Hubble Technology, a wholly-owned subsidiary of Huawei, invested 30 million yuan to Xinyao Semiconductor Materials and holds 23.91% of the shares. Along with Huawei's shareholding, it will 1) open up collaboration between the material side and the product side to improve product quality; 2) expand downstream channels for semiconductor materials to promote production from production capacity to sales volume; 3) strengthen the financial strength of subsidiaries and ensure the steady construction of existing projects. The gallium arsenide/indium phosphate semiconductor business is expected to enter a period of rapid growth, maintaining the company's “buy” rating.
A wholly-owned subsidiary of Huawei took a stake in Xinyao Company. It was announced on December 10, 2020, that Hubble Technology, a wholly-owned subsidiary of Huawei, invested in a monetary increase of RMB 30 million to Xinyao Semiconductor Materials, and Yunnan Germanium relinquished priority subscription rights. After the capital increase was completed, Hubble Technology invested 23.91% of Xinyao Semiconductor Materials, and Yunnan Germanium's shareholding ratio in Xinyao Semiconductor Materials dropped from 70% to 53.26%.
Xinyao's products are gallium arsenide and indium phosphide. Huawei's shareholding will improve product quality and promote market development.
Xinyao Semiconductor Materials is the main body of the company's implementation of gallium arsenide and indium phosphate projects. Among them, the main downstream of gallium arsenide is power amplifier chips (PA) in mobile phones, and the main downstream of indium phosphate is mainly the basic chip for optical communication, all of which are semiconductor basic materials fields where overseas manufacturers account for a relatively high proportion of basic semiconductor materials. We expect that along with Huawei's shareholding, it will 1) open up collaboration between the material side and the product side, improve product quality, and gradually complete the autonomy and control of the material side; 2) expand downstream channels for semiconductor materials to promote the transformation from production capacity to production to sales volume; 3) enhance the financial strength of subsidiaries and ensure the steady construction of existing projects.
Sales of semiconductor materials have maintained rapid growth, which will be the main driving force for the company's performance in the future. In the first three quarters of 2020, the company's sales of gallium arsenide plus indium phosphate single crystal (equivalent to 4 inches) increased 131.3% year on year, and the growth rate remained strong. We expect to sell 160,000 tablets throughout the year, with a growth rate of over 120%. The company currently has a production capacity of 800,000 pieces of gallium arsenide (equivalent to 4 inches) and a production capacity of 50,000 pieces of indium phosphate (equivalent to 2 inches). Benefiting from the autonomous control of the semiconductor industry chain and the growth in the scale of the gallium arsenide substrate industry driven by 5G phones, we expect the company to sell 325/65,000 pieces of semiconductor materials in 2021/2022, corresponding to CAGR of 108%, which is expected to become the main growth point for future performance.
Risk factors: fluctuating germanium prices, sales of germanium products falling short of expectations, and sales of gallium arsenide semiconductors falling short of expectations.
Investment advice: It is expected that the pattern of supply and demand for germanium will improve, and the price of germanium is expected to bottom out. The company has sufficient production capacity for gallium arsenide semiconductors. With Huawei taking a share, production and sales are expected to show a rapid growth trend. We maintain the company's net profit forecast for 2020-2022 at $0.37/105/196 million, which corresponds to the EPS forecast for 2020-2022 at $0.06/0.16/0.30, respectively. Maintain the company's “buy” rating.