Hua Hong Semi announced 1Q25 results. Revenue was up 17.6% YoY/flattish QoQ at US$541mn, a mixed impact of higher wafer shipment (up 42% YoY and up 7% QoQ) and continuous ASP pressure (down 2% YoY and down 1% sequentially). Revenue was largely in-line with guidance and consensus. GPM was 9.2% vs. 6.4%/11.4% in 1Q24/4Q24, within the guided range towards the lower bound, missing consensus estimates by 1.3ppts. 1Q25 GPM improved 2.8ppts from a year ago, on increasing utilization (92% in 1Q24 to 103% in 1Q25) but partially offset by rising depreciation costs. The margin pressure weighed on NP, which was US$4mn. Mgmt. guided 2Q revenue to be US$550mn-US$570mn. Mid-point of guidance (US$560mn) implies 17% YoY and 3% QoQ. GPM is guided to be 7%-9%, showing persistent ASP headwinds of 8-inch products and increasing depreciation costs as Fab9 ramps up. Maintain BUY with TP revised up to HK$37.50. We expect sector revaluation driven by accelerated semiconductor localization amid rising geopolitical uncertainties.
　　We expect FY25 revenue to grow 15.6% YoY, driven by recovering demand and localization needs, partially offset by ongoing ASP challenges. Hua Hong maintained high utilization rates of its 8-inch fabs (100%) and 12-inch fabs (105%). The company’s second 12-inch fab is ramping up with revenue contribution starting from 1Q25. The mgmt. projects the capacity of the new fab to hit 40kwpm by the end of 2025. We expect the overall utilization to remain at a high level (100%). However, this will slow down the ASP recovery trend. We estimate the ASP to improve modestly in the following quarters. We expect GPM to have a slower-than-expected recovery due to ASP pressure and increased depreciation costs on ramp-up of new fabs. We forecast FY25/26E GPM to be 10.6% and 16.8%.
　　Looking forward, we believe Hua Hong will be a key beneficiary amid ongoing geopolitical risks and policies uncertainties (i.e., tariffs). As US- China tariff tensions continue to escalate, semi supply chain localization in China is set to accelerate, which may benefit Hua Hong. In FY24, the company generated approximately 82% of its revenue from the domestic market and 9.4% from North America. With the increasing risk of tariffs and export restrictions on critical semiconductor components, we expect the company’s orders to pick up. We expect FY26 revenue to show stronger growth (27.1% YoY) on better ASP and higher wafer shipments benefitted from recovering demand and incremental capacities.
　　Maintain BUY with TP revised up to HK$37.5, based on 1.35x FY25E P/B, close to its 5-year historical avg. (1.38x). Such revision on TP is mainly due to higher valuation. With ongoing geopolitical tensions, we believe semiconductor localization will accelerate. We expect Hua Hong to benefit from increased domestic demand for chip fabrication, which will help the company to maintain its high utilization rate when new capacity is installed. Potential risks: 1) Intensified competition in mature nodes from both global peers and domestic peers, 2) weak end-market demand, etc.