Event: Q23 achieved revenue of US$455 million, down 28% year over year and 20% month-on-month, slightly above the lower limit of the guidance range of US$45-50 billion. By wafer size, the company's 8-inch production line achieved revenue of US$251 million, down 37% year on year and 16% month on month; 12 inch production line achieved revenue of US$205 million, down 12% year on year and 24% month on month. The overall gross margin was 4%, slightly higher than the median value of 2%-5% in the guideline range. The year-on-year decrease was 34.2 pct and the month-on-month decrease was 12.1 pct, mainly due to pressure on ASP and the decline in capacity utilization. Achieved net profit of US$35 million, a year-on-year decrease of 78% and a month-on-month increase of 155%, corresponding to a net profit margin of 8% to mother. 23 Achieved revenue of 2.286 billion US dollars for the whole year, down 8% year on year, mainly due to ASP pressure; gross profit margin of 21.3%, down 12.8 pct year on year, mainly due to ASP pressure and depreciation growth; net profit to mother of 280 million US dollars, down 38% year on year, corresponding to net profit margin of 12%.

4Q23 performance bottomed out, 1Q24 led to a recovery in demand for some products, and I am optimistic about the full recovery of 2H24. 1) Q23 capacity utilization and ASP bottomed out. 4Q wafer shipments (equivalent to 8 inches) were 951K sheets, down 4.1% year on year and 11.7% month-on-month. This is due to weak demand for products such as MCU and smart card chips, leading to pressure on ASP and a decline in capacity utilization. The company's overall capacity utilization rate decreased by 2.7 pct to 84.1% month-on-month, and the capacity utilization rate of the 8-inch and 12-inch production lines declined slightly from 95.3%/78.4% in 3Q23 to 91%/77.5%, respectively.

2) Strong orders for some products in 1Q24. Demand for 4Q23 image sensors and other power management chips showed signs of a boost. Orders for products such as 1Q24 image sensors increased, demand for power products such as IGBTs and superjunctions was temporarily weak, and the company is expected to recover in 2Q24. Considering the recovery of the semiconductor cycle and strong orders for some products, the company expects the 1Q24 capacity utilization rate to gradually improve. The 1Q24 ASP is expected to remain the same as 23Q4 or even grow slightly, and the performance is picking up compared to 4Q23. The company guided 1Q24 revenue of US$45-500 million, with a median increase of 4% month-on-month; gross profit margin of 3%-6%, and a median increase of 0.5 pct month-on-month. 3) The company is optimistic about the full recovery of 2H24 performance. Demand for MCUs for important products is expected to improve in 2H24; at the same time, as 1H24's capacity utilization rate improves, 2H24 expects to increase pricing on the basis of higher capacity utilization, driving improvements in revenue and gross margin levels.

The release of 12-inch production capacity drove an increase in depreciation, putting pressure on overall profitability in 24 years. Huahong Manufacturing's new production line is expected to be put into operation by the end of 24. 4Q23's total monthly production capacity (equivalent to 8 inches) increased by 33K films to 391K pieces/month, of which 12-inch monthly production capacity increased 15K films to 95K pieces/month, reaching the design capacity of Huahong Wuxi (Wuxi Phase I). The company's second 12-inch production line, Huahong Manufacturing (Wuxi Phase II), is also progressing according to plan, and the production line is expected to be completed by the end of '24. Considering that the company continues to expand production as planned, and the release of production capacity will drive up depreciation and amortization costs and weaken gross profit margins, we expect the company's profitability to be under pressure in 24-25.

Profit forecast, valuation and rating: The company's characteristic process has technical advantages, but considering that the downstream boom is still weak, ASP and capacity utilization are temporarily under pressure, compounded by the release of new capacity to drive depreciation, the company's profitability is expected to continue to be under pressure in 24-25 years, and the net profit forecast for 24-25 years was lowered to US$216/293 million (-42%/-30% compared to the previous forecast), corresponding to a year-on-year growth rate of -23%/+36%; added a 26-year net profit forecast of US$398 million, up 36% year on year. The current stock price of HK$13.86 corresponds to 14x/10x PE in 24/25. The valuation is at a historically low level, and there is room for repair. It is optimistic that the recovery of the semiconductor cycle will drive the company's foundry demand. It is expected that the 24-year performance will pick up quarterly and maintain a “buy” rating.

Risk warning: The semiconductor boom continues to decline; the company's production expansion progress falls short of expectations; competition intensifies risks.