Recovery Signs: Hua Hong Semiconducto逆势大涨

Capacity utilization, wafer shipments, and gross margin have all improved. Among the five major specialty process platforms of Hua Hong Semiconductor, except for the embedded non-volatile memory wafer foundry business which has not shown a significant recovery, other main foundry products' downstream markets have shown signs of bottoming out or recovering.

Hua Hong Semiconductor has recently disclosed two important financial reports. In 2023, its operating income was 16.232 billion yuan, a year-on-year decrease of 3.30%, and the net profit attributable to shareholders of the listed company was 1.936 billion yuan, a year-on-year decrease of 35.64%. In the first quarter of 2024, Hua Hong's operating income was 3.297 billion yuan, a year-on-year decrease of 24.62%, and the net profit attributable to shareholders of the listed company was 0.322 billion yuan, a year-on-year decrease of 78.76%.

From the data, affected by the temporary downturn in the semiconductor market, as an important production link in the upstream of the semiconductor industry chain, Hua Hong Semiconductor's performance inevitably declined. However, after the performance was disclosed, the company's stock price not only did not fall but also rose against the trend. Up to now, Hua Hong's Hong Kong stock price has risen from 14.06 yuan per share at the beginning of April to a maximum of 24.45 yuan, outperforming the market and the chip industry index.

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The reason is that in the first quarter of 2024, although Hua Hong Semiconductor's performance declined year-on-year, there were signs of improvement. Compared with the fourth quarter of 2023, the company's capacity utilization, wafer shipments, and gross margin all improved. More importantly, except for the embedded non-volatile memory wafer foundry business which has not shown a significant recovery, other main foundry products' downstream markets have shown signs of bottoming out or recovering.

Quantity precedes price, recovery signal

In addition to the increase in fixed asset depreciation caused by the increase in capacity, the decline in the average foundry price per wafer is the main reason for the decline in Hua Hong Semiconductor's performance. According to the financial report data, from the first to the fourth quarter of 2023, the company's 8-inch wafer average foundry price was 630.21 US dollars, 587.88 US dollars, 527.88 US dollars, and 478.82 US dollars, respectively, a year-on-year decrease of 1.9%, 15.95%, 24.62%, and 9.29%.

From the data, Hua Hong Semiconductor's wafer foundry price showed a sign of accelerated decline in the second quarter of 2023, and then its price fell rapidly. Reflected in the gross margin level, the company's gross margin decreased from 32.05% in the first quarter of 2023 to 4.00% at the end of the year.

In the first quarter of 2024, Hua Hong's wafer foundry price further decreased to 448.33 US dollars, a year-on-year increase of -28.86%. It should be pointed out that due to the improvement in the revenue structure, compared with the previous quarter, Hua Hong's gross margin marginally improved, and its value increased from 4% to 6.44%. Moreover, looking forward to the second quarter of 2024, the management estimates that the company's gross margin will further recover.

In addition, Morgan Stanley also raised the target price of Hua Hong Semiconductor and stated externally that with the improvement of Hua Hong's wafer factory capacity utilization, coupled with the increase in wafer prices and the improvement of product mix, it is expected that Hua Hong's gross margin will increase from 6.4% to 17.1% between the second half of 2023 and the first half of 2025.

From a qualitative analysis perspective, both Hua Hong Semiconductor's management and Morgan Stanley are optimistic about the company's future performance. If starting from a quantitative perspective, can we find data to support the above judgment?For the manufacturing industry, at the end of a downcycle, changes in shipment volume are an important "leading indicator" to judge whether a company's performance will improve, which is colloquially referred to as "volume precedes price". According to financial report data, in the first quarter of 2024, Hua Hong Semiconductor's wafer foundry shipments reached 1.026 million pieces, a year-on-year increase of 2.5% and a sequential increase of 7.89%, showing growth both year-on-year and quarter-on-quarter.

At the same time, Hua Hong's capacity utilization rate has also begun to rise. In the last four quarters, the capacity utilization rates were 102.7%, 86.8%, 84.1%, and 91.7% respectively. From the data, it can be seen that Hua Hong's capacity utilization rate started to rebound in the first quarter of 2024. Coupled with the changes in shipment volume and gross margin, the company's worst times are behind it.

More importantly, several mainstream institutions in the global industry are optimistic about the semiconductor market in 2024. According to a research report by Tianfeng Securities, WSTS stated that due to the widespread adoption of generative AI, which has driven a surge in demand for related semiconductor products, global semiconductor sales will grow by 13.1% in 2024. IDC is more optimistic than WSTS, believing that global semiconductor sales will reach $632.8 billion in 2024, a year-on-year increase of 20.2%. In addition, Gartner also believes that global semiconductor sales will welcome a growth trend in 2024, with an increase of 16.8%, amounting to $632.8 billion.

The bottom of power semiconductors is emerging.

Wafer manufacturing processes can generally be divided into advanced logic processes and specialty processes. Advanced logic processes develop along Moore's Law, focusing on continuously reducing the width of crystal lines, mainly pursuing high computational speed of products; specialty processes do not completely pursue the miniaturization of devices, but maximize the physical characteristics of different devices to enhance product performance and reliability by continuously optimizing device structures and manufacturing processes.

Hua Hong Semiconductor belongs to the latter category, mainly providing customers with a diversified specialty process platform for wafer foundry and supporting services, including power devices, embedded non-volatile memory, analog and power management, logic and RF, and standalone non-volatile memory.

Among them, the wafer foundry of the first four types of product platforms is the main source of the company's revenue. Taking the data of 2023 as an example, their respective proportions of the current period's operating income are 39.5%, 30.69%, 15.68%, and 8.88%.

As the part with the highest revenue proportion, Hua Hong Semiconductor's power device foundry products mainly include low-voltage MOSFET, super junction MOSFET, IGBT, etc. Among them, the application fields of low-voltage MOSFET are computers, mobile phones, small household appliances, etc.; the application fields of super junction MOSFET are fast charging, LED lighting, server power supply charging, etc.; the application fields of IGBT are new energy vehicles, photovoltaics, wind power generation, etc.

In the last four quarters, the company's power device foundry revenue was $239 million, $223 million, $175 million, and $136 million, respectively, with year-on-year growth rates of 30.52%, 22.82%, -13.87%, and -39.19%, respectively. From the perspective of quarterly data, the company's power device foundry revenue began to show a negative growth trend from the fourth quarter of 2023, and it is accelerating.

It should be pointed out that although Hua Hong Semiconductor's power device foundry revenue is still declining, the power device industry is likely to have bottomed out. To understand the reasons for this judgment, a deep understanding of the global power device market is needed, especially to clarify what factors have led to the decline in the company's performance, and whether negative factors will weaken or disappear.Specifically, the global IGBT and MOSFET markets are highly concentrated, with the vast majority of market share being occupied by overseas manufacturers. According to a research report by Huaxin Securities, in 2022, the leading companies in the global MOSFET market included Infineon, ON Semiconductor, STMicroelectronics, Toshiba, and Shengshi, with market shares of 26%, 14.1%, 6.9%, 5.7%, and 5%, respectively. The combined market share of the top five manufacturers was 57.7%. In the IGBT market, the leading manufacturers included Infineon, Fuji Electric, Mitsubishi, STMicroelectronics, and ON Semiconductor, with market shares of 29%, 15%, 9%, 8%, and 6%, respectively. The combined market share of the top five manufacturers was 67%.

It is evident that the global IGBT and MOSFET markets are oligopolistic, meaning that a small number of large companies control the vast majority of the market share. In an oligopolistic market, there is a certain degree of product differentiation among manufacturers, but these differences are usually not enough to prevent consumers from choosing between different brands. Moreover, manufacturers take into account the reactions of other manufacturers when setting prices and market strategies, often following a "fall but not rise" pattern. Therefore, price wars rarely occur in oligopolistic markets, and market prices are usually set by one or a few "leaders," with other manufacturers following suit.

According to data from Xinbage, the global MOSFET market price leaders include Infineon, STMicroelectronics, and Diodes. It should be noted that Infineon's delivery times showed a decline as early as the fourth quarter of 2022, with delivery times dropping from 52 to 65 weeks in the previous quarter to 40 to 60 weeks. In 2023, its delivery times continued to decrease, with each quarter's times being 26 to 64 weeks, 20 to 52 weeks, 18 to 48 weeks, and 10 to 36 weeks, respectively. STMicroelectronics and Diodes' delivery times declined slightly later than Infineon, but by the second half of 2023, both companies' delivery times had entered a downward trend.

Global IGBT market price leaders are Infineon and STMicroelectronics. In the first three quarters of 2023, the delivery times of the two companies were stable at 39 to 50 weeks and 47 to 50 weeks, respectively. In the fourth quarter of 2023, the delivery times of both companies were shortened to 14 to 52 weeks.

It is important to note that when the transaction times of the leading IGBT and MOSFET manufacturers are shortened, the market price trend remains stable. This suggests that the demand for IGBT and MOSFET has decreased, as prices in an oligopolistic market generally do not decrease. Taking STMicroelectronics as an example, in the third quarter of 2023, the company experienced an increase in revenue but not in profit, with a revenue growth rate of 2.55% and a net profit growth rate of -0.82%. Subsequently, its revenue and net profit continued to decline year-over-year for two consecutive quarters. The decline in STMicroelectronics' performance also indirectly proves the reduction in demand for IGBT and MOSFET.

The decline in global market demand cannot be avoided by domestic manufacturers. More importantly, according to Huaxin Securities, Chinese power device manufacturers mainly produce mid-to-low-end products, and the market competition is relatively fragmented and evenly matched, with no company like Infineon emerging. Therefore, the competition in the domestic power device market is particularly fierce. In 2023 and the first quarter of 2024, the performance of domestic power device leading manufacturers such as Silan Microelectronics and China Resources Microelectronics significantly declined.

Additionally, as Huahong Semiconductor's wafer foundry revenue is nearly 80% from domestic sources, as an upstream foundry for power devices, its performance will inevitably be impacted. This is also the main reason for the continuous decline in Huahong's power device foundry revenue.

It is worth mentioning that since 2024, several domestic power device manufacturers have issued price increase letters. For example, JiJi Microelectronics' Trench Mos product line prices have been increased by 5% to 10%, and Sanlian Sheng's entire product line prices have been increased by 10% to 20%, and so on. This conveys a positive signal to the market that the internal competition among domestic power devices has slowed down.

Furthermore, as the most important application fields for IGBT and MOSFET, the inventory levels of new energy vehicles and photovoltaic markets have also returned to healthy levels. According to data from the General Administration of Customs, Xinbage, and Huajin Securities, in the first quarter of 2024, the inventory of new energy vehicles was reduced to about 600,000 units, and it is expected that the second quarter will usher in a restocking cycle. The photovoltaic industry entered an accelerated destocking cycle in the fourth quarter of 2023, with the industry chain's prices and profit levels gradually decreasing. It is expected that in the second quarter of 2024, the photovoltaic industry chain is likely to see an increase in volume and stable prices.

From this perspective, it is highly probable that the domestic power device market has bottomed out, and Huahong Semiconductor's power device foundry revenue may stabilize.The trend of MCU is still unclear

Embedded non-volatile memory foundry is the second largest source of revenue for Hua Hong Semiconductor, whose main foundry products are MCU and smart card chips. Among them, MCU is divided into automotive-grade MCU, industrial control MCU, consumer MCU, etc., according to the application field.

Looking at the quarterly data, from the third quarter of 2023 to the first quarter of 2024, Hua Hong's embedded non-volatile memory foundry revenue has been significantly negative year-on-year for three consecutive quarters, with revenues of 136 million yuan, 107 million yuan, and 113 million yuan, respectively, growing year-on-year by -32.85%, -52.49%, and -50.69%.

According to the research report of Huajin Securities, the vast majority of the global MCU market share is still occupied by overseas manufacturers. In 2022, the combined market share of the top 5 MCU manufacturers was 76.5%, and the global market share of mainland China's leading MCU manufacturer, GigaDevice, was only 1.60%, ranking 7th globally.

According to the financial report of GigaDevice and the record form of investor relations activities, in 2023, the competition in the global MCU market intensified, and the product prices continued to decline. In the first quarter of 2024, the gross profit margin of the company's MCU products was still lower than that of the same period in 2023, and the trend of MCU product prices is still unclear.

It should be pointed out that the global demand for consumer MCU and automotive MCU remains strong. According to the data of Xinbag, the delivery period of Infineon's automotive MCU products is still in short supply, and the delivery period of consumer MCU of STMicroelectronics and NXP Semiconductors has only slightly decreased. However, GigaDevice's MCU products are mainly concentrated in the industrial field, so the growth of its MCU product revenue is weaker than that of the leading manufacturers.

Correspondingly, as an important domestic MCU foundry manufacturer, Hua Hong Semiconductor's MCU foundry business revenue is also difficult to improve in the short term.

Two types of foundry businesses have reversed

According to Statista data, due to the wide range of downstream applications, the analog market is relatively stable, with fluctuations smaller than the overall semiconductor sector. In 2023, the global analog market size was $90.95 billion, a year-on-year increase of 1.56%, but its growth rate is still far lower than the previous year.

Affected by this, in 2023, Hua Hong Semiconductor's analog and power management foundry revenue continued to decline year-on-year for four consecutive quarters. However, this situation improved in 2024. In the first quarter of 2024, Hua Hong's analog and power management foundry revenue was $97 million, a year-on-year increase of 14.72%.More importantly, in the first quarter of 2024, the global analog chip market showed a significant recovery. According to data from Xingbag, with the reduction in delivery times, the prices of various products from major analog chip manufacturers such as Analog Devices, Infineon, Renesas Electronics, and Microchip Technology have shown an upward trend. Additionally, since the analog chip market is also an oligopolistic market with the top five manufacturers holding more than 50% of the market share, the simultaneous price increase of products by several leading analog chip manufacturers indicates that downstream demand has recovered. For Hua Hong Semiconductor, the recovery of the downstream market will inevitably lead to more demand for foundry services.

In addition to the foundry business for analog and power management products, the foundry revenue for Hua Hong's logic and RF chips has also resumed growth. In the first quarter of 2024, its revenue was $61 million, a year-on-year increase of 62.93%. In fact, in the fourth quarter of 2023, Hua Hong's logic and RF chip foundry revenue had already resumed growth, with a year-on-year growth rate of 30.99%.

According to the investor relations activity record, the main reason for the growth in Hua Hong Semiconductor's logic and RF foundry revenue comes from the demand for CIS products, which has been very strong since the fourth quarter of 2023.

It should be noted that the main function of CIS products is to convert received optical information into electrical signals, making them an important component of digital cameras. The largest downstream application field for them is smartphones. According to data from TrendForce, in 2022, smartphones accounted for nearly 70% of the downstream applications of CIS.

According to a research report from Debon Securities, in the mobile CMOS image sensor market, Hua Hong Semiconductor is a foundry for CMOS products of companies like OmniVision and GCM. With the recovery of the global smartphone market, in the fourth quarter of 2023 and the first quarter of 2024, GCM's operating income growth rates were 5.78% and 51.13%, respectively, and net profit growth rates were 98.73% and 123.35%, respectively. In 2023, OmniVision's net profit was 975 million yuan, an increase of 226 million yuan compared to the previous year. Although OmniVision did not disclose the data for the first quarter of 2024, according to public information, OmniVision has replaced some of Sony's products in the domestic high-end mobile CMOS market.

In addition, Canalys estimates that in 2024, global smartphone shipments will recover to 1.17 billion units, a year-on-year increase of 4.00%. From this perspective, Hua Hong Semiconductor's logic and RF foundry revenue will remain prosperous.