Shulou(Shulou.com)11/24 Report--

The double advantages of 4G tuyere and domestic substitution have created Zhuo Shengwei's capital myth. How to win the "urban battle" in the 5G era will be the key to the return to glory of "the first share of domestic RF chips".

Li Ping | author

Ordinary | Editing

1. When the net profit halves in 2022, heaven and earth will work together, and the heroes will not be free.

Under the semiconductor downward cycle, after Weir shares, another domestic chip giant reported financial results in 2022.

On the evening of January 18, Zhuo Shengwei, a leading domestic RF front-end company, issued a notice saying that the company is expected to achieve operating income of 3.68 billion yuan in 2022, down 20.59% from the same period last year, and its actual net profit was 913 million-1.126 billion yuan, down 47.26% and 57.23% from the same period last year.

According to the previous three-quarter report, Zhuosheng made a net profit of 985 million yuan from January to September 2022, down 35.5% from a year earlier. From this calculation, the company's fourth-quarter net profit range of-72 million yuan to 141 million yuan, there is the possibility of a loss in a single quarter.

According to the consistent expectations of flush institutions, a number of brokerages predict that Zhuosheng micro-net profit in 2022 will be about 1.3 billion yuan, Zhuosheng micro-performance is significantly lower than market expectations.

At present, the single problem of revenue structure is still the core issue of Zhuosheng micro-operating performance fluctuations. From the perspective of revenue composition, Zhuosheng Micro's main business is divided into two parts: RF discrete devices and RF modules, both of which are used in the field of smartphones. Therefore, the company's performance is closely related to the sales of mobile phone terminals.

Since 2022, under the influence of the COVID-19 epidemic and other factors, the global demand for mobile phone terminals has remained depressed. Global smartphone shipments fell 11% to less than 1.2 billion units in 2022, the worst year in nearly a decade, according to a new report by market research firm Canalys.

Of these, only about 255 million smartphones were sold in the Chinese market, down 19% from the same period last year, with negative growth in each quarter. Therefore, the weakness of the downstream smartphone market will inevitably have an impact on Zhuo Shengwei's performance.

In addition, in the context of increasing market competition, Zhuosheng micro-gross profit margin has declined, which is also one of the main reasons why its operating performance is lower than expected.

According to the semi-annual report, revenue of Zhuosheng Micro discrete Devices reached 1.516 billion yuan in the first half of 2022, down 9% from the same period last year, with a gross profit margin of 53.51%, down 1.4% from the same period last year; revenue from RF modules was about 688 million yuan, a slight increase of 4% over the same period last year, and gross profit margin was 51.21%, down 13.92% from the same period last year. It is not difficult to see that the gross profit margins of the two major product lines of Zhuosheng Micro have declined compared with the same period last year.

In addition, the common problem of the downward cycle of the semiconductor industry has also had an impact on Zhuo Shengwei's inventory. Since 2021, the global problem of "lack of core" has become more and more serious due to insufficient supply. In addition, with the occurrence of Huawei and ZTE events, domestic chips have been paid special attention by domestic mobile phone manufacturers. Under the realistic demand of supply and demand mismatch superimposed independent control, the price of domestic chips is rising all the time, so many enterprises stock or even hoard goods on a large scale, which further stimulates the production enthusiasm of chip manufacturers.

With the reversal of the cycle of the semiconductor industry, the inventory of chip companies instantly becomes an "asset burden". From Weir shares, Zhuosheng micro and other listed companies' financial reports, semiconductor companies are facing severe asset impairment pressure.

Data show that the amount of Zhuosheng micro inventory has continued to rise since 2021. By the end of September 2022, the company's inventory balance had reached 1.824 billion yuan, an increase of 4.5 times over the same period in 2020.

However, the secondary market does not seem to mind the decline in Zhuosheng's performance. On January 19, the day after the announcement of the pre-reduction of performance, Zhuosheng's share price rebounded quickly after opening low. As of the close of the day, Zhuoshengwei shares closed at 138yuan, up 3.49% throughout the day, with a total market capitalization of about 73.7 billion yuan.

As a leader in RF front-end chips in China, Zhuo Shengwei was once a well-known "stock king" of technology stocks in the secondary market, and staged a capital myth of 25 times in two years, with a maximum market capitalization of more than 170 billion yuan. As a result, many investors still remember the sharp rise in Zhuosheng's share price that year, so they have the idea of "bottoming out".

In addition, the cycle reversal of the semiconductor industry is also a hot topic for investors. According to previous data, a complete semiconductor cycle takes about 4-5 years, of which the upstream cycle is 2-3 years and the downlink cycle is 1-2 years. If the first half of 2022 is taken as the peak of this cycle, the trough of this cycle will be reached or reached as soon as 2023.

Therefore, since October 2022, under the logic of "short profit" and cycle reversal, Zhuosheng micro shares have continued to rebound and are now up nearly 80 per cent. But it is still 60% away from the all-time high. So, as once the "first share of domestic RF chip", can Zhuo Shengwei return to the peak?

2. According to the public information of the RF chip giant behind Huawei, Zhuosheng Micro was founded in 2006 by Xu Zhihan, an overseas student from Silicon Valley, in Zhangjiang High-tech Park, Pudong, Shanghai.

In the early stage of its development, Zhuoshengwei was mainly engaged in terrestrial TV and mobile TV chip business. Since 2010, due to the change of radio and television policy, the demand for mobile TV chip business has gradually shrunk. Since then, Xu Zhihan decided to change the track and devote himself to the research and development of RF chips.

Radio frequency (Radio Frenquency) chip refers to an electronic component that converts radio signal communication into a certain radio signal waveform and sends it through the antenna resonance. Usually, the radio frequency of the mobile phone we use is also known as the RF front end.

In the process of mobile phone signal transmission, the front part of RF is mainly responsible for the analog / digital conversion of the signal, as well as the amplification and filtering of the signal, which is one of the core devices in the mobile phone. At present, the core problem why some Huawei phones equipped with Kirin 9000 cannot accept 5G networks with 5G chips is that they cannot purchase 5G RF chips.

Generally speaking, the front part of RF consists of power amplifier (PA), filter (Filter), radio frequency switch (Switch) and low noise amplifier (LNA) devices.

From a functional point of view, the filter is responsible for receiving specific frequency band signals and filtering interference signals, PA can amplify and transmit mobile phone signals, LNA is used to receive weak signals and reduce noise interference, and switches are mainly used to select signal paths. among them, filters and power amplifiers are the most difficult in technology and have the largest market capacity.

Due to the rapid decline of mobile TV chip business, Zhuo Shengwei has been faced with the pressure of survival during the transformation, and the enterprise was unable to pay wages for a time. Therefore, in the direction of research and development, Zhuoshengwei chose the strategy of easy refuge, focusing on radio frequency switches and low-noise amplifiers.

Fortunately, there is always a way out, and Zhuo Shengwei successfully broke into Samsung's mobile phone supply chain in 2014, providing it with GPS LNA chips and becoming famous in the industry by catching up with the era of upgrading the mobile communication system from 3G to 4G.

Since then, Zhuo Shengwei has entered the supply chain of Xiaomi, OPPO, vivo and other manufacturers. In September 2019, Zhuo Shengwei successfully entered Huawei's mobile phone supply chain.

Facts have proved that Zhuo Shengwei's strategic choice of "rural areas encircling cities" is very pragmatic and correct. With the rapid rise of domestic mobile phones, Zhuosheng micro business performance has achieved rapid growth. Data show that from 2015 to 2019, Zhuosheng's operating income increased from 111 million yuan to 1.512 billion yuan, while net profit soared from 11 million yuan to 497 million yuan.

In June 2019, Zhuo Shengwei successfully listed on the gem and raised 882 million yuan. Under a series of glories such as Huawei's concept stock, Zhuoshengwei's share price soared tenfold just three months after it went public.

It is worth mentioning that the modularization of the RF front-end in the 5G era has also become a key factor in driving Zhuosheng's micro-performance growth. Data show that from 2020 to 2021, the operating income of Zhuosheng micro radio frequency module was 278 million yuan and 1.201 billion yuan respectively, an increase of 360% over the same period last year. In the first half of 2022, the proportion of Zhuosheng micro radio frequency module products has reached 30.76%.

The so-called RF front-end module refers to the integration of two or more RF devices such as RF switch, low noise amplifier, filter, Duplexer and power amplifier into one module, so as to improve the integration and performance and make the volume miniaturized.

The RF front-end chips of 4G mobile phones mainly use discrete devices, but due to the double growth of the number of RF devices and the limited area of PCB board, 5G mobile phones usually need to use modular products. In addition, with the increase of 5G working frequency, a large number of diversity reception modules need to be added in order to improve the signal reception quality and reduce the signal interference.

After listing, driven by the RF module, Zhuo Shengwei's performance growth momentum remains unabated. From 2019 to 2021, Zhuoshengwei realized revenue of 1.512 billion yuan, 2.792 billion yuan and 4.634 billion yuan respectively, corresponding to year-on-year growth rates of 169.98%, 84.62% and 65.95% respectively, and net profit of 494 million yuan, 1.071 billion yuan and 2.135 billion yuan. The corresponding year-on-year growth rates were 208.31%, 116.50% and 99.41%, respectively.

With good performance, Zhuo Shengwei continues to be sought after by funds in the secondary market. On June 30, 2021, Zhuoshengwei's total market capitalization rose to 179.3 billion yuan, 25 times more than the offering price, making it a well-known "stock king" of technology stocks in the secondary market.

It is not difficult to see that the pursuit of Zhuo Shengwei by investors in the secondary market is not all speculation. During the period from 2015 to 2021, the net profit of Zhuosheng Micro increased from 111 million yuan to 2.135 billion yuan, and the net profit increased by more than 19 times during the six-year period, fully demonstrating the explosive performance of high-tech successful stocks.

Opportunities and challenges in the 5G era, however, everything has its cycle, especially in the semiconductor industry where Zhuo Shengwei is located. Since July 2022, Zhuosheng Weiwei shares began to turn downwards. As of October 12, 2022, the company's total market capitalization had fallen to 42.4 billion yuan, a decline of nearly 80 per cent since its peak.

The slowdown in performance has become one of the main reasons why Zhuosheng's share price continues to plummet. From the quarterly data, since 2021 Q2, Zhuosheng micro revenue growth has gradually slowed down. In Q1 in 2022, Zhuosheng's revenue growth slowed to 12.43%, followed by negative growth in the next two quarters.

In terms of net profit, in 2022 Q1-Q3, Zhuosheng micro net profit grew by-6.7%,-43.93% and-54.58% respectively, showing a year-on-year decline for three consecutive quarters.

At present, the decline in the growth rate of Zhuosheng micro performance is mainly affected by two factors. In addition to the sluggish demand for smartphone terminals, the expansion of new businesses such as the company's SAW filter has not been smooth.

As mentioned earlier, in the research and development of RF front stage separator, Zhuoshengwei chose RF switches SW and LNA products with relatively low technical threshold as a breakthrough, temporarily avoiding the field of RF PA and filters. However, PA and filter are the two areas with the highest value in the front segment of RF.

In terms of the global market, filters account for 53% of the global market segment for RF front-end discrete devices, 33% for power amplifiers, ranking first and second respectively, and switches and low noise amplifiers together account for less than 14%.

As PA is already the Red Sea market, Zhuoshengwei chose to focus on the field of filters. In February 2021, Zhuoshengwei completed its first fixed increase since its listing, raising a total of 3.006 billion yuan, of which 1.41 billion yuan will be invested in high-end RF filter chip and module R & D and industrialization projects, mainly facing the mobile phone market.

In April 2021, Zhuo Shengwei announced that the company signed a cooperation agreement with the management committee of Liyuan Economic Development Zone in Wuxi, Jiangsu Province, to carry out the industrialization project of Xizhuo semiconductor to achieve the industrialization goal of RF SAW filter chips and modules, with a total investment of 3.5 billion yuan.

Before building its own production line, Zhuo Sheng Micro mainly adopted the Fabless (fab-free) mode. In this mode, the company is only responsible for the design, outsourcing the manufacturing to the wafer generation factory, the investment in fixed assets is relatively light, and the enterprise management is relatively flexible.

However, compared with the IDM mode (vertically integrated manufacturing mode) commonly adopted by European and American enterprises, the Fabless mode is controlled by others in the production process, and the production capacity can not be guaranteed.

In addition, Zhuosheng Micro once planned to jointly invest with Foundry manufacturers to establish a wafer production line. However, because the company's products use a special process, which is not consistent with the standard Foundry process, if it is produced in cooperation with the contract factory, there will be the ownership of intellectual property rights during the process research and development.

After choosing the self-built production line, Zhuo Shengwei will increase a large amount of investment in fixed assets, and the resulting capital demand and depreciation of fixed assets will drive down the company's profits, which is also an important reason for the sharp decline in the company's performance in 2022.

According to the different implementation methods, radio frequency filters are mainly divided into two types: surface acoustic wave (SAW) filter and bulk acoustic wave (BAW). Among them, the SAW filter is mainly used in the middle and low frequency band, and the BAW filter is mainly used in the middle and high frequency band, which has the advantages of low loss and high efficiency, so it is more suitable for 5G communication scenarios.

However, due to the high technical barriers, BAW filters are still monopolized by international manufacturers such as Skyworks and Qorvo. The filter products of domestic manufacturers such as Zhuosheng Micro are mainly middle and low-end SAW filters in the receiving class.

In fact, the BAW filter is the most "sticky" link in mobile phone 5G communication, and it is also the biggest obstacle to Huawei's mass production of 5G mobile phones. Therefore, how to achieve a breakthrough in the 5G high-end filter market has become a must-answer on the road of Zhuosheng micro-level.

The power amplifier is another bottleneck on Zhuoshengwei's way forward. Zhuo Shengwei began to lay out the research and development of mobile phone PA many years ago, but the results are not satisfactory. At present, Zhuo Sheng Micro chooses WiFi FEM (WiFi connection module), which is less difficult in RF PA, and does not involve the difficult core product of mobile phone 5G PA.

Therefore, although the company claims to be the only RF enterprise in China to achieve full coverage and mass production of RF front-end products, Zhuo Shengwei's competitiveness in the field of 5G PA is not strong. Relatively speaking, among the domestic enterprises, the mass production time of 5G PA module is earlier and the competitiveness is more prominent.

On the whole, the tuyere of 4G and the realistic demand of domestic substitution have achieved Zhuo Shengwei's brilliant past and created its dreamy capital myth. If the company's previous strategy of "rural areas encircling cities" has achieved phased results, if Zhuo Shengwei wants to gain a firm foothold in the 5G era, it must launch a "urban attack" on the two key links of filters and power amplifiers. and this journey will also be the key to the peak of the company.

This article comes from the official account of Wechat: Guishi Business Review (ID:libusiness), by Li Ping

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