Per reporter: Zhang Mingshuang Per editor: Zhang Haini
Another chip design company sprinted to the listing on the Science and Technology Innovation Board. Recently, the suspension of the IPO of Suzhou Centec Communications Co., Ltd. (hereinafter referred to as Centec Communications) was eliminated, the Shanghai Stock Exchange resumed its issuance and listing review, and Centec Communications also disclosed the reply documents of the first round of review inquiry letters.
Centec Communications mainly adopts the Fabless model, focusing on the research and development, design and sales of Ethernet switching chips and supporting products. From 2018 to 2020 and the first half of 2021 (hereinafter referred to as the reporting period), the first major customers of Centec Communications were Maipuxin Technology Co., Ltd. and its affiliates (hereinafter referred to as Maipuxin), Shenzhen ZhongdianGang Technology Co., Ltd. and its affiliates (hereinafter referred to as Shenzhen Zhongdiangang), all of which are controlled by the concerted actors of the largest shareholders.
It is worth noting that the main products of Centec Communications and MaipuXin both have Ethernet switches, and there are similar services between the two sides. However, Centec Communications said that the similarity between the company and MaipuXin in the switch business is the result of the independent development of the two sides, in view of the differences in strategic positioning, product type, business model and product richness between the two sides, resulting in different customer groups between the two sides, so the two sides do not constitute direct competition.
The first major customer is the related party
During the reporting period, Centec Communications achieved operating income of 128 million yuan, 192 million yuan, 264 million yuan and 199 million yuan, and achieved net profits of -27.4195 million yuan, 6.2207 million yuan, -9.5831 million yuan and 3.8748 million yuan respectively, and has not yet achieved scale profitability.
Centec Communications' main products are Ethernet switching chips, Ethernet switching chip modules, Ethernet switches, etc. The company is strategically positioned as a chip design enterprise, and the Ethernet switch business is a derivative business.
However, the "Daily Economic News" reporter noted that in 2018 and 2019, the largest source of revenue of Centec Communications was the Ethernet switch, accounting for 37.56% and 32.96% of the revenue, respectively, while the Ethernet switching chip was the second largest source of income, accounting for 27.26% and 29.18% of the revenue, respectively. With the expansion of the chip business scale, in 2020 and January to June 2021, the proportion of Ethernet switching chip revenue reached 48.27% and 52.31%, respectively, and the proportion of Ethernet switch revenue fell to 28.07% and 13.56% respectively. However, from the perspective of sales amount, The revenue of Ethernet switches in 2019 and 2020 is still growing.
Image source: Screenshot of prospectus (draft declaration).
During the reporting period, The concentration of Centec Communications customers was relatively high, with the sales amount of the top five customers accounting for 47.30%, 47.21%, 56.65% and 66.86% of the operating income, respectively. The first major customer is MaiPub xin and Shenzhen Zhongdian Port, which are related parties of the company.
MaiPutongXin and Shenzhen Zhongdian Port are both enterprises controlled by China Electronics Information Industry Group Co., Ltd. (hereinafter referred to as China Electronics). At the shareholder level, China Electronics is the fifth largest shareholder of Centec Communications, and its holding subsidiary, China Zhenhua Electronics Group Co., Ltd., is the largest shareholder of Centec Communications, with a combined shareholding ratio of 32.66%. However, Centec Communications said that the largest shareholder and its concerted actors cannot control the company's board of directors and shareholders' meetings, and the company has no controlling shareholders and no actual controllers.
It is worth noting that Centec Communications sells Ethernet switching chips and other products to Maipuxin, but the main product of Maipuxin is Ethernet switches, which have similar services with Centec Communications. Is this to avoid competition in the same industry by not identifying the actual controller? In this regard, Centec Communications said in the feedback reply that the formation of similar businesses between the two sides has a reasonable historical background, and in view of the differences in strategic positioning, product types, business models and product richness of the two businesses, the customer groups of the switch business of the two sides are not the same, and there is no direct competition.
However, the reporter noted that Shenzhen Zhongdian Port is a distributor of Centec Communications, and the sales content is Ethernet switching chips and switching equipment. Does the switching equipment sold include Ethernet switches? On April 27, Centec Communications replied to the Daily Economic News in the form of an email, saying that "Shenzhen Zhongdian Port will purchase switches from our company based on the high adaptability of the company's products and customer needs."
Since the main product of The same control of Mai Pingxin is an Ethernet switch, why does Shenzhen Zhongdian Port still purchase from Centec Communications? Centec Communications responded, "We do not know whether Shenzhen Zhongdian Port has purchased switches from MaiPub.
The average unit price of chip products fell by more than 40%.
Although the sales amount of Centec Communications' Ethernet switching chips and Ethernet switches has continued to rise, its average unit price has continued to decline.
During the reporting period, the average unit price of Ethernet switching chips was 1013.74 yuan / piece, 835.45 yuan / piece, 763.54 yuan / piece and 573.50 yuan / piece, the average unit price fell by 43.43%; the average unit price of Ethernet switches was 17,300 yuan / unit, 13,400 yuan / unit, 12,500 yuan / unit, 10,800 yuan / unit, the average unit price fell by about 37.6%.
For the reasons for the continuous decline in chip prices, Centec Communications said that in 2019, the main strategic customers increased the purchase volume of GreatBelt series products, and the company gave a certain price discount to customers who increased the purchase volume in that year; and the sales volume of GoldenGate series products sold in 2020 increased significantly, and the company gave certain price discounts to customers with large procurement scale; from January to June 2021, TsingMa series products gradually completed the market introduction. The average unit cost and unit price level of this series of products are low.
The factor of switch price decline is also similar, in 2019, the company gave a certain price discount to customers with large procurement scale and long-term strategic cooperation, and from January to June 2021, it was caused by the increase in the proportion of low unit price product sales.
According to the response to the audit inquiry letter, from 2019 to 2021, the top three products in the revenue of Centec Communications Ethernet switching chips are TsingMa, GoldenGate and GreatBelt. Among them, TsingMa revenue grew the fastest, with sales revenue of 1.7282 million yuan, 21.1175 million yuan and 111 million yuan from 2019 to 2021, respectively; GoldenGate was the chip product with the highest revenue in 2019 and 2020, which was only surpassed by TsingMa in 2021, and the sales revenue in the past three years was 20.4984 million yuan, 58.9716 million yuan and 67.8803 million yuan, respectively.
Image source: Screenshot of the reply to the inquiry letter
The reporter noted that the TsingMa series is the company's mid-range core chip, with a switching capacity of 440Gbps, supporting a maximum of 100G port rates; while the GoldenGate series is the company's first high-end core chip, with a switching capacity of 1.2Tbps, supporting a maximum of 100G port rates.
It can be seen that the revenue of the mid-range core chip TsingMa is growing faster, and the high-end core chip GoldenGate series is reducing prices. In this regard, Centec Communications replied to the reporter that the TsingMa series of products launched by the company has a lower unit price, and its switching capacity and maximum port rate can cover the market demand for operator networks and enterprise network aggregation and access, and has a high cost performance; the GoldenGate series gives certain price discounts to customers with large procurement scales, and does not give price discounts to all customers.
As for whether GoldenGate and TsingMa may raise prices in the future, Centec Communications did not have a clear reply, but said in its reply to the audit inquiry letter that in the future, with the further expansion of the company's business scale, the downward trend in sales unit prices that occurred in the early stage for the introduction of strategic customers will be slowed down.
As for whether low-priced products are the future market trend, Centec Communications replied to reporters that the future development trend of Ethernet switching chips is still high-end. However, the reporter saw in the reply to the audit inquiry letter that in the future, Centec Communications planned several high-end switching chips, "while considering the natural extension to the small and medium-sized enterprise network market, planning low-end switching chips." "In terms of low-end products, the company intends to launch series such as TsingMa.AX in the second half of 2022."
The market share is low
During the reporting period, Centec Communications maintained a high growth rate in revenue, but its market share remained low. According to the data of China Insight Consulting quoted in the prospectus (filing draft), in 2020, China's commercial Ethernet switching chip market was calculated by sales caliber, and Broadcom, Meiman and Realtek ranked in the top three with market share rates of 61.7%, 20.0% and 16.1% respectively, accounting for 97.8% of the market share; Centec Communications ranked fourth in sales.
In this regard, Centec Communications supplemented the risk tip that compared with leading enterprises, the company's Ethernet switching chip business scale is small, and there is still a large gap in market share. In addition, there is a certain gap between the company's technical level and international manufacturers, the product line is not yet complete, and there is still a big gap in the control of the supply chain.
This also leads to the gross profit margin of Centec Communications' Ethernet switching chips being lower than that of comparable companies, and from 2019 to 2021, the gross profit margins of Centec Communications' Ethernet switching chips are 47.69%, 34.35% and 39.61%, respectively, and the average gross profit margins of comparable companies are 49.76%, 49.82% and 52.68%.
Image source: Screenshot of the reply to the inquiry letter
The increase in gross margin in 2021 compared to 2020 is mainly due to the decline in average procurement costs due to the scale effect of the GoldenGate series after the volume.
Centec Communications said that in the future, in order to ensure that the company and the world's leading Ethernet switching chip design enterprises can gradually narrow the technology gap, the company will continue to increase investment in research and development to enhance its technical strength and market competitiveness.
In terms of R&D investment, from 2019 to 2021, Centec Communications' R&D expenses were 95.4256 million yuan, 111 million yuan and 182 million yuan, accounting for 49.79%, 41.97% and 39.61% of the operating income in the same period, respectively. Although the amount of R&D investment is increasing, the R&D expense ratio is declining.
For the risk of technological innovation, Centec Communications prompted that in the future, if the company's technology research and development level lags behind the level of industry upgrading, or the company's technology research and development direction deviates from the market development trend, it will lead to the waste of the company's research and development resources and miss market development opportunities, which will adversely affect the company.
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