Entering the science and technology board financing 12 billion, the rise of the third largest domestic wafer foundry?

(Wen/Chen Chen Edit/Yin Zhe) As we all know, chip manufacturing is divided into design, manufacturing and packaging of three major links. Among them, chip manufacturing is the domestic semiconductor was "neck" the most important link.

In recent years, with the development of the industry and changes in the international situation, SMIC has become the "hope of the village". As a result, under the green light, SMIC has become the first foundry stock in China.

Now, after SMIC, the third largest foundry - Hefei Jinghe Integrated Circuit Company Limited (hereinafter referred to as "Jinghe Integrated Circuit") also intends to enter the Science and Technology Board, in order to achieve diversified development.

On May 11, JHI's initial public offering (IPO) prospectus (draft) was accepted by the SSE, and on June 6, it was changed to "inquired" status.

The prospectus shows that the company intends to issue no more than 502 million shares to raise funds of 12 billion yuan, is expected to be fully invested in the 12-inch wafer fabrication in Hefei, the second plant project.

According to the plan, the issue of investment projects will build a capacity of 40,000 wafers / month foundry production line, the main products include power management chip (PMIC), display driver integration chip (DDIC), CMOS image sensing chip (CIS).

Source: JHI Prospectus, same below

Since its 12-inch wafer fabrication plant 1 went into operation, JHI has been engaged in the foundry business of display panel driver ICs, which are widely used in the field of LCD panels, including computers, televisions, and smartphones, etc.

At the same time, JHI has also developed a new product line, which has been widely recognized as the best solution in the world for the LCD industry.

At the same time, with the continuous increase in production capacity and process refinement, JHI's operating income has realized rapid growth.

But behind the scenes, JingHer's business development also involves a series of risks, including a single product mix, a high concentration of customers, insufficient profitability, and the ability of expansion projects to achieve expected results.

Therefore, despite the "domestic third largest foundry" aura, but the crystal integration of the development of the next few years how the trend, is still a difficult to determine the unknown. In order to achieve diversification and technological breakthroughs, it needs to overcome difficulties and move forward.

Birth and fortune "mismatch"

In the past decade, Hefei's new display industry has risen, exacerbating the contradiction of "screen without core". At the same time, the rapid agglomeration of electronic information enterprises, more local governments to create "IC capital" ambition.

"Around 2013, home appliances, flat panel display has been Hefei's pillar industries, but in the search for transformation and upgrading have encountered the same problem - the lack of 'core'. " Hefei Semiconductor Industry Association chairman Professor Chen Junning has said.

In order to solve the problem of lack of core, Hefei City invited more than a dozen experts in the semiconductor industry in China to participate in the discussion and argumentation together, and ultimately formulated the first Hefei integrated circuit industry development plan.

Based on this, in 2015, Hefei CIC cooperated with Taiwan Powerchip Group to build the first 12-inch wafer foundry in Anhui Province - Jinghe Integration.

According to some media reports, this project aims to solve BOE's panel driver chip supply problem.

JHI Hefei 12-inch wafer foundry

According to the master plan, JHI will build four 12-inch wafer fabs in Hefei New Station Hi-Tech Industrial Development Zone Comprehensive Free Trade Zone. The first phase of the investment of 12.8 billion yuan, the process technology for 150nm, 110nm, and 90nm.

As for the important reason for Powerchip to reach a cooperation, is that it was hit by the crisis of overcapacity at the time, it is committed to the transition from the dynamic storage chip (DRAM) manufacturers to chip foundry enterprises.

In October 2017, Powerchip's display panel driver chip (DDIC) production line was officially put into production. This is the first 12-inch wafer foundry in Anhui Province, and the first over 10 billion IC project in Anhui Province.

Subsequently, JHI's production capacity realized a rapid climb. The prospectus shows that from 2018 to 2020 (hereinafter referred to as the "reporting period"), the company's production capacity of 75,000 wafers/year, 182,000 wafers/year and 266,000 wafers/year, respectively, with a compound annual growth rate of 88.59%.

Meanwhile, its products are rapidly taking over the market. According to a CCTV report, 20% of cell phones, 14% of TVs and 7% of laptops shipped worldwide in 2020 will be powered by JHI's driver chips.

For the reasons of rapid development in the past five years, JHI's Chairman, Mr. Cai Guozhi, has summarized that firstly, "it is important to choose the right partners", as well as the company's correct judgment of the market trend, uninterrupted investment, and the "dividend" brought about by the new crown epidemic, and then, "we will continue to work together to improve the quality of our products. "

But a little bit more than that.

But slightly "regrettable" is that the reporting period, Jinghe integrated to overseas customers sales revenue of 215 million yuan, 468 million yuan and 1.263 billion yuan, accounting for 98.59% of the total revenue for the period, 87.69%, 83.51%.

Among them, given the company's Taiwan "background" and related resources, JHI's overseas customers accounted for a high proportion of customers in Taiwan.

In other words, BOE has not purchased a lot of JHI's panel driver chips. Industry data statistics, China's drive chip is still mainly imported. 2019, BOE drive chip procurement amounted to 6 billion yuan, the localization rate is less than 5%, which can be seen supporting the gap is huge.

In addition, the crystal integration relies on the overseas market at the same time, there is also the problem of extremely high customer concentration.

During the reporting period, its revenue from the top five customers accounted for about 90% of the total revenue. Among them, in 2019 and 2020, more than half of the company's total revenue comes from its top customer. This is clearly detrimental to the company's bargaining power and stable operations.

State-owned Taiwan-funded master

Admittedly, as Cai Guozhi said, JHI's rapid growth is indeed due to "uninterrupted investment".

May 12, 2015, Hefei City, the State-owned Assets Supervision and Administration Commission issued a letter agreeing to the Hefei Construction Investment to form a wholly owned subsidiary of the Jinghe Limited (Jinghe integrated predecessor), the registered capital of 10 million yuan.

At the beginning of the establishment, Jinghe Limited had only one shareholder, Hefei Construction Investment. Subsequently, in the domestic semiconductor industry as well as the rapid development of electronic information industry in Hefei, the company decided to engage in construction.

In October 2018, JH Limited increased its capital, and Hefei Core Screen and Powerchip Technology joined the company. Specific share ratio, Hefei Construction Investment holds 32.71%, Hefei Core Screen holds 26.01%, and Powerchip Technology holds 41.28%.

Later, after several capital reductions and capital increases, JHI was limited to November 2020, when it was formally established as a joint-stock company, i.e. JHI.

As of the signing date of the prospectus, Hefei JIC directly holds 31.14% of the shares of the issuer and controls 21.85% of the shares of Jinghe Integration through the Hefei Core Screen, which is a total of 52.99% of the shares.

U.S. research and consulting firm Frost & Sullivan's statistics show that JHI has become the third-largest foundry in mainland China in terms of revenue, behind SMIC and Hua Hong Semiconductor, according to the 2020 sales rankings.

It's worth noting that this ranking does not include foreign-controlled companies with factories on the mainland, nor does it include IDM semiconductor companies.

However, compared to the operating conditions of comparable companies in the industry, JHI still has a considerable gap. For example, in 2020, Semiconductor Manufacturing International Corporation (SMIC) reported revenue of NT$27.471 billion and Hua Hong Semiconductor Corporation (HHSC) reported revenue of NT$6.272 billion, which are 18 times and more than 4 times higher than that of Crystalline Integrated Technologies (CIT), respectively.

On the other hand, JHI has built a 150nm to 55nm R&D platform covering DDIC (panel driver), CIS (image sensor), MCU (microcontroller), PMIC (power management), E-Tag (electronic tag), Mini LED and other logic chips.

However, the Company's market expansion and operations are highly dependent on DDIC foundry services, and thus its main business is extremely monolithic.

During the reporting period, GEMS' revenue from DDIC foundry services amounted to 218 million yuan, 533 million yuan, and 1.484 billion yuan, accounting for 99.96%, 99.99%, and 98.15% of its revenue from its main business, respectively.

However, because of this, JHI expects that there is still a chance for the company's revenue and capacity to usher in a new wave of growth if products such as CIS and MCUs are mass-produced in the future and more advanced processes are put in place.

At present, JHI has accumulated relatively mature experience in 12-inch wafer foundry mass production, but the process is mainly 150nm, 110nm and 90nm process nodes.

Among them, 90nm process is one of the most mainstream processes for DDIC products in the industry, and the provision of 90nm process DDIC product services has gradually become the main business of JHI.

During the reporting period, The average annual compound growth rate of Jinghe integrated 90nm process product revenue reached 652.15%, accounting for the proportion of revenue from 6.52% in 2018 to 53.09% in 2020 year by year. This somewhat reflects its revenue structure is being optimized.

In addition, JHI is conducting research and development of a 12-inch foundry platform for the 55nm process node, and is expected to invest RMB 1.56 billion in 55nm process product research afterward to advance the conversion of revenue from advanced processes.

Also according to the prospectus, in 2021, 90nmCIS products and 110nmMCU products will realize mass production; 55nm touch and display driver integration chip platform has been working with customers, and is scheduled for mass production in October 2021. The 55nm logic chip platform is expected to be developed in December 2021 and introduced to customers for wafer flow.

Based on the above, JHI's business model is expected to expand further in the future, and revenue is expected to increase to a different extent.

Earnings and Gross Margins: All Negative

While continuing to increase revenues, as a newcomer to the semiconductor industry, it is not easy for JHI to achieve profitability. Due to the large investment in equipment purchases, as well as a large number of depreciation expenses incurred each year and other factors, JHI's net profit has been in the red in recent years.

During the reporting period, JINGHE INTEGRATED's net profit was -1.191 billion yuan, - 1.243 billion yuan, and - 1.258 billion yuan, respectively. After deducting the non-recurring gains and losses of the mother of the net profit were - 1.254 billion yuan, - 1.348 billion yuan and - 1.233 billion yuan, three years of non-deductible net profit totaled - 3.835 billion yuan.

As of December 31, 2020, the company's audited undistributed profit amounted to -4.369 billion yuan.

In this regard, in the prospectus, JHI also made a "not yet profitable and there is a risk of cumulative unrecovered losses and sustained losses" tips, and said "it is expected that after the initial public offering and listing, the company will not be able to short-term cash dividends, which will have a certain impact on investors' investment returns. Investors' investment returns have a certain impact."

On the other hand, in order to meet the demand for production capacity expansion, JHI has continued to increase the capital investment in production equipment, with higher depreciation and amortization of fixed costs.

For each period of the reporting period, Crystal Integration's consolidated gross profit was -602 million yuan, -537 million yuan, and -129 million yuan, and its consolidated gross profit margin was -276.55%, -100.55%, and -8.57%, respectively.

Compared with the industry's comparable companies, JHI's gross profit margin gap is huge and much lower than the average of comparable companies' gross profit margin.

It is worth mentioning that TSMC's gross profit margin was far ahead in the same period. And among the semiconductor foundries on the mainland, the gross margins of SMIC and CR Micro are both below average, and only Hua Hong Semiconductor is slightly above average in 2018 and 2019.

However, with the gradual growth of production and sales scale and the scale effect leading to a rapid decline in unit costs, the gap between JHI's gross margin and the average value of comparable companies is rapidly shortening. in 2020, its consolidated gross margin has improved significantly to -8.57%.

Meanwhile, JHI's gross margins for each process product are also improving.

The prospectus shows that in 2020, the company's 150nm process product gross profit has been realized to turn negative into positive, and 110nm and 150nm process product gross profit margin, relatively better than the gross profit margin of 90nm process products. The main reason for this is that 90nm process products are more complex, and the proportion of fixed costs is higher.

JHD seems to be very confident about future profitability, saying in the prospectus that "the gross profit margin of the main business has been negative for several years, but it is showing a trend of rapid improvement.... The future scale effect is expected to enhance the company's profitability to further improve."

In fact, as early as the end of last year, JHI set four strategic goals: in the first year of the 14th Five-Year Plan, to achieve a monthly production capacity of 100,000 tablets, a listing on the KIC board, the start of the three factories, and the profitability of the company. It's easy to see the importance it places on achieving profitability.

However, with reference to the total profit and net profit of the last three years, it is not clear that JHI's losses have improved significantly. Some industry insiders even said, "As the annual equipment depreciation expenses may eat up most of the profits, it may take years to recover the cost."

Technology R&D relies on "friends"

Undoubtedly, the foundry industry is a technology- and capital-intensive industry, in addition to the need for a large amount of capital operation, the R & D capabilities of the requirements of the very high. It can be said that the strength of the R&D capability directly determines the core competitiveness of the enterprise.

Generally speaking, the R&D capability of semiconductor companies is mainly judged by the proportion of R&D expenses invested in total revenue, the proportion of R&D personnel in total personnel, and the conversion rate of scientific research results.

First of all, in terms of R&D investment. In recent years, although it has been "unable to make ends meet", the total R&D investment of JHI still maintains a relatively rapid rise.

During the reporting period, the company's R&D expenses were 131 million yuan, 170 million yuan and 245 million yuan. However, given the more rapid growth in turnover, its R&D investment as a percentage has seen a steady decline to 60.28%, 31.87% and 16.18%.

However, JHI's current R&D expense ratio is still higher than the industry average. This is mainly due to the fact that it is in a rapid development stage, the revenue scale is relatively low compared to comparable companies, but the R&D investment is maintained at a high intensity.

Secondly, in terms of R&D personnel investment. At the end of the reporting period, The number of research and development personnel of Gemplus Integration continued to grow, respectively, 119, 207 and 280 people, accounting for 9.47%, 15.16% and 16.81% of the total number of employees, respectively.

In comparison, as of December 31, 2020, SMIC, Hua Hong Semiconductor, and China Resources Microelectronics had 2,335, unknown, and 697 R&D employees, accounting for 13.5%, unknown, and 7.7% of the total employees, respectively.

It can be seen that JHI's R&D staff accounted for more than the known SMIC and CR Micro, but still lagged behind in terms of the total number of R&D staff.

According to another prospectus, JHI now has five core technical staff, namely, Cai Huijia (General Manager), Zhan Yipeng (Deputy General Manager), Qiu Xianhuan (Deputy General Manager), Zhang Wei Plaster (Director of N1 Plant), and Li Qingmin (Associate and Director of Technology Development Division 2).

However, according to background information, all five core technicians are Taiwanese nationals, and all four, with the exception of Zhan Yi-Peng, worked at Powerchip Technology Corporation.