Hua Hong delivered mixed 4Q25 results, with revenue slightly beating guidance and GPM landing in line, driven by wafer shipment growth (+3% QoQ), while elevated R&D labour costs (G&A +29% QoQ) muted the bottom line. Mgmt. guided 1Q26 revenue of US$650-660m (midpoint -1% QoQ and -6% below consensus) with improving GPM of 13- 15%, as demand for AI and localisation partially offset the squeeze effect of consumer electronics from super memory cycle. We maintain BUY and raise TP to HK$116.5 based on 4.0x P/B (was 3.2x) as we expect the valuation gap between SMIC and Hua Hong to further narrow following Hua Li’s progress in advanced node.
Key Factors for Rating
4Q25 mixed: Revenue grew 22% YoY and 4% QoQ to a historical high slightly above guidance mid-point, mainly thanks to higher wafer shipments (+3% QoQ), driven by strong demand in MCU and PMIC. GPM narrowed 0.6ppt QoQ to 13%, in line with prior guidance. NI recorded US$17m, missing BOCIe and street by 53-54%, mainly due to elevated R&A labour costs (G&A cost + 29% QoQ) while being partially offset by FX gain and government subsidy.
1Q26 guidance mixed: Mgmt. guide 1Q26 revenue to reach US$650-660m (- 1% QoQ at mid-point, -6% below consensus) with GPM to be 13%-15% (+1ppt QoQ mid-point, +1ppt above consensus), given the 1) price increase in PMIC, MCU, discrete devices for AI-related applications as well as auto, robot and green energy, and standalone component for memory, 2) strong and consistent Chinafor- China demand while being partially offset by 3) depreciation in new fab and 4) weak consumer electronic demand.
2026 outlook: We expect Hua Hong’s higher auto, industrial, communication and computing revenue exposure (~36% in 2025), consistent China-for-China initiatives and AI-related demand to insulate the company from consumer electronic demand push-out driven by the super memory cycle. We also see meaningful synergy upside from the HLMC (Fab5) injection to be completed by 2H26 and the ongoing tape-out of various domestic GPUs in 2026 in HLIC (Fab6), both emerging as key stock catalysts for Hua Hong.
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 slightly revise down revenue and margin estimates given moderate nearterm demand, resulting in 2026/27E EPS cuts of 7%/5%. Nevertheless, we expect the market to re-rate Hua Hong upon the advanced node potential catalyst. Accordingly, we raise our TP to HK$116.5 based on 4.0x P/B (prev. 3.2x) as we now directly benchmark it to SMIC’s valuation multiple. Maintain BUY.