Hidden Dragon in the Abyss: Those Artificial Intelligence "Hard Sheep" in A-shares

This article is based on publicly available information and is for information purposes only and does not constitute any investment advice.

During the Chinese New Year, Open AI once again attracted the attention of the tech community, and "Sora" was born, a 59-second walking video that brought people's imagination of the cyber world and the relationship between the virtual and the real.

Corresponding to the explosion of ChatGPT last year, it is foreseeable that the computing power, or the entire semiconductor industry, which is closely related to AIGC technology, will once again stand on the cusp of the market.

Taking this as a guide, let's sort out the trends and characteristics of the current semiconductor industry chain, and at the same time review the high-quality targets of the A-share semiconductor industry from a fundamental perspective.

01 2024: The starting point of a new semiconductor cycle

There are two typical characteristics of the semiconductor industry: the first is strong cyclicality and the other is technology-driven.

As in the era of oil and gas and electricity, the cyclical nature of the semiconductor industry, as the most important basic material in the new era, is also very obvious. In the long term, since the beginning of the 21st century, the overall growth of global semiconductors has been about 3 times.

Figure: Semiconductor production and sales volume and growth rate in the past 25 years, source: Huajin Securities Research Institute

In the short term, the length of each round of semiconductor cycle is about 4-5 years, the expansion cycle is about 2-3 years, and the contraction cycle is about 1-1.5 years.

Figure: Semiconductor industry cycle changes (monthly), source: Choice Financial Client, brocade finishing

Different from the fluctuations of the basic energy cycle, in addition to the impact cycle of supply and demand, the segmented semiconductor market will also have typical counter-cyclical fluctuations with new technology breakthroughs, such as last year's GPU. Since the second half of 2022, it has been in a downward cycle of semiconductors as a whole, with global GPU shipments decreasing by 10.3% in the third quarter, and only half a year later, with the explosion of large models driving the counter-cyclical rise of the GPU market, it will achieve an excellent performance of 16.8% quarter-on-quarter growth in the third quarter of 2023.

According to WSTS (World Semiconductor Trade Statistics Organization) data, global semiconductors are expected to usher in a strong recovery in 2024 after this round of destocking cycle, with an expected growth of 13.1%. Combined with the demonstration effect brought about by the explosion of Sora, the semiconductor industry has formed a bottom cycle and technical resonance, and this year has a high probability of becoming a new starting point of the semiconductor cycle.

To get involved in semiconductors, we must first understand what the semiconductor industry chain includes.

02 Panorama of the semiconductor industry chain

Narrow semiconductors mainly cover two categories, the design link with chip products as the core, and the new manufacturing link with equipment and materials.

The design process is mainly divided into three categories from the perspective of products, logic chips, memory chips and analog chips, in terms of market size, the market share of the three types of products is about 5:3:2 (logic: storage: analog), and logic chips occupy half of the narrow semiconductors.

Figure: Chip design product classification and value analysis, source: Huajin Securities Research Institute, brocade finishing

From the perspective of products, the manufacturing process can also be divided into three categories, upstream raw materials, upstream and midstream equipment parts, and manufacturing packaging and testing. Compared with the design link, the raw materials, equipment and manufacturing links belong to the upstream and downstream undertaking relationship, and there are more amortizable heavy assets, so we cannot distinguish the market share of the three in terms of revenue.

In terms of the value analysis at the equipment level, etching equipment and lithography machines account for about 45% of the total value, and CVD accounts for about 13%, which is the value core of the entire equipment chain.

Figure: Classification of semiconductor manufacturing links, source: Brocade Research Institute

Figure: Semiconductor equipment industry chain flow chart, source: Huafu Securities Research Institute

Together with IP and EDA tools, the above covers almost all links of the semiconductor industry chain.

Back to the A-share market, the two hottest links at present are nothing more than IC chip design, upstream equipment and midstream manufacturing, with the US blockade policy on April 17, 2018 as the node, in the past six years, the entire semiconductor development, financing, market value growth is also the most rapid growth of these three links.

Figure: Changes in the market value of Shenwan Semiconductor's secondary industry, source: Choice financial client, brocade finishing

Next, let's sort out the fundamentals of the A-share target in these three links.

03 List of AI semiconductor "leaders".

(1) Digital chip design

Digital chip design is currently the semiconductor industry chain involving the most listed companies in the sub-sector, mainly including logic chips, memory chip design target enterprises, last year we focused on the "A-share storage power list" in the memory chip design and the fundamental logic of manufacturers, no longer repeated, today mainly combing the logic chip sector.

Taking Shenwan's secondary industry chip design as a sample, we have sorted out the targets that are being developed or have been sold logic chip products that may be related to AI, and summarize them as follows.

Figure: Some chip design targets are involved in logic chip products, source: Brocade Research Institute

Among them, Haiguang Information currently has the highest market capitalization, followed by Weir shares and Cambrian. Only these three companies have broken through the threshold of 50 billion yuan, of which Haiguang has reached 200 billion yuan, leading the fault.

Figure: The total market value of chip design enterprises, source: Choice financial client, brocade finishing

From a fundamental point of view, IC design companies are in the development period, and it is unfair to examine it from the perspective of profitability, and it is not in line with the logic of this round of semiconductor superposition AI technology cycle rise. Therefore, we have selected the indicators that best represent this type of enterprises, which are:

R&D investment on behalf of the R&D level of the enterprise;

The revenue growth rate representing the hematopoietic capacity of the enterprise;

The interest-bearing debt ratio and cash flow reserves that best reflect the long-term viability of the enterprise;

Figure: R&D, revenue, cash flow and debt ratio of digital chip design enterprises, source: Choice financial client, brocade finishing

Judging from the above logic, Weir shares, Haiguang Information and Cambrian are the enterprises with the highest R&D expenditure in the digital chip design industry, and in terms of cash flow, Haiguang Information, Weir shares and Geke Micro are the most abundant, but it should be noted that the interest-bearing debt ratio of Weir shares and Geke Micro is relatively high, and the interest-bearing debt ratios of Haiguang Information, Cambrian, Rockchip Micro and Loongson Zhongke are all less than 10%, which is an excellent level.

Combined with the relevance of AI products, Haiguang Information and Cambrian are the leading targets of this round of semiconductors + AI (Weir shares are less involved in AI products, mainly CMOS image sensing products based on the previous generation of technology, which can also be confirmed from market performance).

Haiguang Information: Whether it is the current market value, product layout, or the overall R&D expenditure, cash flow reserves and even asset structure are the undisputed first-echelon targets of digital chip design. On the whole, whether it is a mature CPU product line or a GPU product line under development, it has a relatively strong domestic substitution value, and there is no shortcoming from a fundamental point of view, and it is necessary to pay attention to the future research and development progress, especially the research and development progress of computing power-related products (DPU products in Haiguang Information's financial report).

Cambrian: Compared with other IC design companies, the product line layout is closer to the AI product line, whether it is NPU or acceleration card, it is no longer the application of ASIC's set of visual artificial intelligence logic. The Cambrian Chen brothers have long been working on cutting-edge theoretical ideas such as convolutional neural networks, and the management of the Mesozoic era is also more likely to adapt to advanced technology. It should be noted that there is a certain gap between the current fundamentals and the leading enterprises.

Finally, we summarize the six-dimensional capability map of the leading digital chip design enterprise for your reference.

Figure: HexaV diagram of the fundamentals of digital chip design enterprises, source: Brocade Research Institute. Click image for full size

(2) Integrated circuit manufacturing

In recent years, the core trend of integrated circuit manufacturing has shown a trend of one super and many strong, "one super" is TSMC, and "how strong" refers to the global wafer foundry CR10 has reached an astonishing 92.7%, with a very strong concentration, of which TSMC has reached 58.2%, and among mainland enterprises, SMIC ranks 4th in the world, Hua Hong Semiconductor ranks 7th in the world, and Huali Micro ranks 9th in the world.

Huahong is the parent company of Huali Micro, if you only look at the advanced manufacturing technology (below 1 micron), there are only two targets in the A-share market, SMIC and Huahong, and the products are mainly mature processes.

According to Gartner's data, the mainland is currently the region with the highest output value of integrated circuit manufacturing, with a market share of about 21%, and the production capacity will increase from 353.1 MSI/Q to 581.8 MSI/Q from 2020 to 2023, but the proportion of advanced processes is relatively small.

Figure: Classification of revenue from different processes of chip manufacturing enterprises, source: corporate financial reports, brocade finishing

Comparing SMIC and Hua Hong, SMIC is superior in terms of scale, revenue, profit, R&D and capital reserves.

Figure: Comparison of SMIC and Hua Hong Semiconductor's financial fundamentals, source: corporate financial reports

On the whole, the A-share integrated circuit manufacturing industry has a capacity advantage, but also has a technical disadvantage, at present, whether it is Huahong or SMIC, compared with TSMC's gross profit end has a profit difference of about 25pct, and the technical disadvantage may only be solved by time.

(3) Semiconductor equipment

There is only one main logic of semiconductor equipment: domestic substitution.

At present, there are a total of 18 targets of A-share semiconductor equipment, with a total market value of more than 10 billion yuan, and only 2 companies with a total market value of more than 50 billion.

Figure: Total market value of semiconductor equipment companies Source: Choice financial client, brocade finishing

As mentioned above, the current relatively high domestic substitution rate in the semiconductor market focuses on degumming, etching, and thin film deposition, accounting for about 30% of the entire chip manufacturing value chain, and the gap with overseas is still relatively obvious.

Figure: Part of the equipment manufacturing process with a localization rate of more than 20%, source: Ping An Securities

Figure: Proportion of capital expenditure on semiconductor equipment, source: Huafu Securities Research Institute

We have sorted out the business involved in semiconductor equipment companies with a market value of more than 10 billion:

Figure: Semiconductor equipment companies with a market value of more than 10 billion are involved in business, source: Brocade Research Institute

In horizontal comparison, among the semiconductor equipment companies with a market value of more than 10 billion, only one company, North Huachuang, exceeded the 10 billion mark in revenue in the third quarter of last year, and on the whole, most companies have achieved rapid and positive growth.

Figure: Revenue and growth rate of semiconductor equipment enterprises, source: Choice financial client, brocade finishing

From the perspective of R&D, NAURA is the only semiconductor equipment company with R&D expenditure of more than 1 billion yuan in the first three quarters, which is of course closely related to the scale of revenue.

From the perspective of cash flow reserves, NAURA and AMEC are also among the best, and the quick ratios of these two companies are more than 1 times, and the margin of safety is relatively high. From the perspective of capital structure, the interest-bearing debt ratio of semiconductor equipment companies is generally low, and the highest does not exceed 20%, and the overall liquidity risk is not large.

Figure: R&D, cash reserves and capital structure of semiconductor equipment companies, source: Choice financial client, brocade finishing

Focus on the industry leader North Huachuang: the platform layout of semiconductor process equipment, has occupied a certain market share in furnace tubes, etching, thin films and cleaning equipment, in addition to semiconductor process equipment, in vacuum lithium battery equipment, precision electronic components have also achieved good results. The two major wafer foundries mentioned above, SMIC and Huahong, as well as domestic storage leaders Changjiang and Changxin, are its customers.

There is the accumulation of basic technology, there are stable customers and markets, and there is a relatively perfect product layout, but the logic of concealing the good news is not right, in the product line of North Huachuang, the localization rate of furnace tubes and cleaning equipment is about 30%-40%, etching equipment is 20%-30%, and the thin film equipment is less than 20%. Therefore, compared with mature enterprises, the profit margin of NAURA is 10pct lower, and there is still room for improvement, and there are still risks in the field of parts and materials in the future.

Similarly, we have also summarized the six-dimensional capability diagram of semiconductor equipment for your reference.

Figure: HexaV diagram of the fundamentals of semiconductor equipment enterprises, source: Brocade Research Institute. Click image for full size

04 Conclusion

Space is limited, this article only covers a small part of the semiconductor industry chain, and there are some semiconductor leaders in the market that are not mentioned in this article, such as Huada Jiutian for EDA, Shanghai silicon industry for materials, etc., all of which are potential semiconductor targets.

Speaking of which, the main logic of the secondary market of the entire semiconductor industry chain is domestic substitution, whether it is design, manufacturing, or equipment. We can see some breakthroughs in the localization of equipment, and we can also see that we are gradually catching up with the gap in the field of design, but on the other side (such as upstream raw materials), it is still Japan and the United States that firmly grasp the initiative and the right to speak.

Semiconductor investment, if only focus on fundamentals is unreasonable, after all, if any link of the product has made a breakthrough in the technical blockade of the upgrade, it is facing a market of hundreds of billions, full of the logic of "don't bully the young and poor".

However, all the births have been planned for a long time, and there is no R&D investment, and there is no technological breakthrough with sufficient capital and talent accumulation.