Hua Hong reported solid 3Q25 results with in-line revenue but strong GPM of 13.5% (+2.6ppts QoQ), driven by wafer shipment (+7% QoQ), ASP (+5% QoQ) and UTR (+1.1ppts QoQ) beats, though bottom line was partially muted by depreciation charges. Mgmt. guided 4Q25 revenue of US$650-660m (+3% QoQ mid-point, -1% below consensus) with stable GPM (+2ppts above consensus), given price increase impact and demand growth across most sub-segments except discrete remains a drag. We believe Hua Hong will continually benefit from robust domestic substitution momentum and AI-related demand. We maintain BUY with new target price of HK$94.5 based on 3.2x P/B.
Key Factors for Rating
3Q25 margins beat: Revenue grew 21% YoY and 12% QoQ, slightly above guidance mid-point, mainly thanks to increase in both wafer shipments (+7% QoQ) and ASP (+5% QoQ), driven by strong demand in MCU and PMIC for AI server. GPM improved 2.6ppts QoQ to 13.5%, beating high-end guidance of 12%, mainly thanks to UTR and ASP improvements but partially dragged by D&A of Fab9. NI recorded US$26m despite strong margins, missing out estimate by 8% mainly due to increased engineering wafer costs, new fab start-up-cost while partially offset by FX gain. The Company also announced impairment provisions that will reduce total profit by RMB58.5m for 9M25.
4Q25 guidance mixed: Mgmt. guide 4Q25 revenue to reach US$650-660m (+3% QoQ mid-point, -1% below consensus) with GPM to be 12%-14% (-0.5ppt QoQ mid-point, +2ppts above consensus), given the 1) continued improvement in UTR, 2) ongoing price adjustment across all tech platforms, 3) further product mix enhancements, partially from AI, 4) strong and consistent China for China demand while partially offset by 5) depreciation in new fab.
Positive outlook toward 2026: Despite ongoing price competition and geopolitical uncertainties, mgmt. maintained a positive outlook for 2026, driven by expanding demand from AI server, super memory cycle, China-for-China initiatives and mainstream segments recovery. Mgmt. also highlighted smooth progress ahead of schedule in the strategic partnership project with STM, and confirmed that the HLMC (Fab5) injection schedule remains unchanged for August 2026. We expect Hua Hong to continue benefiting from robust domestic substitution and AI-related demand.
Key Risks for Rating
US-Sino relationship; mature node price competition; faster-than-expected product migration to advanced node; macro and end-demand risk.
Valuation
We keep revenue estimate largely unchanged but lift GPM by 50-79bps upon robust ASP uptake considering a packed capacity in 2H25. However, power discrete price war, engineering cost and growing depreciation charge may cap near-term margin upside. We raise 2026/27E EPS by 5%/4%.
We derive our new HK$94.5 target price based on 3.2x P/B (was 1.8x) as the re-rate of Hua Hong as the second largest foundry with advanced node potential in China keeps going. Our target price represents 240x/82x/56x 2025/26/27E EPS.