Hua Hong Grace reported its second-quarter 2026 results, achieving record quarterly sales of $717.5 million. This represents a 26.8% increase year-over-year and an 8.6% sequential rise. Gross margin came in at 16.5%, improving by 5.6 percentage points from a year ago and 3.5 percentage points from the prior quarter. Both revenue and gross margin exceeded the company's previous guidance, signaling a continued recovery in specialty process foundry demand.

The improvement in profitability was even more pronounced. Second-quarter gross profit reached $118.4 million, surging 92.2% year-over-year and 37.6% sequentially. Net profit attributable to owners of the parent stood at $38.6 million, skyrocketing 385.9% from last year and 84.6% from the first quarter. Basic earnings per share rose to $0.022, up 340% year-over-year. However, on a consolidated basis, profit for the period was only $3.88 million, resulting in a net profit margin of just 0.5%. This highlights ongoing pressure from capacity expansion depreciation and rising financial costs.

Operationally, Hua Hong Grace maintained high capacity utilization in the second quarter, reaching 102.8%, a sequential improvement of 3.1 percentage points. Wafer shipments, on an 8-inch equivalent basis, totaled 1.538 million units, up 17.9% year-over-year and 5.8% quarter-over-quarter. The company noted a "volume and price growth" dynamic, with higher average selling prices and cost reduction efforts driving gross margin improvement, partially offset by rising depreciation costs.

Looking ahead to the third quarter, the company provided higher revenue guidance of between $770 million and $780 million. At the midpoint, this represents approximately 8% sequential growth from the second quarter. Gross margin is expected to be in the range of 16% to 18%, suggesting profitability can sustain the recovery level seen in Q2. Management also mentioned that AI-driven semiconductor demand is expanding from memory chips to logic and analog areas, and the company's specialty technology platforms are beginning to benefit, though demand across different end markets remains mixed.

Record Revenue Driven by Higher Shipments and ASP Increases

Second-quarter sales revenue for Hua Hong Grace was $717.5 million, an increase of $151.5 million or 26.8% year-over-year, and a sequential increase of $56.61 million or 8.6%. The company explicitly stated that the revenue growth was primarily driven by two factors: an increase in the number of wafers shipped and a rise in the average selling price.

From a revenue structure perspective, wafer sales remain the dominant contributor. Direct sales of semiconductor wafers brought in $692.2 million, accounting for 96.5% of total revenue, while other income contributed $25.36 million, or 3.5%.

On the shipment side, the company shipped 1.538 million wafers on an 8-inch equivalent basis, a 17.9% year-over-year increase and a 5.8% sequential rise. Given that revenue growth outpaced shipment growth, the upward trend in ASPs significantly contributed to revenue, which is also a key reason for the sequential recovery in gross margin.

12-Inch Revenue Grows Faster, Share Exceeds 60%

By wafer size, second-quarter 8-inch wafer revenue for Hua Hong Grace was $271.8 million, up 17.0% year-over-year, representing 37.9% of total revenue. 12-inch wafer revenue reached $445.7 million, up 33.5% year-over-year, accounting for 62.1% of total revenue. The 12-inch business grew significantly faster than the 8-inch segment, with its revenue share increasing from 59.0% in the same period last year to 62.1%. This reflects the continued ramp-up of the company's "8-inch + 12-inch" strategy, where 12-inch specialty process capacity is being released and becoming a core driver of overall revenue growth.

In terms of capacity, the company's monthly production capacity at the end of Q2 was 508,000 8-inch equivalent wafers, up from 489,000 at the end of Q1 and 447,000 a year ago. Overall capacity utilization was 102.8%, lower than the 108.3% recorded last year but a clear recovery from 99.7% in Q1, indicating improved absorption of new capacity.

Gross Margin Rises to 16.5%, but Depreciation and Finance Costs Still Pressure Net Margin

Second-quarter gross profit was $118.4 million, up 92.2% year-over-year and 37.6% sequentially. The gross margin of 16.5% was 5.6 percentage points higher year-over-year and 3.5 percentage points higher sequentially. The company explained that the margin improvement was mainly due to higher average selling prices and cost reduction efforts, partially offset by rising depreciation costs.

Cost pressures remain. Operating expenses for Q2 were $109.1 million, up 11.4% year-over-year and 3.3% sequentially, primarily due to higher employee costs. Administrative expenses were $104.4 million, up 10.3%; selling and distribution expenses were $2.96 million, up 12.6%; and impairment losses on trade receivables and notes were $1.72 million, a 186.5% increase year-over-year.

Net other income was $2.19 million, a 79.4% decline from $10.6 million a year ago. The main drags were higher finance costs and lower government subsidies: finance costs in Q2 were $29.42 million, up 61.2% year-over-year, while government subsidies fell 52.5% to $4.68 million. However, share of profits from associates was $9.49 million, a significant year-over-year increase that partially offset the pressure.

Consequently, despite the notable recovery in gross profit, consolidated profit for the period was only $3.88 million, a net profit margin of 0.5%. Profit attributable to owners of the parent reached $38.6 million, mainly because non-controlling interests still recorded a loss of $34.76 million.

Non-Volatile Memory Becomes Strongest Growth Driver, Independent NVM Revenue Surges 149% YoY

By technology platform, all major segments of Hua Hong Grace grew in Q2, with non-volatile memory (NVM) showing the most outstanding performance.

Embedded NVM revenue was $200.1 million, up 41.8% year-over-year, accounting for 27.9% of total revenue, mainly driven by increased demand for MCUs and smart card chips.

Independent NVM revenue was $68.8 million, a massive 149.3% increase year-over-year. Its share of revenue rose to 9.6% from 4.9% a year ago, primarily due to higher demand for flash memory products. This segment was the most elastic in terms of growth this quarter.

Power device revenue was $182.3 million, up 9.4% year-over-year, driven by increased demand for general-purpose MOSFETs. Analog and power management revenue was $183.1 million, up 13.0%, supported by demand for other power management products. Logic and RF revenue was $83.2 million, up 21.3%, mainly from growth in logic products.

Structurally, the three major platforms—embedded NVM, power devices, and analog and power management—accounted for 27.9%, 25.4%, and 25.5% of revenue respectively, forming the core of the company's specialty process business. Independent NVM contributed the most significant incremental growth in the quarter.

Fastest Growth in 65nm and Below Nodes, Specialty Processes Migrate to Higher Value

By technology node, Q2 revenue from the 65nm and below node was $205.1 million, up 63.4% year-over-year, accounting for 28.6% of total revenue, a notable increase from 22.2% last year. The company stated that growth at this node was mainly driven by higher demand for flash memory and other power management products.

Revenue from the 90nm and 95nm node was $174.4 million, up 19.9% year-over-year, representing 24.3% of total revenue, primarily due to increased demand for MCUs and smart card chips.

The 0.11μm and 0.13μm node generated $78.2 million, up 22.1% year-over-year; the 0.15μm and 0.18μm node brought in $38.2 million, up 31.4%; and the 0.25μm node contributed $2.1 million, up 79.2%, mainly from higher demand for RF products.

Revenue from the 0.35μm and above node was $219.6 million, up 9.4% year-over-year. It remains the single largest node by share, at 30.6% of total revenue, driven by demand for general-purpose MOSFETs.

Overall, mature nodes continue to provide stable cash flow, but the rapidly increasing share of revenue from the 65nm and below node indicates that Hua Hong Grace's product portfolio in specialty processes is moving toward higher value.

China Still Contributes Nearly 80% of Revenue, North America and Europe Grow Faster

By geography, the Chinese market remains the foundation of Hua Hong Grace's revenue. In Q2, revenue from Mainland China and Hong Kong was $563.7 million, up 20.0% year-over-year, accounting for 78.6% of total revenue. Growth was driven by increased demand for MCUs, flash memory, general-purpose MOSFETs, logic, and smart card chips.

North American revenue was $93.8 million, up 77.0% year-over-year, representing 13.1% of total revenue, mainly due to higher demand for other power management and MCU products.

Revenue from other parts of Asia was $32.0 million, up 11.6% year-over-year, driven by demand for super-junction and MCU products. European revenue reached $28.0 million, soaring 90.1% year-over-year, benefiting from increased demand for MCUs and smart card chips.

While China's share remains high, the growth rates in North America and Europe significantly outpaced the overall average, indicating a recovery in demand from overseas customers. However, in terms of scale, overseas revenue is still significantly smaller than the Chinese market, limiting its decisive impact on the company's overall growth.

Consumer Electronics Remains the Largest End Market, Communications Revenue Declines YoY

By end market, consumer electronics continues to be the largest revenue source for Hua Hong Grace. Q2 revenue from this segment was $481.3 million, up 34.7% year-over-year, accounting for 67.1% of total revenue, primarily driven by increased demand for flash memory, MCUs, other power management, and general-purpose MOSFET products.

Industrial and automotive revenue was $162.1 million, up 25.5% year-over-year, representing 22.6% of total revenue, mainly from demand for other power management, smart card chips, and MCU products.

Communications product revenue was $62.5 million, a 12.8% decline year-over-year, dropping to 8.7% of total revenue, mainly due to lower demand for analog products. This was the only major end market to show a year-over-year decline, confirming management's view that "demand intensity and sustainability vary across different end-market segments."

Computing product revenue was $11.7 million, up 48.1% year-over-year, but its share was only 1.6%. Driven by increased demand for MCU products, its contribution to overall revenue remains small.

Operating Cash Flow Improves Significantly, Capital Expenditure Declines Sharply from Q1

In terms of cash flow, Q2 net cash generated from operating activities was $338.1 million, a 99.3% increase year-over-year and a 159.2% sequential increase, mainly due to higher collections from customers. This substantial improvement in operating cash flow was another highlight of the quarterly report, besides revenue and gross margin.

Net cash used in investing activities was $331.2 million, which included $356.6 million in fixed asset investments and $16.1 million in outward investments. The company also received $25.4 million in government subsidies for equipment, $8.6 million in interest income, and $7.3 million in dividends from associates.

Total capital expenditure for Q2 was $356.6 million, a significant decrease from the $924.9 million spent in Q1. Of this, $325.9 million was related to 12-inch capacity, and $30.7 million to 8-inch capacity. 12-inch remains the focus of expansion spending.

Net cash used in financing activities was $406.0 million, primarily consisting of $569.0 million in repayments of bank borrowings and $37.6 million in interest payments, partially offset by $201.5 million in new bank borrowings. The company ended the quarter with $4.532 billion in cash and cash equivalents, down from $4.868 billion at the end of Q1, but still at a relatively ample absolute level.

Asset-Liability Ratio Declines, but Increased Short-Term Debt Lowers Liquidity Metrics

As of the end of Q2, Hua Hong Grace's total assets were $15.226 billion, total liabilities were $5.528 billion, and shareholders' equity was $9.697 billion. The asset-liability ratio was 36.3%, down 1.6 percentage points from 37.9% at the end of Q1.

However, liquidity metrics fell sequentially. Current assets at the end of Q2 were $6.421 billion, and current liabilities were $3.174 billion, resulting in net working capital of $3.247 billion, lower than the $4.718 billion at the end of Q1. The current ratio decreased from 3.4 times to 2.0 times, and the quick ratio fell from 3.0 times to 1.8 times. The increase in current liabilities was mainly due to interest-bearing bank borrowings rising from $811.8 million at the end of Q1 to $1.902 billion, which the company attributed to an increase in the portion of long-term borrowings due within one year.

Regarding inventory, the balance at the end of Q2 was $584.8 million, up from $533.3 million at the end of Q1, mainly due to an increase in work-in-progress. Inventory turnover days remained at 84 days. The turnover days for trade receivables and notes improved slightly to 40 days from 41 days in Q1.

Q3 Revenue Guidance and Hu Li Micro Integration Progress

Hua Hong Grace expects Q3 2026 revenue to be between $770 million and $780 million, with a gross margin ranging from 16% to 18%. Based on the midpoint of the revenue guidance at $775 million, this implies approximately 8.0% sequential growth from Q2's $717.5 million.

Management stated that AI continues to drive growth in global semiconductor demand, with the impact first seen in memory chips and gradually expanding to logic and analog chips related to AI applications. As a specialty process foundry covering multiple end markets, the company has already begun to benefit from this trend.

Additionally, Hua Hong Grace recently received approval from the China Securities Regulatory Commission for the registration of its acquisition of Huali Microelectronics. The company stated that the asset integration will further strengthen its technology portfolio, enhance operational scale effects, and improve profitability. For Hua Hong Grace, which is still in a phase of high capital expenditure and depreciation, subsequent capacity utilization, product portfolio upgrades, and integration synergies will be key variables determining whether gross margins can continue to recover.

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