We covered Huahong Semiconductor (1347.HK) for the first time and gave it a “buy” rating. The target price for the next 12 months is HK$34.7, a potential increase of 30%.
The company's supply and demand are booming, driving rapid growth in performance: Huahong Semiconductor is a relatively scarce and ranked wafer OEM target in mainland China. Supply side: The company provides various special process platforms including logic & radio frequency, power semiconductors, etc. The company's 12-inch wafer production capacity in Wuxi is expected to expand from 65,000 pieces/month at the end of 2021 to 95,000 wafers by the end of 2022. Demand side: The company's customers on multiple platforms have high demand for new orders. Therefore, in the context of strong supply and demand, we expect Huahong Semiconductor's revenue and profit to grow 14% and 9% respectively in 2022, which is a high growth rate. Looking at valuations, thanks to China's inclination towards high-end manufacturing policies such as semiconductors, we think Huahong Semiconductor is expected to follow the upward trend in the valuation center of China's semiconductor industry. As a result, the company was covered for the first time, giving it a “buy” rating.
The rising boom in the semiconductor industry is driving up short-term prices, and the improvement in the company's product portfolio is expected to support the rise in long-term unit prices: First, the semiconductor industry is in a phase of rising prosperity. Many companies in the industry will still have room for price increases next year, and we expect this trend to continue until the end of the year. Huahong Semiconductor will also fully benefit from this trend. The company's wafer unit price has room to be adjusted, and gross margin can be maintained at a high level. We believe that the company's high level of prosperity can be maintained throughout next year, so the overall economic recovery next year will continue to drive up downstream demand. Second, the company is also working to improve its existing product portfolio. In particular, when shipping 12-inch wafers, the company can increase products with high unit prices and high gross margins to maintain long-term price support.
Fully laying out the long-term development of automotive electronics is expected to become the company's new engine: the demand for intelligence from new energy vehicles is expected to significantly drive semiconductors in the automotive industry. According to IHS Markit forecasts, the size of the automotive semiconductor industry will grow at a compound rate of 10% in the next few years. Automotive semiconductor chips arranged by Huahong Semiconductor can be used for functions such as entertainment, video, airbag control, and converters. In the long run, automotive semiconductor chips are expected to be the foundation for the company's growth.
Valuation: We first use EV/EBITDA (Enterprise Value Multiplier Method) to forecast Huahong's valuation. We forecast Huahong's EBITDA of $8.85 billion in 2022 and the target EV/EBITDA of 7.3x, close to the recent average. In the end, we got a target of HK$34.7, a potential increase of 30%, and the first “buy” rating.
Investment risks: The speed and extent of recovery in the global smartphone and automobile industry is lower than expected, dragging down demand in the semiconductor industry; the semiconductor industry's capacity is expanding rapidly, and industry sentiment peaked rapidly; prices of upstream materials in the semiconductor industry have clearly risen, dragging down the company's profit margins; semiconductor equipment procurement progress has been hampered and slower than expected; the company's production capacity is expanding too fast, leading to rising depreciation and rising costs.