华虹半导体晶圆出货量及平均售价改善但估值偏高，维持跑弱评级

valuation remains stretched, reiterate U/PReiterateRating:UNDERPERFORM|PO:69.00HKDIPrice:147.20HKD Operating profit turns positive after losses since 4Q23 the high end of its guided range (US$690Omn-70Omn) and our forecast of USs694mn.Gross margin expanded from 13% in 1Q to 16.5% in 2Q (vs guidance of 14-16%).0P margin turned positiveat 1.5%after prolonged operating losses since4Q23.NetprofitattributabletoshareholderswasUS$39mn(+85%QoQ/+386%YoY),whileEPSwasUs$0.022,vsourestimateofUS$0.021Maturenodechipdemandsolidin2QbackedbyAi/auto Key Changes - demand was strong across most chip products, i.e. NOR flash, MOSFET, general logic, power management, etc,driven by Al and automotive applications.Wenow assumenear-full utilization of the company's capacity in 2H26/2027 (both 8" and 12"), reflectingmanagement's optimistic view that the demand uptrend could sustain through 2027.Thecompany'swaferASProse3%QoQ in2QASP recovering but valuation stretched, reiterate U/P +85235087310dai.shen@bofa.comSimon Woo, CFA >>Research AnalystMerill Lynch (Seoul) Hua Hong guides 3Q26 revenue to USs770mn-780mn (mid-point +8%QoQ) with grossmargin of 16-18%.As management noted, wafer shipment and ASP increase should simon.woo@bofa.com contribute 40%/60% to sequential sales growth.That said,we estimate wafer ASP toincrease by c.5% QoQ in 3Q. This is broadly in line with the pricing outlook of otherAsian mature-node foundries (Exhibit 9), but slightly below our previous forecast of ahigh-single digit percentage increase. We expect the mild price recovery trend to lastthrough2027 (2026/27 ASP +7% p.a.).However,given the rising depreciation costsubstantial improvement in the company's margins/profitability in 2027-GPM 20%+/-;OPM 6-7%; ROE 4-5% assumed, but it is too low to justify the more than 4x P/Bvaluation. We adjust PO for Hua Hong to CNY69, still based on2x historical upcycle levelP/B, but roll forward valuation base from 2026 to 2027, reiterate Underperform. >> Employed by a non-US affiliate of BofAS and is not registered/qualified as a research analystunder the FINRA rules.Refer to 'Other Important Disclosures'for information on certain BofA Securities entities that take responsibility for the information herein in particular jurisdictions. BofA Securities does and seeks to do business with issuers covered in its researchreports. As a result, investors should be aware that the firm may have a conflict ofinterest that could affect the objectivity of this report. Investors should considerthisreport as only a single factor in making their investment decision.Refer to important disclosures on page 13to15.Analyst Certification onpage10.PriceObjective Basis/Risk onpage 10. iQprofile " Huaa HongKey Income Statement Data (Dec)2024A2025A 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 Price to Book Value4.4x Exhibit 1: Hua Hong - Quarterly sales by wafer size and YoY increase and cost reduction60% Source: Company, BofA Global Research Exhibit 6: Hua Hong Semi-P/B band (forward 12-month)Hua Hong current share price implying 4.3x P/B vs historical range mostly c.US$1.5bn capex per year expected for 2026-28, mainly for Fab9Bconstruction 0.5-2x BofA GLOBAL RESEARCH 2Q26 sales/GPM beyond expectation driven by ASP improvement and wafer shipment growth; further sales/GM improvement guided for3Q26 (US$770-780mn/16-18%); we assume slightly higher 2026/27 sales and margin given the higher demand visibility but EPS revision minimal due to higher interest expenseand taxCNYmn1Q262Q263Q26E4Q26E1Q27E2Q27E3Q27E4Q27E2023202420252026E2027E2028E We are already more optimistic on Hua Hong's GPM outlook than consensus, reflecting the company's ASP increase potential; consensus also cautious on thecompany's overall profit generation in 2026-27 (US$mn, %)2Q263Q26E4Q26E1Q27E2026E2027E Exhibit 9: Mature node foundry companies' comments on 3Q26 pricingIndustry pricing momentum continued to strengthen in 3Q26, with foundries broadly reporting ASP increases and persistent supply tightness, driven by Al Exhibit 13: Hua Hong Semi -Cashflow statement RatingPriceMcapP/EP/BEV/EBITDA Hua Hong Grace (HHUSF) Our PO of HKS69 is based on 2x 2027E BVPS of USS4.4. The target P/B is H-share. 2x P/B is higher than the company's historical average of 1.2x as we expect thecompany can still improving profitability in 2026-27 and the semiconductor chipmanufacturing localization demand is still rising in China. Huali Microelectronics at discount, and 3) stronger government supports (su