Event: On February 7, 2024, the company announced results for the fourth quarter of 2023. In Q4 2023, the company achieved revenue of US$455 million, a year-on-year decrease of 27.7% and a year-on-month decrease of 19.9%; realized net profit of US$35 million, a year-on-year decrease of 77.8% and a year-on-year increase of 154.8%. For the full year of '23, the company achieved revenue of US$2.286 billion, a year-on-year decrease of 7.7%; net profit attributable to the parent company was US$280 million, a year-on-year decrease of 37.8%.

Weak demand in '23 affected profitability, and I'm optimistic that demand will recover moderately in '24: affected by the decline in ASP and reduced capacity utilization due to weak demand for MCU and smart chips, etc., revenue for the full year of '23 was US$2,286 million, gross margin was 21.3%, and Q4 '23 achieved revenue of US$455 million in a single quarter, with gross margin of 4.0%, which is in line with the company's previous performance expectations. According to the terminal market breakdown, in 23Q4, consumer electronics revenue reached US$253 million, a year-on-year decrease of 35.4%; revenue from industrial and automotive products reached US$139 million, down 18.2% year on year; revenue from computer products reached US$10 million, down 45.8% year on year; and revenue from communications products reached US$54 million, up 6.6% year on year, mainly due to increased demand for CIS and analog products. The global semiconductor industry market situation was sluggish in 2023, but with the continuation of inventory removal in the industrial chain and the rapid penetration of next-generation communication and IoT technologies, the semiconductor market has recently shown signs of boosting. The company's related products such as image sensors and power management all performed well in the fourth quarter. Looking ahead to Q1 2024, the company expects revenue to fall below US$45-50 billion and gross margin to fall by 3%-6%. In the first quarter of '24, the company's capacity utilization rate and order demand both increased. The company said that demand for orders has picked up recently, especially CIS and power management chips for mobile phones and AI-related products; the company expects that demand for power devices represented by IGBTs and superjunctions is still weak, and demand for power devices is expected to return to normal levels after the Spring Festival. Currently, the capacity utilization rate of the company's three 8-inch plants is between 85% and 90%, and the capacity utilization rate of the first 12-inch plant is over 84%.

Technological innovation lays the foundation for growth and consolidates its leading position in emerging markets: Since 2023, the company has continued to innovate in characteristic process technology, independently developing and forming a characteristic process platform composed of embedded/standalone non-volatile memory, power devices, analog and power management, logic and RF, and has reached leading levels in various fields. In terms of embedded non-volatile memory technology platforms, the company's self-developed Nord-Flash unit and related low power consumption and ultra-low leakage embedded flash memory process platform have been recognized by many customers, and the platform has been selected for product streaming and mass production, providing an advantageous chip manufacturing platform for customer products in the fields of consumer electronics, communications, industrial control, smart medical care and smart cards.

In terms of power device process platforms, the company developed IGBT technology through optimization and iteration, so that the company's power devices have the advantages of high current, small size, high reliability, etc., and can be used in NEV inverters, photovoltaics, etc. At the same time, based on deep groove superjunction MOSFET technology, the company has provided customers with high-end chip manufacturing platforms for data center power supplies, vehicle chargers, etc. Huahong Semiconductor has always insisted on technological innovation, invested a large amount of resources in R&D, and actively promoted the development of new process platforms and the optimization and upgrading of existing process platforms. In addition, the company also actively establishes strategic cooperation with upstream and downstream enterprises at home and abroad, strengthens industrial chain integration, and actively explores emerging markets. In the future, the company will continue to provide customers with better technology and services, focus on new growth markets such as automobiles, photovoltaics, and consumer product upgrades, achieve sustainable development, and consolidate its leading position in the field of specialty process foundry.

The expansion of 12-inch production capacity is progressing according to plan, and profitability is expected to recover: in recent years, with the continuous development of emerging markets such as new energy vehicles, intelligent industrial manufacturing, next-generation mobile communications, the Internet of Things, and new energy, the overall market size of the global semiconductor industry has shown an increasing trend. The construction of the company's second 12-inch factory in Wuxi is progressing according to plan. The total production capacity of the plant is 83,000 pieces/month, of which about 20,000 pieces are power device production capacity and about 63,000 pieces are IC production capacity. The product focuses on 55/40 nm ICs and power devices, based on Huahong Semiconductor's characteristic process, and is equipped with platforms for power management and storage. The company plans to move in equipment from the end of the third quarter to the beginning of the fourth quarter of 2024 and complete the process pipeline in 2 to 3 months. It is expected to have a monthly production capacity of 10,000 to 20,000 tablets by the end of 2024, and a monthly production capacity of 40,000 tablets in the first phase by the end of the third quarter of 2025. Furthermore, according to the current demand situation of several platforms, when the capacity utilization rate recovers to 90%-95% in the future, the company is expected to raise the OEM prices for the 8-inch and 12-inch platforms, and adjust the product portfolio structure to improve the company's gross margin level. With capacity utilization and ASP recovering, the gross margin of the first 12-inch factory can reach at least 20%; the gross margin of the 8-inch factory can reach 40%-45%, or even rise to a historical high of 45%-50%. The company expects that when the first 12-inch factory is fully loaded with 95,000 sheets, its gross margin will still be close to 30% during the peak depreciation period.

Lowering profit forecasts and maintaining the “gain” rating: The company has the ability to manufacture 8-inch and 12-inch power devices, and has the world's leading deep groove superjunction MOSFET and IGBT technology; in the field of analog and power management, the company has become the world's leading provider of analog and power management process technology.

Benefiting from the recovery in demand in the terminal market, the company's order situation has improved. The company's shipment volume and capacity utilization rate are expected to increase in the future, which in turn will drive the recovery in ASP and gross margin. Considering that the semiconductor market is still under pressure, the 2024-2026 profit forecast was lowered. The company's net profit for 2024-2026 is expected to be US$114 million, US$234 million, US$246 million, EPS of US$0.07, US$0.14, and US$0.14, respectively, and PE of 31X, 15X, and 14X, respectively.

Risk warning: Industry sentiment falls short of expectations; downstream market recovery falls short of expected risk; industry competition increases risk; risk of international trade friction.