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On Wednesday, Hua Hong Semiconductor Ltd (1347:HK) (OTC: HHUSF) stock received a notable upgrade from BofA Securities, with analyst Dai Shen raising the company’s rating from Underperform to Buy. The new price target set by BofA Securities is HK$44.50, a substantial increase from the previous target of HK$17.80. The upgrade is rooted in a more optimistic view of the company’s margin recovery prospects for the years 2025 and 2026.
The optimism from BofA Securities stems from several factors expected to benefit Hua Hong Semiconductor. Firstly, a rebalancing of semiconductor supply and demand in China is anticipated, which should lead to a more favorable pricing environment for foundry players. Secondly, Hua Hong is seen as having a potential opportunity to gain market share with both domestic and overseas fabless companies. Lastly, the company’s low sales exposure to the US market is considered a positive factor.
BofA Securities projects an improvement in Hua Hong’s operating profit margin (OPM), forecasting a rise from -8% in 2024 to breakeven in 2025, and then a normalization to 12% in 2026. This outlook has prompted the firm to raise its earnings per share (EPS) forecast for Hua Hong by 46% for 2025 and by 85% for 2026. This expected improvement is largely attributed to a rebound in wafer average selling prices (ASP), with increases of 12% and 9% year-over-year assumed for 2025 and 2026, respectively.
The new price objective of HK$44.50 is based on a valuation of 1.5 times the average book value per share (BVPS) estimate for 2025 and 2026, which is considered a mid-cycle level. This valuation is a significant shift from the previous price objective, which was based on a trough valuation of 0.6 times BVPS. The average BVPS used in the new price target calculation is US$3.79, indicating a substantial upward revision from the earlier valuation.
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