Hua Hong delivered good 3Q24 results with revenue and NI both beating guidance thanks to consumer electronics demand recovery, FX gain and government subsidies. However, conservative 4Q24 GPM guidance of 11-13% may again trigger concerns on demand recovery sustainability and pricing pressure. As a result, Wuxi fab9 new ramp capacity may take longer to bring actual profit in our view. However, at the moment we think the Hua Hong trade is more about China’s stimulus plan and its potential impact to the semi sector, so investors are taking a long term perspective rather than focusing on short term fundamentals. We now base on 0.9x P/B (previously 0.8x) to value Hua Hong. Maintain BUY with new TP HK$26.8.
　　Key Factors for Rating
　　3Q24 results beat: Revenue reached US$526m, down 7% YoY but up 10% QoQ, above the high end of guidance. GPM increased 1.7ppts QoQ to 12.2% thanks to UTR improvement driven by consumer electronics demand recovery though offset by soft ASP, landing above the midpoint of guidance. Net income reached US$45m, beating consensus by 109% due to increased FX gains (US$29m) and government subsidies (US$18m).
　　4Q24 guidance missed with cautious tone on 2025: considering overcapacity, price war and weak market recovery, management projects 4Q24 revenue of US$530-540m (+5% QoQ mid-point) with GPM at 11-13% (flat QoQ mid-point), well below consensus of US$559m and 16%, respectively. Demand CIS, logic & RF and PMIC for consumer electronics and AI should stay healthy for 2025, but power semis for automotive and industrial will likely drag on UTR and ASP.
　　Wuxi fab9 on track: Wuxi Fab9 is on schedule to start trial production in end 2024 and early 2025, targeting 20kWpm new capacity by end-2025 as previously guided.
　　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 now project a milder GPM recovery trajectory in 2025 as demand recovery may come slower following the weakness in automotive and industrial semis and the growing new capacity in mature nodes. As a result, we cut 2024/25/26E EPS by 16%/18%/9%.
　　We derive our new HK$26.8 target price based on 0.90x P/B, -0.5sd below its five year average multiple of 1.4x, up from previously 0.8x P/B as China stimulus plan has lifted the semi sector valuation. Our target price represents 53x/30x/22x 2024/25/26E EPS.