Wingtech Technology: "China's Samsung" is poised to take off

Wingtech Technology: Semiconductor + optics + display + terminal business form layout has been completed, and "China Samsung" is poised to take off

At present, China's local semiconductor industry chain in the policy and lack of "core" environment under the two layers of power support rapid development, domestic chips from scratch, and then to some segments of the field of domestic chips to the international head enterprises side by side, the domestic semiconductor industry fully independent controllable has been the only way, a number of excellent semiconductor companies came into being, of which the market attention of high-quality targets include Wingtech Technology Co., Ltd. (abbreviation: Wingtech Technology, securities abbreviation: 600745). Through the endogenous + M&A development path, Wingtech Technology has made it from a low-margin mobile phone ODM leader to a hot high-tech semiconductor manufacturer in A shares, which is a process that people talk about. In 3 years, the company's market value has soared from 3.58 billion yuan in the original restructuring and listing to a maximum value of 180 billion yuan, and its core assets include Nexperia Semiconductor, Newport, Delta and so on.

Wingtech Technology is currently mainly engaged in three aspects of business: communication terminal products R & D and manufacturing business; semiconductor business segment is engaged in the main business of semiconductors and new electronic components R & D and manufacturing business; optical module R & D and manufacturing business. At present, it has formed a whole industry chain layout from semiconductor chip design, wafer manufacturing, packaging and testing, semiconductor equipment manufacturing to optical modules, mobile phones, notebook computers, IoT, servers, new electronic components, and automotive electronic products research and development and manufacturing.

Leading smartphone ODM manufacturers, customers cover Samsung, oppo, honor, millet and so on. Since the 2017 annual report, the company has not disclosed the production and sales of mobile phone ODM, and the relevant total shipments (own production + outsourced OEM) can be obtained from the convertible bond report disclosed in July 2021. Before the end of 2018, only the company's Jiaxing factory was completing the production of the whole machine, with a production capacity of 30 million units. During the first half of 2019, the company has added three new plants in India, Indonesia and Wuxi, with a design capacity of 3.6 million units, 12 million units and 10 million units, respectively, totaling 26 million units. At present, Wingtech's ODM factories include Jiaxing Manufacturing Center, Wuxi Manufacturing Center, Kunming Manufacturing Center, Indian Manufacturing Center and Indonesian Manufacturing Center, with its own production capacity of about 62.1 million units in 2020, and its own capacity utilization rate has also been continuously improved, from 51.1% in 2018 to 74.1% in 2020. It is worth noting that Wingtech's Jiaxing, Wuxi and Kunming are currently undergoing significant expansion.

Renderings of Wingtech Technology Kunming Intelligent Manufacturing Industrial Park

Figure 1. Wingtech Technology ODM mobile phones to produce and sell

In 2018, the revenue of mobile phone ODM business was 16.619 billion yuan, and the gross profit margin was 7.56%. Mobile phone production capacity of 30 million units, its own output of 15.33 million units, shipments of 92.29 million units; in 2019, the mobile phone ODM business revenue of 39.786 billion yuan, gross profit margin of 9.36%, mobile phone production capacity of 50.1 million units, its own output of 35.79 million units, shipments of 118 million units; in 2020, mobile phone ODM business revenue of 41.667 billion yuan, gross profit margin of 12%, mobile phone production capacity of 62.1 million units, its own output of 46.02 million units, shipments of 120 million units. 2021H1 Due to the impact of raw materials such as screen and memory in raw materials entering the price upward cycle in the second half of 2020, the company's gross profit margin fell back to 9.02%, and the pressure on the cost side began to ease in the second half of 2021, and the company's profit is expected to be repaired. According to the third quarter report of 2021, the company achieved a net profit attributable to the mother of 809 million yuan, an increase of 45.06% year-on-year, and the profit rebounded significantly.

The market size of smartphone ODM in 2020 is about $27 billion, and global smartphone shipments have been declining year by year since 2017. In 2021, driven by the popularity of 5G technology and the tide of mobile phone replacement, smartphone shipments and penetration rates have steadily increased. Counterpoint expects the global smartphone ODM/IDH market to grow to $33.81 billion in 2025, corresponding to a CAGR of 5.1%. At present, the global smart phone ODM market is highly concentrated, huaqin, Wingtech, Longqi are the world's leading manufacturers of smart phone ODM, the top three shares account for about 77%. According to the latest research report of Sainuo, a Chinese market research institution, global brand manufacturers have concentrated resources on developing high-end products in order to optimize costs, and the proportion of ODM manufacturers released by low-end products has increased; the 5G replacement cycle has accelerated the sinking of low-end mobile phones of brand manufacturers, and the volume and price of ODM models have risen; the Matthew effect of the ODM industry has become increasingly prominent, and the industry concentration has increased. Wingtech Technology is the earliest ODM manufacturer to obtain 5G-related patents in China, and is the only enterprise in the industry with self-built mold factory and perfect intelligent production line, with strong market trend prediction ability and customer demand sensitivity, and outstanding supply chain management ability and delivery speed advantage. Thanks to the excellent supply chain control, manufacturing and quality management of the overall improvement, the company's smartphone shipments in 2020 reached 110 million units, an increase of about 2% year-on-year, mainly serving customers such as Samsung, LG, Moto/Lenovo, Oppo, etc. On the other hand, the company's outsourcing ratio of laptops, tablets, servers, etc. is significantly higher than that of mobile phones, according to the company's 2020 annual report, the company plans to increase the proportion of non-mobile phone business revenue from 5% to 30% by 2023.

Figure 2 Recent development of Wingtech Technology's non-mobile phone OEM business

Raise funds to increase production capacity construction, expand new areas and new customers. On July 25, 2021, the company announced that it intends to issue convertible bonds to raise 8.6 billion yuan to increase the capacity of non-mobile phone products in the 5G field and increase the production capacity of non-mobile phone products, mainly for the expansion of intelligent manufacturing factories in Wuxi, Kunming and India and the construction of intelligent research and development centers. 1) Wuxi plans to build a new 25 million units/year smart terminal production line, including smartphones, tablet computers, laptops, TWS headphones and other fields; 2) plans to build a new 30 million smartphone production line in Kunming Phase II; 3) India plans to build a new 15 million units/year smartphone production line. The total planned production capacity of the fundraising project is 70 million units, which is about 1.13 times the existing production capacity.

ODM manufacturers have been cultivating low-end models for a long time, and have great advantages in cost control, and various brand owners have concentrated their resources on laying out high-end models and handed over low-end models to ODM manufacturers. At present, the world's TOP10 mobile phone manufacturers in addition to Apple and vivo have begun to cooperate with ODM manufacturers, and the delivery ratio is also getting higher and higher.

Figure 3 Outsourcing of major head mobile phone manufacturers.

The development of smart phones in recent years has indeed been slow, and there have been no major changes and breakthroughs, and the 4G to 5G model conversion has no substantial replacement experience for consumers. According to Moore's Law and the characteristics of silicon-based chips, 3nm is also about to be the limit of the mobile phone CPU process. The improvement of 5nm to 3nm in the entire industry chain needs to cost far more than 14nm to 7nm and 7nm to 5nm, so major mobile phone manufacturers have begun to improve and enrich the details of the process and functions, which has led to more and more serious product homogenization. Wingtech technology in the ODM industry chain planning is vertical integration, the company's management planning in order to be able to get more host manufacturers of recognition, on the other hand, the company's announcement of the management guidelines, the company for tablets, TWS headphones and laptops and other non-mobile phone ODM is also ambitious, according to the march 10, 2022 announcement, the company's product integration business and overseas specific customers to carry out a number of business cooperation such as computers, smart homes and signed a cooperation agreement, Among them, the smart home project has recently officially begun mass production and achieved normalized shipments, and the total amount of project cooperation is expected to be about 5 billion yuan, which shows that the ODM business should have a good performance in 2022.

The company acquired Nexperia to connect the upstream and downstream of the industrial chain. NXP was formerly the semiconductor business of Philips and was founded independently in 2006 and listed on the NASDAQ (NXPI) in August 2010. In 2015, NXP acquired Freescale Semiconductors in the United States for $11.8 billion, at which point Renesas, NXP+freescale, and Microchip+ATMEL were among the TOP3 vendors in mcCU. So far, NXP's main businesses include NFC (wireless) and smart card ICs, MCU & communication processors, and semiconductor standard parts business (i.e. discrete devices, logic devices and MOSFET device businesses). Among them, the top two automotive-related semiconductor businesses were NXP's most important businesses, contributing 64% of profits, while the semiconductor standard parts business was not a core business with lower gross margins. In October 2016, Qualcomm announced the acquisition of NXP for a record $47 billion. However, the turmoil continued and regulators were mixed, and finally the termination of the acquisition was announced on July 26, 2018. Nexperia was formerly part of NXP's semiconductor standard parts business. In 2015, NXP spent $11.8 billion to acquire Freescale in the United States for a transformation. Nexperia was spun off from NXP in 2017 and became an independent company, selling to Jianguang Assets for US$2.76 billion (about 18.1 billion yuan). Then, in 2019, it was acquired by Wingtech Technology for a consideration of about 33.8 billion yuan in the form of issuing shares + raising supporting funds + own funds + borrowing, and completed the acquisition of NXP's semiconductor standard parts business through a merger and acquisition fund cooperating with Jianguang Assets.

Nexperia simultaneously expands production capacity at home and abroad to achieve effective dual-cycle. Wingtech's wholly-owned subsidiary, Nexperia, is currently a world-renowned semiconductor IDM company, headquartered in Nijmegen, the Netherlands, with nearly 16,000 product numbers, delivering more than 100 billion products per year, and its products are widely used in various electronic designs around the world, and are the top three in the segment. Product planning is to develop from low voltage to high pressure, expanding IGBTs, compound semiconductors, analog ICs, etc. In the field of application, Nexperia has been doing the automotive field for more than 60 years, and the products are basically standard in the car in Europe, and in 2021, Nexperia's revenue in the automotive field will account for more than 45%, and the future expansion space is also very large. In terms of customers, Nexperia has a natural advantage, all Nexperia products are sold globally, and the share of Nexperia products in the global market is relatively large. Nexperia Group has established in-depth cooperative relations with key domestic enterprises in the fields of new energy vehicles, power grids, and communications. Nexperia continues to provide efficient products and services for high-quality enterprises around the world, in the competition with international semiconductor giants, diode and transistor shipments ranked first in the world, logic chips worldwide second, ESD protection devices worldwide first, power devices in the world sixth, and ranked first in the domestic power semiconductor companies.

Source: CoreMount Research

Figure 4 The company's main semiconductor products and their downstream applications

Power devices to achieve partial domestic substitution, Wingtech deeply ploughed in the field of new energy vehicles. In 2021, the global discrete device market size is 30.1 billion US dollars, of which power devices are the main market, while domestic manufacturers' products are mainly low-end discrete devices. The main products of domestic manufacturers are concentrated in diodes, thyristors, medium and low voltage MOSFETs, etc., and the added value and gross profit margin of products are relatively low, while in the field of diodes and bipolar transistors, the domestic Nexperia Group market share has been in the first place in 2020. In the fields with higher technical thresholds such as IGBT devices and modules and medium and high voltage MOSFETs that are widely used in new energy vehicles, industrial control, high voltage transmission, new energy power generation, etc., European, American and Japanese manufacturers occupy a dominant position, and local enterprises such as Wingtech Technology, China Resources Micro, Silan Micro, and Star Semiconductor have begun to accelerate their catch-up. As of the 2021H1 reporting period, Wingtech's product structure has been continuously optimized, and the proportion of revenue from high-margin logic analog devices and MOSFET devices has continued to increase. In terms of product prices, on the one hand, the company actively strengthens the closer cooperative relationship with automobile customers, industrial customers, and consumer electronics customers, and at the same time, in response to the tight supply and demand situation in the market, the sales price of the main dealer MassMarket has implemented batch price increases since 2021 on the basis of the relatively stable price in the fourth quarter of 2020, and the main price increase products include standard logic and simulation, small model diodes/transistors, power diodes/transistors, Mosfets, etc. In the first half of 2021, the company's semiconductor business achieved revenue of 6.773 billion yuan, an increase of 53.25% year-on-year, business gross profit margin of 35.06%, and net profit of 1.310 billion yuan, an increase of 234.52% year-on-year. Profitability has reached an all-time high, and the semiconductor business continues to grow rapidly. The synergy effect of business integration has pushed nexperia into a new historical stage of development. Nexperia's revenue from automotive, mobile and wearable devices, industrial and power, computer equipment, and consumer sectors accounted for 45%, 22%, 22%, 6%, and 5% respectively, and the automotive sector, including electric vehicles, is still the main direction of the company's semiconductor revenue sources. With the rapid increase in the penetration rate of electric vehicles, single vehicle power semiconductors are expected to show multiple levels of improvement, bringing rapid growth of the industry, the company's vehicle specification power semiconductor business is expected to enter a medium- and long-term high-speed growth stage, the future automotive business for Wingtech is certainly a big growth point.

Acquisition of production lines to expand production capacity, continue to strengthen barriers to competition. On July 5, 2021, Nexperia Semiconductor, a wholly-owned subsidiary of Wingtech Technology, signed an acquisition agreement with NEPTUNE 6 LIMITED, the parent company of Newport Wafer Fab (hereinafter referred to as "NWF") and its shareholders. NEPTUNE's main asset is the 8-inch fab Newport Wafer Fab, located in Newport, South Wales, which was built in 1982 and is the largest remaining semiconductor factory in the UK. According to the official website information, the current monthly production capacity of NWF is 35,000 pieces of 8-inch wafers, and the maximum production capacity can be expanded to 44,000 pieces of 8-inch wafers per month, mainly engaged in the manufacture of semiconductor chips in the process of 0.18 μm-0.7 μm, and the main products are MOSFETs, IGBT chips, as well as CMOS and analog chips used in the automotive industry. In addition, NWF also has compound semiconductors (mainly SiC and GaN) development capabilities, Wingtech has been in the layout of compound semiconductors, the first to do GaN, because GaN is a more advanced technology, higher efficiency, more advantages in high frequency, the first generation of GaN products is 650v, in 2021 at the Expo has Wingtech partners released its products, has now entered mass production. At present, Nexperia's own fabs do not currently have the production capacity of IGBT chips. Therefore, the successful acquisition of NWF will help Nexperia further extend its product line, further enrich the supply capacity of automotive chips, and increase market share. In addition, NWF's compound semiconductor technology can also strengthen Nexperia's layout in the field of compound semiconductors.

Nexperia's previous wafer production capacity was about 1.1 million units, and it is expected that H2 production capacity will reach about 1.4-1.7 million units in 2022, an increase of 27%-52%. Among them, the Manchester fab in the United Kingdom and the Hamburg fab in Germany are continuing to expand production capacity and upgrade production lines; the Newport fab acquired in 2021 mainly provides foundry services for products such as medium and high voltage MOS and IGBT for companies such as Infineon, and will gradually reduce the foundry business in 2022 and release the production capacity to Nexperia itself; the Shanghai Lingang 12-inch fab plant, which is built by the major shareholder first, has been capped on February 28, 2022, of which the first phase of production capacity is planned to be 30,000 pieces /month. The second phase of production capacity planning is 30,000 pieces / month, and the third phase of production capacity planning is 40,000 pieces / month. In terms of packaging and testing capacity, malaysia's Seremban packaging and testing plant has started a substantial expansion of production, adding 25 billion new production capacity; the expansion project of Dongguan packaging and testing plant in China is also under planning, and it is expected to increase production capacity by 7.8 billion units / year after completion and operation.

Groundbreaking ceremony for the expansion of the Nexperia Seremban Sealed Testing Plant in Malaysia

The combination of scale advantages, product competitiveness and technical capabilities will bring unparalleled competitive barriers to Nexperia. Unique packaging technology, rapid technology iteration capabilities, and the development of production bottlenecks can all smell Nexperia's ambitions in the field of new energy vehicles. Vehicle regulation products have three major barriers of long verification cycle, high product richness and long customer introduction cycle, and during the reporting period, the company has established cooperative relations with a number of OEMs, tier1, chip suppliers and other upstream and downstream ecological chains in terms of intelligent cockpit, intelligent network connection and automatic driving. The company's goal is to become a supplier of pre-installation vehicle specification solutions for smart cars and smart travel in the automotive electronics industry, providing customers with a complete set of solutions from software to hardware to manufacturing (including but not limited to innovative product research and development in the fields of intelligent cockpit, intelligent networking and automatic driving). At present, the company's first intelligent cockpit product has successfully passed the customer audit and entered the prototype stage. Wingtech Technology's Nexperia has maintained long-term and close cooperative relations with Tier1 suppliers and major automakers. Under the background of global core shortage, Nexperia's large number of automotive-grade chips and devices can be applied to the company's automotive products, providing a solid and powerful guarantee for the development of the company's automotive electronics business.

Looking forward to the future, the system-in-package (SiP) of ODM and Nexperia business cooperation can also be realized, whether it is the Dongguan sealing and testing factory investing in the small batch production of SIP modules or the huge convertible bond investment in the SIP module project of Wuxi Intelligent Manufacturing Industrial Park.

Wingtech Technology Optical Module is the next city, and Delta returns to the arms of specific overseas customers. The company completed the acquisition of Guangzhou Delta and successfully entered the field of optical modules. Zhuhai Delta is scarce in the field of camera module business. Its advanced packaging and testing technology capabilities, the ability to develop some packaging and testing equipment and the ability to supply major customers of world-class mobile phone brands will promote the company's deep entry into the optical track, open up the core links of the upstream industrial chain, promote the company to optimize the customer structure, and further enhance profitability and comprehensive competitiveness. Guangzhou Delta uses industry-leading flip-chip technology to achieve more stable performance, stronger interference resistance, and smaller product size to meet the product needs of specific customers. The company has an intelligent optical module production platform, through the construction of high-standard dust-free workshop, precision automated production lines, the construction of intelligent production systems, and the application of strict product quality management system, escort for production and quality. At present, it is known that Delta is one of the front camera suppliers of the iPhone8-iPhone 11. The following table shows the iPhone's front camera:

Guangzhou Delta was originally a key subsidiary of OFILM, responsible for supplying camera modules for specific overseas customers, with total assets of about 2 billion yuan and net profit of about 300 million yuan by 2020. In February 2021, Wingtech Technology began to acquire camera-related equipment owned by Guangzhou Delta and Jiangxi Jingrun from OFILM, and the final transaction price was 2.42 billion yuan; after the transaction was completed in June, Wingtech Technology carried out acquisition reorganization, and the overall progress was relatively rapid. On November 3, the operating assets purchased by Jiangxi Jingrun have completed equipment commissioning, the trial production line has been put into use and achieved output, wingtech technology has determined the mass production plan with specific overseas customers; on December 1, wingtech technology's first batch of mass production products have been shipped, and the products have entered the batch shipment stage; on December 10, Wingtech technology disclosed that the pre-sample products have passed the final verification of specific overseas customers, and the products have entered the formal mass production and normalized batch shipment stage in accordance with the shipment plan agreed with the customer. Now that it is produced and shipped in Guangzhou, the new factory in Zhuhai will have a larger production capacity, more advanced technology and a higher level of automation than Guangzhou in the future. In the future, Delta products will be used in Wingtech ODM's Android mobile phone, laptop and automotive customers.

Renderings of Delta Zhuhai plant

Zhang Xuezheng, chairman of Wingtech Technology, introduced at the third quarterly report performance exchange meeting that "Delta has scarcity in the field of camera module business, and has advanced packaging and testing technology capabilities, some packaging and testing equipment development capabilities and the ability to supply major customers of world-class mobile phone brands, which will promote the company's deep entry into the optical track and open up the core links of the upstream industry chain; it will promote the company to optimize the customer structure and further enhance profitability and comprehensive competitiveness." “

The acquisition of Delta into the supply chain of specific overseas customers is not Zhang Xuezheng's ultimate intention, and meta-universe (AR/VR) equipment and intelligent driving have higher technical requirements for optical modules. At present, almost all optical manufacturers in Taiwan have related customers and delivery objects, and many related component lens products have been delivered in small quantities for many years. At this time, Wingtech chose to diversify its operation not only to enhance the marginal interest rate of its own OEM machine, but also to prepare for the upcoming meta-universe.

Relying on Wingtech product research and development and semiconductor empowerment, Delta Technology's optical imaging capabilities are expected to get greater room for development, with the development of optical technology and the market space in the field of IoT, intelligent cars, and meta-universes, Delta's optical imaging technology capabilities will also become one of Wingtech's core competitiveness.

In electronic products, in addition to semiconductors and optical imaging components, display components are also one of the core components. Mini/Micro LED is the future of display technology, with great potential in the consumer electronics and automotive electronics markets, and once a breakthrough is formed, it will bring revolutionary changes.

On December 21, 2021, Wingtech Technology said in reply to investors that the company's layout of the Mini/Micro LED field, from technology research and development to product production is based on the semiconductor business IDM platform capabilities, giving full play to the advanced packaging and testing advantages of Anshizi's ITEC automation equipment, and will be applied to the company's product integration business (such as laptops, automotive electronics and other fields) in the future, and will build semiconductors, optics and displays into the core competitiveness of the company's main business. And further promote the in-depth synergy between product integration business and semiconductor business.

It is understood that Wingtech has set up a new display technology division to focus on this field. Based on Nexperia ITEC's world-leading massive transfer technology and Wingtech product integration capabilities, Mini/Micro LED direct display and backlight products have been successfully developed through internal collaborative innovation. At present, the first samples have been provided to multiple automotive customers for testing, and the feedback is very good.

Through two years of endogenous development + international mergers and acquisitions, Wingtech Technology has quietly built a huge industrial layout of analog/power semiconductor+optical module+Mini/Micro LED+smart terminal, becoming the company with the most complete layout from semiconductors to optics, displays and terminal products in China. In terms of corporate form, Wingtech Technology is very similar to South Korea's Samsung. The main theme of 2022 for Wingtech Technology is to expand production capacity. When Wingtech acquired Nexperia, it said that in the next three years, it will make all the company's products the first in the world, and review the strategic plan of Wingtech Technology proposed by Zhang Xuezheng:

In the first stage, the ODM system integration field expands from the consumer field to the industrial, IoT field, and automotive electronics field, with more products, more customers, and greater sales, forming a powerful hardware traffic platform for ODM services.

In the second stage, Wingtech Technology will accelerate vertical integration, through mergers and acquisitions, integration and self-development, in the field of semiconductors, components, integration and development of more components, increase their own supply capacity, the formation of a safe and controllable supply system.

In the third stage, Wingtech Technology will take semiconductors as the leader, increase investment, enhance innovation capabilities, empower components and system integration, comprehensively enhance the core competitiveness of the whole machine products, provide customers with products without me, people with me, and establish a company moat. Our goal is to drive Wingtech's strategic shift from a service company to a product company.

So far, the three stages of travel, products, production capacity and production line have been in full swing, backed by the vertical integration of the company's business, products to accelerate the introduction of domestic terminal products such as Gree, Huawei, various automobile manufacturers and other enterprises, and actively promote the historical mission of localization of power semiconductors. The company's layout of "king of ODM + car specification-level power chip practitioner + meta-universe groping", the three businesses not only have a seemingly clumsy but rock-solid basic disk foundry business, but also have the most pressing and most revolutionary new business in the current lack of core tide, and also have an optical and display business that can be infinitely prospected. If Wingtech can effectively complete the integration of scarce resources and the exploration of industrial direction, and coordinate efforts on semiconductor, optical, display, and communication intelligent terminals, "China Samsung" Wingtech Technology will usher in a new valuation. Counting the past, the great semiconductor manufacturers have achieved strong Hengqiang through endogenous development and mergers and acquisitions, established the situation of today's semiconductor industry oligarchy, watching Wingtech along the way, truly interpreted the "journey of a thousand miles, starting with a single step", I believe it will be able to solve this "Sword of Damocles" and give investors a satisfactory answer. (Source: Jiwei Network)

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