2Q22 gross margin exceeded expectations, and 3Q22 guidance remained flat month-on-month
Huahong Semiconductor (Huahong) announced 2Q22 results on August 11, 2022. Revenue increased 4.4% month-on-month and ASP increased 6.7% month-on-month. 2Q22 revenue (US$621 million) was in line with Huatai's forecast and Bloomberg's unanimous expectations. The gross profit margin (33.6%) was about 5 percentage points higher than Huatai's forecast and Bloomberg's agreed expectations. Huahong expects 3Q22 revenue and gross margin to be the same month-on-month, better than global peers such as Vanguard. Considering that the semiconductor supply chain has entered the inventory adjustment stage, we think the company's guidelines are relatively sound. We raised the 2022/2023/2024 ASP by 4.0%/3.2%/2.4% to $561/543/546, and adjusted our net profit forecast by -6.8%/+2.0%/+1.8% to $3.43/383/513 million, mainly taking into account exchange losses in 2022. We lowered our target price to HK$45, based on 2.4 times the 2022 BVPS ($2.39) forecast, and a 2.6x discount compared to the average expected by comparable company Bloomberg, mainly because the company's 22-year ROE (11.7%) was lower than the industry average (25.1%).
Overall, 2Q22 deduction performance was strong, thanks to a stable customer base, 2Q22 gross margin clearly exceeded the guideline limit, and net profit after deducting non-return to the mother was US$140 million, an increase of 36% over the previous month.
Foundry revenue for logic and RF chips, analog and power management chips declined month-on-month, mainly due to weak demand for consumer electronics products. However, revenue from eNVM, independent NVM, and discrete device platforms increased 23.2%/18.9%/4.2% month-on-month, mainly driven by strong demand for NOR flash memory products, MCUs, IGBTs, and superjunction MOSFET products. Revenue from industrial and automotive products increased 18.4% month-on-month, accounting for 20.3% of total revenue. The improved product structure and stable customer base have enabled production capacity to be at full capacity. Net profit for the second quarter fell 60% below Bloomberg's unanimous forecast, mainly due to exchange losses of as much as $56.56 million.
3Q22 and 2022 outlook: the pace of capacity expansion is in line with expectations
At the performance briefing, Hua Hong reiterated that an additional production capacity of 30,000 tablets per month will be built, tested, and ready by the end of 2022. Furthermore, management anticipates that construction of a new chip factory in Wuxi may begin next year and be put into operation in 2024. Considering the strong demand for specialized platforms such as IGBTs, BCD power chips, and NOR flash memory, we expect Huahong 2H22 production capacity to remain at full capacity.
Valuation: The target price is HK$45.00, based on the 2022 forecast of 2.4 times the BVPS forecast. Since 1H22's ASP exceeded our previous expectations, we raised the 2022/2023/2024 ASP forecast by 4.0%/3.2%/2.4% to 561/543/546 dollars, and accordingly raised the revenue forecast by 3.8%/3.1%/2.4% to 2,474 million /2,753 million dollars. The 2022 net profit forecast was lowered by 6.8% to $343 million, mainly taking into account exchange losses in 2Q22. Since 2020, the corresponding valuation of Huahong's stock price has fluctuated in the 1.4-3.7 times PB range. We lowered our target price to HK$45 (previous value of HK$55), based on our 2022 forecast of 2.4 times BVPS (in the 43% quartile of its historical PB range), mainly due to lower ROE than the industry average. We expect ROE to improve or facilitate the recovery of the company's PB valuation, but if capacity expansion is slow, there may be limited room for improvement.
Risk warning: The rise in production capacity at the Wuxi fab was slower than we expected; capacity utilization and average price increases were lower than our expectations; US export controls were tightened.