Incident: The company's Hong Kong stock report for the second quarter of 2024 was announced, achieving operating income of 0.4785 billion US dollars, a year-on-year decrease of 24.2% and a 4.0% month-on-month increase, in line with the performance guidelines (0.47-0.5 billion US dollars); net profit to mother of 0.0067 billion US dollars, an increase of 79.0% month-on-month; gross profit margin of 10.5%, up 4.1 pcts month-on-month, superior to the previous quarter's performance guidance (6%-10%).

Key points of investment:

The operating rate has picked up across the board. According to the Hong Kong stock financial report, the year-on-year decline in the company's revenue side this quarter was due to a decline in product ASP, and the month-on-month increase was due to an increase in shipments due to market recovery. The company's 24Q2 overall operating rate was 97.9% (QoQ+6.2pcts), of which 8-inch 107.6% (QoQ+7.3PCTs), 12-inch 89.3% (QoQ+5.1PCTs); wafer delivery 1106K, YoY +3%, QoQ +7.8%, ASP was 433 US dollars/piece (QoQ -3.5%), and the monthly production capacity of 8-inch equivalent wafers was 391K/M at the end of the second quarter.

The Q3 guidelines showed a steady recovery, and it is expected to continue to strengthen steadily in the future. According to the Hong Kong stock financial report, the company's 24Q3 revenue guide is between 0.5-0.52 billion US dollars (QoQ +4.5%-8.7%), with a gross margin range of 10-12%. The main depreciation will continue to increase as the 12-inch production line is fully put into operation and the new production line is put into operation in 25 years. The company's long-term customer goal is to increase the proportion of overseas revenue, and in the future, it will actively engage IDM and Fabless customers around the world to expand channels. Currently, the semiconductor market is showing signs of steady recovery, driven by some consumer electronics sectors. With the exception of IGBT, market segments are generally strengthening. As the company's product portfolio improves and prices increase, both revenue and gross margin need to increase.

MCU and power recovered month-on-month, and the 55/65nm process maintained rapid growth. According to the Hong Kong Stock Financial Report, by product, the company's embedded non-volatile storage QoQ +15%, power QoQ +6%, analog and power management QoQ -0.4% (YoY +25.7%), logic and RF QoQ -1.1% (YoY +11%), and standalone non-volatile storage QoQ -23.8%, accounting for 29%, 32%, 13%, and 5% respectively. Looking at the manufacturing process, thanks to the increase in the volume of other power management products, the 55/65nm process node achieved a 16.1% year-on-year increase in 24Q2, accounting for more than 20% of revenue. The company as a whole is changing towards a relatively more advanced process, and the share of 12-inch foundry revenue increased to 48.7%. Looking downstream, the revenue QoQ for consumer electronics/automotive and industrial/communication/computer products was +3.6%/+7.7%/-2.8%/+22.9%.

Depreciation and amortization continued to rise, and capital expenditure declined slightly. According to the Hong Kong stock financial report, the company's 24Q2 depreciation and amortization cost was 0.137 billion US dollars, which remained stable compared to 0.133 billion US dollars in 24Q1; the company's 24Q2 capital expenditure was 0.197 billion US dollars, including Huahong 8-inch 0.028 billion US dollars, Huahong Wuxi 0.04 billion US dollars, and Huahong Manufacturing 0.128 billion US dollars. The overall amount declined from 0.303 billion US dollars in 24Q1. According to the announcement, all of the mechanical and electrical installations of Huahong Wuxi's 12-inch second production line have reached the original target and were completed ahead of schedule. The completion volume is around 80%. It is expected that trial production will be possible before the end of the year. At that time, production capacity and characteristic process platforms will be further expanded and upgraded.

Adjust profit forecasts to maintain a “buy” rating. According to the company's financial report for the second quarter and outlook for the third quarter, we adjusted the company's 2024-2025 net profit to be 0.733/1.287 billion (originally 2.598 billion/3.569 billion), and added 2026 net profit to mother of 1.999 billion, which corresponds to PE 69/39/25X. Due to the heavy assets in the foundry process, we think PB pricing is reasonable. According to Wind's current PB (LF) is 1.19X, SW The IC manufacturing index averaged 2.22X, maintaining a “buy” rating.

Risk warning: customer orders fall short of expectations; industry sentiment falls short of expectations; supply chain risks.