- BUY Entry – 32.0 Target – 37.5 Stop Loss – 29.5
- 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 Internet of Things (IoT), new energy vehicles, artificial intelligence and other markets. The Company operates its businesses through its subsidiaries.
- Another record high quarter in 4Q21. Revenue hit an all-time high of US$528.3 million, up 88.6% YoY and 17.0% QoQ. Gross margin was 29.3%, up 3.5 ppts YoY and 2.2 ppts QoQ. Net profit attributable to shareholders of the parent company was US$84.1 million, up 92.9% YoY and 65.6%. 1Q22 guidance remains upbeat. Revenue is expected to be approximately US$560 million. Gross margin is expected to be in the range of 28% to 29%.
- Most bearish sentiment has been released. Since the Russian invasion started on 24th February, the Hong Kong market had been selling off, and the panic selling happened early this week. However, the retaliatory rebound started after China’s authority vowed support for economic growth and capital markets. Meanwhile, the Fed rate hike decision, balance reduction and economic growth projection aligned with market expectations. Lastly, the peace talks between Russia and Ukraine saw positive progress. After the sharp fall in the market along with heavy short selling, short- covering and potential squeeze will ensue. After all, valuations are the anchors of the prices.
- Prolonged chip shortage. Sanctions on Russia and China’s current lockdown will deter the normalisation of the supply chain. And the shortage of chips has been proved to be a benefit for semiconductors during the 2-year COVID pandemic, as elevated selling prices translate to higher profit margins. Therefore, Huahong will continue to ride on the tailwinds.
- Updated market consensus of the EPS growth in FY22/23 is 41.9%/6.8% YoY respectively, which translates to18.6x/17.2x forward PE. Current PER is 26.4x. Bloomberg consensus average 12-month target price is HK$51.55.