Hua Hong Semi announced 2Q24 results. Revenue was down 24.2% YoY but up 4.0% QoQ to US$479mn, slightly missing Bloomberg consensus by 2.0% and our estimates by 1.6%. The moderate sequential growth was a result of growing wafer shipments (+8.4% QoQ) partially offset by continued downward ASP (-3.5% QoQ). GPM increased QoQ to 10.5% (vs. 6.4%/27.7% in 1Q24/2Q23) on higher utilization (98% in Q2 vs. 92% in Q1). 2Q GPM beat both consensus (8.7%) and our estimate (9.0%). Net profit was US$6.7mn in 2Q24 (-91% YoY/-79% QoQ), missing consensus estimate (US$20mn) but beating our estimate (US$2mn). 3Q revenue guidance (mid-point) is US$510mn, implying a 10.3% YoY decline and 6.6% QoQ growth. GPM guidance is 10% to 12%. 2Q results and 3Q guidance suggest the end market is still challenging but some demand is gradually improving (e.g., consumer electronics), which is in-line with our expectation. Looking forward, we think Hua Hong remains a key beneficiary of semiconductor localization in China. Maintain BUY with unchanged TP at HK$24 on the same 0.8x P/B.
　　Consumer electronics sales grew sequentially from a low base since 4Q23, while demand in other markets is still weak. Consumer electronics (62% revenue contribution in 2Q) grew 14.0%/3.6% QoQ in 1Q/2Q, showing signs of recovery. SMIC (981 HK, NR) reported a similar trend with a rising revenue contribution from smartphone and consumer electronics segments. SMIC mgmt. attributed this to rush orders and inventory restocking. We believe demand will continue recovering at a moderate pace and revenue will grow by a single digit sequentially in Q3 and Q4.
　　Mgmt. forecasts utilization to stay at a high level (98% in Q2 vs. 84%/92% in 4Q23/1Q24), and ASP to rise in 2H despite a challenging 1H. The company achieved utilization rates of 107.6% for its 8-inch fabs and 89.3% for its 12-inch fabs. Wafer shipments (8-inch equivalent) was up by 3% YoY/7.8% QoQ. We project the overall utilization will stay above 95% during 2H with recovering demand driving continuous improvement of utilization rate at Hua Hong’s 12-inch fabs. The growth in utilization/wafer shipments was partially eroded by a declining ASP (down for six consecutive quarters). This coincided with our previous expectations that “ASP is likely to face challenges”, but the company “is capable of managing the impacts, given its strong collaborations with clients” (report). Looking forward, We believe the priority for Hua Hong is still keeping utilization rate at close to 100% level, while balancing ASP and utilization rate to maximize total revenue.
　　Maintain BUY with unchanged TP at HK$24. We slightly trim our revenue forecasts for 2024/25E by 3%/4% on lower ASP, and revise up GPM by 0.5ppt on better-than-projected improvement in margin. With the expectation of production ramp-up at its new 12-inch fab, we think Hua Hong is well positioned as end-market demand is gradually coming back and the semiconductor localization trend remains intact. Our TP is HK$24 on the same 0.8x P/B, ~10% higher than 2-year historical avg. forward P/B as we believe the cycle trough has passed. We expect broad end-market demand to gradually recover to a normal growth trajectory with Hua Hong’s revenue projected to grow by a single digit QoQ in the next two quarters.