HUA HONG SEMICONDUCTOR LTD(1347.HK)：MULTIPLE POSITIVE CATALYSTS DESPITE NEAR-TERM MARGIN PRESSURE

机构：中银国际
研究员：Alex LIN/Alina LIN

　　Hua Hong delivered disappointing 1Q25 results with in-line revenue but weaker gross margins (-2.1ppts QoQ), reflecting ongoing pricing challenges and elevated depreciation expenses. The company's 7-9% GPM guidance for 2Q25 missed consensus by 4ppts again confirms a more competitive dynamic though new Fab9 ramp-up is partly to blame. Despite uncertainties surrounding tariffs, we maintain our positive take on Hua Hong given multiple positive catalysts: emerging AI demand, China’s tariff calling for domestic substitution, and the potential consolidation of HLMC. We maintain BUY as current valuation at 1.2x P/B still trades below historical average of 1.4x. Our new target price of HK$42.5 is based on 1.5x P/B.
　　Key Factors for Rating
　　1Q25 GPM miss: Revenue grew 18% YoY but remained flat QoQ at US$541m, meeting guidance mid-point, mainly driven by increased wafer shipments but offset by weak ASP, indicating competitive pressure. GPM decreased by 2.1ppts QoQ to 9.2%, at the low end of 9-11% guidance, mainly due to depreciation charge of new Fab9 and pricing pressure. NI recorded US$4m, missing consensus and BOCIe by 86% and 46%, mainly due to increased engineering wafer costs, new fab start-up-cost and FX loss. Analog and PMIC are key outperforming segments in 1Q25 thanks to booming AI server demand from both domestic and overseas customers.
　　2Q25 sees ongoing GPM pressure: Mgmt. expect 2Q25 revenue to reach US$550-570m (+4% QoQ mid-point, 4% below consensus) with GPM to be at 7%-9% (-1ppt QoQ mid-point, -4ppts below consensus) due to new capacity bringing high D&A charge in 2Q25. We expect margin pressure will likely persist throughout 2025 as industry adding more new mature capacity including Hua Hong’ own Wuxi Fab9.
　　Tariff remains a positive catalyst for Hua Hong. Mgmt. believe tariff impact from supply side is manageable amid lower visibility from changing policies. On demand side, we believe the tariff war will keep fostering domestic substitution especially on power semis, thus benefiting Hua Hong in the long run. Hua Hong reiterates its plan of HLMC (advanced process) injection before August 2026, which we believe will remain a key near term catalyst.
　　Key Risks for Rating
　　US-Sino relationship; mature node price competition; faster-than-expected product migration to advanced node; macro and end-demand risk.