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China core international: China core from A-share reactor

via:虎嗅网     time:2020/5/10 16:36:47     readed:1320

SMIC as the largest domestic wafer industry and commerce, the U. S. stock market has been delisted for a year ," red chip enterprises "after the implementation of the new regulations choose to return to the mainland capital market.There are three main reasons: compared with Hong Kong stocks, the semiconductor industry will be more popular in science and technology innovation board, with higher valuation, and improve financing capacity; better financing through the mainland capital market, investment in research and development; and the background of trade war. The business promotion of SMIC is very expensive, which needs the support of policies and the help of capital market.

Although SMIC's R & D strength and the industry's first TSMC gap is not small, but in fact the real competition with SMIC has few companies left.

SMIC's return to Hong Kong stock market is the general trend. The upstream and downstream networks have been boosted, but the risk can not be ignored.

Another semiconductor giant, China's largest chip foundry manufacturer, Zhongxin international, has come back.

China International (SMIC), which is listed on the Hong Kong Stock Exchange, announced on the evening of May 5 that it intends to issue no more than 1.686 billion shares in Kechuang.

The company plans to invest about 40% of its funds in the "12-inch chip SN1 project ", about 20% in reserve funds for advanced and mature technology research and development projects, about 40% in replenishment of liquidity, and SMIC will adopt a A H -share structure with both Hong Kong and mainland markets.

In March 2004, SMIC was listed on the New York Stock Exchange and the stock exchange of Hong Kong at the same time. In May 2019, SMIC international delisted from the New York Stock Exchange. In the future, transactions will be more concentrated in Hong Kong. One year later, SMIC international chose to land on the science and technology innovation board.

Why go back to science and technology innovation board?

After the delisting of the nyse, there has been news that china core international will return to A shares, now return to the news of kechuang board implementation, then, why did china core choose to return to the capital market in mainland china at this time?

In response, SMIC made some explanations in the announcement:

The board of directors believes that the issuance of RMB shares will enable it to enter China's capital market through equity financing and improve its capital structure while maintaining its international development strategy. Furthermore, returning to the listing of A shares is in the overall interests of the company and shareholders and is conducive to strengthening its sustainable development.

From the current environment and the development of SMIC itself, there are mainly the following reasons:

First, SMIC will be more popular in science and technology innovation board, will have higher valuation and improve financing capacity, which is crucial for capital intensive semiconductor industry.

The valuation of SMIC in the overseas capital market is obviously low. At present, the P / E ratio of Hong Kong stock is 50 times, while the average p / E ratio of A-share semiconductor plate in recent three months is more than 100 times, which is quite attractive. China's second largest wafer generation industrial and commercial China Resources Microelectronics Co., Ltd. has been listed on the science and Technology Innovation Board of Shanghai Stock Exchange in February this year.

According to the annual report, SMIC's revenue in 2019 is US $3.116 billion, net profit is US $235 million, gross profit rate is 20.6%, current market value is HK $88.658 billion (about US $114.3). If it returns to the mainland capital market, breaking the market value of RMB 100 billion is even a conservative goal.

From futu

Ding min, who focuses on semiconductor investment, told tiger smell that Hong Kong stock market doesn't pay much attention to such enterprises as SMIC. As a whole, the valuation of SMIC is low. SMIC can only raise funds by issuing bonds. Returning to the science and technology innovation board is a good opportunity to cross the capital market. For shareholders, the higher the valuation is, the less the dilution of the same fund for shares is.

Meng Wei, head of Jiuding semiconductor industry fund, said to Huwei that returning to sci-tech innovation board is also very helpful for SMIC to improve its popularity and recognition. Companies in Hong Kong stock market may only focus on the industry, while those in sci-tech innovation board have higher exposure.

Second, accelerate R & D. As stated in the announcement, 40% of the funds raised this time are used for the 12 inch chip SN1 project, and about 20% are used as the reserve funds for its advanced and mature technology research and development projects, which need to be invested in research and development continuously for a long time, and the public offering is always better than issuing bonds. For the semiconductor industry that burns money, going back to the technology innovation board is also an explanation for investors and shareholders.

Thirdly, the background of trade war is unavoidable. SMIC has said that last year's decision to delist from the NYSE was due to low trading volume, not to trade tensions between China and the US.

However, according to the Wall Street Journal report, analysts from Bernstein research said to the return of SMIC to the science and Technology Innovation Board: "with the escalation of tensions between China and the United States, SMIC is gradually cutting off its ties with the U.S. capital market." They added that the company's desire to acquire U.S. technology and semiconductor manufacturing equipment "will become increasingly challenging" given stricter export controls in the United States.

Ding min also said that the domestic capital market is a relatively more independent and closed ecology, and has relatively more protection for enterprises like SMIC international. In addition, last year's Q4 financial report of SMIC showed that 65.1% of its revenue came from the mainland and Hong Kong markets.

The policy gives companies like SMIC an opportunity to return.

On april 30th the csrc issued a notice on the domestic listing of innovative pilot red-chip companies. It adjusted the threshold for the return of listed red silk enterprises. The market value requirements for innovative enterprises were reduced from 200 billion yuan to 20 billion yuan. SMIC's latest market value was 81.1 billion yuan.

It can be said that this is a situation that investors, industries and shareholders are all looking forward to. Ding min also said that this is actually a natural thing.

Burn money, burn money again

For enterprises like SMIC, money is the most important factor among the many factors to return to scientific and technological innovation board.

More than 90% of the core's revenue comes from wafer manufacturing, and the rest comes from the sealing and testing business. For each generation of wafer manufacturing process upgrading, the R & D cost also increases exponentially. Wang Yang, senior director of technology market and Application Engineer of Xinyuan microelectronics company, once disclosed that the R & D cost of 28nm needs us $2-3 million, that of 16nm is about US $10 million, and that of 5nm soars to US $500 million.

Take the chips (that is, the trial production of chips) for example. According to the micro blog of @ mobile phone chip maker, the 7 nm FinFET process cost about 30 million US dollars. Try it. 200 million yuan has been smashed in. If it is a more advanced EUV process, it will be more expensive.

In the past two years, SMIC has invested $663.4 million in R & D and $687.4 million in R & D, accounting for more than 22% of its revenue, which is not low in fact. Huawei has "only" 15%, but there is a gap in volume. Last year, TSMC invested $2.959 billion in R & D.

According to the annual report released by SMIC in April, in 2020, SMIC plans to launch a new round of capital expenditure plan, which will increase to 3.1 billion US dollars from 2.2 billion US dollars last year, and increase capital investment. 3.1 billion US dollars is the operating revenue of SMIC in the past year.

The first investment of capital is the research and development of process. SMIC also announced nm, more advanced process planning, N 1 process planning process in the fourth quarter of last year to complete the flow sheet, is still in the customer product verification phase, SMIC's N 1 process compared to the market's 7 nm performance is slightly weaker, N 2 generation can be close to the mainstream 7 levels, SMIC planned to start production in the fourth quarter of this year, mass production plan has not been announced.

Buying equipment is also a big expense for the semiconductor industry.

In the past few months, SMIC has released a number of announcements, disclosing the company's spending on equipment in the past few years. It has spent 601 million US dollars (about 4.2 billion yuan) on purchase orders from Pan forest groups, 543 million US dollars (about 3.79 billion yuan) on purchase orders from application materials group, and 551 million US dollars (about 3.79 billion yuan) on purchase orders from Tokyo Electronics Group Billion US dollars (about 3.849 billion yuan).

SMIC International's net profit in 2019 is US $235 million, while in recent months, SMIC announced the cumulative expenditure of more than 15 billion yuan (about US $2.12 billion).

But the chip industry needs to burn money. After all, R & D can't keep up. All the development is empty talk. The mature process can contribute to stable profits. However, the R & D of advanced process can provide the company with space for valuation.

Clearly, SMIC's ambition for advanced processes is nm from 14 mass production and 7 planning.

The 12 inch chip SN1 project mentioned in the announcement of SMIC refers to one of the two largest Fabs in Shanghai, which cost US $10.2 billion to build, mainly serving 14nm and more advanced manufacturing processes in the future.

In addition to the business income of SMIC, the source of money mainly comes from two aspects: on the one hand, support from the national level. In 2019, China set up a 2042 branch The National Semiconductor fund of 100 million yuan supports the development of the semiconductor industry and narrows the gap with developed countries; SMIC has been developing for more than ten years without the investment of state-owned assets. According to a report of the organization for economic cooperation and development last year, government support accounted for more than 30% of SMIC's total income from 2014 to 2018.

On the other hand, the capital market, the operation of the science and technology innovation board is of this kind.

Addressing technology gaps

The concentration of wafer foundry industry is quite high, and TSMC is the absolute leader. According to the data of Tuolong Industry Research Institute in January this year, TSMC's market share is more than half, while SMIC ranks the fifth with 4.3% share (if Samsung is not regarded as a full-time industrial and commercial agent, SMIC ranks the fourth, and grofangde is second only to TSMC).

If TSMC is the first tier, Samsung is the second tier, then SMIC is at least the third tier.

Measuring the strength of a wafer industry and commerce, there are mainly two indicators of process and capacity.

The process (in nanonm) refers to the gate width of the chip transistor. The smaller the number, the higher the density of the standard transistor, the higher the chip performance, and the lower the heat and power consumption. It is the core index to measure the technical development level of a foundry enterprise.

TSMC, representing the highest level, already has the mass production level of 7Nm EUV, and will start the production of 5nm process this year; while the most advanced process of SMIC is 14nm, two generations away from 7Nm.

SMIC's first generation of 14 nm FinFET officially launched last year, SMIC's major customers Huawei, and SMIC has teamed up with SMIC to cooperative chip —— Kirin 710 A, this low-end processor used SMIC's 14 nm process contract. Second generation FinFET process N 1 process chips also entered the customer certification period, is expected to achieve small-scale production in the fourth quarter of this year.

However, as the highest level process in SMIC, the proportion of revenue that 14 nm can contribute is quite limited, which is 1% according to Q4 financial report.

Last year's TSMC annual report showed that 16 nm and more advanced processes accounted for 55%,7 nm process revenue accounted for as much as 35%, TSMC is also Huawei, Qualcomm,AppleAnd other core agents of flagship SOC.

In terms of production capacity, in the first half of this year, TSMC's 7Nm wafer production capacity will reach 110000 pieces per month, and in the second half of this year, it will increase to 140000 pieces per month. In the first generation of 14nm, the production capacity of SMIC will reach 6000 pieces per month by the end of this year, and it is planned to increase to 15000 pieces per month by the end of 2020. The final plan is to build two monthly production capacity of 3.5 The gap between the advanced production lines of ten thousand chips is also obvious.

Objectively speaking, the gap between SMIC and TSMC in manufacturing process is at least two generations, at least four years in terms of time.

Although SMIC is second or even third class in the world, it is a leading enterprise in the domestic wafer foundry industry. Among the more mature 28 nm processes of SMIC, only six representative companies in the world have a higher level. The annual revenue of advanced processes below 28 nm of SMIC accounts for 67%.

IC Insights《 global wafer capacity 2019-2023 report shows that by the end of 2019, the production capacity of processes below 28 nm will account for 49% of the total production capacity of the IC industry, in other words ,28 nm and above, still have 50% share.

Mobile phones and PC products, of course, can't see 28nm, but there is still much to be done in various fields, such as intelligent hardware, wearable, car machines, security and so on.

Technology gap does exist, but SMIC is already the "dwarf general", representing the highest level of foundry in Chinese mainland.

Opportunities and risks

Semiconductor is the pain of Chinese industry, self-sufficiency rate is extremely low.

At the World Semiconductor Conference in May 2019, Yu Xiekang, vice chairman of the China Semiconductor Industry Association, said that China's imports of integrated circuits in 2018 amounted to about $312.06 billion, up 19.8 percent from the same period last year, exceeded $300 billion for the first time, exported $84.64 billion, and the deficit exceeded $200 billion; according to the WSTS

All in all, China's semiconductor industry is extremely self-sufficient and heavily dependent on imports.

Therefore, the state has issued a series of stimulus policies, hoping to drive the semiconductor industry to catch up with the international advanced level. In the report "made in China 2025", the State Council proposed that China's chip self-sufficiency rate should reach 40% by 2020, 50% by 2025, and the Ministry of industry and information technology hopes that China's chip self-sufficiency rate will reach 70% by 2025. "The semiconductor industry to some extent represents the comprehensive economic and technological influence of the country, which is related to the national lifeline." Meng Wei added.

In this context, the opportunity for SMIC to return to the domestic capital market is obvious.

The good news is that, while the technology isn't leading, there is strong demand in china, and there are many large and small IC design companies in the mainland market, such as hysteria Huawei, a major customer at smic, whose kylin processing platform has overtaken qualcomm as the top seller on the mainland. According to IC Insights data, China is the only pure wafer OEM sales growth area in 2019, in other words, as long as SMIC technology clearance, no worry no customers.

Therefore, the wafer foundry in mainland China is a "seller's market". Great Wall Securities pointed out in the research report that in Q4 2019, the 65 / 55nm manufacturing process order of SMIC was very popular, which led to the increase of the OEM fee at the end of 2019, and the Q1 gross margin continued to increase on a month on month basis. It is expected that the proportion of advanced manufacturing process (≤ 28nm) and high shortage manufacturing process (65 / 55nm) business will increase on a month on month basis, and the order is expected to release more than expected.

In addition, Chinese mainland has a perfect chip upstream and downstream industries. In some subdivision areas, it also has the world's leading companies, such as HUAWEI Hass, designed by IC, plasma etching of micro semiconductor, long distance power technology for sealing and testing, and so on. The industrial chain can cooperate well.

Therefore, SMIC's international return has a certain driving role for the industry. On the day of SMIC's announcement of return, A-share concept shares were collectively bullish.

Ding Min said that for the cyclical (technology iteration) industries such as chips and panels, if you can carry over the low cycle of the industry, it is easy to drag down your competitors. Although SMIC is not entirely a national team, the industry status is here, and the support will not be less.

Many competitors have stepped on the brake in the investment of advanced manufacturing process. In August 2018, lattice core announced that they would suspend the development of 7Nm LP process indefinitely, so as to transfer the resources to the continuous development of more professional 14nm and 12NM FinFET nodes; at almost the same time, United Power announced that it would no longer invest in advanced processes below 12NM, no longer pursue to be the market leader, but focus on improving the company's return on investment.

In other words, there are few OEMs who are still spending money on advanced manufacturing. Meng Wei believes that SMIC does not have any internal problems, more than the United and other competitors are almost certain.

Of course, SMIC still faces many uncertain risks.

In the Research Report of Founder Securities, it is pointed out that the risks of investment in SMIC mainly include: "terminal demand uncertainty brought by the epidemic", "technology research and development is not as expected", "industry competition is intensified", and "Sino US trade friction is intensified".

Last but not least, this is a big problem faced by Chinese technology companies, which is why Huawei is increasingly choosing SMIC.

For example, amsl's EUV lithography machine), Reuters reported in January this year that trump government launched a broad campaign to prevent the sale of Dutch chip manufacturing technology to China. In November last year, ASML announced that it had suspended its cooperation plan with core international's EUV lithography machine of 7Nm and below advanced technology.

ASML is the world's leading manufacturer of lithography equipment, with a global market share of more than 70% of its lithography equipment. At present, it is the only manufacturer of EUV equipment in the world. In 7Nm and more advanced processes, EUV is the key equipment. If the import is blocked, the impact on research and development is obvious.

In September 2019, Zhao Haijun, CO CEO of SMIC, pointed out in his speech at the 17th China International Semiconductor Expo that the first place to be a fab is to make money, the second place is basically not to make money, and the third place is to lose money, so we must strive to be the top two.

According to the previous article, if Samsung is not regarded as a special industrial and commercial agent, the situation that SMIC can accept is that it ranks second only to TSMC, which is still a very difficult goal.

But on the other hand, if there is another company in the wafer manufacturing industry that can achieve growth and catch up with advanced technology, it can almost only appear in China, because in many cases, this is no longer a market level thing.

(by Zhang Jiahao)

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