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Analysis EO
Mar 25, 2020
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Analysis EO
Mar 25, 2020

GigaDevice, China’s Weapon in the Global NOR Flash Battle [1/2]

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.

Analysis EO
Mar 25, 2020
report
Analysis EO
Mar 25, 2020

GigaDevice, China’s Weapon in the Global NOR Flash Battle [2/2]

This is the second chapter of EqualOcean’s ‘two-parter’ about GigaDevice. Before you start reading this article, please check out the first part. In the previous article, we analyzed the market performance of GigaDevice (603986:SH) and its direct competitors. We also went through the company’s history, investment records and latest attempts to widen the business scope. This chapter zeroes in on new opportunities in the NOR flash memory market, as well as GigaDevice’s business results and possible strategic moves in the near future. ‘Good old NOR’ The predecessor of NAND, NOR flash memory, is now living in the shadow of its successor when it comes to absolute numbers. In 2018, for instance, the main players in the segment brought home only USD 3.2 billion, making up only 0.68% of the global semiconductor market in terms of total revenue. By comparison, the world’s manufacturers sold USD 55.79 billion worth of NAND chips, accounting for nearly 12% for the world’s total microelectronic output in the same year.  For a long time, the NOR flash market has been in decline, lacking promising applications. In many areas, it has given up the seat to the more conceptually flexible NAND memory, a market of an oligopolistic structure, comprising Samsung, Kioxia, Micron and SK Hynix, to name a few. In 2012, the former presented 3D NAND, adding a new dimension to the Moore’s-law-constrained industry and putting a spin on the nature of competition in it. Although we, for obvious reasons, wouldn’t expect an appearance of ‘3D NOR’ or any other groundbreaking changes related to this sort of microelectronics, the ‘good old’ category has something to say in the new world order. There is a long list of emerging tech concepts projected to be game-changing across multiple industries that need reliable memory chips with low capacity and fast random read access. They need NOR flash. As the digital universe is expanding, demand for data on every edge is growing exponentially.  Hitherto, the most significant application of this old-hat memory type has been in Active-Matrix Organic Light-Emitting Diode (AMOLED), smart display device technology that is currently expelling Liquid Crystal Display (LCD) from the diverse world of gadgets. The market is booming, stirred by middle-end Chinese vendors that are actively leveraging the technology. Innovations like smaller notch, in-display fingerprint sensors, punch hole and pop-up cameras are driving the growth of AMOLED, per Counterpoint Research. However, the consumer electronics sphere is undergoing some tectonic shifts these days. Handsets have already become growth laggards and are not likely to recover on a global scale (though there is a lot of room for phone brands in developing regions like Africa and Latin America). At the same time, wearables are conquering the world at a mind-boggling speed.  The looming planetwide connectivity will, most probably, become a primary catalyst for economic growth. No surprise here: every single device designed to bridge the physical and the digital, regardless of the degree of its complexity, must contain at least basic non-volatile memory elements. There are a couple of cautionary notes though. Some projections seem too optimistic, especially those attributed to 5G (now, it is hard to say if the next generation of wireless technology will be massively deployed, becoming mainstream in 2020). Even the demand for AMOLED products, perhaps the most down-to-earth category on the list, is barely predictable. Nevertheless, GigaDevice, which has accumulated a whale of industry experience and is deemed to be in China’s tech avant-garde, looks able to navigate through the storm of uncertainties. ‘Good new GigaDevice’? Probably the loudest story touching upon the company’s products is the one about Apple’s earbuds: you can meet this narrative in almost every report on its business prepared by Chinese securities companies. In a nutshell, GigaDevice has provided the American giant with two 128 Mbit SPI NOR flash chips per set of AirPods 2, being its only supplier of this tiny chip. The model, in league with AirPods Pro – which also contains an essential element made by GigaDevice – saw approximately 40-45 million sets shipped in the second half of 2019. In the first six months of the new year, we expect this number to hit 80 million. Many know that the Cupertino juggernaut is somewhat obsessed with in-house hardware. As for the natural question that pops up, the answer is obvious. The Chinese firm’s memory devices are incredibly affordable. Moreover, GigaDevice is on the right track to becoming a de facto monopolist in this narrow submarket. Let’s appeal to history. Skyrocketing demand for NAND flash memory that started in 2007 boosted the market size. After much thought (in some cases), most of the memory chip makers jumped into the emerging segment, concentrating their capabilities around NAND. In 2010, Korean electronics emperor Samsung finally left the field of NOR flash. There were a bunch of enormous shutdowns at that time. Not seeing much potential in the space, Micron Technology closed an 8-inch NOR production line in Singapore in 2016. A year later, Cypress Semiconductor (CY:NASDAQ) announced its withdrawal from the low-end market. As a result, the industry is forging ahead with a quasi-monopolistic structure, with fewer players involved all the time.  The firm’s involvement in AirPods manufacturing is important due to at least two fundamental reasons. First, it brings GigaDevice cash. In 2019, its share in the global NOR flash market grew from 9.6% in the first quarter to 13.9% in the second, then hit a record 18% in the third. In the meantime, the hearables went off like hot cakes. Second, the accumulated experience and the economy of scale might help it to win more contracts with Android-based phone brands. It is noteworthy that last year Android TWS surpassed Apple by the number of shipments.  Microcontroller units (MCUs), a relatively new business of the company, turned out to be a promising spot as well. In 2018, for example, GigaDevice received CNY 405 million (around USD 57 million) from this direction. As the core technology is maturing and the customer base is expanding, it is projected to get a major boost in the next few years. The epidemic has become a growth driver here too: the chipmaker has reportedly started (in Chinese) making MCUs for temperature guns. We estimate that GigaDevice sold nearly CNY 60 million (USD 8.43 million) worth of microcontrollers in 2019 and is likely to double this figure in 2020. GigaDevice is expected to announce its annual 2019 results on March 27. While last year’s earbud boom stands an excellent chance to force its revenue up, concerns abound about how things can unfold in 2020.