Third-quarter earnings call, November 5, 2026: first quarter with Huali consolidated, record revenue of $987.1 million and fourth-quarter guidance of $1.08 billion to $1.09 billion
Hua Hong Grace Semiconductor reported its first quarter with Huali Microelectronics fully consolidated. The more important disclosure for investors was pricing. Chairman and President Peng Bai said the company raised prices by roughly 10% to 15% this year and expects a similar average increase in 2027, with some products rising more, some less and some staying flat. Management is describing a tightly supplied specialty foundry market in which pricing, rather than volume alone, drives the margin recovery. Chief Financial Officer Daniel Wang tied that directly to profitability, saying he expects 2027 gross margin to reach "around 25% or even above," after a 2026 figure he is "very, very confident" will exceed 20%.
Pricing power is the main driver, and it is being exercised selectively
Bai was careful to present the increases as negotiated rather than imposed. "All the pricing action we have taken, we have done so in consultation with our customers, and they are usually based on market conditions," he said, adding that the company will raise prices "selectively, not across the board," and only where it can supply enough relative to demand. He offered a ranking of where the increases have been largest: MCU first, then flash memory, then power management ICs and, selectively, power discrete. CMOS image sensor logic has seen only small increases. He said he does not want to be "very aggressive" in 2027, and that a firmer range would come with the next quarterly update.
Bai also limited his visibility. He said the company's "crystal ball" does not extend much beyond 2027, although he sees some possibility for 2028 given secular growth and the AI build-out. On cycle duration he was candid. Historically, supply-demand imbalances correct two to three years after new capacity comes online, and while some argue this is a "super cycle," he said, "I personally do not know the answer, I will be honest with you."
Order books remain stretched. Bai said some areas show a 2:1 book-to-bill ratio and others are balanced, but on average "at least 50% of the orders we cannot fulfill." He cautioned against leaning on the metric, because it is distorted by pricing. Management would rather raise prices toward a supply-demand equilibrium than carry a very high book-to-bill ratio.
Third quarter beat guidance; Q4 guide implies further gains
Consolidated revenue was $987.1 million, up 19.9% year on year on a restated comparable basis and 9.9% sequentially. Gross margin was 24.6%, up 7.6 percentage points year on year and 4.7 points from the second quarter. Excluding Huali, revenue was $803.4 million against guidance of $770 million to $780 million, and gross margin was 19.9% against guidance of 16% to 18%. Profit attributable to shareholders was $123.4 million, or $0.066 per share, up 147.1% year on year. Annualized ROE was 6.8%. The 12-inch business now makes up 70.7% of revenue.
For the fourth quarter, the company guides to revenue of $1.08 billion to $1.09 billion and gross margin of 25% to 26%. Bai said the volume increase will come from new 12-inch capacity at Fab 9A in Wuxi, not from Huali, where output should be broadly flat sequentially. Price actions taken during the year will also feed through in the fourth quarter, so management expects a small further rise in average selling prices.
Huali adds about 3 to 4 points of gross margin
Wang described the acquisition as "an incredible transaction." He said Huali has monthly capacity of about 40,000 wafers, generates roughly $700 million of revenue at a gross margin of about 40%, and should contribute more than $200 million of net profit. He estimated it adds 3 to 4 points to consolidated gross margin. The third-quarter gap shows the effect: reported margin of 21.4% on his figure, against around 17% without Huali. The 24.6% figure in the earnings release appears to refer to the restated comparable basis, and the call did not reconcile the two. Management gave no detail on synergies, operating expense or depreciation beyond the statement that the integration has been "financially accretive and operationally synergistic."
Revenue mix: memory-related platforms lead, analog and logic lag
By technology platform, embedded non-volatile memory revenue rose 42.5% year on year to $252.5 million, driven by MCUs and smart card ICs. Stand-alone non-volatile memory rose 28.2% to $147.6 million on flash demand. Power discrete grew 19.5% to $202 million, and analog and power management rose 13.5% to $199.9 million. Logic and RF was flat at $185.2 million. Geographically, China was 77.1% of revenue at $760.8 million, up 14.6%. North America rose 75.1% to $111.9 million and Europe more than doubled to $37.6 million, both on MCU and power management demand. Other Asia was flat.
Asked to rank demand strength, Bai put MCU first, followed by flash, power management, power discrete and CIS. Analog revenue in China was a partial offset.
AI exposure is large but loosely measured
Bai estimated that "more than 50%" of products are AI-related, though he acknowledged the figure is a guess, since the company's old end-market categories of computing, communication and consumer no longer fit and are being revised. Exposure runs through power management and BCD platforms, which go into AI servers, and through MCUs in optical modules and CIS in robotics. He framed the cycle as an infrastructure build, with "chips really the new oil of the industrial age," and noted that high memory prices are suppressing consumer demand for phones and PCs. Industrial and automotive demand improved in the second half.
The 50% estimate is a rough management assertion, not audited data, and it is unusually high for a specialty foundry whose largest platforms serve MCU, power and consumer applications. Investors should treat it with caution until the new categorization is published.
Silicon photonics and memory stacking are options, not yet revenue lines
In response to a question on silicon photonics, Bai said Hua Hong already supplies MCUs, power management and power discrete chips used in optical modules, participating "at the device level as opposed to a more integrated system level." After a strategic review, the company intends to participate in all silicon-based devices within optical modules and has added development projects. He has not decided to enter non-silicon optical devices. Silicon photonics and power management are the two areas where the next capacity expansion, likely starting in 2027, is expected to add "significantly more capacity." No revenue sizing or product specifics were provided.
On memory, Bai said the move toward separating memory cells from peripheral logic in NAND and DRAM, then stacking the dies, creates an opening for logic foundries. Hua Hong already has collaboration projects with DRAM makers. He noted the risk that integrated device manufacturers "might decide, in the long term at least, to do everything themselves," so the size of the opportunity is unclear. Management said it will take time to see the volumes.
Capacity is capped by clean room space; capex stays unchanged
Fab 9B in Wuxi began receiving equipment in mid-September, and management has adjusted the tool plan toward segments in shortage. Bai said that even after Fab 9B is filled, shortages will persist, because "a large part" of next year's added capacity is already spoken for by customers. Total expansion is limited by available clean room space, which will not change next year, so he gave no capex update and said any additional capacity would be announced if found. Management expects utilization of 100% or slightly above, and Wang said Fab 9 will be fully loaded in 2027, helping margins. Bai did not directly answer a question about equipment supply tightness or localization.
Third-quarter capex was $601 million, of which $571.8 million went to 12-inch fabs. Operating cash flow was $377.3 million. Cash rose to $6.05 billion, helped by $1.17 billion of capital contribution from non-controlling interests, while bank borrowings were stable at $4.01 billion. The debt ratio fell to 36.1%.
Questions that remain
Management did not give a 2027 revenue outlook or capex number, and it avoided committing on whether gross margin can return to the 30%-plus levels seen during the COVID period, saying only that it should "continue to improve over time." Several risks are acknowledged, if not emphasized: price increases depend on tight supply and customer consent, the cycle could turn once industry capacity arrives in two to three years, and consumer-facing platforms are weak. The fourth-quarter guide of 25% to 26% gross margin leaves little room for a further 2027 step-up beyond the roughly 25% Wang cited, which suggests the mix and Huali contribution are already largely in the run rate and that the remaining upside depends on realizing the 10% to 15% price increase.