Key points of investment

Incident: Huahong Semiconductor announced its results for the second quarter of 2024. The company achieved revenue of 0.48 billion US dollars, -24%, +4% month-on-month, gross profit margin of 11%, year-on-month -17pcts, and surpassed the previous 10% gross margin guideline limit. Net profit to mother was 0.07 billion US dollars, -92% year-on-year, and -79% month-on-month, mainly 24Q1 as income tax credit, and 24Q2 converted to income tax expenses.

The recovery in consumer electronics demand led to a steady recovery in embedded storage and discrete devices1) By terminal application, 24Q2's consumer electronics/industrial and automotive/communications/computers achieved revenue of $2.9/0.11/0.06/0.01 billion, -14%/-43%/-50% year-on-year, and +4%/+8%/-3%/+23% month-on-month. The recovery in consumer electronics demand led to a month-on-month increase in the company's performance. Currently, demand in all market segments other than IGBT has improved, and the company expects the consumer electronics and AI demand-driven effect to continue.

2) Driven by consumer electronics demand, demand for MCU, RF, CIS, power management ICs, etc. continued to recover, 24Q2 embedded storage/discrete device revenue grew month-on-month, achieving revenue of 0.14/0.15 billion dollars, -34%/-39%, and +15%/+6% month-on-month; analog and power management/logic and RF revenue stabilized month-on-month, achieving revenue 0.1/0.06 billion dollars, +26%/+11%, month-on-month; independent memory realized Revenue of $0.02 billion, -29% YoY and -24% YoY. We believe that demand in the downstream market has reached its bottom. As the consumer electronics market continues to rise, the company's various technology platforms are expected to maintain month-on-month growth.

Production capacity is gradually being released and the utilization rate is expected to remain high. ASP bottomed out and is expected to continue to rise 1) Driven by consumer electronics and AI demand, the 24Q2 company's overall capacity utilization rate reached 98%, -5 pcts year on year, and +6 pcts month-on-month. The company's capacity utilization rate has reached a high level, and is expected to remain high until 2025, driven by strong demand. The construction of the company's second 12-inch production line is progressing smoothly. It is expected that trial production will begin at the end of the year, and production capacity will begin at 25Q1. The company's monthly production capacity is expected to increase by 0.02 million tablets by the end of 2025. At that time, the company's 12-inch monthly production capacity will reach 0.115 million tablets. With the release of new production capacity, the share of overseas customer revenue is expected to return to 30%.

2) 24Q2, equivalent to an 8-inch ASP, was 432.7 US dollars, -26% YoY and -4% month-on-month, reaching an all-time low. Benefiting from consumer electronics demand, it is expected that 24H2 will raise prices in the fields of logic, radio frequency, CIS, embedded storage, etc., and achieve continuous improvement in ASP by optimizing the product structure. The company expects 24Q3 to achieve revenue of 0.5-0.52 billion US dollars, with a median value of -10% year-on-year and +7% month-on-month. The revenue growth is 70% driven by an increase in ASP and 30% by additional shipments. The gross margin is expected to be between 10% and 12%, and 24H2 gross margin will continue to increase.

Profit forecast and investment rating: Considering the moderate downstream recovery, the new production line is climbing in 2025, we adjusted the company's expected net profit to mother in 2024/2025 from 0.31/0.42 billion US dollars to 0.08/0.1 billion US dollars, and expect the company's net profit to be 0.17 billion US dollars in 2026. Using the PB valuation method, the closing price of HK$16.70 on September 2, 2024 corresponds to the 2024/2025/2026 PB of 0.58, respectively /0.57/0.56, maintaining a “buy” rating.

Risk warning: downstream demand falls short of expectations; average price increase falls short of expectations; industry competition intensifies