The semiconductor market will enter a cold winter in 2023 due to the weak demand in the semiconductor market and the resulting inventory adjustments. However, with the gradual recovery of global market demand and the increase of government incentives, the entire industry may usher in a full recovery by the end of 2024. According to the World Semiconductor Trade Statistics Society (WSTS), the global semiconductor market will increase by 13.1% year-on-year to $588 billion in 2024. IDC predicts that the semiconductor market will return to the growth trend in 2024, with an annual growth rate of more than 20%, and the market size will reach $630.2 billion.
The so-called "Chunjiang Plumbing Duck Prophet", in the previous cycle, often the first to perceive the changes in market demand in the memory and storage industry, has shown a clear upward trend in the first quarter of this year - Micron, Samsung and Hynix's Q1 financial reports have achieved a significant increase year-on-year and quarter-on-quarter, and then, we see that the international analog chip giant Texas Instruments (TI) has also made a bullish forecast for the second quarter revenue, indicating that the decline in demand for industrial and auto parts may be easing. This also indicates that the inventory adjustment of the entire chip industry is coming to an end. After eight full quarters of sustained downturn, the semiconductor industry is gradually coming out of the downward cycle.
Chart: Global Semiconductor Cycle (from @dailychartbook)
According to data compiled by Gavekal, the semiconductor cycle is improving after contracting over the past two years.
Semiconductors are a special industry, first of all, they are very cyclical, which means that every time they are at the bottom, they can predict that the next upward cycle is coming. Secondly, the manufacturing cycle of the chip is longer, usually taking 2~3 months, and if the early product definition, chip design and tape-out are also recorded, the whole time will become longer. This means that chip suppliers need to have a forward-looking layout and plan products and production capacity in advance. We often hear established chip suppliers who have spanned multiple cycles emphasized: "When it goes up, every company's business grows quickly, and what really matters is what you do right in the downcycle." The so-called "countercyclical investment" is also a major feature of the semiconductor industry. Because the cycle always returns, anxiety is allowed in a downward cycle, but there is no despair. What we really need to consider is, how to optimize cost efficiency and inventory in the downcycle, and bet on new business growth points in the next upcycle?
On the evening of April 25, Ziguang Guowei, a leading domestic integrated circuit design company, released its financial report for the first quarter of 2024, achieving revenue of 1.141 billion yuan and net profit attributable to the parent company of 307 million yuan.
It can be seen that although affected by the downward cycle of the entire industry, Ziguang Guowei still maintained a very stable performance. While its special integrated circuits inevitably declined due to cyclical reasons, the intelligent security chip business found a breakthrough in overseas markets and ushered in contrarian growth. At the same time, on the eve of industrial recovery, Unisplendour Guowei also aimed at a series of emerging applications and laid out new business growth points.
Steady and far-reaching: The special integrated circuit business is stable, and the intelligent security chip opens up a new situation
The business of Unisplendour Guowei includes special integrated circuits, intelligent security chips and quartz crystal oscillators, of which the business of special integrated circuits and intelligent security chips accounts for more than 90%.
Specialty integrated circuits are a wide range of integrated circuit products that optimize performance, power consumption, and high reliability in specific applications. The special integrated circuit products of Unisplendour cover several series of products such as microprocessors, programmable devices, memories, networks and interfaces, analog devices, ASIC/SoPCs, etc., with a total of more than 600 varieties.
Although the downstream demand of the current special industry has slowed down and the competition in the industry has intensified, this business of Ziguang Guowei still maintains a good gross profit margin. On the one hand, this is determined by the characteristics of the special industry, and on the other hand, it comes from a series of adjustments and optimizations within Unisplendour Guowei.
Unlike conventional consumer, industrial and other markets, the special industry sector does not take price as the core factor in selection. From a long-term perspective, the specialty market has dual requirements for product price and quality. After a certain market price reduction, quality will become a key factor again, thus compressing the overall price reduction space. At this time, customers are more concerned about product performance, intelligence, reliability and reliable delivery.
The scale effect and platform advantages of Ziguang Guowei in the special industry determine that under the same conditions, the competitiveness of its products and business gross profit margin are higher than those of its friends in the same industry. Therefore, even after the competition reaches a certain level of fierceness, Unisplendour Guowei can still maintain an effective gross profit margin. On the other hand, Ziguang Guowei has done a lot of work in energy efficiency, automation, information construction, etc., and the product yield and scale have been well improved, so as to actively respond to the risk of market price reduction and maintain a good gross profit margin. In the future, the competitive advantages of Ziguang Guowei's special integrated circuit business in terms of scale, technical reserves, R&D investment, and product quality will be further reflected.
Let's look at another major business segment of Ziguang Guowei, intelligent security chips, which have risen against the trend in this round of downward cycle.
The so-called smart security chip is a microprocessor chip embedded in various smart cards (such as bank cards, ID cards, SIM cards, etc.). The chip provides advanced security features for data storage, encryption, and authentication. With the digitization and modernization of global payment systems, the demand for smart security chips continues to grow. Especially in the financial services sector, the importance of security chips has increased significantly with the popularity of contactless payment technology and mobile payment applications. In addition, smart card security chips also play an important role in government authentication and mobile communications. Government agencies use these chips to improve the security of citizen ID cards and passports, while communication companies use these chips to protect users' SIM card information and ensure the security of communications.
In recent years, with the changes in the international situation and intensified competition, some competitors have gradually withdrawn from certain segments, providing a lot of opportunities and space for their expansion in overseas markets. This is a strong complement to the decline in revenue caused by the lack of demand for the specialty integrated circuit business. In the future, with the further expansion of Ziguang Guowei's overseas business, the intelligent security chip business is expected to provide greater growth momentum for the overall performance.
Bucking the trend: increase R&D investment and lay out a new business growth curve in the future
The above has analyzed the current main business situation of Ziguang Guowei, and then let's look at the future and see what new growth points are laid out by Ziguang Guowei in the upcoming industry recovery stage?
First of all, let's look at a statistic - R&D investment. In recent years, the R&D expenses of Unisplendour have accounted for more than 60% of the total expenses, and the R&D expenses will be further increased in 2023, accounting for 21.6% of operating income, and it is expected that this proportion will not be less than 20% in the future.
In the eyes of many short-term investors, a high proportion of R&D investment is not a good thing, because it will affect the company's overall profits. However, in the semiconductor industry, the level of R&D investment is precisely the key factor to measure the strength and future space of a chip company. For example, Nvidia's R&D investment accounts for 30%, while Intel's R&D investment accounts for about 26%. When Moore's Law stalled, R&D became a necessary measure for the semiconductor industry to seize future opportunities. According to IC Insights, the total R&D spending of global semiconductor companies is expected to grow at a compound annual growth rate (CAGR) of 5.5% to reach $108.6 billion between 2022 and 2026.
Chart: R&D investment trends in the semiconductor industry (Source: IC Insights)
In the market downturn, Ziguang Guowei still insists on increasing R&D investment, which not only reflects the firm confidence in the market prospects, but also reflects the sense of responsibility to fulfill the mission of China's chips. Behind the increase in R&D investment, a series of outstanding results have also been produced.
From a product point of view, the new generation of high-performance products of Ziguang Guowei has been widely recognized by core customers and has entered the stage of comprehensive promotion. In the field of specialty memory, the new NandFlash and other specialty memories are already on the market. In terms of DSP products, through cooperation with scientific research institutions and its own R&D efforts, Unisplendour Guowei has successfully launched products with industry competitiveness, indicating potential new growth points. At the same time, it has overcome the low-ripple switching power supply control technology, filled the domestic technical gap, and achieved a breakthrough in the key technology of special Ethernet switching circuit design. In addition, with the rich technical reserves accumulated in the field of analog circuits and signal chains, Tsinghua Unigroup will also launch a variety of new products including isolators, power supplies and high-performance frequency devices this year. System-on-chips such as special SoPC platform products and RF-SOC products are widely recognized by customers. Looking forward to the future, Tsinghua Unigroup will continue to expand its multi-variety and multi-series product lines, and continuously improve its ability to provide "supermarket-type" high-quality products and services for special industries.
From an application point of view, the automotive market is undoubtedly the biggest opportunity for mainland chip manufacturers. As the world's largest automobile export and a leader in the era of intelligent driving electrification, the mainland's automobile market is booming. At the beginning of this year, Unisplendour launched a new generation of THA6 series MCUs, which integrate up to 6 ARM Cortex-R52+ cores (including lockstep function), with a frequency of up to 400MHz and built-in large-capacity nonvolatile memory, providing excellent real-time and multi-core processing performance. This series of products can meet the needs of high-safety applications such as power system, chassis control, body and intelligent driving of fuel vehicles and new energy vehicles. At the same time, the THA6 series supports new application scenarios such as domain controllers and zone controllers, providing solid software and hardware support for automotive electronic and electrical architecture.
Figure: THA6 series MCUs on display at the Beijing Auto Show (Source: China Automotive Chip Alliance)
中国首款通过ASIL-D认证的Arm Cortex-R52+内核MCU芯片
In addition, with the gradual decentralization and popularization of automotive electronic keys in low-end models, intelligent security chips will also usher in new market growth points. For example, the information security guarantee of vehicle access control, driver identity verification, Internet of Vehicles data exchange, mobile payment and other functions of intelligent driving cars also requires the participation of intelligent security chips. The vigorous development of automotive electrification and intelligence in Continental will also bring more new application prospects for the intelligent security chip business.
epilogue
After the adjustment of the new management in 2023, Ziguang Guowei has completed the effective combing of the company's internal business, and the financial results of 2023 have also confirmed the success of the new management and this combing. The financial report for the first quarter of 2024 is still showing a steady momentum of accumulation. Although there are still many uncertainties and risks in the current internal and external market environment, the semiconductor industry has begun to gradually come out of the trough and is about to start a new round of upward cycle. Ziguang Guowei is ready to meet the recovery of the industry.