Characteristic process leader, 8-inch + 12-inch drive revenue and high performance growth. The company was founded in 2005, the actual control is Shanghai SASAC, the competitiveness of the company lies in the characteristic mature manufacturing process, covering 0.35um-55nm nodes, the technology combination includes power discrete devices, embedded non-volatile memory, RFCMOS, MCU and other characteristic process platforms. The company is the largest 8-inch wafer factory in mainland China, with a production capacity of about 178,000 wafers per month, according to the company's latest 2021 semi-annual report data. The company's revenue reached a new high of $651 million, an increase of 52.0% over the same period last year, mainly due to the improvement of 812 inch capacity utilization, the increase of wafers and the rise of ASP. For example, the utilization rate of 8-inch wafer capacity in the Q2 quarter of 2021 was 112% higher than the previous quarter, and the net profit attributed to the parent company in the first half of 2021 was $77.1 million, an increase of 102.3% over the same period last year. Mainly benefited from high revenue growth and Wuxi depreciation reduction superimposed price increases and scale effects driven by the increase in gross profit margin, such as the company's Q2 quarter 2021 8-inch gross profit margin of 31.6%, an increase of 3.9 percentage points year-on-year, 12-inch wafer gross margin of 3.3%, an increase of 16 percentage points over the same period last year.

The contradiction between supply and demand has brought about a boom in the volume and price of characteristic technology. The downstream demand of 8-inch wafer mainly comes from the fields of power management chip, CMOS image sensor chip, fingerprint identification chip, display driver IC, RF chip and power devices. Downstream demand since 2018, such as the outbreak of fingerprint recognition (on behalf of Huiding), the acceleration of localization of power management of image sensor chips in 2019 (on behalf of Howie Technology), and the acceleration of automobile growth and substitution of power semiconductors in 2020 (on behalf of Starr semiconductors, etc.), from the downstream point of view, both the life cycle of end products and the share of domestic alternatives, we expect the follow-up demand to maintain a sustained high growth. On the one hand, 8-inch wafers continue to be tight on the supply side: on the one hand, 8-inch global production capacity currently accounts for less than 30%, and international companies are gradually shifting their focus and capital expenditure to 12 inches, but it will take 18-24 months for the 12-inch production line to expand. On the other hand, 8-inch wafer production line equipment mainly comes from the second-hand market, but some equipment such as etching machines, lithography machines, measuring equipment and even parts are in short supply. According to the SEMI report, global semiconductor manufacturers are expected to increase 200mm fab capacity by 17 per cent from 2020 to 2024, reaching a record high of 6.6 million wafers per month, with a compound growth rate of 4 per cent. The contradiction between supply and demand will make manufacturers with the advantage of production capacity benefit from the resonance of gross profit margin and profitability due to the improvement of capacity utilization and structure.

Huahong 8-inch benefit from the characteristics of craftsmanship, 12-inch open the growth ceiling. The company is the largest 8-inch wafer factory in mainland China, with a capacity of about 178,000 wafers per month. the downstream demand of the beneficiary company's product portfolio, such as discrete devices, embedded non-volatile memory, logic and radio frequency, analog and power management, independent non-volatile memory, continues to be strong. The company's Q2 quarter 8-inch wafer capacity utilization was 112%, and ASP increased by about 3-5% quarter-on-quarter. In addition, the 12-inch production line launched by the company quickly climbed to the current 40,000 pieces per month after it was put into operation in 2019, with a capacity utilization rate of 104%, and according to the company's plan, the production capacity is expected to reach 65,000 pieces per month by the end of 2021. From the company's expanded product categories and the company's layout of customers are the future domestic alternative direction and domestic alternative segment industry leaders, such as Starr Semiconductor, then with the rapid full capacity utilization and profits from EBIT to net profit, the company's Wuxi scale is expected to replicate Shanghai Huahong's 8-inch scale.

Profit forecast: we predict that the company's total revenue in 2021 and 2022 will be US $1.453 million respectively, and its net profit will be US $1.61 billion, an increase of 61.42% and 32.72% over the same period last year, corresponding to PB 2.62%. On the one hand, we believe that the 8-inch production line of the company benefits from the cash flow caused by the short supply of MCU, discrete devices, RF devices and so on. On the other hand, Wuxi 12 production line benefits from domestic wafer design IGBT/CIS/NOR and other demand expansion, which makes the company's production capacity from 400,000 pieces of H1 in 2021 to 65,000 pieces in 2021 and accelerates the break-even speed, taking into account the company's growth and valuation level, covering for the first time, giving a "buy" rating.

Risk hints: Wuxi 12-inch production line progress is lower than expected risk; downstream demand to capacity utilization fluctuation risk; industry spatial measurement deviation risk; research and reporting information update risk.