25 August 2025 | 11:01AM HKT Hua Hong (1347.HK): Capacity expansion and ASP recovery on strong UT rates; 28nm as potential next driver; Neutral We are positive on Hua Hong's long-term potential, driven by the increasing local-for-local demand in China, the strong UT rate along with growing capacities, and its planned future migration from 40nm to 28nm. We expect the near-term drivers, including its continuous capacity expansion plans and ASP recovery supported by strong UT rates, to support the company's sh ...

Financial Data and Key Metrics Changes - GF reported second quarter revenue of $1,688 million, a 6% increase quarter-over-quarter and a 3% increase year-over-year [32] - Adjusted free cash flow for the quarter was $277 million, representing a margin of over 16% [37] - Gross profit was $425 million, translating to a gross margin of approximately 25.2% [35] - Net income for the second quarter was $234 million, an increase of approximately $23 million from the previous year [36] Business Line Data and Key Metrics Changes - Automotive revenue grew over 36% year-over-year, comprising nearly 22% of total revenue [19][34] - Smart mobile devices represented approximately 40% of total revenue, with a year-over-year decline of about 10% [34] - Communications infrastructure and data center revenue increased approximately 11% year-over-year, representing about 10% of total revenue [34] Market Data and Key Metrics Changes - Automotive and communications infrastructure and data center markets demonstrated double-digit percentage year-over-year revenue growth for the third consecutive quarter [7][28] - Smart mobile devices and home and industrial IoT markets experienced slower recovery due to geopolitical uncertainties impacting consumer demand [8][22] - The IoT market saw revenue growth year-over-year for the second consecutive quarter, with design wins in Wi-Fi and Bluetooth technologies [25][27] Company Strategy and Development Direction - GF is focusing on geographic diversification to mitigate risks associated with global trade tensions and tariffs [11][12] - The company is enhancing its manufacturing capacity in the U.S. and Europe to support domestic supply and meet customer demand [12][13] - GF announced the acquisition of MIPS to strengthen its capabilities in AI and processor IP, which is expected to enhance customer collaboration and customization [15][16] Management's Comments on Operating Environment and Future Outlook - Management noted that some customers took on additional inventory in anticipation of tariff impacts, which may affect demand in the second half of the year [11] - The company remains optimistic about growth in high-margin end markets, particularly automotive and communications infrastructure [46] - Management expects to generate over $1 billion in adjusted free cash flow for 2025, despite market uncertainties [41] Other Important Information - The company is actively managing supply chain cost impacts associated with tariff uncertainties, estimating limited impacts of around $20 million for 2025 [38] - GF's diversified product portfolio and focus on critical performance and connectivity are driving market share gains [10][14] Q&A Session Summary Question: What types of headwinds are being seen for Q3? - Management expects solid growth in automotive and communications infrastructure but anticipates declines in smart mobile and IoT due to inventory management [45][46] Question: Can you elaborate on the China for China strategy? - The strategy focuses on localizing manufacturing for automotive applications, with significant interest from both international and Chinese customers [48][51] Question: What were utilizations in Q2 and outlook for the second half? - Utilization was in the low 80s in Q2, with expectations to progress further into the low to mid-80s in the second half [56][57] Question: Can you comment on inventory levels at customers? - Inventory levels have been normalizing, with some customers indicating potential tightness that could lead to demand spikes [66][70] Question: What is the strategic importance of the MIPS acquisition? - The acquisition is expected to add $50 million to $100 million in top-line revenue and enhance GF's differentiation in the AI space [71][76]

Investment Rating - The investment rating for SMIC is maintained as "Buy" [7][8][11] Core Views - SMIC's 1Q25 revenue reached US$2.2 billion, reflecting a 28% year-over-year increase and a 2% quarter-over-quarter increase, aligning closely with consensus expectations [1][2] - The gross margin for 1Q25 was reported at 22.5%, exceeding both management guidance and market expectations, attributed to improved utilization rates [1][2] - The company is expected to continue significant capital expenditures to expand capacity in response to increasing demand from local clients [1][7] Summary by Sections Financial Performance - 1Q25 revenue was US$2,247 million, a 28% increase year-over-year and a 2% increase quarter-over-quarter [6] - Gross profit was US$506 million, with a gross margin of 22.5%, significantly higher than the previous year's 13.7% [6] - Operating income was US$310 million, representing a 12777% increase year-over-year [6] - Net income for 1Q25 was US$188 million, a 162% increase year-over-year [6] Capacity and Utilization - SMIC's capacity increased to 973k wpm (8-inch equivalent) in 1Q25, up from 948k wpm in 4Q24 [2][6] - Utilization rates improved from 85.5% in 4Q24 to 89.6% in 1Q25 [2][6] Future Guidance - For 2Q25, SMIC expects revenues to decrease by 4% to 6% quarter-over-quarter, while still projecting a year-over-year growth of 11% to 13% [6][7] - The gross margin for 2Q25 is guided to be between 18% and 20% [7] Investment Thesis - SMIC is positioned as the largest foundry in China, covering a wide range of technology nodes and applications, with a positive long-term growth outlook driven by local demand [7][8] - The shares are considered attractively valued, trading below historical average P/E ratios, with expectations of gradual margin recovery [7][8]

Financial Data and Key Metrics Changes - First quarter revenue was $1,585 million, representing a 13% decrease sequentially but a 2% increase year over year [25] - Gross profit for the first quarter was $379 million, translating to a gross margin of approximately 23.9% [28] - Net income for the first quarter was $189 million, an increase of $15 million from the previous year [29] - Adjusted free cash flow for the quarter was $165 million, representing a free cash margin of approximately 10% [8][30] Business Line Data and Key Metrics Changes - Automotive revenue represented approximately 19% of total revenue, decreasing 25% sequentially but increasing 16% year over year [27] - Smart mobile devices accounted for approximately 37% of total revenue, with a 21% sequential decrease and a 14% year-over-year decrease [26] - IoT revenue represented approximately 21% of total revenue, decreasing 8% sequentially but increasing 6% year over year [27] - Communications infrastructure and data center revenue increased approximately 2% sequentially and 45% year over year, representing 11% of total revenue [28] Market Data and Key Metrics Changes - The automotive market is expected to see meaningful year-over-year revenue growth in 2025 despite short-term unit sales challenges [15] - The IoT market returned to year-over-year growth in Q1, but uncertainty remains for the second half of the year due to tariffs [19] - The communications infrastructure and data center market is projected to grow in the high teens for 2025, driven by substantial investments in data centers [52] Company Strategy and Development Direction - The company is focused on generating free cash flow and maintaining operational excellence while navigating geopolitical tensions and trade uncertainties [9][10] - Investments exceeding $7 billion have been made in U.S., Germany, and Singapore facilities since 2021 to enhance manufacturing scale and technology diversity [10] - The company anticipates a serviceable addressable market growth of approximately 10% per annum through the end of the decade [11] Management's Comments on Operating Environment and Future Outlook - Management acknowledges ongoing trade and tariff disputes impacting the semiconductor supply chain and is closely monitoring the situation [9] - Despite uncertainties, the long-term demand for essential chip technologies remains strong, with a focus on security of supply for customers [11][35] - The company is well-positioned to grow at or faster than overall market growth rates due to its differentiated technologies and global footprint [11] Other Important Information - The company has a strong balance sheet with $4.7 billion in liquidity and declining leverage [13] - The second quarter revenue guidance is set at $1,675 million, with expectations for gross margin in the range of 25% [31] Q&A Session Summary Question: Impact of tariffs on revenue and manufacturing geography - Management has not seen significant short-term impacts from tariffs on orders but is closely monitoring the situation for potential medium-term effects [38] - The manufacturing footprint provides optionality for customers, with increased interest in U.S. content from various sectors [40][41] Question: ASP trends and gross margin maintenance - ASPs are expected to decline mid-single digits for the year, primarily due to product mix and underutilization payments [42][44] - Management remains confident in maintaining gross margins through better utilization and structural cost improvements [45] Question: Growth expectations in communications infrastructure and data center - High teens growth is expected for the communications infrastructure and data center market in 2025, driven by increased data center investments [52] Question: Outlook for automotive and smart mobile devices - Automotive is expected to continue growing, while smart mobile devices are projected to remain flattish due to inventory adjustments [60][63]