The Shanghai Stock Exchange (SSE) STAR Market recently began to gather pace: 141 companies submitted listing applications as of June 28. The platform was designed to upgrade the complex system of links between capital markets and leading tech firms in China. China Securities Regulatory Commission (CSRC) and other state bodies in charge plan to reach this goal by carrying out a set of fundamental reforms. Intention to allow unprofitable companies to go public on the SSE heads the list of the most anticipated changes here. Has this expectation been met since the fresh venue was opened on March 18? Three months have passed; there is a proper time to reflect on this.

According to the official data, just five out of 141 companies that initiated their relationships with the Shanghai bourse were unprofitable in 2018; and only one of them has been incurring huge (billions of yuan) losses – HeJian Technology (和舰芯片). The Suzhou-based semiconductor foundry company possesses a broad upstream network that includes a number of local industry kingpins such as MediaTek Inc., Silergy Corp., Novatek Microelectronics (联咏科技) and UnisCom (紫光集团). As a foundry, it provides its clients with products designed for the direct embedding into electronic devices of several categories including automotive, smartphones, VR/AR systems, laptops, unmanned aerial vehicles and so on. The company is in top gear: throughout the last three years, the factory's real performance has been exceeding the declared monthly capacity of 60,000 wafers. For instance, the figure of 856,934 (or monthly average of 71,411) was recorded in 2018.

In the past, the firm was illegally financed and then acquired by the Taiwan-based world's leading chipmaker UMC (United Microelectronics Corporation). Now, pursuing listing on a local marketplace is seemingly the only choice for HeJian Technology as its parent company was previously mixed up with some issues of intellectual property rights violation. This fact leads to the company's exposure to the greater risks these days.

Going back to the "why this firm is so different" issue, let's have a glance at the key financial indicators: 

Over the last three years, HeJian Technology has been losing money badly: almost CNY 3 billion (USD 436.5 million) of loss was recorded in 2018, topping off the continuous dive. Is it an unviable model per se or we just look at the temporary deviation?

What's wrong with it?

Firstly, it isn't easy to be a foundry nowadays. History shows that each time a new generation of semiconductors appears on the global scene, inner costs of the product increase. Given the fact that the mighty demand-side players (spurred by their own downstream buyers' expectations) always want prices to drop, companies from this link of the supply chain need to keep spending in order to stay in the game.

Another key factor is the market rivalry. A spoiler: it's fierce. Chinese subsidiaries of the major international corporations, such as Intel, Samsung and Hynix, possess the largest shares in the industry. 

With a tiny piece (and the eighth place among the major players in the sector) of 2.32%, HeJian Technology can't claim that it levers the market. Lacking the scale, it is rather a follower than a leader. However, the company may do well in the narrow segments by targeting certain chip models and concentrating on innovative solutions (the firm's R&D expenses amounted to 10.45% of the total revenue in 2018).

The fundamental industry characteristics and the state of affairs on the semiconductor battlefield that are described above severely affect the long-term performance of the Suzhou-based chipmaker. Other two factors appearing in such a capital-intensive industry are renovation and production expansion, the fixed costs related to these processes might be crucial. As mentioned in the prospectus, HeJian Technology records negative gross margins (-20.24% and -37.36% in 2017 and 2018 respectively). It is primarly caused by the launch of the new plant in Xiamen and capital reequipment. Quite natural.

To sum up, there are both objective and subjective phenomena contributing to the latest negative financial records of the firm. Nevertheless, it is the second (after SMIC) local player in the field so far, its involvement in the new marketplace project is of the strategic importance. 

The big picture

Semiconductor manufacturing businesses are on the upswing lately: total industry sales revenue of almost USD 478 billion was recorded in 2018, and this figure has been growing at a CAGR of 8.7% since 2009. 

No wonder why the chipmakers' market performance is overly sensitive to the shocks affecting their downstream supply-chain partners (among the most recent stories: the industry players around the globe were jolted by the Huawei ban). In the modern globally integrated manufacturing ecosystems all the commotions appearing are prone to be echoed across the whole supply chain. Foundries are being placed between Scylla and Charybdis and HeJian Technology isn't an exception.