Goldman Sachs Raises Hua Hong Target Price to HK$174, Maintains Buy

Overview

Goldman Sachs issued an earnings commentary report on Hua Hong Semiconductor (1347.HK), maintaining a 'Buy' rating and raising the 12-month target price by 14.5% from HK$152 to HK$174. The report posits that as one of China's major foundries, Hua Hong is benefiting from semiconductor demand growth driven by AI-related applications, recent supply chain restructuring, full capacity utilization, and continuous capacity expansion. Additionally, cost advantages from larger 12-inch capacity and increased contributions from domestic equipment constitute positive factors.

Core views

Core views focus on Hua Hong's growth trajectory and capacity expansion strategy. On the demand side, increased semiconductor demand from AI-related applications and supply chain restructuring have brought new growth momentum, with current capacity fully utilized. On the supply side, the company continues to advance the expansion of 12-inch specialty process capacity. As of Q1 2026, total capacity reached 489,000 wafers/month (8-inch equivalent), of which 12-inch capacity was 138,000 wafers/month. In 2025, 42,000 wafers of 12-inch capacity were added, with an expected additional 45,000 wafers in 2026. Future capacity sources are diverse: the second 12-inch fab (designed total capacity of 83,000 wafers, with 43,000 wafers added as of 26Q1) is still ramping up; a new 12-inch fab is about to break ground, with equipment expected to arrive by year-end; meanwhile, the company is acquiring 40nm/65nm mature process fabs from Hua Hong Group, which will further increase the listed entity's capacity. Goldman Sachs believes these proactive capacity expansions will not only help capture larger market share but also enable the company to build new capacity for new products in the AI era. Regarding financial forecasts, based on a more optimistic revenue and gross margin outlook, Goldman Sachs has raised net profit forecasts for 2027-2029 (up by 0.4%/0.3%/0.1% respectively). Revenue forecasts were also adjusted upward (2027-29E up by 0.9%/0.6%/1.3% respectively), as continuous capacity expansion can better meet customer demand. Simultaneously, with improved utilization rates and increased contributions from 12-inch production lines, gross margins are expected to improve, leading to a slight upward revision of gross margin forecasts for 2027-29. Although operating expenses are estimated to increase slightly, operating profit still achieves growth.

Analysis framework

Goldman Sachs employs a Discounted P/E method to value Hua Hong. The target price is based on the expected 2028 P/E ratio, discounted back to 2026. Specifically, the target price of HK$174 corresponds to a 2028 expected P/E of 96.4x (previously 84.2x), based on a cost of equity (COE) of 13.1% as the discount rate. The determination of the target multiple references the correlation between the 2026 trading P/E of global semiconductor peers and their average year-over-year EPS growth rate for 2026-27, adjusted according to market conditions. This target multiple is higher than Hua Hong's historical average P/E of 47.0x, reflecting a positive outlook on its sustainable scale expansion and technology migration potential.

Methodology notes

• Valuation MethodPE/PEG valuation

  Target P/E method based on the correlation between peer P/E and earnings growth

  The institution determines a reasonable valuation multiple for the target company by observing the linear relationship between the Price-to-Earnings (P/E) ratio and earnings growth rate (Growth) of companies in the same industry. This method essentially embodies the logic of PEG (Price/Earnings to Growth), meaning high growth should match a high P/E ratio.

• Industry/Sector Analysis FrameworkSupply and Demand Framework

  Supply and demand analysis matching capacity expansion with demand

  In the semiconductor manufacturing industry, the analysis focus lies on the matching degree between supply-side capacity construction (such as the ramp-up of 12-inch fabs) and demand-side factors (such as orders driven by AI applications). The improvement in capacity utilization directly drives gross margin improvement and profit release.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Hua Hong (1347.HK)

  Beneficiary: As a major Chinese foundry, it directly benefits from semiconductor demand growth driven by AI applications and its own 12-inch capacity expansion.

  Strengths

  Full capacity utilization, continuous increase in 12-inch specialty process capacity, cost advantages from increased contributions of domestic equipment, and acquisition of group mature process assets to increase capacity.

  Risks

  End-market demand falling short of expectations; slower-than-expected ramp-up of 12-inch fabs; uncertainty in US-China trade relations.

Key data

• Target PriceHK$174Up 14.5% from previous HK$152
• 2026-28E Revenue CAGR21%Goldman Sachs model forecast
• 2026-28E Net Profit CAGR48%Goldman Sachs model forecast
• 2026 New 12-inch Capacity45,000 wafers/monthEstimated value
• 2028E Target P/E96.4xTarget multiple used for valuation
• Cost of Equity (COE)13.1%Valuation discount rate

Impact & implications

The research report believes that through proactive capacity expansion, Hua Hong can capture more market share in the AI era and establish a capacity foundation for new products. As the proportion of 12-inch capacity increases and utilization rates remain high, the company's economies of scale and technology migration potential will drive the valuation center upward, resulting in a P/E ratio higher than its historical average.

Risks

• End-market demand weaker than expected
• Slower-than-expected capacity ramp-up of 12-inch fabs
• Uncertainty in US-China trade relations