'The global semiconductor market has entered a period of weakness', will the domestic market be positive?

The transformation of the domestic chip market, what are the results?

Source | Financial Breakfast

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On October 7, the share price of AMD (AMD) fell sharply, closing at $58.44 per share, a drop of 13.87%, the lowest level since July 2020. In addition to AMD, the memory chip giant Samsung Electronics also recently disclosed its second-quarter results, and the results were also unsatisfactory.

The authoritative research firm Gartner said that chip sales growth was much slower than expected and will begin to decline in 2023, marking the end of the industry's biggest boom cycle. Gartner analyst Richard Gordon also said: "The global semiconductor market is entering a period of weakness that will continue through 2023. At that time, semiconductor revenue is expected to decline by 2.5%."

The semiconductor industry seems to be heading towards the opposite of a "core" that is hard to find during the epidemic - overcapacity. Unlike the global market showing weakness, domestic demand for semiconductors and enthusiasm for research and development are rising steadily in the face of escalating restrictions in the United States.

The domestic chip market is actively undergoing transformation, so how is the current progress?

How is the process of domestic self-developed chips?

Self-developed chips have become the main direction of major manufacturers and technology companies after the promulgation of the US Restriction Act, and the chip industry has ushered in a wave of entrepreneurship.

Just in July, the Changdian Technology official announced that it has realized the 4nm mobile phone chip packaging process, which can undertake packaging needs. In addition to the 4nm process packaging, CPUs used in computer equipment such as PCs and notebooks, as well as display chips such as graphics cards GPUs, can also be packaged.

This is just one of the many achievements of China's self-developed chips.

In order not to be stuck for a long time, relevant departments have successively issued favorable policies to promote the development of the semiconductor industry. Below, Sanlin tries to focus on the entire semiconductor industry chain and "track" the current progress of mainland companies.

Before looking at companies, we may wish to briefly classify the semiconductor industry in order to understand the business distribution of mainland companies in the entire semiconductor industry.

According to industry habits, we can roughly divide the semiconductor industry into: 1. Upstream raw material end; 2. Midstream semiconductor product design and manufacturing; 3. Downstream semiconductor application end.

At present, mainland enterprises are mostly concentrated in the middle and lower reaches, especially in downstream applications, involving a large number of enterprises. Due to the fact that the industry is too subdivided, this article only lists the core or concerned areas in the industry chain. If readers and friends have other directions of interest, they can communicate with you in the comment area.

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Let's look at the upstream raw material side first.

The material end is the lifeblood of the development of the semiconductor industry. We often say that the chip is stuck in the neck. A large part of the reason refers to the independent research and development and manufacturing of this part of the material, which is still lacking in China.

1. Silicon wafer

As the carrier of chips, the importance of silicon wafers is self-evident.

As the two major wafer foundries occupying about 70% of the global semiconductor market, Samsung and TSMC have both stated that they are mass-producing chips with a 3nm process and will complete the delivery as soon as possible.

The largest wafer foundry in China is SMIC. In the second quarter of this year, its sales revenue was US$1.903 billion, a year-on-year increase of 41.6%.

According to the global market sales ranking of the pure-play foundry industry in 2021 released by IC Insights, SMIC ranks fourth in the world and ranks first among mainland Chinese companies; Hua Hong Group ranks fifth, following closely behind.

However, in terms of manufacturing process, there is still a gap between mainland enterprises. Looking at SMIC, the revenue of 8-inch wafers and 12-inch wafers accounted for 31.7% and 68.3% respectively, and the production of more advanced processes is still insufficient.

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2. Photoresist and photolithography machine

The global production of semiconductor equipment is mainly concentrated in the hands of manufacturers in the United States, the Netherlands and Japan.

Taking the lithography machine as an example, the world's largest lithography machine equipment supplier is currently the Dutch lithography machine giant ASML (ASML in Chinese), which monopolizes 83.3% of the global high-end lithography machine market . The same goes for photoresist.

Photoresist manufacturers mainly include Japanese companies such as Hitachi Chemical, Tokyo Yinghua, and Japan's Fujifilm. Japanese companies occupy an absolute dominant position, including 72% of the global market share.

However, unlike photolithography machines, photoresist production with a relatively low threshold is currently making rapid progress in the mainland.

Among the 13 photoresist concept stocks in A shares, the semiconductor photoresist business of Beijing Kehua, a subsidiary of Tongcheng New Materials (603650.SH), achieved operating income of 85.4316 million yuan in the first half of this year, a year-on-year increase of 51.3%. In addition, the semiconductor photoresist business of companies such as Jingrui Electric (300655.SZ) and Nanda Optoelectronics (300346.SZ) is also making positive progress.

In addition to upstream supplies such as silicon wafers, lithography machines, and photoresists, we look at midstream semiconductor product design and manufacturing companies, mainly in the design, manufacture, and packaging and testing of chips (ie, integrated circuits).

1. Chip Design

Some people may not be very clear about the relationship between semiconductors, chips, and integrated circuits.

According to Xinhua News Agency, semiconductor products are mainly divided into four categories: integrated circuits, optoelectronic devices, discrete devices and sensors. Among them, integrated circuits account for more than 80% of semiconductor products. Therefore, the semiconductor industry is also called the integrated circuit industry in the industry.

And by arranging many reduced transistors on a semiconductor silicon wafer, the resulting product is called a large integrated circuit, that is, a chip. This is why when we talk about semiconductors, we refer to chips, and when we talk about integrated circuits, we still refer to chips.

The world's largest chip design company is British ARM, and the software design tools used for chip design, namely electronic design automation (EDA) software, are all monopolized by American companies.

As the most important software design tool for chip design, after the restriction bill came out, many EDA companies appeared in China, including Huada Jiutian, Gaolun Electronics, Hangzhou Guangliwei, etc. The former two are A-share listed companies.

2. Chip packaging and testing

Packaging is the process of laying out, fixing, connecting and finally potting the chip on the substrate, mainly to protect the chip from damage and ensure that it can work normally.

Packaging and testing is in the middle and lower reaches of the semiconductor industry chain, which can be further subdivided, including upstream packaging materials and downstream applications.

There are not a few domestic companies engaged in the chip packaging and testing business, and there are many A-share listed companies, including Changdian Technology, Huatian Technology, Xinpeng Shares, etc. The business development trend and performance are also good.

Taking Changdian Technology as an example, its revenue in the first half of this year was 15.594 billion yuan, a year-on-year increase of 12.85%, and its net profit was 1.543 billion yuan, a year-on-year increase of 16.74%. Domestic companies still have great potential in the subdivision of packaging and testing.

Finally, there are downstream application-side enterprises.

The downstream applications of semiconductors are found in all walks of life, including consumer electronics, network communications, automotive electronics, industrial manufacturing, etc. These are importers of semiconductor originals. Because their fields are too subdivided, this article will not introduce them too much.

end

According to public data from the customs, China's chip imports in 2019 were US$304 billion, while crude oil in the same year was US$166.2 billion, iron ore was US$92.9 billion, and grain was US$42.5 billion. The import value of chips is almost the sum of the latter three.

After the sanctions, China's chip imports in 2020 will be approximately US$349.9 billion, a year-on-year increase of 14.6%.

The continuous growth of the amount is not only due to factors such as the difficulty in finding a "core" and rising prices brought about by the epidemic, but also the increase in demand brought about by the development of China's information and communication industries.

It can be seen that although the United States restricts exports, although the global semiconductor market may enter a period of weakness, domestic demand is still strong, and self-developed chips have naturally become the highest priority.

With the attention of domestic enterprises and relevant departments, domestic semiconductors are developing vigorously, and the results are beginning to show. According to the 2021 economic operation data released by the National Bureau of Statistics, the output of China's integrated circuit industry reached 359.4 billion yuan last year, a year-on-year increase of 33.3%, and this result will be even better in the future.

The development of the semiconductor industry is limited by historical reasons, and the gap with foreign countries cannot be caught up and surpassed overnight. Fortunately, we are already on the road.

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