And for the second half, it is going to be at roughly $210 million—the second half. These are the forecast numbers. And for the third fab, we're just starting.

Daniel Wang: For the third fab, we are just starting. There is virtually not going to be any. If there is anything, it would be minimal for this year. Then for my Hua Hong Grace, we are projecting about $30 million for the H2. For that fab, the depreciation expense is pretty much behind them. We are looking at around $50 to $60 million a year, and it is going to start to decline even further down in the next few years.

Speaker #1: There's not—virtually, there's not going to be any. There's not going to be any. If there's anything, it will be minimal for this year.

Speaker #1: And then, for Microelectronics, okay, we're projecting about $30 million for the second half, okay? For that fab, the depreciation expense is pretty much behind them.

Speaker #1: We're looking at around $50 to $60 million a year, and it's going to start to decline even further down in the next few years.

Daniel Wang: We are looking at around $50 to $60 million a year, and it is going to start to decline even further down in the next few years.

Tracy Cui: Got it. Thanks, Danny. My next question is regarding the new business. I think last earnings call, you talk about expanding to like interconnect solutions such as silicon photonics, interposer. Wondering if any like quick update progress in any of those business, any specific area that you see stronger growth potential? Thank you.

Speaker #4: Got it. Thanks, Daniel. My next question is regarding new business. I think on the last earnings call, you talked about expanding into interconnect solutions such as silicon photonics and Interposa.

Speaker #4: So wondering if any like a quick update progress in any of those business, any specific area that you see stronger growth potential. Thank you.

Peng Bai: Okay. Thank you for the question. I have to be careful what I say here. We are probably the largest specialty foundry in China. You know well the second-largest foundry in China, but in the specialty technology. As I said earlier, in answering earlier questions, we go where the market goes. In that regard, of course, that is one factor. Another factor is we also go where we think we have a strength or have advantage. Those are two. Combining those two, that determine where we go. The part you mentioned, there is a We looked at the AI. It is definitely a growth driver, therefore, anything that is related with the AI application that happens to be in the specialty technology area, we look at very carefully and decide whether then if we are now already there.

Speaker #1: Okay. Thank you for the question. I have to be careful what I say here. We are probably the largest specialty foundry in China, and also the second largest foundry in China.

Speaker #1: But in specialty technology, as I said earlier in answering previous questions, we're going where the market goes. So in that regard, of course, that is one factor.

Peng Bai: Another factor is we also go where we think we have a strength or have advantage. Those are two. Combining those two, that determine where we go. The part you mentioned, there is a We looked at the AI. It is definitely a growth driver, therefore, anything that is related with the AI application that happens to be in the specialty technology area, we look at very carefully and decide whether then if we are now already there.

Speaker #1: Another factor is we also go where we think we have a strength or an advantage. Those are two—combining those two, that's the determinant of where we go.

Speaker #1: The part you mentioned, there's— we look at the AI definitely as a growth driver. Therefore, anything that's related to the AI application, that happens to be in the specialty technology area, we want to— we look at very carefully and decide whether— if we are not already there.

Peng Bai: We are already in a lot of those areas, the PMIC, MCU, I mentioned, the power devices, all those things are in. There is a few, like optic electronics, silicon photonics, for example. We actually are already in there. Some of the MCUs do go into the module that makes the final silicon photonics topic. We like to expand the footprint there to probably get into more types of silicon-based devices because that is where we will have expertise. Yes, we are going to basically look at the application there, look at some of the chips that are inside the optic, the silicon photonics module. We already participate in some of those chips in there. We want to expand a couple more items on the IC, silicon-based IC. That is still the plan, and we are still in the early stages of doing that.

Speaker #1: We're already in all of those areas that can make MCU. I mentioned the power devices—all those things are in. There are a few, like optoelectronics, silicon photonics, for example. Actually, in a way, we are already in there; some of the MCU do go into the modules that make the final silicon photonic topic.

Speaker #1: We'd like to expand our footprint there to probably get into more types of silicon-based devices. So it's going to be, because that's where we will have expertise.

Speaker #1: So yes, we are going to basically look at the application there, look at some of the chips that are inside the optics, that silicon photonic module, to see—are we already in, already participating in some of those chips in there. We want to expand a couple more in terms of the IC, silicon-based IC.

Peng Bai: Yes, we are going to basically look at the application there, look at some of the chips that are inside the optic, the silicon photonics module. We already participate in some of those chips in there. We want to expand a couple more items on the IC, silicon-based IC. That is still the plan, and we are still in the early stages of doing that.

Speaker #1: That's still the plan. We are seeing the earliest stages of doing that. The power devices—that's another area that is probably going through some technological market transition that, up to this point, is mostly silicon-based.

Peng Bai: The power devices, that is another area that is probably going through some technological or market transition. Up to this point, it is mostly silicon-based. Now, the silicon carbide, for example, these devices are also becoming part of a power device offering. Again, there, the product is, if you look at a module where it tends to contain silicon-based devices and increasingly, silicon carbide. This is something if we want to continue in the power device area, we will have to look at. We have no choice but look at, see whether we have a more complete offering. We are definitely doing the planning, and a lot of the planning, we do need to get a few things together before we say that we officially are in there. But we are not slowing down. We are going forward. Thank you.

Speaker #1: But now the silicon carbide, for example, base devices are also becoming part of a power device offering. Again, there, the product is—if you look at a module, it tends to contain silicon-based devices and, increasingly, silicon carbide.

Speaker #1: So this is something, if we want to continue in the power device area, we will have to look at. We have no choice but to look at this to see whether we have a more complete offering.

Peng Bai: This is something if we want to continue in the power device area, we will have to look at. We have no choice but look at, see whether we have a more complete offering. We are definitely doing the planning, and a lot of the planning, we do need to get a few things together before we say that we officially are in there. But we are not slowing down. We are going forward. Thank you.

Speaker #1: So, we are definitely doing some planning, and a lot of the planning we do requires us to get a few things together before we can say that we are officially in there.

Speaker #1: But we're not slowing down. We're moving forward. Thank you.

Tracy Cui: Got it. That is very clear. Thank you, Dr. Bai and Daniel. That is all from me, and I will go back to the queue. Thank you.

Speaker #4: Got it. That's very clear. Thank you, Dr. Bai and Daniel. That's all from me, and I will go back to the queue. Thank you.

Speaker #5: Thank you for the questions. With that, I'll now take the last question from Hua Jian of Oren Securities. Your line is open, please go ahead.

Operator: Thank you for the questions. With that, I will now take the last question from Kuai Jian of Dongfang Zhengquan. Your line is open. Please go ahead.

Kuai Jian: Hi. This is Kuai Jian from Dongfang Zhengquan. Thank you, Dr. Bai and Daniel. My first question is about our revenue from North America and Europe grew very strongly. Could you give us more color about these two regions? Maybe it is from the server PMIC or maybe MCU or these kind of products. That is my first question.

Speaker #6: Hi, this is Hua Jian from 东方证券. Thank you, Dr. Bai and Daniel. My first question is about our revenue from North America and Europe, which grew very strongly.

Speaker #6: So could you give us more color about these two regions? Maybe it's from, like, the server PMIC, or maybe MCU, or these kinds of products?

Speaker #6: That's my first question.

Peng Bai: The revenue from North America, a large part of it is in the BCD PMIC area. A lot of the product there happens to be related to AI server boxes. That is the reason you see huge increases, because that is directly going to AI. For Europe, the large European company have this China for China strategy. Their product is mostly in MCU, and the smart cards, and some power devices as well. I think that as they prosecute their China for China strategy, if we are their partner of choice, which we think we are in China, that is the reason we see growth. We expect to continue to see more growth from Europe as well.

Speaker #1: The revenue from North America, a large part of it is in the CCD PIMIC area. And a lot of the product there happens to be related to AI server boxes.

Speaker #1: That's the reason you see huge increases. Because that's directly going to AI for Europe. It's really Europe is the large European company have this China for China for China strategy.

Speaker #1: Their products mostly in MCU and the smart parts and some power devices as well. I think as they prosecute their China for China strategy, if we are their partner of choice, which we think we are in China, that we that's the reason we see growth.

Speaker #1: We expect to continue seeing more growth from Europe as well. Thank you.

Kuai Jian: Thank you, Dr. Bai. My second question is about the equipment and material. People are always talking about the equipment supply are very tight, and the price for materials are increasing, all these kind of things. From our point, how do we see the supply of equipment and materials?

Speaker #6: My second question is about the equipment and materials. People are always talking about the equipment supply being very tight, and the prices for materials are increasing.

Speaker #6: All these kinds of things. So from our point of view, how do we see the supply of equipment and materials?

Peng Bai: A good question. The equipment supply is getting tighter because all over the world, the semiconductor houses are increasing their capacity. This is true for our overseas suppliers as well as domestic suppliers. The one manifestation is the lead time has been increasing. It is still manageable level. Since we started this capacity expansion last year, a lot of the equipment we already booked last year, so we have not seen huge impact. They are definitely getting tighter, so we are tightly managing with our supplier partners to get the equipment lead time to a point that does not affect our overall capacity growth increase schedule. So far, I think that we, by and large, can do that. For material, there is some isolate.

Speaker #1: That's a good question. The equipment supply is getting tighter because semiconductor houses around the world are increasing their capacity. This is true for our overseas suppliers as well as our domestic suppliers.

Speaker #1: So one manifestation is that the lead time has been increasing, but it's still manageable. It's still at a manageable level. And for us, we started this capacity expansion last year.

Speaker #1: So, a lot of the equipment we already booked last year, so we haven't seen a huge increase or huge impact. But things are definitely getting tighter, so we are tightly managing with our suppliers.

Peng Bai: They are definitely getting tighter, so we are tightly managing with our supplier partners to get the equipment lead time to a point that does not affect our overall capacity growth increase schedule. So far, I think that we, by and large, can do that. For material, there is some isolate.

Speaker #1: We are working with our partner suppliers—our supplier partners—to get the equipment lead time to a point that doesn't affect our overall capacity growth increase schedule.

Speaker #1: And so far I think that we by and large can do that. For material there's a some isolated there's a few example because of the for example because of the war in Middle East or some other reasons that we do see tightness and even price increases on some of the for example helium gases because of the war there.

Peng Bai: There is a few example, for example, because of the war in Middle East or some other reasons, we do see tightness and even price increases on some of the, for example, helium gases, because of the war there, it had a temporary spike. But now it has managed to come down. And overall, there are some metals, also metal prices, some because of general inflation or because of the supply situation. So we do see some price increases in some isolated area. But overall, it has not been a significant impact. We still managed to basically keep the price flat or down. And because the overall market price in term of our supplier market is still reasonably healthy for us. Thank you.

Speaker #1: It had a temporary spike, but now it has managed to calm down. Overall, we don't see—there are some metals, or some metal prices—some prices have increased because of general inflation or because of the supply situation.

Peng Bai: So we do see some price increases in some isolated area. But overall, it has not been a significant impact. We still managed to basically keep the price flat or down. And because the overall market price in term of our supplier market is still reasonably healthy for us. Thank you.

Speaker #1: So we do see some price increases in some isolated areas, but overall there hasn't been a significant impact. We still manage to basically keep the price flat or down.

Speaker #1: And we, because the overall marketplace—in terms of our supplier marketplace—is still reasonably healthy for us. Thank you.

Speaker #6: Thank you, Dr. Bai. That was very clear. Those are all my questions.

Kuai Jian: Thank you, Dr. Bai. It is very clear. That is all my questions.

Speaker #5: Thank you, ladies and gentlemen. That's all the time we have for questions. I will now hand back to Mr. Daniel Wang for closing remarks.

Operator: Thank you, ladies and gentlemen. That is all the time we have for questions. I will now hand back to Mr. Daniel Wang for closing remarks.

Daniel Wang: This concludes our today's call. Once again, thank you all for joining us today and for your valuable questions and input. It has been an exciting quarter. We look forward to see you again in the next earnings call. Thank you.

Speaker #1: Yes, that concludes our call today. Once again, thank you all for joining us and for your valuable questions and input. It has been an exciting quarter.

Speaker #1: We look forward to seeing you again in the next earnings call. Thank you.

Speaker #2: Thank you.

Peng Bai: Thank you.

Operator: Ladies and gentlemen, thank you for attending. You may all now disconnect.

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