20150622-大华继显-An_Undervalued_Foundry_Player_14页_407kb

Summary of Hua Hong Semiconductor (1347 HK) Analysis

Core Content

Hua Hong Semiconductor is a leading 200mm wafer foundry company in China, known for its focus on specialty semiconductor applications. The company is positioned to benefit from growing demand in smart cards, energy-efficient products, and the Internet of Things (IoT). It is currently the second-largest pure-play 200mm foundry in the world and the second-largest in China. With a strong presence in key markets, Hua Hong is expected to see continued revenue growth due to favorable government policies and technological advancements in the Chinese semiconductor industry.

Main Points

• Market Position:

  • Hua Hong was the world's second-largest pure-play 200mm foundry in 2013.
  • It holds a 1.4% global market share and is the second-largest foundry in China.
  • The company is well-positioned to benefit from the growth of smart cards and IoT.

• Products and Applications:

  • eNVM: Used in smart cards, SIM cards, and consumer electronics.
  • Power Discrete Devices: Includes MOSFET, SJNFET, and IGBT chips for energy efficiency.
  • Analog & PM: Audio amplifiers, AC-DC converters, and LED lighting ICs.
  • Logic & RF: Memory card controllers and Bluetooth/Wi-Fi devices.
  • The company's products are used across consumer electronics, communications, computing, and industrial/automotive sectors.

• Revenue and Profitability:

  • In 2014, consumer electronics and communications accounted for nearly 80% of revenue.
  • Revenue grew by 12.5% yoy to US$166m in 1Q15, with a 22.3% yoy increase in net profit to US$24.8m.
  • The company's gross margin improved to 30.5% in 1Q15, and net margin reached 15.6%.
  • Management guided for capacity expansion to 146,000 and 164,000 wafers per month in 2015 and 2016 respectively.

• Government Support:

  • The State Council's "National Guidelines for Development and Promotion of the IC Industry" set a revenue CAGR of 20% for China's IC industry from 2014 to 2020.
  • The Ministry of Industry and Information Technology (MIIT) established a National Integrated Circuit Industry Investment Fund, which has already invested in SMIC.
  • The government is promoting the nationalisation of ICs for security reasons, which could benefit Hua Hong.

• Strategic Collaborations:

  • Hua Hong collaborates with companies like eMemory, iMQ Technology, and Lexvu to enhance its technological capabilities and expand into IoT and smart meter markets.
  • These partnerships help the company gain experience in developing products for various end-markets.

• Valuation:

  • Hua Hong is trading at 12.1x 2016F PE and 0.88x 2016F P/B.
  • It is valued at a 15% discount to SMIC's P/B due to its smaller size and less advanced technology.
  • The target price is HK$12.68, implying a 14.0% upside from the current share price of HK$11.12.

Key Information

• Share Price and Target: HK$11.12 (current), HK$12.68 (target), 14.0% upside.
• Market Cap: HK$11,476m or US$1,480m.
• Capacity Expansion: Expected to reach 146,000 wafers/month in 2015 and 164,000 wafers/month in 2016.
• End-Market Mix: Consumer electronics and communications are the main revenue drivers.
• Geographical Advantage: Hua Hong is the largest pure-play 8-inch foundry in China, which allows it to benefit from the local IC market growth.
• Technology Node: Hua Hong's most advanced is 90nm, while peers like SMIC and TSMC are developing more advanced nodes (28/22nm).
• Potential M&A: Hua Hong has a 17.72% stake in Huali, a 300mm foundry, and may acquire more shares if demand shifts.

Risks

• Breakdown in production facilities.
• Failure to meet expansion targets.
• Slower-than-expected nationalisation of ICs.
• Sudden advancement in technology that may reduce demand for 200mm wafers.

Investment Highlights

• High Demand in Key Segments: Smart cards, IoT, and energy-efficient products.
• Capacity Expansion: Expected to boost revenue and order intake.
• IPO Proceeds: Provide sufficient capital for expansion and reduce financing costs.
• Strategic Partnerships: Help Hua Hong improve its technology and expand into new markets.

Financial Performance (2013–2016)

Conclusion

Hua Hong Semiconductor is an undervalued foundry player with strong fundamentals and a favorable market position. It is well-positioned to benefit from the growth of the Chinese IC industry, particularly in the smart card and IoT markets. Despite its less advanced technology compared to peers like SMIC, the company's strategic collaborations, geographical advantage, and strong end-market demand support its growth prospects. The report recommends a BUY with a target price of HK$12.68.