December 8, 2025 08:00 PM GMT TSMC | Asia Pacific Our thoughts on the China AI GPU foundry opportunity; keep OW The China AI GPU foundry opportunity, if any, would present upside to our TSMC forecasts. But we do not plan to put into our base case forecasts until US and China policy both confirm this business development. Reiterate TSMC as Top Pick. What's new? After our recent Asia field trip, investors are asking two questions about TSMC's opportunity to serve China's AI accelerators market: 1) Is recent n ...

Summary of Hua Hong Semiconductor Ltd Conference Call Company Overview - **Company**: Hua Hong Semiconductor Ltd (1347.HK) - **Industry**: Technology Semiconductors - **Region**: Greater China Key Financial Metrics - **Current Stock Price**: HK$80.10 (as of November 6, 2025) [4] - **Price Target**: HK$60.00 [4] - **EPS Forecasts**: - 2025: US$0.05 (down from US$0.06) - 2026: US$0.22 (unchanged) - 2027: US$0.26 (unchanged) [2][4] Investment Thesis - **Rating**: Underweight (UW) [4] - **Rationale**: - EPS forecasts have been lowered due to fluctuations in tax expenses and minority interests [2] - Price target remains unchanged despite the adjustments in EPS [2] Market Dynamics - **Utilization Rate**: Expected to remain over 100% for the 8-inch business, indicating strong demand [12] - **ASP Trends**: Anticipated strong rebound in average selling prices (ASP) [12] - **Capacity Expansion**: - 12-inch capacity business expected to ramp up sooner than previously anticipated, which could enhance gross margins [12] - New 12-inch fab (Fab 9) in Wuxi is starting to ramp up capacity in 2025, but depreciation may increase rapidly, potentially harming gross margins [14] Risks and Challenges - **Valuation Concerns**: Current valuation at 2.7x 2026 estimated book value per share (BVPS) is considered high compared to historical ranges of 0.5-3.2x [15] - **Competitive Landscape**: Other Chinese players are aggressively building 8-inch capacity, which may impact market share [24] - **Customer Dynamics**: Domestic customers are gaining share from overseas vendors, but there is uncertainty regarding the outsourcing of orders to Hua Hong [12][24] Earnings Drivers - **Wafer Shipments**: - 2025: 5,258k (up from 4,629k in 2024) - 2026: 6,973k [20] - **Revenue Exposure**: - 60-70% from Mainland China - 10-20% from North America [21] Consensus and Market Sentiment - **Consensus Rating Distribution**: - 54% Overweight - 29% Equal-weight - 17% Underweight [17] - **Price Target Distribution**: Ranges from HK$22.53 to HK$118.96 [9] Conclusion - Hua Hong Semiconductor Ltd is facing a mixed outlook with strong demand in certain segments but significant risks related to valuation, competition, and operational challenges. The company remains underweight in the investment thesis, with a cautious approach recommended for potential investors.

Summary of Hua Hong Semiconductor Ltd Conference Call Company Overview - **Company**: Hua Hong Semiconductor Ltd - **Industry**: Semiconductors - **Market Cap**: US$9,802 million - **Stock Rating**: Equal-weight (EW) - **Price Target**: HK$34.00 - **Current Price**: HK$44.78 - **52-Week Range**: HK$45.60 - HK$14.88 - **Average Daily Trading Value**: HK$926 million Key Financial Highlights - **2Q25 Revenue**: US$566 million, up 5% Q/Q and 18% Y/Y, in line with expectations [2] - **Gross Margin**: 10.9%, up 1.7 percentage points Q/Q, exceeding guidance of 7-9% due to a strong utilization rate (UTR) of 108% [2][10] - **3Q25 Revenue Guidance**: Expected to be between US$620-640 million, representing a 10-13% increase Q/Q, with a gross margin of 10-12% [3] - **Revenue Mix**: 12-inch wafers accounted for 59% of revenue in Q2, driven by the ramp-up of Fab 9 [3] Pricing and Market Dynamics - **Price Hike**: The company has started raising prices for 12-inch wafers, which is expected to contribute significantly to revenue and gross margin in Q3 and Q4 [3] - **Depreciation Concerns**: Rising depreciation burden may slow margin recovery, despite positive pricing actions for mature node foundries [5] - **Tariff Impact**: North America accounted for 9.4% of total revenue in 2Q25; management believes the tariff impact is manageable due to clients having businesses outside the US [4] Investment Outlook - **Valuation**: The company is trading at 1.5x the estimated 2025 book value per share (BVPS), which is considered fair compared to its historical range of 0.5-3.2x since 2014 [5] - **Utilization Rate**: High UTR (>100%) is a positive indicator for future performance [5] Risks and Considerations - **Upside Risks**: - Higher than expected fab utilization and wafer average selling price (ASP) [13] - Faster market share gain from local customers [13] - Accelerated penetration of electric vehicles [13] - **Downside Risks**: - Potential failure to implement price hikes [13] - Aggressive capacity expansion by other Chinese players in the 8-inch segment [13] - Slow scaling or customer acquisition challenges at the Wuxi fab [13] Conclusion Hua Hong Semiconductor Ltd shows strong revenue growth and margin improvement driven by strategic pricing actions and high utilization rates. However, concerns regarding rising depreciation and potential pricing pressures in the 8-inch wafer market warrant caution. The stock is currently viewed as fairly valued, with a balanced outlook considering both upside and downside risks.

Investment Rating - The report downgrades the investment rating for Hua Hong Semiconductor Ltd from Overweight to Equal-weight [1][6][27] Core Insights - The rising depreciation burden and intense pricing competition in the 8-inch wafer market are expected to lead to gross margin erosion in 2025 and 2026, indicating that the stock appears fairly valued [1][6][38] - The company guided for 2Q25 revenue of US$550-570 million, with a gross margin forecast of 7-9%, reflecting a decline due to increased depreciation costs and the ramp-up of the new 12-inch fab [3][13] - The pricing environment for 8-inch wafers remains soft, which is likely to hinder gross margin recovery for Hua Hong [4][38] Summary by Sections Financial Performance - 1Q25 revenue was US$541 million, showing a 0.3% increase quarter-over-quarter but an 18% decrease year-over-year, with a gross margin of 9.2%, down 2.2 percentage points from the previous quarter [2][11] - The company reported a net income of US$4 million in 1Q25, a significant decline compared to the previous year [11] Guidance and Projections - For 2Q25, the company expects revenue to be between US$550-570 million, with a gross margin of 7-9%, indicating a continued decline in profitability [3][13] - The report revises the 2025 EPS estimate down by 14% but raises the 2026 and 2027 EPS forecasts by 5% and 6%, respectively, due to anticipated capacity and shipment growth trends [23][24] Market Dynamics - The report highlights that the 12-inch wafer demand remains strong, which may gradually drive up prices, while the 8-inch wafer market faces pricing pressure due to increased competition [4][38] - The acquisition of HLMC is noted, with plans for integration by 2026, focusing on overlapping mature-node business [5][38] Valuation - The price target for Hua Hong is raised to HK$34.00 from HK$32.00, reflecting changes in the EPS estimates for 2025-2027 [25][27] - The stock is currently trading at 1.2 times the estimated book value per share for 2025, which is considered fair compared to historical averages [27][39]