Hua Hong Semiconductor is mainly engaged in integrated circuit manufacturing, with advanced 8-inch and 12-inch advanced process wafer foundry production lines, is the world's leading featured process pure wafer foundry. Benefiting from the magnificent demeanor of the industry, the company's performance improved significantly in the third quarter.

Wafer foundry demand is strong, capacity continues to be full: scientific and technological innovation represented by new energy vehicles superimposes the reduction of semiconductor capacity utilization caused by the global epidemic, and other factors, leading to the global semiconductor industry supply and demand imbalance continues, semiconductor wafer foundry continues to exuberant. According to TrendForce, the top 10 fabs saw revenue growth of more than 20% for two consecutive years in 2020 and 2021, breaking the $100 billion mark. Since the first half of this year, leading companies at home and abroad have repeatedly raised wafer foundry prices, and the demand of the wafer foundry industry in the fourth quarter is still strong. The company as a mature process wafer foundry head enterprise, the main business income is growing steadily. Revenue from the 8-inch wafer foundry business rose 33.2% year-on-year to $310 million in the third quarter of 2021, and gross profit margin increased to 35.2% from 27.2% in 2020. The capacity utilization rate reached 110.9% in the third quarter and has been running at full capacity for several months in a row. Taking into account the rising prices of the industry as a whole, the revenue of the 8-inch wafer foundry business is expected to grow steadily this year.

12 Si wafer production capacity rapidly, the future performance is good: Hua Hong Semiconductor's production expansion plan was implemented earlier, and the earlier capacity release will help Huahong to seize more market share in the global imbalance between chip supply and demand. The 12-inch wafer production capacity of Huahong Wuxi Plant is planned to increase significantly from 20,000 wafers / month of Q4 in 2020 to 65,000 wafers per month of Q4 in 2021. The climb in production capacity has led to rapid growth in profits. Revenue from the 12-inch wafer foundry business rose 723.3% year-on-year to $140 million in the third quarter, up 62.5% from a month earlier. According to the company's guidelines, the 12-year wafer production capacity will reach 95,000 wafers per month in 2022. Although the gross profit margin remains low due to the depreciation of equipment at this stage, with the continuous release of production capacity and the continued imbalance between supply and demand in the market, gross profit margin will be greatly improved.

Investment advice: at present, the imbalance between supply and demand in the semiconductor industry has not been effectively alleviated, and the inflection point of the industry has not appeared yet. Leading companies generally expect the imbalance between supply and demand to continue into the second half of 2022. We are optimistic about Hua Hong Semiconductor's performance in this industry expansion and recommend buying.