Hua Hong Semiconductor is a Chinese technology company that produces semiconductors. It was founded in 1996 as part of China’s efforts to build its own integrated circuit industry, and the company now has annual revenues of more than a billion dollars.
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What’s making money on
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According to the 2021 annual report, nearly 95% of the company’s revenue comes from semiconductor wafer production. Geographically, sales are mostly developed in China, 74%, with more than 10% coming from other Asian countries. 9.8% of revenue comes from North America; 4.3% from Europe, and the rest from Japan.
Comparison with Competitors
Hua Hong Semiconductor is not the largest company, with a market capitalization of less than $5 billion. The P/Eratio is at the median level among competitors, and the stock looks expensive by EV/Sales. At the same time, profitability is lower than that of foreign competitors, as well as revenue, and profit margins. The positive factor is negative net debt.
Outlook and Risks
New listing. The company’s stock is listed on the Hong Kong Stock Exchange. but it recently received regulatory approval for a secondary listing in Shanghai (SSE) for $2.5 billion on the technology Star Market, which is the Chinese version of NASDAQ — the high-tech sector trades there. Most of the funds raised are for modernization and expansion of production facilities.
The company is also expected to start building a new production site in Wuxi County in 2023.
Earlier, the U.S. imposed restrictions on the supply of high-tech chips and equipment to China. HHS was not much affected by this ban because its production is not focused on advanced chips, but on older chips. Yes, the company cannot create what TSMC and Samsung can, but the HHS strategy is to maximize performance and reliability. Its chips have found application in important areas: IoT, 5G, telecommunications equipment, and electric cars.
Beijing is reviewing the supply chain because of U.S. restrictions and is seeking to secure its own production. HHS can offer the market the components it needs, which means the Celestial Government will help the company financially and politically.
The Chinese government is preparing an ambitious plan to support its own industry with more than 1 billion yuan ($143 billion) — twice as much as in the CHIPS and Science Act, which the U.S. president signed this summer.
Chinese companies have begun cutting orders from foreign manufacturers and are turning to local ones. Thiscreates a demand for HHS products. Of course, we’re not talking about advanced chips — but the technology issue is a long-term problem for the entire industry in China.
The following risks can be highlighted:
- Because of declining consumer demand, the crisis has begun to resolve and component inventories are emerging. The cyclicality of the sector could hit HHS when demand declines in China — this could hit finances and negatively impact the company’s future development.
- The lack of advanced technology makes it impossible to compete with industry leaders.
- Semiconductors have become an issue of national security, with many countries intending to set up their own production to meet their needs. China may lose many important markets or significantly reduce supply to them. So far, this trend is not visible, and domestic demand contributes to the growth of HHS, but over the long haul, the risk cannot be ruled out.
What to do with Hua Hong Semiconductor stock
Since early 2022, HHS stock has gone into a downtrend along with the market and has lagged behind. In mid-October, the stock began to recover and broke through the moving averages on the daily chart. At the moment no buy signals are formed due to consolidation. But buying is possible in the range of 27-24 HKD. The next technical target is the level of 36 HKD. Considering the volatility of the securities, it is possible to place the stop order by 8% below the opening price.