Hua Hong's Recovery Is Around the Corner, but Long-Term Prospects Weighed by Heavy Capital Spending

As the second-largest foundry in China, Hua Hong Semiconductor, or Hua Hong, focuses on providing specialty products that perform narrower sets of tasks compared with the most advanced processors. These tasks range from storing small bits of data for very long periods to regulating electricity flows. Hua Hong has no intention to offer cutting-edge chips like smartphone and data center processors, owing to financial, scale, and personnel constraints. Most of Hua Hong’s offerings are commoditized as they are fabricated on process technologies that first debuted over a decade ago. Customers can obtain a perfect or very close substitute at other chipmakers barring major shortages, which limits Hua Hong’s pricing power.