HUA HONG SEMI(01347)44.00 Huaxing Securities: Reiterate the "buy" rating on HUA HONG SEMI (01347) and raise the target price to HKD 44.00.

Huaxing Securities released a research report, reaffirming a "buy" rating on HUA HONG SEMI (01347) and raising the target price from HK$30.40 to HK$44.00. The firm has raised the 2025 target P/B ratio to 1.5 times (previously 1.0 times) to reflect a more optimistic view on the company's industry positioning after the integration of Huali Microelectronics by Hua Hong. Hua Hong's current P/B ratio of 1.7 times compared to United Microelectronics Corporation's 1.7 times shows a 23% discount, and compared to Semiconductor Manufacturing International Corporation's 2.5 times (with higher exposure in China's local AI story) shows a 48% discount, highlighting its attractive valuation. Main points from Huaxing Securities include: Management changes to asset integration by 2025 Dr. Bai Peng, the new president of HUA HONG SEMI, officially took office on January 1, 2025. As an industry veteran with extensive experience in IDM (Integrated Device Manufacturing) and wafer foundry fields, Dr. Bai clarified the growth driving strategy of Hua Hong as a feature process platform in the company's 4Q24 performance conference call. The firm believes that his plan to migrate some products to more advanced processes to enhance performance and efficiency is reasonable. In the firm's view, Dr. Bai's implementation of this growth plan is very favorable: 1) The "China for China" approach will only become more prominent, and Hua Hong's competitive pricing compared to foreign peers is advantageous. 2) The new 12-inch production line in Wuxi will gradually start production this year and continue to ramp up in 2026-2027. 3) Hua Hong is nearing the scheduled integration time of its subsidiary Huali Microelectronics. Among the three wafer fabs operated by Huali Microelectronics, wafer Fab 5, which started production in 2015 (the firm estimates a monthly capacity of around 38,000-40,000 pieces), is nearing the end of its depreciation. Based on 2024 data, the firm estimates that the potential integration of Fab 5 could bring about $100 million in incremental operating profit to Hua Hong (compared to its operating loss of $131 million). Additionally, the integration of advanced processes of 28 nanometers and above will further solidify Hua Hong's product portfolio and growth prospects. Considering these factors, the firm noted that Hua Hong's trading stock price in 2024 was lower than 1.0 times forward P/B, suggesting a revaluation of Hua Hong based on the P/B method. Strong demand outweighs pricing challenges A highlight of the company's 4Q24 performance was a capacity utilization rate of over 100%, indicating strong demand for specialty products, mainly driven by consumer electronics. With the ongoing stimulus policies for domestic consumption, the firm expects this trend to continue into the first half of 2025. Although ASP in 4Q24 only slightly increased, indicating competition and tepid macroeconomic factors have constrained Hua Hong's pricing plans, the firm believes that strong shipping trends and market share improvement are more important for Hua Hong's growth strategy and can drive potential value revaluation. Forecast adjustments Assuming a decrease in pricing, the firm has lowered revenue forecasts for 2025/26 by 5%/6%. Considering cautious performance guidance for 1Q25, the firm has lowered gross margin assumptions. With operating expenditure assumptions remaining essentially unchanged and non-operating income forecasts increasing, the firm's net profit forecasts for 2025/26 have been lowered by 22%/1% compared to previous estimates. Risk factors: Weak demand in end markets, slower than expected progress in the production of 12-inch wafer fabs, increased competition, and escalating geopolitical tensions.