1Q24 gross margin slightly exceeded expectations, and 2Q24 is expected to increase month-on-month. The company released unaudited results: 1Q24 achieved sales revenue of US$460 million (YoY -27.1%, QoQ +1.0%), in line with the guidelines (US$4.5-50 billion), gross margin of 6.4% (YoY -25.7pct, QoQ +2.4pct), slightly exceeding the guidelines (3%-6%). The year-on-year decline in performance was mainly due to a decrease in average selling price and reduced capacity utilization. The company's 2Q24 sales revenue was between US$47—50 million, gross margin was between 6%-10%, and the median revenue and gross margin guidance increased month-on-month.
Wafer deliveries increased 7.9% month-on-month, and capacity utilization rebounded to 91.7%. By the end of 1Q24, the company had an 8-inch monthly production capacity of 391,000 tablets, the same as at the end of 2023. The 1Q24 shipment was equivalent to 1027 thousand 8-inch wafers (YoY +2.5%, QoQ +7.9%), and the capacity utilization rate recovered to 91.7% (YoY -11.8pct, QoQ +7.6pct). Among them, 8-inch wafers generated revenue of US$240 million (YoY -36.8%, QoQ -4.3%), capacity utilization rate of 100.3% (QoQ +9.3pct); 12-inch wafer revenue of 220 million (YoY -27.1%, QoQ +7.5%), and capacity utilization rate of 91.7% (QoQ +7.6pct).
Consumer electronics and communications showed a month-on-month recovery, and demand for industrial and automotive products was under pressure. According to the terminal market, consumer electronics and communications revenue increased 14.1% and 12.9% month-on-month, with demand for power management, flash memory, logic and CIS increasing, and industrial, automotive, and computer revenue falling 25.9% and 20.9% month-on-month; by technology platform, revenue from independent non-volatile memory and analog and power management increased 114.7% and 60.3% month-on-month, and discrete devices decreased 21.9% month-on-month; by process technology node, revenue from 55nm and 65nm and 0.25um increased 55.3% and 43.1% month-on-month. 0.35um fell 16.8%.
The new plant in Wuxi is expected to be put into operation by the end of 2024, and the company will enter a period of high capital expenditure. The 1Q24 company's capital expenditure was US$303 million, including Huahong 8-inch US$32 million, Huahong Wuxi US$71 million, and Huahong Manufacturing US$200 million. According to Shanghai Construction Engineering, the Huahong Wuxi manufacturing project fully capped the main plant ahead of schedule on April 20. According to the company's previous forecast, it will be completed and launched by the end of 2024, forming a 12-inch monthly production capacity of 15,000 to 20,000 wafers, completing the first phase of building a monthly production capacity of 40,000 wafers in 3Q25, and gradually forming a monthly production capacity of 83,000 12-inch wafers within three years. Therefore, we expect the company's capital expenditure to increase significantly from 2024 to 2026, and the successive commissioning of two new wafer production lines will also bring about a significant increase in depreciation.
Investment advice: Optimistic about the long-term prospects of leading domestic process foundry companies and maintain a “buy” rating; we expect 2024-2026 revenue of US$20.38/24.38/US$2,837 billion (value before 2024-2025:
US$2,068/US$2.49 billion), net profit of US$135/2.40/US$397 million (previous value: US$0.97/276 million). The current stock price corresponds to 0.61 times PB in 2024, maintaining the “buy” rating.
Risk warning: downstream demand slows down; introduction of new processes falls short of expectations; expansion of production falls short of expectations.