Shulou(Shulou.com)06/02 Report--

"New infrastructure" is a subject of great concern in the investment community recently, but in fact it is not a new concept. As early as the Central Economic work Conference held at the end of 2018, the positioning of "new infrastructure construction" such as 5G, artificial intelligence, industrial Internet and Internet of things was clearly defined. Subsequently, "strengthening the construction of a new generation of information infrastructure" was included in the 2019 government work report.

The concept of "new infrastructure" has attracted a lot of attention in the investment community recently, thanks to a number of high-level meetings held since the beginning of 2020 that have focused on new infrastructure construction.

On March 4, the government formally proposed to increase investment in public health services and emergency supplies, and speed up the construction of new infrastructure such as 5G networks and data centers.

In theory, "new infrastructure" is enough to arouse the reverie of the market for the acceleration of scientific and technological innovation, and quickly lead to the performance of the secondary market of a number of scientific and technological innovation companies in line with policy guidance, but the market response lags behind. Let the latter fail temporarily.

As a matter of fact, the market has not completely recovered from the blow to the confidence of the scientific and technological subject matter caused by the epidemic. As of March 7, the CSI science and technology index has fallen 7.28% since Feb. 26, while the semiconductor index in the sector has fallen 16%, according to Wind.

On March 4, the domestic chip design giant Zhaoyi Innovation was sold by two institutions totaling 626 million yuan, while the domestic semiconductor equipment giant North Huachuang was sold by three institutions totaling 389 million yuan, and its share price plummeted 6.91%.

Among them, the recent market performance of the semiconductor equipment giant North China Chuang is particularly worth pondering. From the beginning of 2020 to late February, the stock price soared from more than 90 yuan to an all-time high of 180.15 yuan, doubling directly, but after February 26, the stock price began to decline again, and the plummeting momentum can no longer be stopped.

It is better to look at "fundamentals" than to look at the rise and fall of Huachuang in the north.

The recent "falling" stock market performance of Huachuang in North China has aroused discussion among many investors. Some investors believe that this is the direct result of the large-scale flight of institutional funds, while some investors think that the stock has been too hot before and has now entered a period of return of value. In short, the root cause is the "chasing the rise and killing the fall" of the organization.

From a short-term point of view, the agency's "up-and-down" is indeed a major driving force behind the recent sharp rise and fall in the share price of North Huachuang.

March 5, the day after a mass exodus of agency funds. North Huachuang announced its performance in 2019, KuaiBao. The report shows that its revenue in 2019 increased by 22.10% over the same period last year, and its operating profit increased by 25.93% compared with the same period last year. The net profit belonging to shareholders of listed companies increased by 32.34% over the same period last year, and various financial indicators increased steadily.

Unexpectedly, the stock market's response to the excellent performance of North China Chuang is very lukewarm. North China Chuang's shares rose only 4 percent on March 5, fell 2.39 percent on March 6, and fell another 8.88 percent on Monday, March 9. This shows that the excellent performance of North China Chuang is also recognized by the stock market, but the institutions continue to act, and the market downward pull is too strong.

However, if you stretch the timeline a little longer, you will find that it is not these "traders" who engage in short-term speculation but the "fundamentals" of North China that really determine the value of North China. To judge the value of Northern Huachuang, it is necessary to combine the macroeconomic situation and the basic situation of the company to analyze.

More recently, the share price of North China Chuang rose from about 90 yuan to 180 yuan from December 2019 to February 25, 2020. It is closely related to two major events.

First, the matter of raising 2 billion yuan from the National Integrated Circuit Fund, Beijing Electric Control and Beijing Guorui Fund in 2019 in the form of a non-public offering has been settled. North Huachuang began to issue relevant announcements on December 5.

Second, the equity incentive plan of North Huachuang 2019 involves the market-oriented reform of state-owned enterprises, and the related issues have been repeatedly demonstrated and finally made a breakthrough, which was adopted by the board of directors on February 22, 2020.

If you stretch the timeline a little longer, you can see that North China Chuang's share price has been depressed for a long time from 2012 to 2018. In fact, it was the six years when North China Chuang had a difficult management and meagre profits.

In the first two years of listing in 2010 and 2011, the revenue growth rate of North China Chuang was 37.94% and 42.67% respectively, and the growth rate of deducting non-net profit was as high as 74.91% and 90.78% respectively. But the good times are not long. From 2012 to 2015, North Huachuang's revenue performance has been poor, deducting non-net profit has declined year by year.

North Huachuang's revenue returned to double-digit growth after 2016, but the deduction of non-net profit showed huge losses of-261 million yuan and-208 million yuan respectively in 2016 and 2017, and less than 100 million yuan in 2018. Reflected in the stock price, the share price of North China Chuang gradually rebounded in the three years from 2016 to 2018, but at a slow pace.

North China Chuang's share price soared after 2019, which is generally the result of the joint efforts of new products, performance, private fundraising of 2 billion, and equity incentive plan.

In fact, North China Chuang is very suitable for long-term investment. If you want to do long-term investment, you should pay attention to the fundamental analysis of North China Chuang.

From small to big

Chips are not only the foundation of 5G, AI and IOT, but also the foundation of "new infrastructure". In every process of wafer manufacturing, such as cleaning, etching, lithography, etching, degumming, ion implantation and thin film deposition, semiconductor equipment is inseparable from the participation of relevant semiconductor equipment, so semiconductor equipment is the cornerstone of chip manufacturing.

North Huachuang is one of the two major oligarchs of semiconductor equipment in China. In the wave of "localization of integrated circuits" and under the tuyere of "new infrastructure", semiconductor equipment is a well-deserved "national weight". Among them, the important position of North Huachuang can not be ignored.

When we look at Northern Huachuang from a more macro perspective, we can see that behind the 19 years of bumpy development since its establishment in 2001, there is also a 19-year history of domestic semiconductor equipment industry from 1 to 10, from small to large.

Although China's semiconductor industry started later than Europe, the United States, Japan and other developed countries, it has laid its own foundation since the reform and opening up.

In September 2001, Beijing Electronic Control integrated the original state-owned 700, 706, 707, 718, 797 plants, initiated the establishment of Seven Star Electronics, mainly engaged in semiconductor equipment and precision electronic components. In October of the same year, Beijing Electronic Control United Seven Star Group, Tsinghua University, Peking University and Chinese Academy of Sciences jointly funded the establishment of Northern Microelectronics, mainly engaged in high-end semiconductor equipment.

Seven Star Electronics buried in the development of nearly a decade, to 2010 successfully landed A shares. After the listing, the performance in the first two years was outstanding. But when smartphone demand began to erupt and global demand for semiconductor equipment shifted from mature to advanced processes below 28nm, Seven Star failed to catch up with this wave of technology, leading to poor performance in the years after 2012.

Under the critical situation, in 2015, Seven Star Electronics opened the road of strategic reorganization with Northern Microelectronics. In 2016, this restructuring strategy was approved, and the reorganized group introduced strategic investments such as the National Integrated Circuit Industry Fund and Jingguorui Fund, realized the combination of industry and capital, and became the leader of semiconductor equipment in China.

After 2016, the platform construction of the restructured group became more and more perfect, and the development began to get back on the right track, returning to the double-digit revenue growth rate.

In 2017, the group officially changed its name to "North Huachuang", forming four subsidiary platforms of semiconductor equipment, precision components, vacuum equipment and new energy lithium power equipment, of which semiconductor equipment and compact components are still the revenue pillars of North Huachuang, both accounting for more than 99% of revenue and profits.

As of 2017, the 12-inch 90-28 nm integrated circuit process equipment of North Huachuang has been industrialized, and the 12-inch 14 nm integrated circuit process equipment has entered the process verification stage. At the same time, in 2018, North Huachuang completed the acquisition of American cleaning equipment company Akrion, enriching its own integrated circuit product line.

In 2019, North Huachuang raised 2 billion yuan, mainly for R & D and industrialization of semiconductor equipment, and expanded production of high-precision electronic components.

At this point, after nearly 20 years of bumpy development, North Huachuang has finally grown into the most extensive semiconductor equipment giant in China, with a unique position in China.

Big but not strong

North Huachuang's products cover a wide range of fields, in the field of semiconductor equipment, in addition to not doing lithography, covering most of the front core equipment, such as PVD, CVD, etching machine, ALD, oxidation furnace, annealing furnace, MFC, cleaning machine and so on. Such a complete product line coverage is not only unique in China, but also extremely scarce in the world, even for the veteran international giant Applied Materials (American applied materials company AMAT.US).

But in 2017, applied materials accounted for 23% of the global semiconductor equipment market, with sales of $14.5 billion. By contrast, North Huachuang had only 0.3% of the global market in 2017, with sales of $170 million, less than a fraction of the former.

The poor performance of the northern Huachuang market reveals that it is far from catching up with the international mainstream advanced process technology trend.

As early as 2016, North Huachuang launched its own 14nm etching machine and began to enter the customer verification stage after 2017, but three years later, North Huachuang has not been able to go any further.

Considering that the international mainstream mature process has transferred from 28nm to 14nm, the advanced process is sprinting from 7nm to 5nm. If the 14nm integrated circuit process equipment of North Huachuang cannot enter the market as soon as possible, two or three years later, the 14nm process will be eliminated by the international mainstream market. At that time, the dilemma of North China Chuang around 2012 will probably be repeated again.

And the current competitive pressure on North China Chuang comes not only from international giants, but also from domestic competitors.

As another of the two major semiconductor equipment oligarchs in China, medium and micro semiconductor MOCVD has achieved mass supply and become the mainstream of the domestic market. In the field of chip manufacturing, the 5nm plasma etching machine independently developed by medium and micro semiconductors has been verified by TSMC with excellent performance and will be used in the world's first 5nm production line.

So on the whole, as the semiconductor equipment giant with the most complete product line in China, although North Huachuang is involved in a wide range of fields, it only makes the platform big enough and does not have comprehensive market competitiveness.

An inescapable test

As early as a few years ago, international semiconductor equipment giants have begun to prepare for the upcoming tide of scientific and technological change, continue to increase investment in research and development, and promote the progress of advanced process technology.

With the transition of advanced process nodes from 14nm to 12/10nm and then to 7nm, the process is becoming more and more complex, and the requirements for semiconductor equipment suppliers are higher and higher. In the global semiconductor equipment market, Matthew effect is becoming more and more prominent.

At present, the world's most advanced process technology has been transferred from 7nm to 5nm. TSMC is the only foundry with the ability to put 5nm process into production. It is expected that TSMC's 5nm process can be mass produced on a large scale in the second quarter of 2020.

In TSMC's 5nm production line equipment supplier list, the top five semiconductor equipment suppliers in the world account for 75% of TSMC's procurement. In fact, this is also a reflection of the strong.

Over the years, the global semiconductor market is constantly concentrated to the head. By 2018, the top ten international semiconductor equipment giants accounted for more than 96% of the global market.

Fundamentally speaking, the dependence of these giants on the market is the solid scientific and technological barriers they have built with their R & D investment.

Take applied materials as an example, the cumulative R & D investment of applied materials from 2010 to 2018 exceeded 13.03 billion US dollars, with an average annual investment of more than 1.478 billion US dollars. During the 20 years from 1998 to 2018, applied materials R & D accounted for about 15% of revenue.

As a result, applied materials not only cover a wide range of semiconductor equipment, but also always take the lead in technology. By 2018, there will be more than 12500 patents for applied materials.

However, domestic semiconductor equipment manufacturers generally started late and have been trying to catch up with these international giants, among which the plasma etching machines of medium and micro semiconductors have successfully entered TSMC's 5nm supply chain, demonstrating their remarkable scientific research achievements.

In contrast, one of the major purposes of North Huachuang's financing of 2 billion yuan in 2019 is to engage in 5nm/7nm research and development, that is to say, North Huachuang's 5nm/7nm process equipment is still in the stage of research and development, and it is optimistically estimated that the related equipment of North Huachuang will not be put into production until two or three years later.

The gap between North Huachuang and the international giants is very obvious, but there is not much time left for it to catch up.

Under the trend of localization of integrated circuits, Chinese mainland ushered in the spring tide of fabs. A total of 62 new semiconductor production lines have been added worldwide from 2017 to 2020, of which 26 are located in the mainland. With the construction and commissioning of domestic wafer production lines such as Changjiang Storage, Hefei Changxin, Huahong Semiconductor and Yandong Microelectronics, the demand for domestic semiconductor equipment is accelerating.

But these fabs themselves face fierce market competition, although they tend to give priority to the use of domestic semiconductor equipment. However, if there is too much difference between the products of these domestic equipment manufacturers and international manufacturers, these manufacturers cannot be hanged from a tree, using only the products of these domestic manufacturers.

Opportunities and challenges go hand in hand

The tuyere of "new infrastructure" will start in 2020. The market has classified 7 major fields, such as 5G infrastructure and applications, photovoltaic power grid and UHV, industrial Internet, intercity high-speed railway and intercity rail transit, new energy vehicles and charging piles, artificial intelligence, cloud computing big data center, etc., as "new infrastructure".

In these seven areas, there is no lack of opportunities to display the talents of the four platforms of North Huachuang semiconductor equipment, vacuum equipment, new energy lithium equipment and precision components.

Especially in the areas of 5G infrastructure and applications, industrial Internet, artificial intelligence and big data Center of cloud computing, the role of chips is decisive, and it is self-evident how huge the market demand is. As the cornerstone of chip manufacturing, it can be said that semiconductor equipment ushered in an unprecedented market opportunity.

For domestic semiconductor equipment manufacturers, such market opportunities even superimposed rare historical opportunities. From a macro point of view, the historical trend of the migration of the semiconductor industry to Chinese mainland after 2015 has been very obvious.

First of all, the proportion of Chinese mainland IC design, wafer foundry and packaging and testing industry in the corresponding links of the global industry chain is increasing.

More importantly, the market scale of Chinese mainland semiconductor equipment itself is growing at a high speed.

In 2016, the Chinese mainland market surpassed North America and Japan for the first time, with semiconductor equipment sales reaching US $6.46 billion, up 13 percent from a year earlier, making it the third largest market for semiconductor equipment sales worldwide, according to data from SEMI (International Semiconductor Industry Association). In 2017, Chinese mainland remained the third largest market in global semiconductor sales, reaching a market size of US $8.23 billion with a growth rate of 27 percent.

By 2018, Chinese mainland had grown by 59 per cent to reach US $13.11 billion, making it the world's second largest semiconductor equipment market after South Korea for the first time. Sales of semiconductor equipment in South Korea were $17.71 billion in 2018, but down 1 per cent from a year earlier.

In the trade frictions since 2018, the United States has blocked Chinese technology companies in an attempt to remove Chinese mainland technology companies from the global industrial chain, making many enterprises lose confidence in free trade and the global industrial chain of division of labor. However, this has promoted the localization of integrated circuits to become a trend, and the market for Chinese mainland semiconductor equipment has accelerated its growth.

For Huachuang in the north, the transfer of semiconductor industry to China, the trend of localization of integrated circuits, coupled with the "new infrastructure", this opportunity is just right.

In the three years from 2016 to 2018, the restructured North Huachuang has continuously consolidated its platform construction, increased investment in research and development, and launched relevant new products that meet the needs of the market, so its revenue has grown rapidly and turned losses into gains in deducting non-net profits.

In 2019, North Huachuang completed 2 billion yuan of financing, and once again increased its R & D investment. In fact, North Huachuang is not unprepared for the current opportunity. In its previous estimate, it will enter the peak period of equipment procurement of the Bank of China in 2020, after which demand will fall somewhat, but the localization rate will continue to increase.

Therefore, the market opportunity after 2020, for the well-prepared North China Chuang, it is everything ready, but also to the east wind.

But from a more realistic point of view, opportunities are always accompanied by challenges. In the historical trend of the transfer of the semiconductor industry to Chinese mainland, the scale of Chinese mainland's semiconductor equipment market has accelerated. International semiconductor equipment giants will certainly pay more and more attention to the Chinese mainland market. The question is, in the face of the surging attack of international giants, can North Huachuang resist?

The general trend of the transfer of the global semiconductor industry to Chinese mainland is irreversible, but in the market-oriented competition, North Huachuang does not have enough time to bridge the gap with the international giants. Therefore, the biggest competitor that North Huachuang is facing now is time.

(official account of Liu Kuang / tr. by Phil Newell) ID:liukuang110

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