Hua Hong: Initiating Coverage of China's Second-Largest Foundry; HKD 18.40 Fair Value Estimate

We initiate coverage on Hua Hong Semiconductor with a no-moat rating, a fair value estimate of HKD 18.40 per share, and a High Morningstar Uncertainty Rating. Shares are fairly valued. Hua Hong is China’s second-largest contract semiconductor manufacturer, or foundry, after Semiconductor Manufacturing International. Hua Hong benefits from China’s initiative to create a self-sufficient supply chain and currently derives more than 75% of its sales from Chinese customers. We forecast Hua Hong to achieve 8.7% top-line CAGR from 2022 to 2027, but to achieve that, Hua Hong is spending USD 6.7 billion, or more than double our 2024 revenue forecast, on a new plant.