Hua Hong Semi released its 2Q25 earnings. Revenue was RMB566mn, up 18.3%/4.6% YoY/QoQ, driven by increased wafer shipments (18.0%/6.0% YoY/QoQ). The results were in line with guidance and Bloomberg consensus.
　　GPM improved 1.6ppts sequentially to 10.9%, beating guidance (7%-9%) and consensus (8.3%). NPM rose to 1.6% from 0.7% in 1Q25 on better GPM and increased other gains (subsidies etc.). Utilization rate climbed to 108.3% (up 5.6ppts/10.4ppts from 1Q25/2Q24), a record high during the past 11 quarters, driven by demand recovery and operational improvements. Blended ASP was US$434, +0.2%/-1.3% YoY/QoQ. Mgmt. believes ASP will stabilize, particularly on the 12-inch products. Meanwhile, mgmt. guides 3Q25 revenue to be US$620mn-640mn. The mid-point of guidance represents 19.7%/11.3% YoY/QoQ, showing accelerated growth from 2Q, a normal seasonal trend. The outlook of GPM in 3Q/4Q is flattish at a range of 10%-12%, similar to 2Q level, due to depreciation headwinds. Overall, 2Q is a decent quarter, and we think the stock is fairly valued at this level. Downgrade to HOLD, with TP adjusted to
　　HK$48.
　　We forecast 20% YoY revenue growth in 2025E, driven by capacity expansion, high utilization and ASP stabilization. We expect total sales
　　to increase to RMB2.4bn this year, with sequential growth of 11.4%/7.2% in 3Q/4Q25. Wafer shipment is expected to grow by 16.2% in 2025E, driven by capacity expansion. 50% of Fab 9’s capacity is up and running, while mgmt. expects full expansion to be completed by mid-2026. Blended ASP almost stabilized at the current level for four quarters (within +/-1.5% movements sequentially), with price adjustments implemented in 2Q. We expect a single- digit ASP increase in 2H25.
　　Despite a GPM beat in 2Q, depreciation headwinds persist. Hua Hong’s
　　capacity expansion schedule remains on track, while ongoing depreciation expense continues to weigh on margins this year. D&A expenses rose to RMB352mn in 1H25 (vs. RMB270mn in 1H24), a 30% YoY increase. We expect D&A to be ~RMB750mn this year, as Fab 9 ramps up. GPM is guided to be 10%-12% by mgmt., in line with 2Q’s 10.9%, a mixed impact of ongoing high utilization rate, improving operational efficiency and depreciation pressure. We project GPM of 10.9%/14.7% in 2025/26E.
　　Downgrade to HOLD, with new TP of HK$48. The new TP is based on
　　1.7x 2025E P/B, 0.5SD above 5-year avg. historical forward (vs. previous 1.4x), reflecting ASP stabilization and the business bottoming out from the cyclical downturn. While we remain positive on Hua Hong’s role in China’s semiconductor localization theme, the stock has risen over 50% in the past two months and we see valuations as fair at current levels. Potential upside catalysts: stronger-than-expected demand recovery, greater-than- anticipated ASP increase, etc. Downside risks: weaker demand, ASP pressure, geopolitical tension, etc.