Incident: The company announced its results for the third quarter of 2024. In the first three quarters of 2024, the company achieved sales revenue of 1.465 billion US dollars, a year-on-year decrease of 19.99%; net profit to mother was 0.083 billion US dollars, a year-on-year decrease of 65.95%. In 24Q3, the company achieved sales revenue of 0.526 billion US dollars, down 7.4% year on year and 10.0% month on month; net profit to mother was 0.45 US dollars, up 222.6% year on year, and 571.6% month on month.

Demand for logic and CIS increased, and gross margin recovered month-on-month in 24Q3: In 24Q3, the semiconductor market showed signs of steady recovery, driven by some consumer electronics and other fields, and revenue recovered month-on-month. By technology platform, embedded storage, independent storage, discrete devices, logic and radio frequency, analog and power management achieved revenue of 1.33/0.29/0.163/0.077/0.123 billion dollars, respectively, -7.7%/-20.3%/-30.8%/+54.4%/+21.8%. Demand for smart card chips, flash memory, IGBT and superjunction products declined, but demand for CIS, logic and other power management products increased. In terms of profitability, in 24Q3, the company's gross margin was 12.2%, -3.9 pcts year over year and +1.7 pcts month over month. The main reason for the increase in gross margin was the increase in capacity utilization. 24Q3's 8-inch/12-inch capacity utilization rates were 113.0%/98.5% respectively, and the overall capacity utilization rate was 105.3%, +7.4pcts month-on-month. In 24Q3, the company's operating expenses were 0.081 billion US dollars, -4.3% year-on-year and -9.9% month-on-month, mainly due to a decrease in R&D project expenses. Looking ahead to 24Q4, the company expects sales revenue to fall below 5.3 to 0.54 billion US dollars, and gross margin falls below 11% to 13%.

Downstream demand has recovered but is clearly divided. It is expected that the 24Q4 market will maintain its growth situation: the overall recovery trend of the semiconductor market is in line with expectations, but there is structural differentiation. Demand in consumer electronics and some emerging applications is improving, and improvements in demand for power semiconductors are still to be seen. Specifically, 24Q3's revenue in the consumer electronics sector was 0.3309 billion US dollars, up 1.8% year on year, accounting for 62.9% of revenue, up to +5.7pcts year on year, mainly due to increased demand for other power management products, but partially offset by ASP and falling demand for super junction and flash memory products; revenue in the industrial and automotive sector was 0.1239 billion US dollars, down 22.3% year on year, accounting for 23.5%. The main reason was the decline in ASP and demand for IGBT products; revenue in the communications sector was 0.066 billion US dollars, down 8.0% year on year, accounting for 12.5%. The main reason was the decline in demand for smart chips and analog products, which was partly offset by increased demand for CIS products; revenue in the computer sector was 0.0056 billion US dollars, accounting for 1.1%, mainly due to the decline in demand for general purpose MOSFETs and superjunction products. For the fourth quarter, the company believes that the overall market is still growing moderately, but demand for some technology platform products is still under pressure.

The recovery trend in the semiconductor market confirms that new production lines are expected to be put into operation to meet the growing needs of the automotive electronics market: WSTS expects global semiconductor sales to increase 16% from $526.9 billion in 2023 to a record $611.2 billion in 2024. It is estimated that the global semiconductor market output value will further increase by 12.5% to reach 687.4 billion US dollars in 2025. In addition to AI, smart electric vehicles will also be an important incremental market for the industry, which will drive the semiconductor industry to reach a trillion US dollar milestone around 2030. Under the trend of electric intelligence, the automotive semiconductor market is expected to reach 99 billion US dollars in 2026 and 135 billion US dollars by 2031. Seizing opportunities in automotive semiconductors has become the consensus in the industry chain.

The Huahong Wuxi Phase II project focuses on automotive-grade chip manufacturing to build a 12-inch specialty process production line with a monthly production capacity of 0.083 million pieces, with a total investment of 6.7 billion US dollars. On August 22, 2024, the Huahong Wuxi Phase II project ushered in the first batch of process equipment. After the completion and delivery of the project, the total monthly production capacity of Huahong's Wuxi integrated circuit R&D and manufacturing base will reach about 0.18 million pieces. In addition, the company expects trial production and process verification of various process platforms to be fully rolled out from the end of this year to the beginning of next year. The company will use new production lines to continuously iterate technology on the process platform to meet the continuous emergence and growth of various emerging downstream needs.

Raise profit forecasts and maintain the “gain” rating: After several quarters of continuous weakness, the semiconductor market showed signs of steady recovery, driven by some consumer electronics and other sectors. We are optimistic about the recovery trend in the semiconductor sector in the future. In addition, the 12-inch production line in Wuxi will enter trial production and process verification in an orderly manner. It is expected that 0.02 million pieces/month of production capacity will be released by the end of next year, and the company's future performance is expected to continue to recover.

Considering that the company's 24Q3 sales revenue, gross profit margin, and net profit all achieved month-on-month increases, and the capacity utilization rate also reached full production, the Wuxi production line is expected to bring more sales revenue growth, which is conducive to the continued restoration of gross margin, so the profit forecast was raised. The company's net profit for 2024-2026 is estimated to be $0.118 billion, $0.255 billion, and $0.35 billion, EPS is 0.07, $0.15, and $0.20, respectively, and PE is 39X, 18X, and 13X, respectively.

Risk warning: Risk of downstream demand falling short of expectations; risk of exchange rate fluctuations; risk of market competition increasing risk; risk of production line construction falling short of expectations.