Hua Hong Semiconductor's 1Q26 results were broadly in line, but 2Q26 revenue guidance was soft

Overview

This report is Morgan Stanley's 1Q26 earnings review for Hua Hong Semiconductor Ltd (1347.HK). The key takeaway is that 1Q revenue was broadly in line with expectations, but gross margin was below expectations and net profit attributable to shareholders was below Morgan Stanley's estimate; 2Q revenue guidance also came in below Morgan Stanley's expectations. Even so, the report maintains an Equal-weight rating and notes that Fab 9B expansion and power IC demand related to China's AI infrastructure continue to support the company's mature-node foundry positioning.

Core views

The report maintains a neutral stance. Positive factors include 1Q26 revenue growth of 22% year on year, continued ramp-up of Fab 9B through the year, and support for mature-node foundry from power IC demand tied to China's AI infrastructure; negative factors include 1Q26 gross margin of just 13%, which was below expectations, 2Q26 revenue guidance of US$690-700mn below Morgan Stanley's expectations, and an implied downside of about 31% from the current share price to the HK$88 target price.

Analysis framework

The report mainly compares actual earnings results with Morgan Stanley estimates and consensus expectations, and combines the company's 2Q26 revenue and gross margin guidance, Fab 9B capacity ramp-up, mature-node demand, valuation model, and potential risk scenarios. The valuation uses a residual income model and key assumptions such as cost of equity, risk premium, beta, medium-term growth rate, and terminal growth rate.

Methodology notes

• Valuation methodResidual Income (RI)

  Residual Income model

  The base case uses a residual income model, with key assumptions including a 9.2% cost of equity, a 2.0% risk-free rate, a 6% risk premium, a 1.20 beta, a 16.5% medium-term growth rate, and a 5.0% terminal growth rate.

• Forecast frameworkMorgan Stanley ModelWare

  Internal financial forecasting framework

  Unless otherwise stated, the financial metrics in the report are based on the Morgan Stanley ModelWare framework.

• Consensus expectationsRefinitiv Estimates

  Consensus comparison

  The report compares the company's results with consensus expectations and identifies Refinitiv Estimates as the source of consensus data.

Asset mapping & comparison

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

• Hua Hong Semiconductor Ltd (1347.HK)

  Coverage name; Hong Kong-listed semiconductor foundry company

  Strengths

  Clear positioning in mature-node foundry, continued ramp-up of Fab 9B, and support from power IC demand related to China's AI infrastructure.

  Weaknesses

  1Q26 gross margin was below expectations, 2Q26 revenue guidance was below Morgan Stanley's expectations, and the target price is below the current share price.

  Comparison

  The industry view is Attractive, but the stock rating is Equal-weight, indicating a relatively positive view on the sector but a more cautious view on the stock's risk-reward.

  Risks

  If utilization, wafer ASP, or domestic customer share come in below expectations, or if 8-inch capacity competition intensifies, application migration to 12-inch happens faster than expected, or Wuxi fab ramp-up is slower, results and valuation could be pressured.

Key data

• 1Q26 revenueUS$661mnUp 22% year on year and flat quarter on quarter, broadly in line with Morgan Stanley estimates and consensus expectations.
• 1Q26 gross margin13%Below expectations, mainly due to slightly lower utilization in the quarter.
• 1Q26 net profit attributable to shareholdersUS$20.9mnBelow Morgan Stanley's estimate, but above consensus expectations.
• 2Q26 revenue guidanceUS$690-700mnThe midpoint implies 5.1% quarter-on-quarter growth, but is below Morgan Stanley's expectations.
• 2Q26 gross margin guidance14-16%Expected to expand versus 1Q26, supported by a higher blended ASP.
• RatingEqual-weightMorgan Stanley maintains this rating.
• Target priceHK$88.00Implies about 31% downside versus the 2026-05-14 closing price of HK$127.00.
• 2026e revenue forecastUS$3,117mnForecast revenue for 2026 disclosed in the chart.
• 2026e ModelWare net profitUS$404mnForecast net profit for 2026 disclosed in the chart.

Impact & implications

In the near term, softer 2Q26 revenue guidance and 1Q26 gross margin below expectations limit upside momentum for the shares; in the medium term, Fab 9B expansion, power IC demand, and the mature-node foundry positioning still provide fundamental support. But with the current share price above the target price, Morgan Stanley keeps an Equal-weight rating, indicating it sees the risk-reward as unexciting.

Risks

• Potential price increases fail to materialize.
• Other Chinese players aggressively expand 8-inch capacity.
• Applications migrate to 12-inch faster than expected.
• Wuxi fab expansion is slower or new customer acquisition is hindered.
• Export controls and related entity restrictions may affect compliance with investment or trade activities.

What to watch

• The ramp-up progress of the additional 43kwpm capacity at Fab 9B during the year.
• Whether 2Q26 revenue can reach the US$690-700mn guidance range.
• Whether 2Q26 gross margin can improve to 14-16%.
• Changes in mature-node foundry utilization and wafer ASP.
• The strength of power IC demand driven by China's AI infrastructure.
• The pace of domestic customer share gains and the durability of their cooperation with Hua Hong.
• Whether EV penetration is faster than expected.