Goldman Sachs Bullish on Hua Hong Semiconductor: AI Drives Expansion in Power Semiconductors and Silicon Photonics

Goldman Sachs released a research report on May 18, maintaining a Buy rating on Hua Hong Semiconductor with a 12-month target price of HK$152, representing an upside of approximately 31% from the current stock price of HK$115.9.

The firm believes that the demand for power management chips driven by AI applications, the expansion of local customers under the "China replacement" trend, and the migration to 28nm process technology constitute the three pillars of Hua Hong's medium-term growth.

Goldman Sachs held an investor conference with the CFO of Hua Hong Semiconductor at its Asian Technology Summit, focusing on the opportunities and challenges of China's semiconductor industry, as well as Hua Hong's progress in advanced nodes. Goldman Sachs expects Hua Hong's revenue to grow at a compound annual growth rate of 26% from 2025 to 2028, with revenue expected to reach approximately US$4.78 billion in 2028.

AI Opens Up Three Growth Paths

Hua Hong's management is positive about the prospects of China's semiconductor industry, believing that the growth of generative AI investment and the "Made in China" trend are creating new opportunities for the local supply chain.

Specifically, AI's pull on Hua Hong is reflected in three directions: First, power management chips. Hua Hong's PMIC and BCD process platforms are benefiting from the booming demand for AI servers. Second, power semiconductors. The demand for IGBT and super junction MOSFET platforms in data center high-voltage power architectures continues to grow.

The third direction is silicon photonics (SiPh). With the increasing demand for high-speed optical interconnection in AI data centers, silicon photonics is becoming a new field for Hua Hong to explore.

Capacity Expansion and Process Upgrade Go Hand in Hand

Hua Hong is promoting capacity expansion and process node migration to 28nm. Existing factories are running at full capacity, and the second 12-inch wafer fab (Fab 9A) is ramping up smoothly.

Management revealed that the company has planned a third 12-inch factory (Fab 9B), which is expected to start moving in equipment at the end of 2026 and contribute output in 2027. The continuous expansion of production capacity is aimed at undertaking the increasing foundry demand of local customers.

Challenges and Risks

Goldman Sachs also pointed out that the external environment facing China's semiconductor industry is becoming increasingly complex. Geopolitical tensions are prompting China to accelerate the construction of a more complete local supply chain, but the technological gap with global leading companies still exists.

The firm estimates that China needs to add approximately 2261 lithography equipment by 2035 to meet all chip demand, and the maturity of domestic lithography solutions will still take several years and a large amount of capital investment. Achieving process capabilities below 3nm alone may require approximately US$40 billion in R&D and capital expenditure.

In terms of valuation, Goldman Sachs derived the target price based on discounting the expected price-to-earnings ratio of 84.2 times in 2028 to 2026. This multiple is higher than Hua Hong's historical average of 33 times, reflecting the firm's optimistic expectations for the company's scale expansion and technological upgrade potential. The main downside risks include lower-than-expected terminal demand, slower-than-expected ramp-up of the 12-inch factory, and uncertainties in Sino-US trade relations.