Hua Hong Semiconductor's capacity expansion is progressing as planned, and Nomura keeps Neutral with a HKD100 target price

Overview

This report is Nomura's quick note after Hua Hong Semiconductor's 1Q26 earnings call. The key conclusion is that the company's capacity expansion and proposed acquisition of HLMC Fab 5 are progressing as planned, short-term demand and pricing trends are strong, but earnings recovery still needs to be monitored, and the current share price leaves little upside relative to the target price.

Core views

Hua Hong Semiconductor's 1Q26 revenue was broadly in line with Nomura's expectations, but the 13.0% gross margin was at the low end of guidance. Management's 2Q26 guidance for revenue of USD690-700mn and gross margin of 14-16% is in line with Nomura's forecast. Nomura leaves its earnings estimates unchanged and maintains a Neutral rating and HKD100 target price. On capacity expansion, the HLMC Fab 5 acquisition has entered substantive review and is expected to be completed in 2H26E, while the Wuxi Fab 9A/9B progress has not been materially affected by US export controls. On pricing, the company expects average ASP to rise 10-15% in 2026E, but for power devices, faster industry supply growth may limit room for price increases.

Analysis framework

The report mainly assesses the situation by combining actual 1Q26 results, 2Q26 company guidance, the capacity expansion timetable, demand and ASP trends across product platforms, the potential consolidation of HLMC Fab 5, and the relative historical valuation range. The target price is based on 3.5x 2026F BVPS of USD3.68, while also taking into account demand strength and the potential margin uplift from consolidating HLMC Fab 5.

Methodology notes

• Valuation methodsprice-to-book ratio method

  derive target price from 2026F BVPS and target P/B multiple

  Nomura's HKD100.0 target price is based on 3.5x 2026F BVPS of USD3.68. The target multiple is at the high end of Hua Hong's historical trading range and is used to reflect resilient demand and the potential margin uplift from consolidating HLMC Fab 5.

• Operating analysisperformance and guidance comparison

  compare actual results, company guidance, Nomura forecasts, and Bloomberg consensus

  The report compares 1Q26 revenue, gross margin, and profit metrics with Nomura and market expectations, and uses 2Q26 revenue and gross margin guidance to judge the short-term trend.

• Capacity and product cyclewafer fab expansion tracking

  track the contribution timing of Fab 9A, Fab 9B, and HLMC Fab 5 to revenue and margins

  The report focuses on the timing of Fab 9A full utilization, Fab 9B equipment move-in, and HLMC Fab 5 consolidation to judge capacity release and earnings contribution in 2026-2027.

Asset mapping & comparison

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

• Hua Hong Semiconductor（1347.HK）

  Covered company and investment target

  Strengths

  Demand for specialty process platforms is resilient, capacity utilization is high, the share of 12-inch revenue is rising, and the proposed consolidation of HLMC Fab 5 may lift margins.

  Weaknesses

  1Q26 profitability was below Nomura's and the market's expectations, the current share price is above the target price, and pricing increases for some platforms are constrained by supply expansion.

  Comparison

  1Q26 revenue was close to Nomura's forecast but below Bloomberg consensus; net profit and EPS were significantly below Nomura's and Bloomberg's forecasts.

  Risks

  End-market demand is weaker than expected, IDM outsourcing trends are slower than expected, capacity expansion by Chinese foundry peers is faster than expected, and US-China geopolitical tensions escalate.

• HLMC Fab 5

  Proposed acquisition and consolidation asset

  Strengths

  It has 65/40nm, about 40kwpm of installed 12-inch capacity, annualized revenue of about USD800mn, and gross margin above 20%, higher than Hua Hong's overall 2025 gross margin.

  Weaknesses

  The transaction is still in substantive review, and there is execution uncertainty around completion timing and the consolidation schedule.

  Comparison

  Compared with Hua Hong's 2025 revenue of USD2.4bn and gross margin of 11.8%, HLMC Fab 5 could contribute a higher-margin asset.

  Risks

  Approval delays, slower-than-expected integration, and consolidation contributions below model assumptions.

• Wuxi Fab 9A / Fab 9B

  Core capacity expansion project

  Strengths

  Fab 9A is expected to reach about 83kwpm full capacity by the end of 2026; Fab 9B focuses on specialty processes, mainly the 40nm node.

  Weaknesses

  Fab 9B requires significant capital expenditure, initial output is not expected until 2027, and full ramp-up will still take about 1.5 years.

  Comparison

  Fab 9B is Hua Hong Wuxi's third 12-inch fab, and the expansion pace is a key variable for the company's medium-term revenue growth.

  Risks

  Equipment procurement, export controls, capacity ramp-up, demand matching, and capital expenditure return risks.

Key data

• 1Q26 revenueUSD661mnBroadly in line with Nomura's USD659mn forecast, below Bloomberg consensus of USD687mn.
• 1Q26 gross margin13.0%Flat QoQ, up 3.8 percentage points YoY, and at the low end of guidance.
• 2Q26 revenue guidanceUSD690-700mnThe midpoint implies about 5% QoQ growth, supported by higher ASPs and increased wafer shipments.
• 2Q26 gross margin guidance14-16%Broadly in line with Nomura's forecast, indicating gross margin is likely to recover QoQ.
• Total capacity utilization99.7%Management said all process platforms are performing strongly.
• 1Q26 revenue geographic mixChina 79.5%, North America 13.0%, Asia (including Japan) 5.2%, Europe 3.3%Revenue from China grew 18.7% YoY, and North America grew 51.9% YoY.
• 1Q26 product platform mixeNVM 27.9%, Analog & PM 26.3%, Power discrete 25.9%, Logic & RF 11.3%, Standalone NVM 8.6%eNVM, Standalone NVM, and Analog & PM grew relatively quickly YoY.
• Average ASP uplift assumption10-15%High-demand platforms may see higher increases, some platforms could reach 20-25%, while weaker platforms may be close to 5%.
• HLMC Fab 5about 40kwpm of 12-inch capacity, 65/40nm, annualized revenue of about USD800mn, gross margin above 20%The proposed acquisition asset has entered substantive review at the Shanghai Stock Exchange and is expected to be completed in 2H26E.
• Fab 9B capital expenditureabout USD6bnEquipment move-in is expected in 4Q26E, initial output is expected to begin in 2027, and full capacity should take about 1.5 years.

Impact & implications

The report implies that Hua Hong Semiconductor's medium-term operating leverage mainly comes from three lines: first, HLMC Fab 5 consolidation lifts revenue and gross margin; second, Wuxi Fab 9A/9B expands 12-inch specialty process capacity; third, demand from AI servers, robotics, industrial applications, PMICs, and NOR flash supports ASP increases. But the current share price is already above the target price, and faster supply expansion in power devices, weak consumer electronics, and geopolitical risks will still cap room for a rating upgrade.

Risks

• The trend of IDM outsourcing in power semiconductors is slower than expected.
• End-market demand is weaker than expected, especially consumer electronics which still shows weakness.
• Capacity expansion by Chinese foundry peers is faster than expected, which may weigh on prices and utilization.
• Escalation in US-China geopolitical tensions may affect equipment procurement and customer demand.
• Raw material prices may rise due to supply-chain disruptions such as the Middle East war, although management believes the impact is manageable.
• The approval or integration progress of the HLMC Fab 5 acquisition may be slower than expected.

What to watch

• Whether 2Q26 revenue falls within the USD690-700mn guidance range and whether gross margin can recover to 14-16%.
• Whether the HLMC Fab 5 transaction completes as planned in 2H26E and whether it starts contributing from 3Q26.
• Whether Fab 9A reaches about 83kwpm full capacity by the end of 2026.
• Whether Fab 9B equipment move-in proceeds in 4Q26E as scheduled, and whether US export controls create any new impact.
• Whether average ASP can rise by 10-15%, especially the differences among analog/BCD, NOR flash, and power device platforms.
• Whether demand from AI servers, robotics, and industrial applications can continue to offset weakness in consumer electronics for PMICs and power devices.
• Progress in the deployment of new technology platforms such as silicon photonics, SiC, GaN, high-density capacitors, and 2.5D silicon interposers.