华虹半导体：2026年ASP温和复苏指引；利润仍微薄：重申跑输大市

profit still lean: reiterate UnderperformReiterateRating:UNDERPERFORM/PO:63.00HKDIPrice:127.00HKD 1Q26 sales/GPM flattish QoQ end of the guided range (US$650-660mn). Gross margin was 13% (vs the guided rangeof 13-15%)-no meaningful improvement from13% in 4Q25.The operating loss margin narrowed from -7% in 4Q25 to -3% in 1Q26. The net profit for shareholders wasUS$21mn.In1Q26,EPSwasUS$0.012,vsUS$0.002/US$0.01in1Q/4Q25.L-T goals in advanced packaging, photonics, power semis...We acknowledge Hua Hong's efforts in exploring long-term business opportunities. KeyChanges Management confirmed its plans of:1)establishing an advanced packaging affiliate under Hua Hong Group; 2) exploring silicon photonics chip manufacturing technologies;3) expanding into compound semiconductor (GaN/SiC) foundry services.It alsoreaffirmed the target to fully load Fab9B with 55k wpm 12" capacity by 2028 (no issuewith equipment procurement for now)....butS-Tprofitabilitystilltooweak;reiterateU/P +852 3508 7310dai.shen@bofa.comSimon Woo, CFA >>Research AnalystMerrill Lynch (Seoul) Hua Hong's blended waferASP in 1Q26 was flat QoQ.The2Q26guidance (salesUSs690-700mn, up4~6% QoQ,GPM 14-16%)should be mainly supported by mid/low- single-digit% ASP increase (mainly by 8" wafers).Management also guided that its 2026ASP increase will be 10-15%YoY-slightlybetter than our previous estimate of 8%butnot supporting a substantial profit improvement in our view.We now expect Hua Hongto deliver 18-19% GPM in 2H26 (vs previously c.17%), while its OP margin/ROE willremain in the 4-5% range through 2H26/2027E, which is too low compared with itsalready rich valuation (near-4x 2026/27E P/B).We adjust our PO for Hua Hong to HK$63,whichis still basedon2x2026/27EBVPSof USs4.0andwe reiterateour Underperformrating.Estimates (Dec) (USS)2024A2025A2026E2027E2028E simon.woo@bofa.com Price >> Employed by a non-US affiliate of BofAS and is not registered/qualified as a research analystunder the FINRA rulesRefer to'Other Important Disclosures'for information on certain BofA Securities entities that takeresponsibility for the information herein in particular jurisdictions.BofASecuritiesdoesandseekstodobusinesswithissuerscoveredinitsresearchreports.Asa result,investorsshouldbeawarethat thefirm mayhaveaconflict ofinterest that could affect the objectivity of this report. Investors should consider thisreport as only a single factor in making their investment decision.Refer to important disclosures on page 12 to 14. Analyst Certification on page 9. PriceObjective Basis/Risk on page 9. iQprofile " Huaa HongSemiKey Income Statement Data (Dec)2024A Semiconductors Hua Hong Semiconductor is a pure foundry mainly engaged in 200mm and 300mm wafer processing. Different tosome of its foundry peers, the company primarily focuseson manufacturing the semiconductors for specialtyapplications, such as embedded non-volatile memory(eNVM) and power discrete. Our Underperform rating for Hua Hong Semi is based on 1) cautious view on the semiconductor demand in China in2026, 2) limited upside for the company's profitabilityimprovement, and 3) already rich valuation. Stock Data 4.1x Exhibit 1: Hua Hong Semi - Quarterly sales by wafer size and YoY 1Q26 sales US$661mn (0% QoQ/+22% YoY), both shipment and ASP flat QoQ1,200120% backed by 8" ASP increase and better 12"loading%09 Exhibit 6: Hua Hong Semi- P/B band (forward 12-month)Hua Hong current share price already implying above 4x P/B vs historical range mostly 0.5-2x c.US$20bn capex per year expected for 2026/27, mainly for Fab9Bconstruction 1Q26 sales/GPM largely in-line with previous guidance; mild sales/GM improvement guided for 2Q26 (US$690-700mn/14-16%); we revise up 2026/27 grosSmargin given the slightly better ASP guidance (10-15% YoY vs our previous estimate of 8% YoY) We estimate more meaningful margin improvement in 2H26; our margin forecast for 2H26 already higher than consensus estimate,likely because of higher Even if operating profit breakeven likely to happen in 2H26, overall profit generation in 2026/27 still low, 2027 OP margin only 5% RatingPriceMcapP/EP/BEV/EBITDA Hua Hong Semi (HHUSF) Our PO of HK$63 is based on 2x 2026E BVPS of US$4.0. The target P/B is benchmarking China A-share foundry/OSAT stocks' average valuation of 3x P/B (2026E)but discounted due to Hua Hong Semi's 40-60% A-share price premium over its H-share.2x P/B is higher than the company's historical average of 1.2x as we expect the companylocalization demand is still rising in China. Huali Microelectronics at discount, and 3) stronger government supports (subsidies,policies supporting semis localization, push for industry consolidation, etc). peers such as SMiC, Nexchip, United Nova, etc., 2) softer-than-expected end-demand onmacro/trade issues, 3) being cut-off from accessing key equipment and materials. AnalystCertificationWe, Dai Shen and Simon Woo, CFA, hereby certify that the views each of us has expressed in this resea