CSCI-Semiconductor-Hua Hong Semiconductor (1347 HK)：Compelling entry opportunities - 20181004

Compelling entry opportunities

• Our update with the management reaffirms our positive view on Hua Hong Semi (“HHS”). As a majority of its products were shipped to destinations outside the U.S., the escalating China-U.S. trade war will have a limited impact on its growth prospects.
• In our view, the 8-inch market is a safe haven of the jittery global semiconductor industry amid the global trade disputes.
• We trimmed our FY18E/19E revenue and earnings estimates by 1.4%/3.3% and 3.3%/4.7% respectively and lowered our DCF-based price target to HKD30.0. HHS’ share price has come down by more than 50% in the past three months, which was unwarranted given its intact solid growth prospects and instead presents a compelling entry opportunity, in our view. Maintain Buy.

Trade disputes cloud global semiconductor industry. The semiconductor industry has been vulnerable to global economic downturn and financial crisis, as suggested by historical experience. The escalating China-U.S. trade war and persisting trade disputes between the U.S. and its major trading partners have raised the stakes of a slowdown in global economic growth, as we see a rising number of global institutions lowering their global economic growth forecasts. In addition, the lukewarm demand of the three new iPhone models also added to the gloom of the global semiconductor industry.

8-inch market remains resilient. Nonetheless, we see continued strong demand in the 8-inch semiconductor market, underpinned by 1) strong demand from IOT and emerging industry applications, and 2) sluggish capacity growth due to the difficulty in sourcing 8-inch foundry equipment. As one of the leading global pure 8-inch plays, HHS’ leading global position in many specialty products (like MCU for IOT and home appliance, IGBT, PMIC and RF) makes it resilient. Our update with its management suggests continued solid order flow, as its projects destined for the U.S. being insignificant.

Compelling entry opportunities. Taking into account of the potential impacts from the escalating China-U.S. trade war and global economic downturn, we trimmed our FY18E/19E revenue and earnings estimates by 1.4%/3.3% and 3.3%/4.7% respectively and lowered our DCF-based price target to HKD30.0 (from HKD32.0). HHS’ share price has come down by more than 50% along with a global-wide selloff in technology names in the past three months. However, in our view, the deep selloff in HHS’ shares was unwarranted and presents a compelling entry opportunity in light of its intact solid growth prospects.