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Recently, we have conducted a survey of the industry leaders in the 5G industry chain. This paper will introduce the development status of the base station filter industry and the opportunities and challenges of the traditional filter leader Dafu science and technology in the wave of industry change. The following is a summary.

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Massive MIMO technology and active antennas have brought about changes in the filter industry, pushing up the volume and price of the industry.

The application of Massive MIMO technology and active antenna drives the filter to be miniaturized and lightweight, the filter industry is facing technological upgrading, and the metal cavity evolves to the ceramic dielectric filter. Traditional base station filters mainly use aluminum, silver, copper and other metals as raw materials, while ceramic dielectric materials may become mainstream in the future, mainly because of their low loss (QxF value), high dielectric constant (ε r), low frequency temperature coefficient and thermal expansion coefficient, and can withstand high power. With the application of active antennas, filter RF products need to be integrated with antenna arrays, and those manufacturers with strong integrated design capabilities and deep cooperation with antenna faucets and equipment vendors have advantages. At the same time, with the innovation of new technology, new entrants will emerge in the industry. the application of ceramic dielectric filter requires filter manufacturers on the basis of the original filter design ability. it will increase the requirements of ceramic dielectric material preparation, processing, product automatic debugging and so on.

The application of Massive MIMO technology and active antenna promotes the rise of volume and price in the filter industry. In terms of quantity, the number of channels of RF units, from the traditional two to four, will grow to 64 in the 5G era, which will be an order of magnitude increase. At present, the schemes adopted by the mainstream 5G Massive MIMO base stations require 64-channel filters. In order to improve the system capacity and meet the needs of multiple application scenarios, higher frequency band communication will be used in the 5G era. The higher the frequency band, the smaller the coverage radius. from the point of view of continuous coverage, the number of base stations in 5G may be 1.5-2 times that of 4G. In terms of price, as the manufacturing technology is also changing, the value-volume ratio of the filter may have to be increased. At present, there are about 4.28 million base stations in China. It is estimated that the global number of 4G base stations may reach 7 million in the future, while the number of 5G base stations is expected to reach 14 million. According to the calculation of filter demand, if calculated at the price of 50 yuan per channel, the market size will be as high as more than 100 billion yuan, the corresponding annual peak purchase amount may be as high as 20 billion yuan, and the normal annual purchase amount in 4G period is less than 10 billion yuan. In the future, the annual purchase volume is expected to increase significantly.

The company's base station filter business benefits from 4G continuous construction and 5G new cycle.

Recently, the winning result of China Unicom wireless network integration project has been announced, with a total budget of about 34.8 billion yuan, procurement of L900 and L1800 base station 416000 stations, L1800 integration, software functions and so on. This time, there are four main equipment companies shortlisted, ranking by share are Huawei, ZTE, Ericsson and Nokia, which is good for both the main equipment providers and upstream suppliers. The result of winning the bid requires the winning enterprise to "arrive within 28 days after placing the order", and the construction cycle is intensive. By the end of 2018, China Unicom had about 2 million base stations of various systems and about 960000 4G base stations. The number of 4G base stations collected this time exceeded 40% of China Unicom's existing base stations. In the past, the 4G network technology approved by China Unicom is LTE-FDD, and its main frequency band is the internationally common and mature Band3 (1800MHz). The main purpose of this tender is to expand the 900MHz band, which has stronger penetration capability and will greatly improve its coverage. For Unicom itself, it will not only help to maintain the existing network competitiveness, but also help to pave the way for 5G; for upstream equipment suppliers, it will give a big boost to their performance in the first half of this year.

As Huawei's core supplier of base station filters, the company is expected to benefit from the expansion of Unicom's 4G network. Huawei, as the world's largest communications equipment provider, has a high share of the wireless market, so paying attention to the company's sales to Huawei helps to judge the flexibility of the company's filter business. Huawei's core base station RF device suppliers during the 4G period included Dafu Technology, Wuhan Vangu and Chunxing Seiko, among which the company and Wuhan Vangu ranked in the top two in Huawei's sales share, with sales of 759 million yuan and 862 million yuan respectively in 2017. With the intensification of market competition, the market concentration is expected to further improve, and the company's market share in 4G filters is expected to continue to rise. In addition, the company is currently in the capacity climbing stage, with the scale effect brought by the improvement of capacity utilization, the company's overall gross profit margin is expected to gradually pick up.

Faced with the arrival of 5G, the company said it will further focus on the main business of base station filters, improve product competitiveness, or further divest non-core assets. The company has laid out the new 5G technology in advance, the dielectric resonant rods independently developed by the company have been supplied to customers in large quantities, and the technologies and products for 5G reserve, such as miniaturized metal filters, dielectric waveguide filters, high-order MIMO filters, high-performance ceramic materials, etc., have gradually matured with the promotion of cooperation with customers, and some products have been supplied in bulk. As of June 30, 2018, the company has 130 authorized invention patents and 318 utility model patents.

The leader of filter company introduces the basic situation.

The company's advantages in the communications business and the progress of the communications business as a whole

The reduction of filter cost and size are the key elements of commercialization. Therefore, the company currently has industry-leading technology for the three types of 5G filter metals. At present, metal is one of the largest shipments. In the long run, dielectric waveguides will gradually become the future choice because of the technical advantages of small size and light weight.

But companies will still build vertical integration capabilities as they did in the 4G era. The company has the independent ability to suppress sintering debugging automation equipment, and has a unique competitive advantage in the industry. After having the manufacturing capacity of automation equipment, on the one hand, it is more flexible in process adjustment; on the other hand, in the rapid climbing phase of 5G vertical volume, it can meet the customer's rapidly rising demand for pick-up. Compared with other filter manufacturers, the company can achieve full autonomy in all aspects of production, so it can quickly have the ability of vertical integration.

In terms of business progress, the company also supplies 5G filter products to the three major equipment markets downstream. Looking back at the four quarters of 2018, the company's 5G filters increased significantly in terms of the number of projects and sales. Since the second half of 2018, the proportion of 5G sales in total product sales has continued to rise, and it is expected that the sales of 5G products in the company's communications business will continue to grow in 2019 and significantly exceed the 2018 level.

In terms of equipment manufacturing capacity, on the basis of the independent design and manufacturing capacity of key equipment, the rapid development of the overall AAU size change has led to a qualitative change in the AAU shell manufacturing process. 4G before 400mm to 550mm, responsible for 2 to 4 RF channels. After 4.5g, it increases to 600 to 700 mm, carrying 4 to 16 RF paths. In the 5G stage, because the whole AAU carries 64 RF paths, the size is 800mm or more than 1500 mm.

Large structural parts first need the support of large forming equipment such as die casting machine. At present, the company already has several large-tonnage die-casting machines that support large-scale structural parts forming tons, which is the company's advantage and has a sustained and sufficient investment capacity. At the same time, the company's affiliated company Tian Zhizao has a large CNC machining center tailored for 5G large structures, which also provides a full guarantee for the company's mass production capacity in the processing link.

From the perspective of 4G development, the good coverage of 4G will not be replaced in the 5G era, and 4G will continue to improve and build. At present, it is the golden era of 4G, which is entering a rising period of positive cycle replacement of 3G network, and gradually covering rural and remote areas. It is expected that 4G demand will remain stable in the next two to three years.

R & D and innovation capability: it is in a leading position in the industry. As of June 30, 2018, the company has authorized 130 invention patents and 318 utility model patents. The investment in R & D is high. After listing in 2010, the company's R & D investment continues to increase in 2018, resulting in a simultaneous increase in the number of patent applications and the ability to undertake R & D projects. The company has vertically integrated precision manufacturing capacity and nearly 50 perfect product processing and manufacturing processes, providing one-stop quality services for the whole process of mechanical, electronic, radio frequency, automation and other products from raw materials to finished products.

Industry status: first of all, the company is the industry leader in technological innovation; secondly, the company is currently the world's largest provider of base station radio frequency filters, with sustainable mass production capacity and the ability to quickly climb the slope at a time of strong market demand. Third, excellent quality control is the cornerstone of obtaining the trust of high-quality customers.

Core customer cooperation: it began to cooperate with Ericsson and Huawei in 2006 and became a supplier to Kangpu in 2012. The company has entered the filter product line of Ericsson and Nokia in the past two years and will have more room for growth in the future.

Looking forward to the communication service

The reasons for the decrease of cycle gross profit margin after 4G include three aspects: the high amortization rate of fixed assets caused by the decline in income; the concept of customer supply chain management; 4G has no essential change compared with 3G, so with the passage of time, industry innovation barriers are reduced. At present, the above problems have been basically solved.

The company is expected to make high profits in the 5G era. First, the capital expenditure of operators is increasing, and the number of stations built as a whole, including 4G and 5G, is increasing. Second, in the 5G era, filter technology, especially in the field of dielectric waveguide filter, has undergone essential changes compared with 4G, especially the manufacturing process. In this innovative situation, it is beneficial for technology leaders to obtain high gross profit margin. Secondly, the technical barrier of 5G filter is high, and it is in the early stage, which makes it very difficult to be copied, and the time for the decline of industry barriers is prolonged. Third, customers' concept of supply chain management is gradually improved, and they pay more and more attention to the ecological health of the supply chain. In addition to price, the measurement of supply strength and quality accounts for a higher and higher proportion in the bidding. Fourth, the company's 5G business has been gradually launched, the proportion will gradually increase.

In the future, the company's business development will be divided into three directions to ensure growth. On the one hand, to expand the number of customers, before 2018, the customers of communication RF business are mainly Huawei and Kangpu. In 2018, the company achieved a substantial breakthrough in the filter product line in its core customer Ericsson, and has become both a supplier of structural components and filters for Ericsson. With the completion of Nokia's acquisition of Alcatel-Lucent and the completion of supply chain integration, the company has successfully become the preferred supplier for Nokia. The second aspect is to strive to increase the proportion of customers. The third aspect is to broaden the product range, in the future 5G AAU module, the company has the ability to provide filters, structures, antennas and other products, the future will strive to further expand the product line beyond the filter to downstream customers.

The company's future strategy

In the 5G era, the company will divest inefficient assets and focus on the development of communications business. The auxiliary line is in terminal and automotive business. On the one hand, it will develop new product lines based on existing high-quality customers; on the other hand, it will open up markets and develop new customers.

Last year, the company completed the divestiture of Dafu heavy Industries, bringing corresponding revenue and reducing the burden for the company. The company will continue the divestiture work in 2019.

In the future, the rate of R & D expenditure will decline with the increase of overall income, and it is also a rule in terms of sales rates. Historically, in 2014, the utilization rate of production capacity was relatively good, the amortization of fixed assets decreased significantly, and the gross profit of the whole RF product continued to grow. In 19 years, when the income expectation is better, the expense rate will also gradually decline during the period.

Question and answer session

Q: analysis of the market demand and competition pattern of structural parts?

A: the demand of the structure industry is matched with the filter. Demand and gross profit margin are good. In the 5G era, the company will expand the structure business in addition to the filter business. At present, structural products have been provided in batches for major downstream customers. The competition in this area is also mainly domestic. Few filter competitors do structural parts at the same time, and the company's advantage lies in the processing of large structural parts.

From the perspective of 5G strategy, different from the RRU structure before 4G, due to the obvious increase in the size of the structure of 5G macro station AAU, the processing difficulty is greatly increased. At present, there are not many equipment capable of processing such large-scale structural parts in the whole industry, and the company has the ability to provide this kind of large-scale structural parts processing, thanks to the large horizontal machining center that Tianzhi, an affiliated company of the company, has developed for this product customization. large-scale product mode processing can be carried out at a significantly lower cost than other general-purpose equipment.

In terms of structure and filter ratio, a 5G base station is calculated according to 3 sectors, which requires 192 filters and 3 large structure modules. The size of a single frame member may even exceed 1 meter. The company has made an earlier layout in this respect, and there are a variety of process plans, and its average cost may be similar to that of the filter at the present stage.

How are the Q:2.6GHz and 3.5GHz filters progressing? How to achieve metallization?

A: the company has completed the development of the above dielectric waveguide filter. With the independent design and manufacture of some core equipment, the company has a very good competitiveness in the key link of dielectric waveguide filter manufacturing-molding. Similar to the metal cavity filter, in order to achieve stable batch supply, the dielectric waveguide filter still needs the whole process capability from design to final debugging, including five major processes: powder development-embryo-porcelain-metallization-testing. The company began to invest in the development of ceramic powder in 2007, and set up the corresponding postdoctoral workstation. The company has all the methods commonly used in the metallization industry for the development of ceramic powder, but the technology is in the confidential stage. In terms of debugging, automated equipment is ready.

In a word, the core competence of the company is to build the whole supply chain and realize the integrated vertical integration from video design to structural design to five major manufacturing processes.

QRV 5G shipments? What is the competitive advantage of 5G?

A: the company has been the core supplier of Huawei gold medal for many years. In 2017, the company made a historic breakthrough in delivery and quality, and won six awards, including excellent supplier and excellent quality awards, all of which were the only winners in the RF category.

In 2018, we began to provide filter products to Ericsson and Nokia, which grew rapidly, achieved a breakthrough from 0, and will strive to become the main supplier of customers in the future.

Although 5G filter involves new technology, it is still a communication radio frequency filter product in nature. in order to achieve stable batch supply, as before 4G, it still needs the ability of radio frequency design, structure design, mold design and so on. and good cooperation between design and production. If you can not from the most powerful design, until the end of the manufacturing delivery, it is impossible to achieve a stable supply to customers in the stage of mass demand.

The company's 5G products have been shipped to customers in bulk since the first half of 2018, and there has been a significant increase in the second half of 2018.

The advantage of the company lies in the ability of R & D and innovation, and 2G~4G takes the lead in R & D, but in the later stage, due to the relatively mature technology, it has been imitated and plagiarized by the industry. 5G has made great changes, which brings new opportunities to the company's R & D and innovation capabilities; second, the integration of the whole product process. The whole process can ensure that customers can supply goods in bulk when they are in high volume.

Q: what is the market position of the company's 5G filter?

A: the company always emphasizes its supply capacity of the whole process and is confident that it will continue to be the leader in this industry. With the demand and maturity of dielectric waveguide products, there is still a long process from small batch to large batch. The initial situation does not represent the future competition pattern, in the future, vertical quantity when there is a large quantity of supply capacity is the key.

Q: when is the dielectric waveguide filter expected to be increased? How is the profit margin?

A: it's hard to say the exact amount of the expected batch. Because its dielectric ceramics are relatively less mature than metal cavities, many indicators still have room for improvement, and the outfield has not been fully tested. But in the long run, it is the development trend in the future, so each company is improving its mass production capacity, but the overall batch supply capacity of the market is still not comparable to that of metal cavities. It is expected that the demand for at least the second half of 2019 will not exceed that of metal cavities for the time being. So it is mainstream in the long run, and it is difficult to predict the quantity and proportion in the short term.

In essence, the dielectric waveguide filter is still a radio frequency device in the AAU radio frequency system. The first step is to have the ability to make samples, and the second step is to withstand all aspects of performance test, and from a small batch to the final batch delivery, and can withstand the quality test of customers for a long time, and then when customer demand fluctuates greatly, when vertical quantity is needed, is it able to serve customers with quality and quantity and deliver goods stably? It is also a higher realm. To achieve this level, from the beginning of R & D and design to the vertical integration of every full process integration in the middle, there will be great advantages, as the company did in the 4G era. The company is confident that it will be at the 4G level in the 5G era.

Q: do you feel that Huawei has raised a certain gross profit margin for upstream suppliers?

A: we think this is the overall development trend of an industry. In previous years, due to the periodic fluctuations of the whole industry, as well as downstream customers' ideas on supply chain management and other reasons, led to a number of filter manufacturers in the industry, including the company, suffered huge losses. With the gradual maturity of the industry, customers' supply chain management ideas are constantly being optimized and improved. Customers have gradually considered more factors such as delivery capability, quality control ability, automation level, overall service capability and so on, in addition to the product price. It is believed that with the support of customers, the development trend of the filter industry in the future will be better and better.

Q: the share of China Unicom's 416,000 stations, the share of each main equipment provider, and the benefit proportion of the company?

A: for the time being, we can't tell whether the filter orders we got from Huawei, Ericsson and Nokia come from this Unicom collection. In terms of share, according to industry news, Huawei accounts for more than 50% of China Unicom. For 416,000 base stations, the company believes that this expansion process may continue into the second half of this year.

Q: there are three steps in the production capacity planning of the company's dielectric waveguide filter this year. Does the capacity planning reflect the company's judgment on this kind of bidding for operators?

A: because the dielectric waveguide filter is a new product different from the metal cavity filter in manufacturing, it needs corresponding new production capacity investment. The company's current capacity planning is based on the judgment of demand, as well as its own independent equipment design and manufacturing capacity and integration capacity, comprehensive consideration. We believe that we can cope with the high demand for 5G dielectric waveguide filters, while our own vertical integration and equipment manufacturing capabilities enable us to respond very quickly to rising demand. can be flexibly adjusted according to the progress of the industry and customer demand at any time.

At the same time, the company has prepared the production capacity for 4G filter and 5G metal cavity filter.

Q: what is the market demand for capacity?

A: it has always been 500,000 base stations. Objectively speaking, the average household is only 100000. It is estimated that this number should be available from 2020. Combined with the planning of competitors' production capacity, it is expected to reach 100 million / year capacity in 2020.

Q: the company has several times before the extension is not very ideal, for what reasons to terminate the layout of these extensions, as well as the consideration of some of the extension layouts that are still under way.

A: the independent financial consultant employed by the company, the relevant intermediary agencies of the Great Wall Securities Organization, continue to carry out relevant due diligence work on Bailifeng. During this period, Bailifeng was unable to cooperate with independent financial advisers to complete verification work such as correspondence, visits and obtaining statements, so it was unable to carry out further verification procedures and the project could not proceed. Therefore, in order to safeguard the interests of the company and all shareholders, the company decided to terminate the major asset restructuring. The company hopes that the company's previous major asset restructuring terminated both parties' timely projects.

With regard to the oled project, the design of the company's private offering fund-raising plan in 2015 is mainly based on the technological development of the industry, customer demand and competition pattern at that time, but as a new entrant to the OLED industry, it is difficult to break the original supply chain system of potential customers. Up to now, the overall OLED screen market demand does not meet expectations. Under such an industry background, the company carefully implements the fund-raising investment projects, and intends to terminate some investment projects from the point of view of controlling the investment rhythm and effectively reducing the investment risk.

Q: what are the projected gross profit margins for 18 and 19 years?

A: at present, only one qualitative analysis can be given. First of all, the gross profit level of the company is greatly affected by revenue. In the case of unsaturated capacity, the fixed cost amortized to a single product is higher, so it will have a greater negative impact on gross profit. Once the capacity utilization increases, it will have a better positive impact on gross profit margin. In 2019, with the arrival of the climbing period of 5G and the stable demand of 4G, the demand for RF filter products is expected to grow better. If the sales revenue in 2019 is satisfactory, the gross profit margin will be improved compared with 2017 and 2018.

Q: what is the recruitment plan for this year?

A: according to the growth of sales revenue, some additional resources are needed. As a variable expense, the labor cost in manufacturing costs increases with the increase of revenue.

The recruitment of front-line personnel, the company has been in a good state, at the same time, the company continues to improve the level of manufacturing automation, so there is no problem in front-line personnel.

Q: how to consider the disposal of assets?

A: from a directional point of view, we dispose of unrelated assets that are not obviously helpful to our main business. Just like what we divested in 2018 (Dafu heavy industry technology) is also out of this consideration. On the other hand, the assets disposed of should be able to form a win-win situation with the buyer. It is now under way.

Q: does it pose a competitive threat for other manufacturers to purchase powders with the help of their existing large-scale shipping capacity?

A: first of all, the powder is just one of several major processes. In addition to ensuring the stability of external supply, there are several major processes, such as molding, debugging and other capabilities, as well as the overall rapid capacity and equipment autonomy and so on. Therefore, it is not enough to look at a single process, even if the purchased powder is completely open, it may not pose a competitive threat.

Risk hint

1, 5G investment construction is not as expected; 2, the progress of mass production of dielectric waveguide filter is slow; 3, the competition in the industry is intensified.