2023.03.27 20,500 points to be the major resistance

Although China has lowered the RRR for financial institutions by 0.25% to around 7.6%, the market expects that RRR cut can potentially release ~CNY500bn of liquidity. As the magnitude of the cut is quite restrained, market does not expect much looser monetary policy in anytime soon, the cut had not brought a significant positive impact to the market. Fed raised interest rates by 0.25% as expected and signaled at least one more hike this year. According to Fed ‘dot plot’, the interest rate will peak at 5.1% in 2023. Although US Treasury Secretary Yellen said US is prepared to further support banks’ depositors if needed, the Fed had lowered its US economic growth forecast for the next two years. We expect Hong Kong stocks to remain volatile in the near term.

UBS takes over Credit Suisse for CHF$3.0 billion, however, Credit Suisse also said CHF16 bn of its Additional Tier 1 debt will be written down to zero. Market concerns about the risk of CoCo bonds of financial institutions has dragged the Hang Seng Index below 19,000 at one point. Although we expect the investment market to remain volatile, we believe that there is limited downside for Hang Seng Index as the probability of a larger scale financial system failure to be low. The VHSI (Volatility Index) of the Hang Seng Index stays around 27, reflecting the market risk aversion has remained high. Technically, Hang Seng index is above 10-days and 250 days SMA but has yet to return to the 20,000 level, technical trend remains weak. Investors may focus on liquidity and confidence issue in the European and American financial industry after the results peak season. We expect Hang Seng index to trade between 19,000 -20,500 points.

The market expects limited upside for US interest rates, which has driven the performance of technology stocks. As artificial intelligence continues to be a market focus, semiconductor companies are also expected to benefit from its development, the related stocks are worth some attention.

ASMPT (522 HK) is engaged in the design, manufacture and marketing of machines, tools and materials used in the semiconductor industry and surface mount technology placement machines. In 2022, the rev was HK$19.3bn, -11.8% YoY, in which semiconductor solution (accounting for 52% of total revenue) dropped 25.2% YoY to HK$10.1bn, and SMT solution (accounting for 48% of total revenue) increased 9.8% to HK$9.259 bn. The net profit was HK$2.62bn, -17.3% YoY.

Mgmt targets revenue in 1Q23 to be US$455mn to 525mn (-27.4% YoY and -11.4% QoQ at mid-point). However, mgmt aims bookings to grow 10%-20% QoQ in 1Q23. In the longer term, mgmt expects the Global Semiconductor Device Market to have CAGR of 8.2% 22-27E, the medium and long-term prospects of the company are still looking good. Although the industry is in a downward cycle in the short term, management is still optimistic about its advanced packaging and automotive business. It is expected that the advanced packaging and automotive business to have CAGR of 13% and 10% from 23 to 27E. In addition, the company is also expected to benefit from the development of ChatGPT, as its customers also include GPU, CPU and memory chips companies. It is recommended to buy at HK$73.0, target at HK$82.0, stop loss at HK$69.0. Risk: If the industry fails to recover as expected in 2H23, it may bring pressure onto the share price.

HUA HONG SEMI (1347 HK) is principally engaged in the manufacture and sale of semiconductor products. In 2022, the company’s revenue was US$2.475 bn, +51.8% YoY, the net profit for the period was US$450 mn. The overall gross profit increased by 86.8% to US$844 mn and the gross profit margin increased by 6.4% to 34.1%, mainly due to the increase in the ASP and the optimization of product mix. During the year, wafer shipments increased 22.8% to 4.09 mn pieces, and capacity utilization remained flat at 107.4%.

Mgmt expects 1Q23 revenue to be US$630mn (flat QoQ), while gross margin drop to 32%-24% from 38.2% in 4Q22. Although the industry is still in a down cycle, mgmt is confident that it can outperform its peers. At the same time, the company also reiterated the capacity expansion plan for the 12” fab. The 12”fab capacity is expected to expand from 65k wafer/month in late 2022 to 95k wafer/month in 2023E. Meanwhile, the construction of the second 12″ fab is to begin in 1H23 at the earliest, and the contribution could commence from 2H24 (total  12” wafer/month is expected to reach 125k in 25E). With the increase in production capacity and efficiency improvement, the company’s future revenue and gross profit are expected to improve. It is recommended to buy at HK$33.5, target at HK$38.0, stop loss at HK$32.0. Risks: Nearly 60% of the company’s revenue comes from consumer electronics products. The global recession may affect the company’s performance.