Hua Hong
　　Semiconductor Ltd
　　1Q24 results review: UTR rebounds though ASP pressure remains
　　Hua Hong’s 1Q24 results were a beat overall with revenue at low-end guidance due to weak ASP but GPM above high-end guidance driven by sequentially improved UTR to 92%. We believe Hua Hong’s 2Q24 guidance with sequentially improving GPM is in line with market expectation. We expect semi demand recovery will continue and partially offset the new capacity and pricing pressure in following quarters. With 0.6x P/B, we believe Hua Hong remains undervalued with long-term catalysts of domestic substitution and automotive electronics growth. We rate Hua Hong BUY with HK$23.2 TP, based on 0.80x P/B (was 0.82x).
　　Key Factors for Rating
　　1Q24 financials: Revenue decreased by 27% YoY but increased 1% QoQ to US$460m, at the low-end of guidance, due to slow MCU and power discrete demand and ASP decline. GPM increased 2.4ppts QoQ to 6.4%, above the higher end of guidance thanks to UTR improvement. NI was US$32m, beating BOCIe and consensus due to income tax credit and minorities.
　　Positive 2024 guidance maintained: 2Q24 GPM guidance slightly beat consensus as Mgmt’ expects UTR to grow and price to stabilise. Consumer electronic demand remains strong while industrial and automotive are in the early stage of recovery. Mgmt’s current strategy is to ramp up UTR as quickly as possible before considering lifting ASP and margins.
　　PMIC to benefit from AI: we believe Hua Hong’s PMIC demand will remain strong throughout 2024 as PMIC is a key IC for AI server motherboard. Per Mgmt., ultimate customers of Hua Hong’s PMIC products include major domestic and overseas AI server brands. We remain upbeat on consumer electronics demand recovery as a key positive catalyst for Hua Hong in 2024.
　　Key Risks for Rating
　　US-Sino relationship; intensifying mature node price competition; faster-than- expected product migration to advanced node; macro and end demand risk.
　　Valuation
　　We derive our new HK$23.2 target price based on 0.80x P/B, -1sd below its five year average multiple of 1.4x as China’s semi remains at cycle trough. Our target price represents 29x/17x/14x 2024E/25E/26E EPS.
　　We believe the current share price of Hua Hong at 0.6x P/B with more than US$4.2bn net cash position still offers attractive risk-reward after the recent HS Tech rally.