BOCOM INTL: Maintains "Buy" rating on Hua Hong Grace Semiconductor (01347), target price HKD 160.

BOCOM INTL released a research report stating that it maintains a "Buy" rating on Hua Hong Grace Semiconductor (01347) and has raised the target price to HKD 160, corresponding to a P/B ratio of 5.0 times in 2027. The company's Q2 2026 performance exceeded expectations across the board, achieving revenue of USD 717.5 million, surpassing the upper limit of the guidance of USD 700 million, with a gross margin of 16.5%, also exceeding the upper guidance limit of 16%. Management stated that they have received regulatory approval for the acquisition of Hualiwei (Fab 5), and may start consolidating Hualiwei's performance in the next quarter, which could enhance the overall profitability of the company; excluding Hualiwei, management guided Q3 2026 revenue to be between USD 770 million and USD 780 million, with a gross margin of 16%-18%. The bank has adjusted the company's revenue forecasts for 2026/27/28 to USD 3.00 billion / 3.60 billion / 4.05 billion (previously USD 2.84 billion / 3.51 billion / 3.96 billion), and raised gross margin estimates to 16.4% / 17.4% / 18.6% (previously 15.0% / 16.3% / 16.9%), believing that Hua Hong will continue to benefit from increased AI demand. The main points from BOCOM INTL are as follows: Q2 2026 performance significantly exceeded expectations, and the Hualiwei acquisition has been approved for consolidation. The company achieved revenue of USD 717.5 million and a gross margin of 16.5% in Q2 2026, both exceeding the upper limit of guidance; the bank estimates an incremental monthly production capacity of about 8,400 12-inch wafers, mainly from the expansion of Fab 9A, and estimates that ASP (converted to 8-inch equivalent, same below) increased approximately 3% sequentially. Management stated that they have received regulatory approval for the acquisition of Hualiwei (Fab 5) and may start consolidating Hualiwei's performance in the next quarter. The bank believes that consolidating Hualiwei could enhance the company's overall profitability. Management guided that excluding Hualiwei, Q3 2026 revenue is expected to be between USD 770 million and USD 780 million, with a gross margin of 16%-18%. The trend of rising volume and price continues, with increased AI demand intensifying supply constraints. Management mentioned that the growth in AI demand further exacerbates supply tightness, with strong demand observed in areas such as MCU, NVM memory (embedded/standalone NOR flash), PMIC/BCD products, among others, with some product order volumes reaching 1.5-2.0 times capacity. It was noted that rising AI-related demand may also crowd out some consumer electronics demand. The bank believes that part of the unexpected Q2 2026 performance was driven by higher unit prices due to strong demand for certain products, and price increases may continue to be realized in the future. Capacity expansion accelerates, with capital expenditure plans revised upward. Regarding capacity and capital expenditures, management reaffirmed an increase of 55,000 12-inch wafers per month at Fab 9B, in line with the bank's expectations; it was noted that equipment installation at Fab 9B might begin in Q3 2026, earlier than the bank's previous expectation of starting in Q4 2026, and that Fab 9B might begin contributing capacity/revenue in 2027. Management also mentioned that equipment supply is starting to become tight, and the proportion of domestic equipment in Fab 9B may further increase. The total investment in Fab 9B is projected to be USD 6 billion, with the bank believing it may be spread out over the 2026-2028 period. Considering that the companys capital expenditures for the first half of 2026 have reached USD 1.28 billion, the bank has adjusted the companys capital expenditure forecasts for 2026/27/28 to USD 1.80 billion / 2.61 billion / 2.53 billion (previously USD 1.73 billion / 2.80 billion / 2.70 billion) and slightly revised the incremental monthly capacity for Wafer Fab in Wuxi (9A/9B) for late 2026-2028 to 41,000 / 32,000 / 23,000 wafers (previously 41,000 / 37,000 / 18,000 wafers).