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Analysis EO
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Analysis EO
Jul 16, 2020 10:10 am ·

China’s Semiconductor Scene, SMIC and Its Star Market IPO

Looking back into the history of China’s A-share market, companies raising the largest amount of funds in their initial public offerings are those operating in the traditional industries like banking, coal mining or oil and gas. But the situation is poised to change after the country’s largest semiconductor foundry, SMIC (00981:HKEX, 688981:SH) goes public on the Star Market. According to its prospectus and a few pre-trading announcements, SMIC will raise at least CNY 46.30 billion, just a little lower than CNY 46.60 billion that the country’s major bank ICBC (601398:SH) obtained in its IPO in 2006. The foundry has become the first technology firm in the top 10 companies with the highest IPO funding in the history of China’s capital market. Prior to SMIC, railway giant CRSC (03969:HKEX, 688009:SH) was the first company listed in Hong Kong and the Star Market at the same time and has the largest IPO size of CNY 10.53 billion among stocks listed on the Star Market. Meanwhile, Foxconn Industrial Internet (601138:SH) was the technology firm that raised the most money in a mainland IPO to date. Why is SMIC back to the A-share market at this stage? Why has it chosen the Star Market? Trade disputes between China and the United States originally started in March 2018, with the main raising tariffs involving seafood, agricultural products, fruits and daily necessities. Worse than that, the US is now trying to restrict China’s development in technology. For instance, since 2019, the US has put Huawei and its subsidiaries on the ‘entity list’ of export control.  As one significant supplier of Huawei, TSMC is undoubtedly significant in the standoff between the US and China. Owing to the most advanced 7nm processing techniques, TSMC possesses the initiative. Just as it said that other customers are ready to step in and fill the gap if the US sanctions force the chipmaker to cut ties with Huawei. Under these circumstances, it is urgent for Huawei to find a foundry to substitute TSMC. At the end of 2019, SMIC announced (in Chinese) that it had realized the volume production of 14nm and has won orders from Huawei to be equipped in Kirin 710A.  SMIC is the best choice for Huawei around the country, but it lags behind TSMC at about two generations of process nodes. While TSMC’s 7nm node techniques are commonly used in chips and 5nm will be mass-produced this year, SMIC just realized 14nm processing and its microdevice-level performance cannot be as good as TSMC’s.  In terms of R&D expenditures, TSMC can definitely be self-sufficient. TSMC’s enormous demands dilute costs, and a large number of revenues guarantee high R&D investment demands, forming a positive business cycle. Considering it is hard for domestic technology companies like SMIC to achieve a more competitive position in the world, the government created Star Market, where the first batch of stocks kicked off trading since July 22, 2019. Within one year after establishment, the Star Market became an important place for high tech firms to go public. In addition, considering the strict ban released in May and how much attention has been paid to SMIC since its realization of 14nm last year, it is a good time to go back to A-shares through the Star Market. Affected by the news that SMIC will go public in the Star Market, its Hong Kong stock price has increased a lot. Since June 1, when SMIC submitted its prospectus to the Shanghai Stock Exchange, the stock price of SMIC in HKEX has increased 148.22% by the end of July 14, 2020, and it has gone up by 250.08% this year.  Comparing SMIC’s P/E ratio and market share with UMC and TSMC, we can find that the valuation of SMIC is higher. P/E ratio for SMIC is four times that of TSMC while its market is less than 1/10 of TSMC. Besides, for the same company, the price of A-shares is higher than that of shares in the Hong Kong market, and the valuation in the Star Market tends to be higher than other boards in A-shares, like the mainboard, which means that after SMIC going public in the Star Market, its share price and P/E is likely to be even higher. Apart from that, SMIC’s chance to be listed in the Star Market has attracted private investors’ attention. Most of them hold positive views on its future development. In the short term, its stock price will increase, but in the long term, the market will become rational and the price will stabilize at some stage. With investment from the China National Integrated Circuit Industry Investment Fund (CICIIF or 'Big Fund') and other supportive policies, SMIC has accumulated large amounts of funds for R&D. However, to fully realize business sustainability, there is a long way to go.  Last but not least, as the youngest market of Chinese A-share, the Star Market will launch the ‘STAR 50’ index starting from July 22, 2020. It is probable that SMIC will be added into that portfolio when it meets the requirements of the time length of having been listed in the Star Market.

Analysis EO
Analysis · 2
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Analysis EO
Jul 6, 2020 05:24 pm ·

Chips on Shoulders: China’s 10 Largest Public Semiconductor Companies

The United States released a new ban in May, preventing companies using software and hardware developed by American firms from doing business with Huawei without specific approval. Though China has shouted its slogan of ‘supporting domestically produced chips’ for many years, its capabilities in the domain are still lagging behind those of more developed economies. In recent years, many local chip companies have made progress, reaching new milestones and nabbing significant shares of the global semiconductor market. EqualOcean has long been keeping a close eye on China’s semiconductor industry. In this article, we introduce the 10 largest publicly traded Chinese chipmakers that are worth following, given the country’s attempts to further open its financial markets. Will Semiconductor (603501:SH) completed the acquisition of OmniVision and Superpix in 2019, both of which are image sensor manufacturers. OmniVision ranks third by 9% after Sony (42%) and Samsung (22%) in the globe. After that, revenues increased from CNY 3.96 billion (CNY 9.7 after adjustment) in 2018 to CNY 13.63 billion in 2019. Among all products and services, CMOS contributed the most, accounting for about 71.94% of total revenues.  SMIC (00981:HKEX), one of the largest foundries globally, won orders from Huawei after achieving an unprecedented leap from 28 nm to 14 nm lithography. The process, which spans two generations at a time, is mainly due to Liang Mengsong’s participation. He used to be the director of TSMC’s R&D department and helped Samsung directly jump to 14nm after leaving TSMC. AMEC (688012:SH), or Advanced Micro-Fabrication Equipment, develops electronic equipment for front-end semiconductor manufacturing, back-end wafer-level packaging, LED production, micro-electromechanical system (MEMS) applications and other Integrated Circuit (IC) fabrication processes. Its downstream is pretty much localized: over 83% of its 2019 revenue came from China’s mainland-based clients. Meanwhile, the domestic semiconductor manufacturing equipment market more than tripled in the past five years, reaching nearly USD 13.5 billion in 2019. Montage Technology (688008:SH), which started its way in the noughties as a TV chipset producer, has evolved into China’s top memory interface chip designer. Recently, the company has also been involved in a few alternative projects. One example is its new server platform Central Processing Unit (CPU) for data centers that entered the mass production stage in 2018, after two years of cooperation with Intel and China’s top school and research center Tsinghua University. GigaDevice (603986:SH) is a fabless flash memory developer developing independent products in NAND flash and MCU segments, 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.  Goodix (603160:SH) is a fingerprint-recognition and touch chips seller, and two such kinds of products accounted for 99.65% of total revenues in 2019. It has cooperated with terminal giants including Huawei, OPPO, vivo and Samsung. The company realized a gross profit margin of 60.40% in 2019, because of the large-scale commercial use of new products. Naura (002371:SZ) has realized the mass-production of high-end semiconductor equipment, including 12-inch silicon etching machine, metal PVD, vertical oxidation/reduction stoves and wet cleaning machines. Among the two major business segments, electronics manufacturing equipment business achieved operating income of CNY 3.19 billion and the electronic components business achieved CNY 847 million, accounting for 78.64% and 20.88% of total revenues in 2019. NSIG (688126:SH) is one of the biggest semiconductor silicon wafer manufacturers in China, mainly providing 300mm and below products. The global semiconductor wafer industry has a high market concentration. In recent years, the market shares of the top five semiconductor wafer factories in the world are over 90%, showing an oligopoly pattern. The company is relatively small, accounting for 1.26% of the global market in 2018. Over 70% of revenues in 2019 were from the market outside of China’s mainland. Maxscend (300782:SZ) is an enterprise of domestic chips in the field of RF front-end segmentation. As two main kinds of Radio Frequency (RF) products of the company – switch and low-noise amplifiers – accounted for 79.86% and 16.87% of total revenues respectively in 2019. Samsung, Huawei, Xiaomi, OPPO and vivo are Maxscend’s customers, and according to the performance in recent two years, over 71% of its revenues came from the overseas market. Changjiang Electronics (JCET) (600584:SH) provides one-stop services for microsystem integration, packaging and testing. It has a close relationship with SMIC, because the chairman of JCET, Zhou Zixue holds the same position in SMIC. Those two parties made up the vacant parts of the domestic chip industry. According to TrendForce, in the global packaging and testing market in 2019Q3, JCET ranks third by 17% after ASE (36%, including Siliconware Precision Industries’ 13% of the market share) and Amkor (19%.) Divided by region, 78.61% of its revenues in 2019 come from the overseas market. These 10 companies’ business scopes cover three main steps of the chip-making process: design, manufacturing, packaging and testing. While it seems that Chinese firms are capable of producing completely domestic chips, there are some problems to be considered: 1)    IP authorization. The vast majority of fabless firms need to purchase IP from overseas companies like ARM and Cadence, to place their design upon it. 2)    Local technologies are lagging behind those of some companies outside of China. For instance, SMIC can produce 14nm chips while TSMC can manufacture 7nm and 5nm, which is necessary, for one, when it comes to 5G devices. 3)    Tracing the upstream of the industry chain, it is hard to avoid American technology in the whole process. Apart from those public companies, there are quite a few significant private mainland-based chipmakers worth attention. For instance, 13 out of 50 worldwide upstarts mentioned in EqualOcean’s report ‘Semiconductors: Trends and Startups 2019’ are China-based.

Analysis EO
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Analysis EO
Jun 28, 2020 07:28 pm ·

Cambricon: Staggering Growth, IPO and Post-Huawei Uncertainty

► AI chips for terminal devices are not likely to be the focus of Cambricon in the near future. ► The company’s growth is likely to come from the sales of cloud and edge AI chips and intelligent computing cluster systems. ► The competition in these new fields is stiff, both countrywide and on a global scale – this will be a hard nut to crack for Cambricon. On June 23, Cambricon passed the Shanghai Stock Exchange Listing Committee’s review and is now expected to start trading on the Star Market in July. This article reveals the chipmaker’s product mix, its key problems and its role in China’s semiconductor renaissance. Founded in 2016, Cambricon is a company focusing on the research and development of AI chips for cloud, edge and terminal application scenarios.  Its revenue structure has so far been somewhat imbalanced. According to the prospectus, the biggest changes of its revenue structure came in 2017 and 2018 – over 98% of company revenues then came from the intelligent terminal processors’ IP business. While, in 2019, the intelligent computing cluster business became the main constituent of revenues, followed by cloud intelligent chips and accelerator business. Below, we describe each of Cambricon’s businesses. Terminal intelligent processor IP The terminal intelligent processor IP business (primarily, Cambricon 1A, 1H and 1M series) was the only significant source of the company's income in 2017 and 2018.  Cambricon’s former-largest client accounted for 98.34% and 97.63% of operating revenues in 2017 and 2018 respectively. Huawei signed four contracts with the company, three of which were completed in 2018; the last one was due at the end of 2019. Since that, the telecom equipment giant hasn’t placed any orders with Cambricon, as it started building IP for its System-on-a-Chip (SoC) series, Kirin, in-house in the second half of 2019.  That was the very reason for Cambricon’s revenues from its IP business decreasing from CNY 117 million in 2018 to CNY 69 million in 2019. The share of this segment in the firm’s revenue dropped from 99.69% to 15.49% over that period. The quest for self-sufficiency is an industry-wide trend. Not only Huawei but also Apple (AAPL:Nasdaq) is now designing chips by itself to better match requirements for product performance. Other Chinese companies (like vivo and OPPO, for example) have stable relationships with the likes of Qualcomm (QCOM:Nasdaq.) Unless the United States government starts to prohibit the supply, there is no reason for those vendors to replace the original partner with local entities. Most probably, the IP-related revenues of Cambricon will not increase in both absolute and relative terms in 2019. Cloud intelligent AI chips and intelligent computing clusters In addition to processors for the terminal, Cambricon also designs AI chips for the cloud, including MLU 100, 270 and 290. In the cloud, servers and data centers need to process a large amount of raw data, which has high requirements for computing power and data storage of basic hardware. The demand for data center services is growing fast. According to IDC data, the scale of China's smart server market in 2018 was USD 1.31 billion, with a year-on-year increase of 131%, and will reach USD 4.33 billion by 2023. The overall CAGR of the market will reach 27.08%. Considering that the budget of AI chips accounts for 30%-35% of the cost of AI servers, the future demand for AI chips in the Chinese server market is expected to exceed CNY 10 billion. Apart from cloud AI chips, Cambricon provides customized software and hardware solutions. For clients with AI computing construction capabilities, Cambricon integrates the cloud intelligent chip accelerator cards into the existing computing cluster.  The core of this business consists of three parts, including cloud intelligent chip accelerators (MLU 270, 100), the basic system software platform – Cambricon Neuware – and an intelligent computing cluster management system. Edge AI chips In November 2019, Cambricon launched MLU 220, an AI acceleration product dedicated to edge computing application scenarios. On the one hand, edge computing can effectively make up for the disadvantage of the insufficient computing power of terminal devices. On the other hand, it can alleviate potential problems such as data security, privacy protection, bandwidth and delay in cloud computing scenarios. The combination of edge computing and AI technology is widely deemed to be helpful in the development of smart manufacturing, retail, education, home IoT, energy management, transportation and other fields. At the edge side, with the rapid commercialization of 5G in China, various supporting industries in the 5G industry will usher in opportunities for rapid development, and application industries such as V2X, Industrial Internet and Internet of Things will gradually enter a new stage of development. According to CCID Consulting, China’s edge computing market will reach CNY 32.53 billion by 2022. Noticing the value of edge AI chips, major semiconductor companies have entered the area. For instance, Nvidia launched the Xavier NX in November 2019 and Huawei’s Ascend, the computing power of which is 8TOPS. As a new niche player in this field, Cambricon does not seem to have any competitive advantage. Cambricon as a part of China’s big semiconductor story Since the US launched stricter bans on Huawei, more attention has been paid to the domestic semiconductor industry. The Shanghai bourse’s new tech board is becoming a great channel for financing for those high-tech companies. For instance, the country’s top foundry SMIC submitted the application for the secondary listing on the Star Market on June 1, passed the registration review on June 22, and will launch trading in July.  With the support of the government, the semiconductor industry is likely to have new development opportunities. However, in contrast to SMIC, Cambricon is an AI chip designer, subject to ever-appearing challenges on both ends of the industry chain – upstream and downstream.  On the supply side, they need IP and EDA authorization from ARM, Synopsys and Cadence. On the customer side, the original largest customer started designing its own chips in-house. It’s hard for them to find a substitute as big as Huawei, or one as reliable and comparatively broad in its pool of terminal users. Turning to the cloud and the edge, AI chips can help Cambricon achieve new growth opportunities and, indeed, this contributed a lot to its increase in revenues in 2019. The problem is that with the development of IoT, Internet giants are also establishing companies to research and develop AI chips. For example, PingTouGe, Alibaba's wholly-owned chip arm, achieves cloud and terminal technological innovation through software and hardware convergence. In an industry with high R&D investment requirements, CNY 2.8 billion, which the firm aims to raise this time, can only support Cambricon in the short-term. How to survive in the increasingly competitive market, in the long run, depends on the strategy, product performance and many other aspects. We can say one thing with certainty: it’s not easy.

Analysis EO
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Analysis EO
Jun 23, 2020 01:45 am ·

SMIC to Land on Star Market in July

► It raised an enormous fund to accelerate R&D and increase working capital. ► As the king of chip firms in mainland China, Semiconductor Manufacturing International Corporation (SMIC) owns massive patents and is set to further increase product competency. The Shanghai Stock Exchange (SSE) disclosed SMIC’s prospectus on June 1. After 19 days, the listing committee of Star board has finally approved its IPO. As a result, the firm will go public next month, and its financing scale will set a new record on the history of the Star board. The Chinese chipmaker is one of the largest chip foundries globally, with over 10,000 employees. Moreover, it is the largest circuit chip manufacturer in China by its production line size, providing integrated circuit (IC) foundry capacities ranging from 0.35 micron to 14 nm. The firm was founded in 2000, yet the first few years were not easy. From 2004 to 2012, the integrated circuit maker SMIC was in an intellectual property dispute with Taiwan Semiconductor Manufacturing Company (TSMC). After 2012, SMIC changed its strategy, in a move to increase its operational efficiency. Over the past 20 years, SMIC has transformed its chips from 250 nm to 14 nm. Considering the current global politic-economic environment, SMIC's plans for the STAR market listing are reasonable. Firstly, there are relaxed listings thresholds in the STAR market for chipmakers like SMIC. Secondly, keeping trading in the US market would not benefit this chip-manufacturer. Due to its low trading volumes of American depositary receipts (ADRs) and high-executive compensations, SMIC was delisted from the New York Stock Exchange (NYSE) on June 13, 2019. Last but not least, the China Securities Regulatory Commission (CSRC) has lowered the threshold for red chip firms to return to A-share market. Moreover, the US has stopped exporting chips to Huawei, which has triggered the collaboration between Huawei and SMIC. Thus, this situation suggests it is an appropriate time for SMIC to go back to China. Regarding SMIC's intended fundraisings, USD 2.8 billion is comparatively large, surpassing the railway communications giant China Railway Signal & Communication Corporation’s (中国通号) USD 1.5 billion fundraising. In other words, SMIC’s massive fundraisings imply investors’ confidence for its promising future. With its IPO in July, this amount would also surpass SMIC's past fundraising. On November 28, 2017, SMIC raised USD 0.972 billion totally from equity portfolios in the Hong Kong Stock Exchange (HKSE). These fundraisings were quite smaller when compared with US$2.8 billion. As for the value per share, SMIC would issue for US$0.004 per share, the same as its H-share. 40% of the intended USD 2.8 billion would be invested in the “SN1 12-inch chip” (12英吋芯片SN1), 20% for storage fund of R&D and 40% for capital liquidity. From 2014 to the first quarter of 2020, SMIC showed a steady growth, of around 58%, in its operating revenue. When comparing semiconductor firms, the ratio of R&D expenditure to operating income should not be ignored, as it can show the efficiency of firms’ spending on R&D. As for domestic comparisons, SMIC owned the highest ratio of R&D expenditure to operating income for 22%, quite higher than the second-ranking firm United Microelectronics Corporation’s (联华电子) 8%. Meanwhile, in the global market, there is still a gap between SMIC and other international chipmakers, such as TSMC. For instance, TSMC made its thinnest chip to 7 nm, while SMIC's thinnest one is still 14 nm. In a word, stepping into the Star market is a turning point for both SMIC and China's high-tech industry. Although there is competition from global firms like TSMC and Samsung, the Chinese chipmaker is trying to catch up with them. Specifically, it is making every effort to make its chips smaller, to 7 nm. The potential collaboration with Huawei could also be seen as an example. Moreover, it could prompt other China concept stocks to return later. 

Analysis EO
Analysis · 2
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Analysis EO
Jun 18, 2020 11:17 am ·

Life after TSMC: Is SMIC Able to Serve Huawei and Co.?

► Semiconductor Manufacturing International Corporation (SMIC) is one of China’s biggest bets in the global semiconductor race. ► Lavishly invested in by the government over recent years, the foundry has been getting technologically advanced, but is still lacking in talents. ► The global economic turbulence is presenting both risks and opportunities. The Integrated Circuit (IC) manufacturing process can be divided into three major steps: IC design, foundry, packaging and testing. The specific traits of the semiconductor industry typically require companies to spend capital on research and development and maintain vast production capacities. It is almost impossible for players other than enormous chip giants to follow the traditional ‘Integrated Device Manufacturer’ (IDM) model. As Moore's law accelerated in the second half of the 20th century, unmet demand from the industry upstream was the reason for the establishment of TSMC, the world’s first company to specialize in completing manufacturing orders from IC designers, in 1987. The company pioneered a fundamentally new business model in the field – the semiconductor foundry.  Lured in by this new type of low-cost, asset-light chipmaking, many companies have started to pursue the fabless model. Foundries have mushroomed around the world, becoming the key links in the global electronics supply chain. As one of the largest foundries globally, SMIC’s (00981:HKEX) income from its main business segment (chip manufacturing at 0.35 µm to 14 nm), accounted for 90.81% of its total revenues in 2019. It also provides one-stop support services, including design and IP support, photomask manufacturing, bump processing and testing, to name a few. Last year, SMIC became the first Chinese mainland foundry to achieve mass production of 14 nm FinFET. According to its newest prospectus, compared to the first generation, second-generation 14 nm FinFET technology is expected to improve performance by approximately 20% and reduce power consumption by approximately 60%. However, around the globe, not only SMIC but also GLOBALFOUNDRIES and UMC (2303:TWSE) have realized the mass-production of 14 nm in 2015 and 2017 respectively. TSMC has meanwhile been capable of 7 nm production since 2018. SMIC is almost two generations behind TSMC. According to data from Trendforce, we can see that, in 2Q20, TSMC’s market share was 51.5%, which was the highest among all foundries in the world. And the second place was occupied by Samsung, the market share of which was 18.8% in the same period. Among the top five foundries, only SMIC is a China mainland company, with a 4.5% market share ranking it fifth. After browsing the information above, we find that TSMC is absolutely the leader in the foundry market. As an important partner of Huawei, it is currently caught in the crossfire between the two largest economies, and Huawei has transferred some of its 14 nm orders to SMIC.  However, though SMIC can produce 14nm, it has lagged behind TSMC in many aspects, including R&D investment, revenue and gross profit margin, for years. For instance, in 2019, TSMC invested TWD 91.4 billion (CNY 21.1 billion) in R&D – the number of SMIC was CNY 4.7 billion. Though TSMC spent over 4 times more than SMIC, the proportion of its R&D investment was 9%, 13% lower than that of SMIC. In addition, the gross profit margin of SMIC was less than half of TSMC’s. As shown in the graph below, the margins of TSMC and SMIC are downward, but comparing the exact numbers, we can see that, in 2019, the gross profit margin of SMIC was 21%, while TSMC achieved 46%. Apart from those parts, there are some other disadvantages of SMIC compared to TSMC. For example, SMIC ordered an Extreme Ultraviolet Lithography (EUV) from ASML two years ago, but it hasn’t received the results yet. EUV is a piece of crucial equipment for making chips under 7 nm. Considering this, on the supply side, it’s hard for SMIC to be competitive with TSMC. By comparison, on the demand side, there are opportunities for SMIC. Under the bans released by the US government, HiSilicon needs to turn to domestic semiconductor companies for the supply chain. As the best local player among foundries, SMIC is set to be the crucial partner of HiSilicon and Huawei. Another thing is that, on May 15, SMIC announced that National Integrated Circuit Industry Investment Fund and Shanghai Integrated Circuit Industry Investment Fund agreed to make a capital contribution of USD 1.5 billion and USD 750 million respectively into the registered capital of Semiconductor Manufacturing South China Corporation (SMSC). 50.1% is indirectly owned by SMIC. This is not only capital that matters in the microelectronics world: experienced talents are vital for the development of the domestic chip industry. The company can buy equipment, but if no one is capable of using it, no matter how powerful the machines are, it will be no more than just iron-scrapping. Quite possibly, triggered by the recent geopolitical uncertainty, more Chinese nationals majoring in engineering and graduating from prominent US schools will be returning to the country in the following years. Some of them will join China’s top chipmakers, while others will start their own fabless firms. In the short term, Chinese chipmakers are likely to face profound difficulties, as the international supply chain is getting disrupted in many ways. In the long run, as usual, challenges and opportunities coexist. In league with global economic uncertainties, ubiquitous competition in the domain will shape the strategies of up-and-coming Chinese semiconductor companies. Representing the country in one of the principal subsectors, SMIC, seemingly, has no margin for error.