Buying spree is ready 

  • Reiterate Buy Entry – 41 Target – 48 Stop Loss – 37.5
  • Hua Hong Semiconductor Ltd is an investment holding company engaged in production and sales of semiconductor wafers. The company produces 200mm and 300mm-wafers. Its products are applied in general microcontroller (MCU), Type-C interface chips, image stabilization chips, touch control chips, and smart meter controller chips. The products also serve the Internet of Things (IoT), new energy vehicles, artificial intelligence and other markets.
  • Previously, the company announced a good set of 1Q21 results. Revenue reached an all-time high of US$304.8mn with a 50.3% YoY growth and 8.8% QoQ growth. GPM was 23.7%, 2.6ppts above 1Q20 but 2.1ppts below 4Q20. Net profit attributable to shareholders of the parent company grew by 63% YoY but dropped by 24.1% QoQ to US$33.1mn. Management guided revenue in 2Q21 to be US$335mn, and GPM to be in the range of 23% to 25%. 
  • The temporary downturn of the semiconductor sector due to the chip shortage is about to end, in our view. The PHLX Semiconductor Sector ETF (SOXX US) has bottomed out since mid-May, implying that the market has factored in the headwinds and started to look forward to improvements in 2H21. The positive sentiment is expected to eventually make its way to Hong Kong related counters. 
  • Consensus estimates peg the 12-month target price at HK$50.83, implying a 26% upside potential. EPS is forecasted to grow at 62%/23%/20% for FY2021/22/23F, which would bring forward P/Es down to 45x/36x/30x FY2021/22/23F.
1347 HK (Source: Bloomberg)