EB SECURITIES: Hua Hong Semi (01347) raised its prices in 3Q25, helping to drive both volume and price increases and supporting the continued improvement of gross profit margins. The "buy" rating is maintained.

EB SECURITIES released a research report stating that downstream demand continues to recover, and high capacity utilization is driving HUA HONG SEMI (01347) into a price hike cycle. However, considering the increased depreciation pressure from the company's accelerated expansion, the company's net profit attributable to the parent for 2025-2027 was adjusted to 70/150/190 million U.S. dollars (compared to the previous forecast of -4%/+6%/+5%), corresponding to year-on-year growth of +20%/+119%/+23%. The current stock price corresponds to 2.8/2.7xPB for 2025/2026, bullish on the company's market share growth aided by self-controllable and localization trends, expansion supporting long-term revenue growth, and the injection of high-quality assets further boosting performance and valuation, maintaining a "buy" rating on HUA HONG SEMI (H). EB SECURITIES' main points are as follows: Event: 3Q25 gross margin exceeding expectations The company achieved revenue of 635 million U.S. dollars in 3Q25, up 20.7% year-on-year and 12.2% quarter-on-quarter, in line with the company's guidance range of 620-640 million U.S. dollars, driven by the increase in wafer shipments and ASP growth. In terms of wafer sizes, revenue for 8-inch wafers was 259 million U.S. dollars, down 1.6% year-on-year and up 11.4% quarter-on-quarter, accounting for 40.7%, down 0.3 percentage points quarter-on-quarter; revenue for 12-inch wafers was 376 million U.S. dollars, up 43% year-on-year and 12.8% quarter-on-quarter, accounting for 59.3%. In terms of profitability, the gross margin for 3Q25 was 13.5%, exceeding the upper limit of the company's 10%-12% guidance range, higher than the market expectation of 11.3%, up 1.3 percentage points year-on-year and 2.6 percentage points quarter-on-quarter. The increase year-on-year was driven by improved production capacity utilization and ASP growth, partially offset by increased depreciation, and the quarter-on-quarter increase was due to ASP growth. The net profit attributable to the parent in 3Q25 was 25.73 million U.S. dollars, slightly below the market expectation of 27.17 million U.S. dollars. Bullish on the continuous increase in demand in 2026, with a price hike in 3Q25 already in place, "Local for Local" expected to contribute revenue starting in 4Q25 1) It is expected that downstream demand will improve in 2026, with power management chips and storage chips continuing to experience high growth. Revenue from simulation and power management chips in 3Q25 was up 33% year-on-year, and the company expects the strong growth trend driven by AI demand for power management chips to continue at least until 2026, supporting revenue growth in North America. Revenue from embedded and standalone non-volatile memory in 3Q25 increased by 20% and 107% year-on-year respectively, driven by the storage "super cycle" price hike which stimulated storage demand; combined with the company's further production in higher-end processes, the company expects strong growth in the storage business to continue for the next few quarters. 2) Local for Local production: The company has already started collaborating with overseas IDM companies such as ST, with ST's 40nm MCU already starting production ahead of schedule and expected to contribute revenue starting in 4Q25. 3) Price hike initiated: The price hike in 3Q25 has been implemented, with ASP up by 5.2% year-on-year and quarter-on-quarter. The company expects strong demand in 2026 to bring opportunities for another price hike and improvement in product structure, further driving profitability. Considering the intense competition and price pressure in the discrete device market, and more capacity being released, the bank believes that the extent and timing of the price hike in 2026 is not yet clear, but a steady price hike trend can still be sustained. Fab9 production capacity continues to be released, with high capacity utilization being a long-term growth driver The capacity utilization rate in 3Q25 was 109.5%, up 4.2 percentage points year-on-year and 1.2 percentage points quarter-on-quarter due to the recovery in semiconductor demand. Wafer shipments continued to increase, with the equivalent of 8-inch wafer shipments reaching 1.4 million pieces in 3Q25, up 16.7% year-on-year and 7.3% quarter-on-quarter. The total capacity of 8-inch wafers in 3Q25 reached 468,000 pieces per month, with Fab 9 having installed capacity of 45,000 pieces per month and production capacity of 35,000 pieces per month. Looking ahead, the bank predicts that the expansion process will accelerate, with Fab 9 expected to complete the release of 83,000 pieces per month of capacity by the end of 2026, driving continued revenue growth from increased wafer shipments. The company stated that the acquisition of Hualcmicro is progressing smoothly, with the transaction expected to be completed before the end of 2026, taking over operations in 2026M8. 4Q25 revenue guidance relatively flat The company guided for a revenue of 650-660 million U.S. dollars in 3Q25, with the midpoint corresponding to a year-on-year increase of 21.5% and a quarter-on-quarter increase of 3.1%, lower than the market expectation of 662 million U.S. dollars; the gross margin guidance was 12%-14%, with the midpoint up 1.6 percentage points year-on-year and down 0.5 percentage points quarter-on-quarter, higher than the market expectation of 11.3%. The bank's judgment: 1) Revenue is expected to continue to grow rapidly in 2026, driven by the improvement in downstream semiconductor demand, "Local for Local" taking on orders from overseas IDM companies to ensure future capacity utilization; combined with the expected outperformance of Fab 9's capacity release, wafer shipments in 2026 are expected to maintain rapid growth. 2) Future profitability levels will continue to improve. The price hike initiated in 3Q25 has opened the way for further price hikes, with the bank expecting prices to steadily rise in the future; although the depreciation pressure from Fab 9 has increased, the effects of price hikes and economies of scale are expected to offset this, coupled with the company's active cost control measures leading to a recovery in profitability. Risk warning: Uncertainty in US-China tariff policies; downturn in the semiconductor cycle; intensifying industry competition.