Due to weak demand in the semiconductor market and the resulting inventory adjustments, the semiconductor market entered a cold winter in 2023. However, with the gradual recovery of global market demand and increased government incentives, the entire industry may experience a full recovery by the end of 2024. According to the World Semiconductor Trade Statistics Association (WSTS), the global semiconductor market will grow 13.1% year over year to reach 588 billion US dollars in 2024. Meanwhile, IDC predicts that the semiconductor market will return to a growth trend in 2024, with an annual growth rate of more than 20%, and a market size of 630.2 billion US dollars.
The so-called “Chunjiang Plumbing Duck Prophet”, the memory and storage industry, which was often the first to sense changes in market demand in the first quarter of this year, showed a clear upward trend in the first quarter of this year — Micron, Samsung, and Hynix's Q1 earnings have all achieved significant year-on-year and month-on-month increases; and since then, we have seen that international analog chip giant Texas Instruments (TI) also made bullish predictions on revenue for the second quarter, indicating that the decline in demand for industrial and auto parts may be easing. This also indicates that inventory adjustments across the chip industry are coming to an end. After eight full quarters of continuous downturn, the semiconductor industry is gradually emerging from the downward cycle.
Figure: Global Semiconductor Cycle (from @dailychartbook)
According to data compiled by Gavekal, the semiconductor cycle is improving after shrinking for the past two years.
Semiconductors are a special industry. First, they are very cyclical, which means that every time it is at a rock bottom, it is possible to predict the imminent arrival of the next upward cycle. Second, the chip manufacturing cycle is long, and it usually takes 2 to 3 months; if early product definition, chip design, and streaming are also included, the entire time will be 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 vendors that span multiple cycles emphasize: “When it's up, every company's business grows fast; what really matters is what you do right during the downturn cycle.” The so-called “countercyclical investment” is also a major characteristic of the semiconductor industry. Because the cycle always returns, anxiety is allowed in the next cycle, but hopelessness is not present. What really needs to be considered is how to optimize cost efficiency and inventory in the downside cycle and secure new business growth points in the next upward phase?
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 million yuan and net profit of 307 million yuan to mother.
As can be seen, despite being affected by the downward cycle of the entire industry, Ziguang Guowei maintained a very steady performance. While its specialty integrated circuits inevitably declined due to cyclical reasons, the smart security chip business found breakthroughs in overseas markets and ushered in contrarian growth. At the same time, on the eve of industrial recovery, Ziguang Guowei also targeted a series of emerging applications and laid out new business growth points.
Steady and far-reaching: the special integrated circuit business is steady, and smart security chips are opening up a new situation
Ziguang Guowei's business includes special integrated circuits, smart security chips, and quartz crystal oscillators. Among them, special integrated circuits and smart security chips account for more than 90% of the business.
The so-called special integrated circuit covers all kinds of integrated circuit products that optimize performance, power consumption, and achieve high reliability in specific application fields. Ziguang Guowei's special integrated circuit products cover several series of products such as microprocessors, programmable devices, memories, networks and interfaces, analog devices, ASIC/SoPC, etc., totaling more than 600 varieties.
Although downstream demand in the specialty industry is slowing down and industry competition is intensifying, Ziguang Guowei's business has maintained a good level of gross margin. On the one hand, this is determined by the characteristics of the special industry; on the other hand, it comes from a series of adjustments and optimizations within Ziguang Guowei.
Unlike conventional consumer and industrial markets, special industries do not use price as a core factor in model selection. From a long-term perspective, specialty markets have dual requirements for product price and quality. After a certain amount of market price reduction, quality will once again become a key factor, thereby reducing the overall price reduction space. At this point, more customer considerations ultimately fall on product performance, intelligence, reliability, and reliable delivery capabilities.
Ziguang Guowei's scale effect and platform advantage in the specialty industry determine that under the same conditions, its product competitiveness and business gross margin level are higher than those of its peers. Therefore, even after competition reaches a certain level of intensity, Ziguang Guowei can still maintain an effective level of gross margin. On the other hand, Ziguang Guowei has done a great deal of work in energy efficiency, automation, information technology construction, etc., and has greatly improved product yield and scale, so it can respond positively to the risk of market price cuts and maintain a good state of gross margin. Meanwhile, 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 in the future.
Let's take a look at another major business segment of Ziguang Guowei - smart security chips, which bucked the trend in this 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.). This chip is capable of providing advanced security features for data storage, encryption, and authentication. As global payment systems are digitized and modernized, the demand for smart security chips continues to grow. Especially in the field of financial services, with the spread of contactless payment technology and mobile payment applications, the importance of security chips has increased significantly. 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 telecommunications companies use these chips to protect users' SIM card information and ensure communication security.
According to reports, Ziguang Guowei's smart security chip business has always remained in the first tier at home and abroad. In recent years, as the international situation changes and competition intensified, some competitors have gradually withdrawn from certain segments, providing them with plenty of opportunities and space to expand in overseas markets. As a result, the performance of Ziguang Guowei's smart security chip business in overseas markets has increased dramatically. This provided a strong complement to the decline in revenue due to insufficient demand in the specialty integrated circuit business. In the future, with the further expansion of Ziguangguowei's overseas business, the smart security chip business is expected to provide greater growth momentum for overall performance.
Contrary investment: increase investment in R&D and lay out a new business growth curve in the future
The above analyzes the current main business situation of Ziguang Guowei. Next, let's focus on the future and see what new growth points Ziguang Guowei has laid out in the upcoming phase of industry recovery?
First, let's take a look at one piece of data — R&D investment. Ziguang Guowei's R&D expenses have accounted for more than 60% of total expenses in recent years. R&D expenses increased further in 2023, accounting for 21.6% of revenue. It is expected that this ratio will not fall below 20% in the future.
In the opinion of many short-term investors, too much R&D investment is not a good thing because it affects the company's overall profit. However, in the semiconductor industry, the level of R&D investment is a key factor in measuring the strength and future space of a chip company. For example, Nvidia accounts for up to 30% of R&D investment, while Intel accounts for about 26% of R&D investment. When Moore's Law stalled, increasing research and development became a necessary step for the semiconductor industry to seize future opportunities. According to IC Insights, the total R&D expenditure of global semiconductor companies is expected to grow at a compound annual growth rate (CAGR) of 5.5% between 2022 and 2026, reaching US$108.6 billion.
Ziguang Guowei continues to increase investment in R&D during the market downturn. This not only shows firm confidence in the positive market prospects, but also reflects a sense of responsibility in carrying out China's chip mission. Behind the increased investment in research and development, it has also produced a series of impressive results.
From a product perspective, Ziguangguowei's next-generation high-performance products have been widely recognized by core customers and have entered the comprehensive promotion stage. In the field of special memory, new NandFlash and other special memories have been introduced to the market. In terms of DSP products, through cooperation with scientific research institutions and its own R&D efforts, Ziguang Guowei successfully launched industry-competitive products, which indicates potential new growth points. At the same time, it overcame low ripple switching power supply control technology, filled gaps in domestic technology, and achieved breakthroughs in key technologies for special Ethernet switching circuit design. Furthermore, with the rich technical reserves accumulated in the field of analog circuits and signal chains, Ziguang Guowei will also launch various new products this year, including isolators, power supplies, and high-performance frequency devices. System-level chips such as special SoPC platform products and RF-SoC products are widely recognized by customers. Looking forward to the future, Ziguang Guowei will continue to expand its multi-variety and multi-series product line and continuously improve its ability to provide “supermarket-type” high-quality products and services for special industries.
From an application perspective, the automobile market is unquestionably the biggest opportunity for Chinese chip manufacturers. As the world's largest automobile outlet and a leader in the era of smart driving electrification, China's automobile market is showing a booming trend. At the beginning of this year, Ziguang Tongxin's latest next-generation THA6 series MCU integrates up to 6 ARM Cortex-R52+ cores (including locking function), a maximum frequency of 400 MHz, and built-in high-capacity non-volatile memory, providing excellent real-time and multi-core processing performance. This series of products can meet the needs of fuel vehicles and new energy vehicles in high-safety applications such as power systems, chassis control, body, and intelligent driving. At the same time, the THA6 series supports new application scenarios such as domain controllers and area controllers, providing solid software and hardware support for automotive electronic and electrical architectures.
China's first ASIL-D certified ARM Cortex-R52+ core MCU chip
In addition, with the gradual decentralization and popularization of automotive electronic keys in low-end models, smart security chips will also usher in a new market growth point. Information security guarantees for functions such as vehicle access control, driver authentication, vehicle networking data exchange, and mobile payment for smart driving cars also require the participation of smart security chips. The booming development of automobile electrification and intelligence in China will also bring more new application prospects to the smart security chip business.
epilogue
After the adjustment of the new management in 2023, Ziguang Guowei has completed the effective sorting of the company's internal business, and the 2023 financial results have also confirmed the success of the new management and this sorting. The financial report for the first quarter of 2024 also continues to show a steady and energetic trend. Although there are still many uncertain risks in the current internal and external market environment, the semiconductor industry has begun to gradually break out of the bottom and is about to begin a new upward cycle. Meanwhile, Ziguang Guowei is ready to welcome industrial recovery.