The chipmaker got the green light from the country's financial regulator on November 26. What’s special about its business?
The Shanghai Stock Exchange Sci-Tech Innovation Board, also known as the Star Market, is about to welcome another microelectronics company – Giantec Semiconductor (聚辰半导体, A19012:SH). Meanwhile, the number of stocks listed on China’s new Nasdaq-style platform is growing: fifty-six firms have already completed their public offerings, with a dozen more currently preparing to kick off trading.
Giantec is another Shanghai-based semiconductor firm that is willing to dip its toe into the local capital market’s waters. Founded roughly 10 years ago, it has grown into one of the most significant providers of electrically erasable programmable read-only memory (EEPROM) chips – microdevices that are typically used to store configuration parameters in personal computers and other intelligent tools of the digital era. These tiny things loom large in the company’s output structure, accounting for 88.4% of its operating income in the first half of 2019.
Smart card chips and driver integrated circuits (IC) for voice coil motors can also be found in Giantec’s product mix. Together with the rest of the chipmaker’s non-EEPROM devices, they have netted CNY 167.18 million (USD 23.79 million) over the past three years. Both the absolute figures and the relative weights of these two types of chips in the company’s financial results have been declining steadily, with the main product line boosting its total value from CNY 239.59 million (USD 34.09 million) in 2016 to CNY 385.52 million (USD 54.85 million) in 2018.
Remarkably, this is the case when there is a strong relationship between the capital outlay and revenue structure, which often leads to huge economies of scale. Giantec is no exception. According to the prospectus filed with the market regulator, the gross profit margin of EEPROM production has been hovering between 50% and 56% since 2016. The numbers are way more meager for two other categories. For example, the indicator hit 27%, 24% and 28% in 2016, 2017 and 2018 respectively, for smart card chips.
In the EEPROM field, one of the most commoditized segments of the complex global semiconductor industry, the Shanghai chip designer competes against the likes of Arizona-based Cactus Semiconductor (acquired by medical device firm Cirtec in 2018), European conglomerate STMicroelectronics (one of the five biggest auto chip makers globally; STM:NYSE) and sixty-year-old Japanese corporation Rohm (6963:JP). Tough.
In China, FMD (Fremont Micro Devices; 辉芒微电子), Shanghai Fudan Microelectronics (上海复旦; 1385:HK) and Hua Hong (华虹; 1347:HK) represent direct competition for Giantec. Though they are a few steps behind the Star Market applicant in terms of sales, the capabilities (and thus the scope) of each of these companies are more diverse. Fudan Microelectronics, for instance, markets a handful of application-specific integrated circuits (ASIC); it also provides full-cycle solutions for finance, transport, insurance and several other industries.
The abovementioned STMicroelectronics and Atmel, an American company that was gobbled up by Microchip Technology (MCHP:Nasdaq) three years ago, together possess nearly 60% of the market. This duopoly seems to be solid; however, it is possible to outplay the giants by leveraging the geographical advantage. Asia-Pacific is known for manufacturing the lion’s share of consumer electronics sold around the world; the overwhelming capacities that have been built here over the past decades tell us that this is not likely to change in the short term.
With an enormous list of clients comprising renowned brands such as Samsung, Huawei, vivo, oppo, Xiaomi and Lenovo, Giantec is doing well in this harsh submarket (gross margins are strangely high for a highly competitive field though). Besides, it is a de facto leader within some narrow segments. For one thing, in 2018, it grabbed a 42.72% share of EEPROM in the smartphone camera market, outshining STMicroelectronics (the second with 23.3%) and Nasdaq-listed ON Semiconductor (the third with 14.29%).
Adopting the fabless business model, the firm is outsourcing almost everything physical – from raw materials to manufacturing. With over five dozen people (two-thirds of whom hold a master’s degree) driving innovation, it is fully concentrated on the most vital activity – research and development. However, the capital allocated in this direction might be not enough to revolutionize the sector: R&D expense-to-operating income, one of our usual metrics, was only 14.67% last year. This is rather disappointing for a small-sized microelectronics company.
The chipmaker’s major supply chain upstream (or downstream – the scheme is somewhat inverted in this industry) partner network includes famous foundry Semiconductor Manufacturing International Corporation (中芯国际; 0981:HK), which is widely considered the next challenger of the world’s largest semiconductor company – TSMC (TSM:NYSE), which can now boast about a USD 270 billion market cap.
Other well-known names on the list are the Chinese mainland’s biggest Outsourced Semiconductor Assembly and Test (OSAT) factory, Changjiang Electronics (JCET, 江阴长电; 600584:SH), and Advanced Semiconductor Engineering Group (ASEG, 日月光半导体; 3711:TW) who are in charge of assembling and functional testing. Last year, these and three other companies collected as much as CNY 256.23 million (USD 36.42 million) from Giantec for their services. In the first half of this year, this number hit CNY 147.47 million (USD 20.96 million).
As we have noticed in earlier articles, the Star board (read more about the new venue in latest EqualOcean report -- download) is now gathering not just distinct technology-driven enterprises, but whole production ecosystems. This implies both the value chain and geographical aspects. One example is that all the chipmaking players here – from tiddlers like Anji (688019:SH) to goliaths such as Montage (688008:SH), which is the most massive stock on the sci-tech board at the moment – are headquartered in Shanghai. Furthermore, most of their fabs and other core facilities are located at the heart of the Yangtze River Delta as well.
This natural-looking disposition might be a part of a bigger plan that has been gradually carried out by the country at large. When the ChiNext board – the first technology-focused marketplace experiment that was also inspired by Nasdaq – launched trading in 2009, the Shenzhen bourse saw an influx of local hardware developers over the next several years. Following this logic, the fresh Shanghai venue is, quite obviously, designed to activate the next generation of startups in Eastern China.
Here it comes. Direct financing is not the only thing the new board was created for. The richer-than-ever country can’t rely upon the old growth drivers anymore. Continually improving living conditions are pummeling the advantage of the cheap labor pool, leading to a natural shift from the low-end segments across a handful of markets. Therefore, extensive economic growth is not an option for China. It needs to either look for micro-innovation in certain spheres and/or foster synergies between the existing market actors.
The Star Market is about the latter. And Giantec’s example is illustrative.