Everbright Securities International released a research report stating that artificial intelligence and the memory cycle are driving downstream demand. It is forecast that HUA HONG SEMI (01347) will maintain a high utilization rate in 2026, with prices stable or rising slightly. However, accelerated capacity expansion still faces increasing depreciation pressure. The firm adjusted its net profit attributable to shareholders forecast for 2026-2027 to $142 million / $195 million (representing a -7% / +3% change from the previous forecast) and introduced a new 2028 forecast of $248 million, corresponding to year-on-year growth of +158% / +38% / +27%. The current stock price corresponds to 3.3x / 3.2x price-to-book (P/B) for 2026/2027. The report is optimistic that the trend towards self-sufficiency and localization will aid the company's market share growth, while process technology improvements and active capacity expansion support long-term revenue growth. The injection of high-quality assets such as HLMC Fab 5 is expected to further boost performance and valuation, leading to the maintenance of a "Buy" rating on HUA HONG SEMI.

The main points from Everbright Securities International are as follows:

Fourth-quarter 2025 performance was in line with company guidance. Revenue for 4Q25 reached $660 million, up 22.4% year-on-year and 3.9% quarter-on-quarter, near the upper end of the company's $650-$660 million guidance range. This was attributed to increased wafer shipments and higher average selling prices (ASP), though it slightly missed the market consensus of $666 million. By wafer size, 8-inch revenue was $253 million, up 0.2% year-on-year but down 2.3% quarter-on-quarter; 12-inch revenue was $407 million, surging 41.9% year-on-year and 8.1% quarter-on-quarter, accounting for 61.7% of total revenue, an increase of 8.5 percentage points year-on-year. The gross margin for 4Q25 was 13%, within the guided range of 12%-14%, improving 1.6 percentage points year-on-year but declining 0.5 percentage points quarter-on-quarter. The annual improvement was due to ASP growth and cost reduction efforts, while the quarterly dip was attributed to increased labor costs. Net profit attributable to shareholders for 4Q25 was $17.5 million, below the market expectation of $37.4 million.

For the full year 2025, revenue was $2.402 billion, an increase of 19.9% year-on-year, driven by higher wafer shipments. The gross margin was 11.8%, up 1.6 percentage points year-on-year, boosted by rising ASPs and cost optimization, partially offset by increased depreciation.

Strong demand in areas like BCD and memory is expected to sustain high growth, with a cautiously optimistic outlook for 2026 ASPs. 1) AI-driven demand: 4Q25 revenue from analog and power management grew 41% year-on-year, as AI data centers fuel demand for power management chips. The company anticipates BCD technology will maintain rapid growth. 2) Memory trends are more beneficial than detrimental: 4Q25 revenue from embedded non-volatile memory (NVM) grew 31% year-on-year, while standalone NVM revenue grew 23% year-on-year. Shortages in memory supply could lead to capacity constraints and demand spillover. Furthermore, the iteration of MCUs towards more advanced process technologies may present 'local for local' customer opportunities. 3) Pricing: Minor price increases were achieved in 2025. The company believes there is still room for price increases on 12-inch wafers in 2026, while the potential for 8-inch wafers is relatively limited, possibly leading to structural price adjustments.

Fab 9 capacity continues to be released, though the utilization rate saw a slight decline. The acquisition of HLMC Fab 5 is progressing orderly. The 4Q25 utilization rate was 103.8%, up 0.6 percentage points year-on-year but down 5.7 percentage points quarter-on-quarter. The quarterly decrease is attributed to timing differences between equipment installation, capacity, and orders during rapid expansion. The full-year 2025 utilization rate reached 106.1%, up 6.6 percentage points year-on-year. Wafer shipments continued to increase, with 4Q25 8-inch equivalent wafer shipments reaching 1.448 million, up 19.4% year-on-year and 3.4% quarter-on-quarter. Total capacity in 4Q25 reached 486,000 8-inch equivalent wafers per month, a 3.9% increase quarter-on-quarter.

Looking ahead: 1) Fab 9 will continue its capacity expansion, expected to enter the final stages in 2026, with company guidance indicating a year-on-year decrease in capital expenditure for 2026. 2) The acquisition of HLMC Fab 5, which has a capacity of 38,000 12-inch wafers per month, is progressing orderly. The report believes increasing wafer shipments in 2026 will continue to drive revenue growth.

First-quarter 2026 revenue guidance is steady, with gross margin guidance indicating sequential improvement. The company guided for 1Q26 revenue of $650-$660 million, with the midpoint representing year-on-year growth of 21.1% and a slight quarter-on-quarter decrease of 0.7%, below the market consensus of $695 million. The gross margin guidance is 13%-15%, with the midpoint representing a year-on-year increase of 4.8 percentage points and a quarter-on-quarter increase of 1 percentage point, exceeding the market expectation of 13.2%.

Everbright Securities International judges that: 1) The company will dynamically adjust and balance factors such as capacity expansion, pricing, utilization rate, and profitability. Considering the AI wave and the major memory cycle, strong demand in certain downstream segments, coupled with securing overseas customer orders through the 'local for local' strategy, supports the expectation of maintaining a high utilization rate in 2026. With Fab 9's continued capacity ramp-up, wafer shipments are expected to drive sustained rapid revenue growth in 2026. 2) Profitability is continuing to recover. The report anticipates stable price increases going forward. Although Fab 9 brings increased depreciation pressure, the effects of price hikes and economies of scale from capacity are expected to provide a hedge, supplemented by the company's active cost control measures, supporting a continued recovery in profitability.

Risk warnings include geopolitical risks, a downturn in the semiconductor cycle, intensifying industry competition, and delays in technology iteration.