Huahong Semiconductor announced results for the second quarter of 2024. The quarterly revenue was $0.479 billion, down 24.2% year over year, up 4.0% month on month, slightly lower than Bloomberg's agreed forecast of 2.0%, and slightly lower than CMB International's forecast of 1.6%. The moderate month-on-month increase was mainly driven by an increase in wafer shipments (8.4% month-on-month increase), but the continued decline in average sales prices (3.5% month-on-month decrease) partially offset the impact. Benefiting from the continued increase in capacity utilization (capacity utilization rates in the first and second quarters were 92% and 98%), the company's gross margin for the second quarter was 10.5% (6.4% in the previous quarter, 27.7% in the same period last year), higher than Bloomberg's agreed forecast of 8.7% and CMB International's forecast of 9.0%. Net profit for the quarter reached 6.7 million US dollars (down 91% year on year and 79% month on month), lower than Bloomberg's agreed forecast of 20 million US dollars, but higher than CMB International's forecast of 2 million US dollars. Looking ahead, the median value of the company's revenue guidance for the third quarter was $0.51 billion, representing a 10.3% year-on-year decline and 6.6% month-on-month increase. The gross margin guideline is 10%-12%. The company's second-quarter results and third-quarter guidance show that although the terminal application market still faces challenges, demand in some market segments is gradually picking up (such as the consumer electronics market). This is in line with our previous expectations. We believe that the company is the main beneficiary of the trend of autonomy and control in China's semiconductor industry chain. Maintaining the “Buy” rating, the target price remains unchanged at HK$24, corresponding to 0.8 times the 2024 net market ratio.

The company's revenue from the consumer electronics market bottomed out in the fourth quarter of last year and achieved month-on-month growth in the first half of this year. The consumer electronics market contributed 62% of total revenue this quarter, and sector revenue achieved 14.0% and 3.6% month-on-month growth in the first and second quarters, respectively, showing signs of recovery. At the recent results meeting, SMIC (981HK, unrated) also mentioned the recovery trend in the consumer electronics market and indicated that the smartphone and consumer electronics markets contributed more to the company's revenue in the first half of the year. SMIC believes that the increase in revenue in the consumer electronics market is mainly benefiting from some downstream companies' urgent orders and inventory replenishment needs. We believe that demand in the downstream market will continue to recover, and Huahong Semiconductor's quarterly revenue in the second half of the year will achieve single-digit month-on-month growth.

Looking ahead, management expects capacity utilization to remain at a high level (84%, 92%, and 98% in the fourth quarter of 2023 and the first and second quarters of 2024, respectively); although the company's average sales unit price faced challenges in the first half of the year, it is expected to increase in the second half of the year. Currently, the company's 8-inch fab's capacity utilization rate is 107.6%, and the 12-inch fab utilization rate is 89.3%. Wafer shipments (about 8 inches) increased 3% year over year and 7.8% month over month. We expect the overall capacity utilization rate of Huahong Semiconductor's 12-inch fab to remain high (95% +) in the second half of the year as demand in the terminal market gradually recovers. However, the increase in the company's capacity utilization rate and wafer shipments will be affected by weak average unit sales prices (six consecutive quarters of decline). This is consistent with our previous prediction that “the average unit sales price of the company's products may face continued pressure” (link), but we believe that with close partnerships with customers, Huahong Semiconductor will have sufficient capacity to meet these challenges. We believe the company's top priority is to find the best balance between average unit sales price and capacity utilization to maximize revenue.

The “Buy” rating was maintained, and the target price remained unchanged at HK$24. We have slightly lowered our 2024/25 revenue forecast by 3% and 4% due to the decline in the average unit selling price. At the same time, since gross margin improved better than expected, we raised the company's gross margin forecast by 0.5 percentage points. With the gradual recovery of demand in the terminal market and the deepening trend of autonomy and control in the semiconductor industry chain, we believe that the increase in the company's 12-inch wafer production capacity will drive the company's further development. We expect Huahong Semiconductor's revenue to achieve single-digit month-on-month growth in the next two quarters. Keep the company's target price of HK$24 unchanged. The valuation is based on a net market ratio of 0.8 times, which is 10% higher than the two-year historical average forward price-earnings ratio.