"Big Banks" Bank of America Securities: HUA HONG SEMI continues to incur operating losses, reiterates "underperform" rating

Bank of America Securities published a research report indicating that Hua Hong Semiconductor (01347.HK) is expected to meet performance expectations in the fourth quarter of 2025, but operating losses continue. The company reported fourth-quarter sales of USD 660 million (up 4% quarter-on-quarter, up 22% year-on-year), at the upper limit of guidance; the gross margin was 13%, in line with the guidance range of 12% to 14%, but showed no significant improvement from the 13.5% in the third quarter. The operating loss margin widened from 2% in the third quarter to 7% in the fourth quarter, which the firm believes is likely due to increased operating expenses from the new Fab9. The net profit excluding minority interests was a loss of approximately USD 19 million, while the net profit including minority interests was approximately USD 17 million, with earnings per share of 1 cent in the fourth quarter.

The firm stated that Hua Hong's overall profit margin may continue to be under pressure due to the company's ongoing capacity expansion (the new Fab9B will add more than 50,000 12-inch wafer monthly capacity, primarily constructed between 2026 and 2028), leading to increased depreciation costs. The firm expects the company's operating losses to continue into the first half of 2026, followed by low single-digit operating profit margins in the second half of 2026 and the first half of 2027. Therefore, its return on equity for 2026 and 2027 may remain at a low level of 3% to 4%, compared to 5% to 10% for Chinese semiconductor foundries and packaging and testing peers.

The firm anticipates a resumption of dividends in 2026, and Bank of America Securities raised the target price for Hua Hong from HKD 59 to HKD 61, still based on 2 times the forecasted book value per share of USD 3.9 for 2026, reiterating a "underperform" rating