Hua Hong Semiconductor (1347.HK) reported its first-quarter 2026 financial results, which met expectations. The company achieved revenue of $661 million, representing a year-over-year increase of 22.2% and a sequential increase of 0.2%, surpassing the upper end of its guidance range of $650-$660 million. By wafer size, 8-inch revenue was $246 million, up 6.6% year-over-year but down 2.6% sequentially. 12-inch revenue reached $415 million, a significant increase of 33.8% year-over-year and 1.8% sequentially, accounting for 62.7% of total revenue. The gross margin was 13.0%, improving by 3.8 percentage points year-over-year and remaining flat sequentially, landing within the company's guided range of 13.0%-15.0%. Net profit attributable to shareholders was $20.9 million, soaring 458.1% year-over-year and increasing 19.9% sequentially.
Strong demand in storage and power management is driving performance, with the company forecasting a 10%-15% increase in the average selling price (ASP) for the full year 2026. Firstly, demand for power management chips is being fueled by AI servers, with Q1 revenue from analog and power management products growing 26% year-over-year. The company is actively expanding its BCD power management capacity to meet rising customer demand. Secondly, the storage segment is a significant contributor, with Q1 revenue from embedded non-volatile memory (NVM) up 42% year-over-year and standalone NVM revenue up 33%. Supply shortages in the memory market are leading to capacity constraints and demand spillover, with persistent growth in areas like Nor Flash. The company anticipates increases in both memory shipment volumes and prices. Regarding pricing, the company guides for a full-year 2026 ASP increase of 10% to 15%, with prices for products in high demand potentially rising over 20%-25%.
The expansion of Fab 9A is progressing steadily, though the utilization rate saw a slight decline. The acquisition of HLMC's Fab 5 is advancing in an orderly manner. The Q1 utilization rate was 99.7%, down 3 percentage points year-over-year and 4.1 percentage points sequentially. Wafer shipments remained relatively stable, with equivalent 8-inch shipments reaching 1.453 million, up 18% year-over-year and 0.3% sequentially. Total equivalent 8-inch capacity reached 489,000 wafers per month, a sequential increase of 0.6%. Future capacity continues to be released: 1) Fab 9A is undergoing continuous expansion, with equipment move-in expected to complete in Q3 2026 and ramp-up to planned capacity anticipated from late 2026 to early 2027. 2) Construction on Fab 9B began in March 2026, with equipment move-in expected in Q4 2026. Current equipment procurement is unaffected by U.S. export controls, with full production targeted for 2028. 3) The application for acquiring HLMC's Fab 5 has entered the substantive review stage, with completion expected in the second half of 2026, which is anticipated to significantly enhance the company's capacity and profitability.
The Q2 2026 guidance points to continued profit improvement, while new technology initiatives open long-term growth potential. The company guides for Q2 revenue of $690-$700 million, with the midpoint implying approximately 5.2% sequential growth, slightly below market expectations of $715 million. The gross margin guidance is 14.0%-16.0%, with the midpoint representing a 2.0 percentage point sequential improvement, exceeding the market expectation of 14.6%. It is judged that strong demand from the AI wave and the memory super-cycle will help maintain relatively high utilization rates. The ASP increase is expected to become more pronounced in the second half of 2026. Combined with active cost control measures, this should lead to a continued improvement in gross margin levels.
The company is actively laying out new businesses in silicon photonics, compound semiconductors, high-density deep trench capacitors, and advanced packaging. ① Silicon Photonics: Related plans are underway, with more details to be disclosed subsequently. ② Compound Semiconductors: The company has initiated layouts for Gallium Nitride (GaN) and Silicon Carbide (SiC), with R&D work already started. Mass production may be advanced through partnerships. ③ High-Density Deep Trench Capacitors: R&D in this area has been ongoing for some time, and revenue contribution is expected soon. ④ Advanced Packaging: An advanced packaging subsidiary has been established at the group level, which is expected to create synergies with the company's existing business.
Earnings Forecast, Valuation, and Rating: Driven by demand from artificial intelligence and the memory cycle, utilization rates are expected to remain high. Demand spillover is driving positive pricing trends. However, accelerated capacity expansion still faces significant depreciation pressure. Forecasts for net profit attributable to shareholders for 2026-2028 have been adjusted to $147 million, $209 million, and $246 million, representing changes of +3%, +7%, and -1% from previous forecasts, corresponding to year-over-year growth of +167%, +42%, and +18%. The current stock price corresponds to a price-to-book (P/B) ratio of 3.8x for 2026 and 3.7x for 2027. The outlook is positive, supported by trends toward supply chain autonomy and localization, which should aid market share growth. Advancements in process technology and active capacity expansion underpin long-term revenue growth potential. The anticipated injection of high-quality assets like HLMC's Fab 5, along with strategic layouts in silicon photonics and compound semiconductors, are expected to boost both performance and valuation. The "Buy" rating for Hua Hong Semiconductor is maintained.
Risk factors include geopolitical risks, a downturn in the semiconductor cycle, intensifying industry competition, and delays in technological iteration.
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