Hua Hong reported disappointing 4Q24 results with in-line revenue but US$49m operating loss due to ongoing pricing challenge and high R&D/start-up costs. 9-11% GPM guidance for 1Q25 also missed consensus by 3ppts due to high D&A from new capacity despite solid demand. Nonetheless, we expect Hua Hong to benefit from DeepSeek AI demand potential, end of inventory correction and localisation demand, thus worthing an overall re-rate. We now base on 1.1x P/B (previously 0.9x) to value Hua Hong. Maintain BUY with new TP HK$30.1.
　　Key Factors for Rating
　　4Q24 results missed: Revenue increased 18% YoY and 2% QoQ to US$539m, at the high end of guidance, mainly driven by increased wafer shipments. GPM decreased by 0.8ppt QoQ to 11.4%, above the high end of guidance thanks to higher UTR. NI recorded -US$25m, missing consensus and BOCIe by 188% and 186%, mainly due to increased engineering wafer costs, new fab start-up-cost and FX loss.
　　Weak 1Q25 guidance but 2025 tone is optimistic: Mgmt. expect 1Q25 revenue to reach US$530-550m (+1% QoQ mid-point, 4% below consensus) and full-year revenue growth to reach at least 10%. Mgmt. guided GPM at 9%- 11% (-2ppts QoQ mid-point, -3ppts below consensus) in 1Q25 due to new capacity and high D&A burden. However, mgmt. still targets 20% GPM within 1-1.5 years.
　　Mild recovery across downstream application. Demand for CIS, MCU, logic & RF and NOR Flash should stay healthy for 2025, driven by demand recovery in consumer electronics, the end of inventory correction in automotive and industrial, emerging AI and localisation demand from key IDMs like STMicro and Infineon.
　　Wuxi fab9 on track: Construction of Wuxi Fab9 has completed, targeting 40kWpm new capacity to be added by mid-2025 and total 83kWpm capacity to come on stream by mid-2026.
　　Key Risks for Rating
　　US-Sino relationship; mature node price competition; faster-than-expected product migration to advanced node; macro and end-demand risk.