Hengshuo Semiconductor sprints to the IPO of the Science and Technology Innovation Board to reply to many questions of the Shanghai Stock Exchange

Economic Observer Network reporter Li Jingheng has another domestic chip company that is seeking to go public.

On March 29, Hengshuo Semiconductor (Hefei) Co., Ltd. (hereinafter referred to as "Hengshuo Semiconductor") replied to the audit inquiry letter of the Shanghai Stock Exchange and accelerated the IPO of the Science and Technology Innovation Board. The company plans to raise about 754 million yuan for research and development and production projects such as NOR Flash chips, general-purpose MCU chips and CiNOR integrated AI inference chips.

Among them, NOR Flash chip is a non-volatile flash memory chip, with fast reading speed, in-chip execution and other characteristics, often used to store a variety of electronic equipment boot program; MCU chip is a micro-control unit, the use of ultra-large scale integrated circuit technology to integrate CPU, memory, counter and other modules into a chip, constitute a small and perfect microcomputer system, is an indispensable master control chip for various electronic devices; CiNOR technology is a kind of storage and computing integrated technology developed by the company. The operation is done once in the chip, and there is no need for external memory to store intermediate data.

According to the prospectus, Hengshuo Semiconductor is an integrated circuit design enterprise whose main business is the research and development, design and sales of memory chips and MCU chips. From 2018 to 2020 and the first half of 2021, Hengshuo Semiconductor's operating income was 101 million yuan, 134 million yuan, 252 million yuan and 267 million yuan, respectively, and the net profit attributable to the owners of the parent company was -6.28 million yuan, -5.066 million yuan, 20.5971 million yuan and 54.6888 million yuan, respectively.

Memory chips are growing rapidly

Hengshuo Semiconductor introduced that according to different functions, integrated circuit products are mainly divided into four categories, namely memory chips, logic chips, analog chips and microprocessors. According to the World Semiconductor Trade Statistics Association (WSTS), the largest proportion of the global integrated circuit industry market in 2020 is logic chips and memory chips, accounting for 32.78% and 32.52% respectively, and the market size reached 118.408 billion US dollars and 117.482 billion US dollars, respectively.

According to the World Semiconductor Trade Statistics Association, in 2021, the fastest growing scale of the entire integrated circuit market is memory chips, an increase of 37.1% over 2020, and the market size reached 161.110 billion US dollars. It was followed by logic chips, which increased by 26.2% over 2020 and reached a market size of $149.388 billion. At that time, the proportion of memory chips in the market size of the entire integrated circuit industry will increase from 32.52% in 2020 to 35.05%, while the market size of logic chips, microprocessors and analog chips will account for 32.49%, 16.82% and 15.64% respectively.

Hengshuo Semiconductor said that China is one of the world's most important memory chip consumer markets, and the market size has generally maintained rapid growth in recent years. From 2015 to 2020, the size of the mainland memory chip market increased from 136 billion yuan to 302.1 billion yuan, with an average annual compound growth rate of 17.31%, far exceeding the global growth rate (10.19%) in the same period. It is estimated that the market size of mainland memory chips will reach 338.3 billion yuan in 2021.

According to Hengshuo Semiconductor, memory chips can be divided into volatile memory chips (data loss after power failure) and non-volatile memory chips (data is not lost after power failure). Volatile memory chips are commonly dram (dynamic random access memory) and SRAM (static random access memory), usually used with the CPU to provide the CPU with the storage of intermediate data during operations. Non-volatile memory chips include Flash (flash memory) and ROM (read only memory). Flash memory chips are divided into NAND Flash and NOR Flash. NAND Flash has a large capacity, mainly used for large-capacity data storage; NOR Flash has a smaller capacity, but can execute program code directly on-chip, typically to store boot software programs. ROM is currently the most widely used mainly for EEPROM (live erasable programmable read-only memory, is a kind of memory chip that does not lose data after power failure), the storage capacity is smaller, usually used to access a small amount of program code.

Among the many memory chips, the largest market size is DRAM and NAND Flash, according to semiconductor market research institute IC Insights forecast, the global DRAM market size in 2021 accounted for about 56% of the entire storage market (about $86.9 billion), NAND Flash market size accounted for about 41% of the entire storage market (about $63.6 billion), NOR Flash market size accounted for about 2% of the entire storage market (about $3.1 billion), Other memory chips (EEPROM, EPROM, ROM, SRAM, etc.) accounted for a total of 1% (about US$1.6 billion).

Henso Semiconductor said NOR Flash is widely used in electronic devices that need to store system program code. NOR Flash is the largest memory chip in the market outside of DRAM and NAND Flash. In recent years, with the growth of downstream applications such as smartphones, Internet of Things, TWS (true wireless stereo headphones), 5G and automotive electronics, the NOR Flash market size has gradually grown. According to IC Insights, the global market size of NOR Flash is about $2.5 billion in 2020, and the size of the NOR Flash market is expected to be about $3.1 billion in 2021.

Hengshuo Semiconductor also said that the current global NOR Flash market is mainly composed of Winbond Electronics Co., Ltd. (hereinafter referred to as "Winbond"), Wanghong Electronics Co., Ltd. (hereinafter referred to as "Wanghong"), GigaDevice Innovation (603986. SH) and Cypress Semiconductor Corporation (hereinafter referred to as "Cypress") are the four manufacturers, which together account for about three-quarters of the market share. In 2020, Hengshuo Semiconductor's NOR Flash product sales revenue was 243 million yuan, accounting for 1.50% of the global NOR Flash market share.

"From the perspective of revenue growth rate, in 2018, 2019 and 2020, the company's NOR Flash revenue was 0.99 billion yuan, 128 million yuan and 243 million yuan respectively, with a compound growth rate of 56.90% in the past three years, far exceeding the growth rate of the global NOR Flash market in the same period (3.30%), considering that the company's NOR Flash sales revenue (241 million yuan) from January to June 2021 is close to the whole of 2020. The company's sales revenue for the whole year of 2021 and beyond is expected to continue to increase. Hengshuo Semiconductor said.

However, In response to the Shanghai Stock Exchange's audit inquiry letter, Hengshuo Semiconductor also admitted that the NOR Flash chips produced by the company have problems with fewer product types and smaller market space. The company's NOR Flash product capacity has currently covered 1Mb to 128Mb, and lacks large-capacity products above 128Mb. At present, the NOR Flash product capacity of Winbond, Wanghong, Gigabit Innovation and other manufacturers has covered 512Kb to 1Gb, and Wanghong and Gigabit Innovation have even developed 2Gb super capacity products.

Compared to NOR FLASH chips, the market size of DRAM and NAND Flash chips is larger. The SSE asked Hengshuo Semiconductor to explain why it did not develop both chips. Hengshuo Semiconductor said that there are technical difficulties in both DRAM and NAND Flash chips. However, NAND Flash chips and NOR FLASH chips have acquaintances in terms of design, and the company plans to continue to develop the NAND Flash business when conditions are available in the future. However, considering the difficulty of research and development, the financial strength and the foundry difficulties of DRAM, the company will not develop the DRAM business in a short period of time.

Expand MCU chip business

According to Hengshuo Semiconductor, MCU chips usually include three main parts: the computing core, embedded memory and various peripherals. The current 32-bit computing core has gradually become the core of global consumer electronics and industrial electronic products due to its good ecology and excellent scalability.

McUs can be divided into 4-bit, 8-bit, 16-bit, and 32-bit bits according to the number of bits of data in the processor. The higher the number of digits of the processor, the faster the operation speed, the larger the supported storage space, and the more peripheral interfaces, which can meet different types of market needs. The 8-bit is suitable for products with small computing capacity, such as LCD, small household appliances, toys, etc. The 32-bit is suitable for slightly more computed products, such as automotive electronics and industrial control.

According to Hengshuo Semiconductor, global MCU product shipments increased from 22.058 billion units in 2015 to 36.065 billion units in 2020, and its market size increased from 15.945 billion US dollars in 2015 to 20.692 billion US dollars in 2020. IC Insights predicts that the global MCU market size will grow from $20.7 billion to $28.5 billion by 2020 by 2026.

According to industry analysis firm IHS Markit, The size of China's MCU market reached 25.6 billion yuan in 2019. As the growth rate of China's IoT and new energy automobile industry leads the world, driving downstream application products to maintain strong demand for MCU products, China's MCU market growth rate continues to lead the world. In 2020, the size of China's MCU market exceeded 26.8 billion yuan, an increase of 5% over the previous year. In China, MCU products are mainly used in five major areas, namely consumer electronics, computers, automotive electronics, industrial control and IC cards. Among them, the consumer electronics market accounted for the highest proportion of 26.2%, and the market share of automotive electronics MCU applications was 15.2%.

"In the next 5 years, with the gradual reduction of the impact of the epidemic, the global economic situation will gradually improve, China's economy will take the lead in recovering and continue to strengthen, under the influence of favorable factors such as the rapid development of the Internet of Things, emerging medical electronics and new energy applications, China's MCU market will continue to maintain a good growth trend." Hengshuo Semiconductor said.

Hengshuo Semiconductor also said that at present, the global MCU suppliers are mainly foreign manufacturers, and the industry concentration is relatively high. China's MCU market is mainly occupied by foreign manufacturers such as STMicroelectronics, NXP Semiconductors, Microchip Technologies, Renesas Electronics Corporation and Infineon Technologies, and the market share of domestic manufacturers is low. GigaDevice, one of the largest MCU sellers in China, has a sales revenue of 750 million yuan in 2020, with a domestic market share of less than 3%. From the perspective of application fields, foreign manufacturers have a complete range of MCU products, covering consumer electronics, automotive electronics and industrial control and other fields, and the production capacity distribution is relatively balanced. Automotive electronics has high performance requirements for MCU products and is also the application area with the highest market share of MCU.

Hengshuo Semiconductor's MCU products began mass production and sales in 2020, starting relatively late, still in the early stage of business expansion, and in a small scale in the entire MCU industry. In 2020 and January-June 2021, the sales revenue of the company's MCU products was 7.1773 million yuan and 25.2162 million yuan, respectively, and the shipment volume was 12.7295 million units and 35.4675 million units, respectively.

Both a customer and a supplier?

In the audit inquiry letter, the SSE questioned the business cooperation between Hengshuo Semiconductor and Wuhan Xinxin Integrated Circuit Manufacturing Co., Ltd. (hereinafter referred to as "Wuhan Xinxin"). Since 2015, Hengshuo Semiconductor and Wuhan Xinxin have signed a series of technical licensing agreements, the core content of which involves Nor Flash and MCU chips, the main products of Hengshuo Semiconductor.

From 2018 to 2020 and the first half of 2021, Wuhan Xinxin is the largest supplier of Hengshuo Semiconductor, accounting for 75.30%, 77.03%, 65.72% and 68.02% of the total procurement in each period, respectively. Hengshuo Semiconductor mainly purchases wafer foundry and wafer testing services from Wuhan Xinxin. At the same time, Wuhan Xinxin is also a customer of Hengshuo Semiconductor, which mainly provides technical services to it.

For the above situation, the SSE requested Hengshuo Semiconductor to explain the reasons and rationality of Wuhan Xinxin as both a customer and a supplier, the specific content of the company's sales to it, whether the transaction has a real commercial background, the pricing basis and fairness, and whether it conforms to industry practices.

Hengshuo Semiconductor explained that chip design companies usually adopt the Fabless (fabless) business model, focusing on chip research and development, design and sales, wafer foundry, wafer testing and chip packaging and testing through outsourcing. Therefore, having stable and good upstream supplier resources such as wafer foundry is a necessary factor to maintain the development of chip design enterprises.

"At the beginning of its establishment, the company cooperated with Wuhan Xinxin in wafer foundry, based on the close connection between the design technology and the wafer foundry process technology in the chip product manufacturing process, the two sides gradually formed a multi-faceted long-term strategic cooperative relationship covering wafer foundry, product technology research and development and licensing in the process of cooperation." The above cooperation has helped the company to quickly realize product verification and mass production in the early stage of the company's establishment, improved the matching degree between product design technology and manufacturing process in the company's development process, shortened the product design and development cycle, and ensured the stable supply of foundry capacity. Hengshuo Semiconductor said.

For example, the cooperation between Hengshuo Semiconductor and Wuhan Xinxin in the NOR Flash product line includes wafer procurement and product technology research and development and licensing. The company sent a purchase order to Wuhan Xinxin to purchase wafer manufacturing and testing services, and Wuhan Xinxin completed wafer manufacturing and testing according to the order. The cooperation model is consistent with the procurement model of the company and other suppliers. At the same time, the company will be part of the NOR Flash products of the integrated circuit layout design (layout) authorized to Wuhan Xinxin, Wuhan Xinxin according to the stage to bear the relevant product part of the mask, tape-out and other costs and pay fixed technical service fees, Wuhan Xinxin use authorized technology to produce and sell related independent brand products in accordance with the contract to pay the technical use fee (sales commission).

Similarly, hengshuo semiconductor and Wuhan Xinxin in the MCU product line cooperation is similar, including exclusive licensing of product technology and procurement of wafers.

Hengshuo Semiconductor said that the technical service fees and technical usage fees charged by the company to Wuhan Xinxin during the reporting period correspond to specific product technologies and products, with real business backgrounds. The business is related to the specific authorized products and product research and development process, and the company and Wuhan Xinxin negotiate to confirm the charging standards, and the pricing is fair. Moreover, semiconductor manufacturers sell both private label products and provide foundry business to customers in line with industry practices. Intel, Samsung and other international famous enterprises, the production and sales of products at the same time for some customers to provide wafer foundry services, domestic listed companies China Resources Micro (688396. SH) also has a wafer foundry business and an independent product sales business such as power semiconductors.

In addition, the SSE also requires Hengshuo Semiconductor to analyze the stability and sustainability of Wuhan Xinxin as an important supplier, whether there is a situation where production and sales are limited by Wuhan Xinxin, and whether there is a significant dependence on Wuhan Xinxin.

Hengshuo Semiconductor said that compared with the scale of wafer foundry revenue, the sales scale of Wuhan Xinxin's own brand NOR Flash products is relatively low, and meeting the customer service needs of wafer foundry is still its highest priority. According to the past cooperation history and the current scheduling situation provided by Wuhan Xinxin for the company, the company and Wuhan Xinxin have formed a long-term and stable cooperative relationship, and Wuhan Xinxin has stability and sustainability as an important supplier of the company.

Moreover, in addition to Wuhan Xinxin, Hengshuo Semiconductor has expanded the selection of wafer foundry and test suppliers. For example, some of the company's products are available at SMIC (688981. SH) production line to achieve mass production, by SMIC to provide wafer foundry services to the company, in 2021 the company's procurement of wafers from SMIC accounted for 23.20% of the total wafer procurement amount of that year, but also expanded the new wafer test suppliers such as Shenghe Micro Semiconductor (Jiangyin) Co., Ltd.

"With the development of domestic wafer foundry testing technology, wafer foundry and testing capacity is gradually enriched, and the company will also have more supplier choice space." Therefore, although the company's wafers are mainly purchased from Wuhan Xinxin, there is no situation where production and sales are limited by Wuhan Xinxin, and the company does not have a significant dependence on Wuhan Xinxin. Hengshuo Semiconductor said.