HUA HONG SEMICONDUCTOR LTD(1347.HK)4Q25 RESULTS：RE-RATING UNDERWAY ON ADVANCED NODE POTENTIAL

Core Viewpoint - Hua Hong reported mixed results for 4Q25, with revenue slightly exceeding guidance but net income falling short due to increased R&D labor costs. Management provided a cautious outlook for 1Q26, expecting revenue to decline slightly while gross profit margin (GPM) improves due to demand in AI and localization [1][2][3]. Group 1: 4Q25 Results - Revenue grew 22% year-over-year and 4% quarter-over-quarter to a historical high, driven by a 3% increase in wafer shipments, particularly in MCU and PMIC segments [2]. - GPM narrowed by 0.6 percentage points quarter-over-quarter to 13%, aligning with prior guidance [2]. - Net income was recorded at US$17 million, missing estimates by 53-54%, primarily due to elevated R&D labor costs, although partially offset by foreign exchange gains and government subsidies [2]. Group 2: 1Q26 Guidance - Management guided for 1Q26 revenue of US$650-660 million, representing a 1% decline quarter-over-quarter at the midpoint and 6% below consensus [3]. - GPM is expected to be between 13% and 15%, reflecting a 1 percentage point improvement quarter-over-quarter and above consensus expectations [3]. - Factors contributing to revenue include price increases in PMIC, MCU, and discrete devices for AI applications, alongside strong domestic demand in China, though offset by depreciation in new fabs and weak consumer electronics demand [3]. Group 3: 2026 Outlook - The company is expected to benefit from increased exposure to auto, industrial, communication, and computing sectors, projected to account for approximately 36% of revenue in 2025 [4]. - Initiatives focused on China-for-China and demand for AI-related products are anticipated to mitigate the impact of declining consumer electronics demand [4]. - Potential catalysts for stock performance include the completion of the HLMC (Fab5) injection in 2H26 and ongoing developments in domestic GPUs at HLIC (Fab6) [4]. Group 4: Valuation - Revenue and margin estimates have been slightly revised downward due to moderate near-term demand, leading to EPS cuts of 7% for 2026 and 5% for 2027 [5]. - Despite this, the market is expected to re-rate Hua Hong based on advanced node potential, prompting an increase in target price to HK$116.5, based on a 4.0x price-to-book ratio [5].