Hwatsing benefits from China's memory expansion, but valuation is already largely priced in

Overview

This report focuses on growth opportunities for Hwatsing in China's semiconductor equipment sector, especially CMP equipment. Goldman Sachs believes Chinese fabs and IDMs are increasingly favoring domestic equipment due to supply security and cost considerations; against the backdrop of tight global memory supply, accelerated DRAM/NAND capex should drive Hwatsing CMP shipments and create opportunities for its new products to enter customer accounts. However, the report believes the company's valuation is already relatively full, so it maintains a Neutral rating.

Core views

The core views are: first, China's semiconductor capex has a long-term growth trend, and memory capacity expansion is an important near-term source of incremental demand; second, Hwatsing has a leading position in China's CMP equipment market, already serves Chinese memory IDM customers, and is expected to cross-sell new products such as ion implantation, thinning, dicing and polishing to existing customers; third, as the industry migrates to more advanced capacity, the company can lift the share of high-end products and support gross margins above 42%; fourth, although earnings estimates and the target price are raised, valuation remains in a relatively reasonable range, so the rating stays Neutral.

Analysis framework

The report combines company fundamentals, the industry capex cycle, customer demand and relative valuation. Earnings forecasts focus on revenue, gross margin, operating margin and EPS revisions; the valuation side uses a near-term P/E approach, deriving the target multiple from the relationship between peers' 2027E P/E and 2027-28E EPS growth.

Methodology notes

• Valuation methodsRelative P/E valuation

  Use the target P/E multiple multiplied by forward EPS to derive the target price

  Based on the relationship between peer P/E and future earnings growth, Goldman Sachs sets Hwatsing's target P/E at 37.8x 2027E P/E and thus derives a 12-month target price of Rmb214.7.

• Factor frameworkGS Factor Profile

  Compare stock attributes across growth, financial returns, valuation multiples and composite percentile

  This framework measures growth using sales, EBITDA and EPS growth; financial returns using ROE, ROCE and CROCI; valuation multiples using P/E, P/B and EV/EBITDA; and then forms a composite percentile.

• M&A frameworkM&A Rank

  Assess the probability of a company becoming an acquisition target

  Goldman Sachs uses a 1-to-3 score to assess the potential M&A probability of covered companies, where 1 indicates high probability, 2 medium probability and 3 low probability; if the rank is 1 or 2, an M&A component may be incorporated into the target price.

• Database toolQuantum

  Goldman Sachs' proprietary financial database

  Quantum provides historical financial statements, forecasts and ratio data, and can be used for deep single-company analysis and cross-company comparison.

Asset mapping & comparison

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

• Hwatsing (688120.SS)

  Research coverage name; China's leading domestic CMP equipment player

  Strengths

  Benefits from growth in China's semiconductor capex, accelerated memory customer demand, rising preference for domestic equipment and an improved mix of high-end products.

  Weaknesses

  Valuation is relatively fair; the target price implies limited upside versus the current price.

  Comparison

  The 37.8x target P/E lies within the company's roughly 23x-45x trading range since July 2022 and references the relationship between peers' 2027E P/E and 2027-28E EPS growth.

  Risks

  If semiconductor capex expansion, SPE order capture or new-product expansion is weaker than expected, growth and valuation support could be undermined.

• China DRAM/NAND capex

  Core demand driver

  Strengths

  Against the backdrop of tight global memory supply, DRAM/NAND expansion may accelerate, driving demand for CMP equipment.

  Weaknesses

  The capex cycle is highly volatile; a slower expansion pace would affect order conversion.

  Comparison

  Compared with logic and foundry expansion, memory expansion is the near-term incremental opportunity emphasized in the report.

  Risks

  Changes in memory prices, customer expansion plans or equipment procurement pace could lead to weaker-than-expected demand.

Key data

• RatingNeutralThe report maintains a Neutral rating on Hwatsing.
• 12-month target priceRmb214.7Raised by 14.6% from the previous Rmb187.3.
• Target valuation multiple37.8x 2027E P/EDerived from the relationship between peer P/E and forward earnings growth, within the company's roughly 23x-45x trading range since July 2022.
• Revenue forecast revision2026-28E revised up by 0%/1%/3%Driven by a more positive outlook for domestic semiconductor capex.
• EPS forecast revision2026-28E revised up by 0%/1%/3%Gross margin and operating margin are largely unchanged.
• Gross margin outlook42%+Goldman Sachs expects this to be supported by a higher mix of high-end products over the next few years.
• Earnings growth assumptionAverage net profit YoY growth of 25% for 2027E-28EUsed to update the target P/E multiple.
• Current priceRmb276.28Hwatsing price shown on the disclosure page.

Impact & implications

For investors, Hwatsing offers three growth themes: domestic semiconductor equipment substitution, memory capacity expansion and new-product penetration. However, the report believes these positives are already largely reflected in valuation. The target price increase reflects improved earnings and industry cycle assumptions; the Neutral rating signals that the short-term risk/reward is not especially attractive.

Risks

• Semiconductor capex expansion stronger or weaker than expected.
• Semiconductor customers' SPE order capture faster or slower than expected.
• New-product expansion and cross-selling progress faster or slower than expected.
• Valuation multiples affected by changes in market risk appetite, peer valuations and earnings growth expectations.

What to watch

• The pace of DRAM/NAND customer expansion in China and equipment procurement orders.
• Hwatsing's CMP shipment growth and changes in penetration among memory IDM customers.
• Customer validation and revenue contribution from new products such as ion implantation, thinning, dicing and polishing.
• Whether gross margin can stay above 42% and how the mix of high-end products changes.
• Whether the relationship between peers' 2027E P/E and 2027-28E EPS growth continues to support the 37.8x target multiple.