What happened: 1Q22 achieved revenue of US $595 million, an increase of 95% over the same period last year and 13% month-on-month growth, which was significantly higher than the previous guidance of US $560 million and 6% month-on-month growth, mainly due to an 11% increase in 8-inch ASP compared with the previous year. From the perspective of product structure, the higher-than-expected revenue is mainly driven by analog and power management and independent NVM revenue, which are up 24% and 50% respectively over the previous month, accounting for 20% and 10% of revenue. 1Q22's overall gross profit margin was 26.9%, down 5.6% from the previous month, less than the guidance range of 28% PMI 29%, mainly due to an audit adjustment of government subsidies and an increase in bonuses. Realized operating profit of US $85 million, an increase of 11% over the previous month; realized net profit of US $103 million, an increase of 211% over the same period last year, down 23% from the previous month, corresponding to a net interest rate of 17%.

The company's production capacity continued to be fully loaded, and ASP increased significantly: 1Q22's 8-inch production line achieved revenue of US $333 million, an increase of 33% over the same period last year and 3% month-on-month growth; the company's 8-inch factory space was nearly saturated, and the utilization rate of 1Q22 capacity remained high, so the revenue growth was mainly due to the ASP improvement brought about by quarterly price adjustments and product portfolio improvement. At present, the company's 12-inch production line has successfully reached full production, capacity utilization reached 104%, wafer shipments increased by 20%; at the same time, 12-inch ASP increased by 6% month-on-month, corresponding to the company's 12-inch production line achieved revenue of US $262 million, an increase of 27% over the previous month, and the proportion of income expanded to 44%. The smooth increase in 12-inch volume drove its operating loss to narrow further, with its operating margin rising from-5% of 4Q21 to-1%.

ASP is expected to further improve under product portfolio optimization, and the company is optimistic about the continued expansion of the company's production capacity in the long run: thanks to the strong demand for downstream MCU, IGBT and super-results, we expect that 2Q22's capacity utilization will remain high, but will be affected by the epidemic to a certain extent; the company has guided 2Q22 revenue of US $615 million, corresponding to an increase of 78% year-on-year and 3.4% month-on-month growth, which we believe is mainly driven by a further slight increase in ASP. At the same time, the price increase is conducive to the improvement of the company's profitability, and the company guides 2Q22's gross profit margin range of 28% to 29%. The company expects to expand production to 94.5K/m at the end of 22nd, and the new capacity expansion is expected to be put into production at the beginning of 4Q22 or early 23rd. At the same time, the company announced in 3M22 that it intends to issue RMB shares to be listed in Science and Technology Innovation Board. We believe that the company is expected to start the construction of the new Huahong No. 9 plant and further increase 12 inches of production capacity.

In the long run, the company's continued expansion is expected to open up a new round of growth space.

Earnings forecast, valuation and rating: maintain the strong growth momentum of the company's fundamentals, 8-inch fundamentals stable, 12-inch positive. Based on the strong downstream demand, the company's capacity utilization remained high, and the company's 8-inch price increase exceeded expectations, the 22-23 net profit forecast for home ownership was raised by 9% to $333,000,000, and the 24-year net profit forecast was $471 million, corresponding to a year-on-year increase of 27%, 31% and 8%. Wafer foundry industry capacity tension continues, driving the logic of price increases, contract manufacturing value boost again, is expected to drive the company's valuation. The current share price of HK $24.60 corresponds to 12 times PE, which is at the bottom of the company's historical valuation and maintains a "buy" rating.

Risk hint: the production capacity of the newly built 12 inches is lower than expected; the valuation of the semiconductor sector fluctuates systematically.