This is the first chapter of EqualOcean’s ‘two-parter’ about GigaDevice. Click here to read the following article.
In the days of turbulence caused by the COVID-19 pandemic, many fund managers can be seen keeping tabs on the stock market's ‘fear gauges,’ such as the Chicago Board Options Exchange’s (CBOE’s) volatility index (known as VIX), or betting on remote-working software developers, online education companies and other obvious short-term winners. Meanwhile, the recent selloffs present a plethora of buy-and-hold opportunities.
With its bold opening-up strategy, China – which, at the time of writing, seems to be finally controlling the outbreak domestically – is becoming more attractive for foreign capital. Now, some industry analysts are even promoting the country’s capital market as a hedge. A few weeks ago, this statement could be considered a joke – a cheap one. In many ways, we are in unchartered waters.
Among all the knowledge-intensive industries, the semiconductor sector is deemed to be principal in China’s future endeavors. Since 2015, the local businesses have been spending more on imported microelectronic devices than on crude oil coming from other countries. Resulting from countless attempts to bolster the nascent field, a number of chipmakers have gone public on the mainland’s bourses over the past several years. Among them, GigaDevice (603986:SH, 兆易创新), a fabless flash memory developer, offered its shares on the Shanghai exchange in August 2016.
Surrounded by well-documented hype, the Beijing-based company’s shares leaped from CNY 23.26 (USD 3.27) apiece on the first trading day to CNY 426.16 (USD 59.89) on February 25, 2020. (Hereinafter, USD/CNY = 7.1160 as of March 23, 7:03 GMT.)
Last year, the firm was on the upswing both by the absolute and relative means – compared to its global counterparts, GigaDevice performed decently as well. As a consequence, it rolled into 2020 as the second-largest NOR flash producer in the world, trailing only Idaho-based giant Micron (MU:NASDAQ).
The symptoms
The Chinese semiconductor industry, like almost everything else on this planet, was jolted heavily by the now-omnipresent disease. The chipmaker was no exception: the bloodcurdling outbreak pushed the stock into a four-week-long dip. On March 23, GigaDevice closed trading at CNY 246.42 (USD 34.63), or 42.18% lower than its February peak.
Multiple market insiders now believe that the firm is undervalued. “The [company’s] current market capitalization is a result of the systematic crisis,” an industry source told EqualOcean. “We expect the stock to recover right after it publishes financial results on March 27.” Chinese brokerage Northeast Securities gave GigaDevice a buy rating with a six-month target of CNY 374.4 (USD 52.61) on March 6.
While the colliding black swans are making the real situation around the valuation accuracy unclear, there is another critical note to sound about GigaDevice. The company is, in many respects, a metonym (read: a sort of ‘mini-me’) of China’s high-tech mass market as a whole.
First, it is a chipmaker – the sector has the highest priority in the state’s current development strategy. Second, it is directly backed by the China Integrated Circuit Industry Investment Fund, known as the Big Fund – which, by the way, is planning to sell out a part of its 9.7% stake in the firm. Third, the chips it is manufacturing can hardly be embedded in any new-generation device – they are mostly customized for low-end gadgets (the only exception is, probably, Apple’s AirPods; we talk about this application in the second chapter). And this is not an extensive list of features that resemble Chinese technology on a larger scale.
The genesis
A Tsinghua University alumnus, Zhu Yiming had spent several years in Silicon Valley before registering GigaDevice in 2004 and then, nine months down the road, returning to China. The company’s Beijing headquarters started operating in April 2005, rolling out the first Static Random-Access Memory (SRAM) product almost immediately.
Three years later, the young chipmaker completed a milestone project, launching China’s first Serial Peripheral Interface (SPI) NOR flash memory chip. With its NOR capabilities continuously growing, the expanding engineering team entered the Microcontroller Unit (MCU) market in 2013. In the same year, it developed an SPI NAND flash memory chip – the world’s first, as the company claims.
Following the fabless model typically requires high research and development expenses: spurred by the immortal Moore’s law and international competition, the lifespan of each generation of chips has been shrinking since flash memory was invented by Toshiba in 1984. This fact is seemingly well-understood by GigaDevice’s top management. For one, in the first three quarters of 2019, they poured CNY 243.22 million (USD 34.18 million) to push innovation internally – over 62% more than 2018.
R&D has always been key. To maintain its ever-running projects, the firm closed several Venture Capital (VC) deals before the IPO. From a seed investment of USD 50,000 from Northern Light VC’s founder Feng Deng in June 2005 to massive late-stage funding rounds (Series D in 2011 and Series E in 2012) involving most of the locally prominent hardware-focused private equity funds.
In 2016, after a successful IPO, GigaDevice, a private sector offspring with a sharp startup profile, found itself among the enterprises the Chinese government was betting on in the intensifying race for global semiconductor dominance. Around one year later, the Big Fund bought 11% of its stock, becoming the second on the list of the chipmaker’s shareholders after its founder.
Besides being an object in the private equity domain, Mr. Zhu’s brainchild has also been exploring value-added opportunities as an investor. It has taken part in a handful of early-stage funding events, including Resistive Random Access Memory (RRAM) project Reliance Memory’s (睿科微电子) Series A in 2018. The startup is a joint venture of GigaDevice, Rambus (RMBS:NASDAQ) and a few other entities.
The memory developer has also made some investments in well-established enterprises. One case is its acquisition of 1.02% of the mainland’s most significant foundry – Semiconductor Manufacturing International Corporation (SMIC, 0981:HK) in November 2017. After that transaction, GigaDevice became the fifth-largest shareholder of the fab behemoth.
Resulting from the balanced market positioning and ecosystem-focused approach, the firm has grown into a solid regional force in the field of mergers and acquisitions. In 2018, it gobbled up biometric sensor System-on-a-Chip (SoC) solution provider Silead for CNY 1.7 billion (USD 238.9 million). Worth mentioning is that it previously had been attempting to buy American memory device company Integrated Silicon Solution Inc (ISSI), but the deal eventually fell through.
All these synergy-seeking actions have affected the chipmaker’s product mix resilience. It is now developing independent products in NAND flash and MCU segments. More surprising is that the company intends to etch into the volatile memory domain, cooperating with ChangXin Memory Technologies (CXMT), a four-year-old challenger that is projected to occupy China’s still-empty spot in the global Dynamic Random-Access Memory (DRAM) market, taking on the likes of Samsung, SK Hynix and Micron.
Both chipmakers have become essential pillars of the country’s national strategy. In October 2017, they signed an agreement, launching a 19 nm DRAM memory development project, with a staggering budget of about CNY 18 billion (USD 2.53 billion), 20% of which was contributed by the Beijing company. Crowned with success, the product entered the mass production stage in July 2018. At the same time, Zhu Yiming was appointed as a new CEO at ChangXin – a quite unusual move for China, which rarely engages private-sector representatives into core national development programs.
Apparently, these are not all the subsectors GigaDevice is now present in. Nonetheless, NOR flash memory remains its core competency. In the following article of this series, we will talk about new applications in the global NOR flash memory market as well as the company’s current business results and possible future directions.