occurrences

The company released its 2023 performance report. For the full year of 2023, the company achieved operating income of 16.232 billion yuan, -3.30%; realized net profit to mother of 1.936 billion yuan, -35.64% year on year; gross profit margin 21.3%; and total assets of 76.226 billion yuan, +59.21% year over year. Looking at Q4 alone, we achieved operating income of 3.279 billion yuan, -27.54% YoY, -20.20% month-on-month; realized net profit to mother 251 million yuan, -77.24% YoY, +161.46%.

Key points of investment

Q1 Utilization rate and order demand increased, and prices stabilized. The semiconductor market was sluggish in 2023. According to IBS data from a third-party research agency, due to the continued weakness of the terminal consumer market, the global semiconductor market declined by about 10% in 2023. The foundry market is also facing challenges, and the predicted decline is about 10% to 15%. The semiconductor industry is facing multiple stages of pressure, such as weak demand, high inventory, price pressure, and low utilization of foundry production capacity. Oversupply of chips pushes up inventories and causes chip prices to continue to fall. In 2023, the company achieved operating income of 16.232 billion yuan, -3.30% year on year; realized net profit of 1.936 billion yuan, or -35.64% year on year; gross profit margin of 21.3%, or -40.60% year on year. Among them, 23Q4 achieved revenue of 3.279 billion yuan, -27.54% year-on-year and -20.20% month-on-month, mainly due to the decline in ASP and shipment volume. 23Q4 gross margin was 4.40%, compared to 38.2% in the same period last year and 16.1% in the previous quarter. The month-on-month decline was mainly affected by ASP cuts (10pcts) and preparation for inventory price drops (3.9 pcts). With the continuation of inventory removal in the industrial chain and the rapid penetration of next-generation communication, Internet of Things and other technologies, the semiconductor market has recently shown signs of boosting, and the company's related products such as image sensors and power management all performed well in Q4 2023. The company expects an increase in both capacity utilization and order demand in Q1 2024. It expects Q1 sales revenue of about US$450 to 50 million, and gross margin of about 3% to 6%. The company believes that overall capacity utilization has been boosted, and order demand in the past two months has also picked up, especially CIS and power management chips for mobile phones and AI-related products. Demand for power devices represented by IGBTs and superjunctions is still weak, but company management believes that demand for power devices will return to normal levels after the holiday season. Demand for MCUs is still weak, and Q1 2024 orders are still weak.

In terms of price, the company believes that Q4 of 2023 has basically hit the lowest OEM price, and the OEM price has now stabilized. Currently, the capacity utilization rate of the company's three 8-inch production plants is between 85% and 90%, and the first 12-inch factory produces more than 80,000 films per month (total monthly production capacity is 95,000 pieces).

Looking ahead to the full year, the company believes that Q1 2024 is a low performance point. Q2 will continue to improve, and full recovery is expected in the second half of the year.

Based on “characteristic IC+ power devices”, we will create a characteristic process platform. The company is committed to continuous innovation in characteristic process technology. Independent research and development has formed a characteristic process platform composed of embedded/standalone non-volatile memory, power devices, analog and power management, logic and RF, and has reached the world's leading level in various fields. In terms of embedded non-volatile memory technology platforms, the company has attracted many customers to choose this platform for product streaming and mass production through technological innovation, self-developed Nord-Flash units and related low power consumption and ultra-low leakage embedded flash memory process platforms. The platform satisfies the dual needs of ultra-low static power consumption and production efficiency of MCU electronic products on the market, and provides 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, through continuous optimization and iterative development of IGBT technology, the company's power devices have advantages such as high current, small size, and high reliability, and are used in fields such as NEV inverters and photovoltaics. 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. With many years of technology accumulation and diversified process platform advantages in characteristic process fields, the company's various products, especially IGBT and super junction, have continued to develop in the fields of new energy, automotive electronics, etc., and have been highly recognized by customers.

Promote the construction of Huahong manufacturing and actively expand production layout for medium- to long-term development. The company has three 8-inch wafer factories (Huahong Plant 1, Plant 2 and Plant 3) in Jinqiao and Zhangjiang, Shanghai, with a monthly production capacity of about 180,000 wafers. In addition, a 12-inch wafer factory (“Huahong Wuxi”) with a monthly production capacity of 94,500 sheets has been built in the Wuxi High-tech Industrial Development Zone. It is not only the world's leading 12-inch specialty process production line, but also the world's first 12-inch power device foundry line. Currently, the company is promoting the construction of the Huahong Wuxi Phase II 12-inch chip production line (“Huahong Manufacturing”), laying a solid foundation for the company's medium- to long-term development. The factory has a total production capacity of 83,000 pieces per month. The product focuses on 55/40 nm ICs and power devices. It is based on Huahong Semiconductor's special process and has a power management and storage platform. Among them, the production capacity of power devices is about 20,000 pieces, and the IC production capacity is about 63,000 pieces. The company plans to move in equipment from the end of Q3 to the beginning of Q4 in 2024 and complete the process 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 Q3 2025.

Investment advice

We expect the company's 2023-2025 revenue of 162.32/173.68/18.644 billion yuan, net profit of 19.36/17.66/19.56 billion yuan, and the closing price on March 21, 2024 corresponds to the company's 2023-2025 PE 30.52/33.45/30.21 times, and PB 1.35/1.32/1.26 times, respectively, to maintain a “buy” rating.

Risk warning

Macroeconomic fluctuations; downstream demand recovery fell short of expectations; production expansion fell short of expectations; gross margin was under pressure due to depreciation; and market competition intensified.