3Q24 gross margin exceeded expectations, but 4Q24 guidance fell short of expectations. Huahong Semiconductor's 3Q24 revenue increased 10% month-on-month to 0.526 billion US dollars, higher than Huaxing Hong Kong's forecast of 1%. The gross margin reached 12.2%, higher than our forecast of 11.5%. Overall, management said consumer electronics maintained a strong growth trend, but industry and automotive remained weak. The 8-inch/12-inch unit price rose 2%/1% month-on-month, and the increase was more moderate than we expected. Management explained that the uneven recovery in demand was hampering further price increases. By application, both analog and power management, and logic and RF grew 21% month-on-month, driven by BCD and low-voltage PM products, and part of the overall consumer electronics recovery. MOSFETs and IGBTs are still weak, continuing the 2Q24 trend. Due to other revenue exceeding expectations, net profit to mother was 45 million US dollars, 9% higher than Huaxing Hong Kong's forecast. Huahong's 4Q24 revenue range was 0.53 billion to -0.54 billion US dollars, and the gross margin range was 11%-13%, lower than our forecast of 0.576 billion US dollars and 14%. We attributed this to a slower than expected price increase. Huahong expects the overall capacity utilization rate to remain close to 100% in 4Q24.

The pace is slowing down and the cycle is getting longer: Looking ahead to 2025, we expect support from personal electronics products to weaken as smartphone and PC inventories are currently being rebuilt. In our view, the long-awaited recovery in the industrial and automotive sectors should begin in the first half of 2025, but the pace will be much slower than expected, making the current cycle longer than the usual six quarters. Compared to when we upgraded Huahong to a “buy” rating in June of this year, we are now more cautious about the recovery in demand in the solar photovoltaic industry because the related structural oversupply has not shown any signs of improvement. That being said, we still expect continuous quarter-on-quarter revenue growth (double-digit year-over-year) in 2025, driven by a new 12-inch production capacity, and that annual revenue will surpass the peak of 2022.

We lowered our 2025-26 revenue forecast: Since Huahong's price increase was slower than we expected, we lowered our unit price assumption, thereby lowering our 2025-26 revenue forecast. We saw that Lianhua Electronics plans to cut prices in 1Q25, which also reflects the difficult price environment.

Reiterating the “Buy” rating and fine-tuning the target price to HK$30.40: we will move the valuation benchmark forward to 2025 and maintain the target P/B ratio of 1.0 times. We reaffirm our “buy” rating for Huahong because we believe continued profit improvements driven by a recovery in downstream demand should support the company's valuation reshaping. As Huahong continues to focus on mature manufacturing processes, we believe that potential US-led restrictions on AI applications and processes at 28 nm and below have limited downside risks to Huahong. Risk warning: Demand in the terminal market is weak, the launch of 12-inch products is slower than expected, and competition and geopolitical tensions are increasing.