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DBS: Hua Hong Semiconductor Ltd – Buy Target Price HK$53.00

<News Alert> A-share listing application on STAR board accepted by Shanghai Stock Exchange

What’s New

– Hua Hong (1347 HK) announced that its listing application on the STAR board has been accepted by Shanghai Stock Exchange after market closed last Friday and is now in progress.

– The proposed initial offering size is 4.33bn shares, accounting for c.25% of total shares outstanding.

– The expected amount of funds raised is Rmb 18.0bn.

– The FY22F PB of the A-share would be c. 3.4x premised on the proposed offer price, much higher than that 1.0x of the H-share currently. 

– The proceeds will be used to fund 12-inch capacity expansion at the Hua Hong Wu Xi fab and upgrade of the 8-inch Fabs.

– Rmb 12.5bn of the proceeds will be to establish a 12-inch production line with capacity of 83K wafers/month, which is expected to double its 12-inch capacity in 2025.

– The terms of the offering, including the final size and price range and the timetable of the proposed listing have not been disclosed.

– Hua Hong had applied to list on the SSE STAR board in July 2022. 

Our View:

– We expect share price to be supported as the valuation for the A-share is higher than the H-share currently. 

– The proposed listing is expected to unlock the value of Hua Hong.

– The potential 12-inch capacity expansion stated in the prospectus is expected to drive the foundry business’s growth in the coming three years.  

– We maintain our BUY rating with TP at HK$53.0 on its robust capacity expansion plan.

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