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Author: Tao Huidong

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On January 12, 2022, Tianyue Advanced, the "first silicon carbide stock", was listed on the Science and Technology Innovation Board. It opened up 8% on the first day and its market value exceeded 38 billion yuan.

Tianyue Advanced is one of the core enterprises in my country's third-generation semiconductor industry. In the field of semi-insulating silicon carbide substrates, Tianyue Advanced's market share ranks first in China and third in the world. At present, the concept of third-generation semiconductors is hot, and Tianyue Advanced's IPO has attracted much attention. Its strategic investor lineup is very luxurious. CATL, GAC, Xiaopeng and other car companies have each subscribed 49.75 million yuan.

Among Tianyue Advanced's shareholders, the most noteworthy one should be Huawei's Hubble Investment. In 2019, Hubble Technology invested 110 million yuan in Tianyue Advanced, and has now received more than 20 times the return.

Since Huawei established its wholly-owned subsidiary Habour Investment in 2019 to invest in the industrial chain, Habour Investment has won five IPOs , with Tianyue Advanced being the most recent one. The book returns of these five IPOs exceeded 6 billion yuan, which is twice the amount Huawei has invested in Habour Investment.

Zong Yanmin, the founder of Tianyue Advanced, was born in the 1960s and is from Shandong. He graduated from Qilu University of Technology, an unremarkable university in Shandong, neither a 985 nor a 211 university. However, Qilu University of Technology has the characteristic of producing entrepreneurs. Sun Mingbo, the former chairman of Tsingtao Brewery Group, and Chen Hongguo, the chairman of Chenming Paper, are alumni of the university.

Zong Yanmin majored in materials in college. After graduation, he was initially assigned to work at the Jinan Light Bulb Factory. Soon after, the factory closed down. Zong Yanmin was forced to start his own business and founded a company specializing in the agency of Volvo excavators and other engineering equipment. The company was very successful. In an interview with the media a few years ago, Zong Yanmin revealed that it had achieved a scale of "annual sales revenue of more than 3 billion yuan and profits of 100 to 200 million yuan."

Although he made a lot of money as a salesperson, Zong Yanmin, who majored in materials, always had a dream of doing scientific research. When he was an agent for engineering equipment, he built a laboratory of more than 2,000 square meters in the company compound, used the company's profits as experimental funds, and did scientific research on his own. In 2010, the 46-year-old Zong Yanmin decided to invest the money he earned in the first half of his life in another adventure and founded Tianyue Advanced, a company engaged in semiconductor material research and production.

After Tianyue Advanced was established, it briefly took sapphire substrate as its main business direction. Sapphire substrate is a material used for LED chip substrates and is a mature mainstream technology. But soon, Tianyue Advanced discovered a more promising but also risky innovative product, that is, the third-generation semiconductor material silicon carbide.

In 2011, Jiang Minhua, a former academician of the Chinese Academy of Sciences and professor at Shandong University, passed away, leaving behind a technology that successfully cultivated silicon carbide single crystals in the laboratory. However, due to the difficulty of industrialization, this important technology was shelved. By chance, Zong Yanmin learned about this, so he found Shandong University and spent a lot of money to buy this technology from Shandong University.

Zong Yanmin later said: "Professor Jiang Minhua is admirable. It is a pity if the advanced results of his life-long research are shelved. my country will once again lose a major opportunity in semiconductor technology."

In this way, Tianyue Advanced has been fully committed to the industrialization of silicon carbide semiconductor materials since 2011. In 2012, Shandong Tianyue achieved mass production of 2-inch silicon carbide substrates; in 2013, it achieved mass production of 3-inch products; in 2017, it achieved mass production of 6-inch conductive silicon carbide substrates; and in 2019, it achieved mass production of semi-insulating 6-inch processes.

After nearly a decade of unremitting research and development, Tianyue Advanced has finally gradually caught up with the international advanced level of silicon carbide substrates, becoming the world's fourth company to mass-produce silicon carbide substrate materials, and some of its product technologies have entered the top two in the world . Currently, the world's leading silicon carbide technology is the American company Wolfspeed, which has achieved mass production of 8-inch process. Tianyue Advanced has already started the research and development of 8-inch process in 2020.

Although Shandong Tianyue is not very large at present, it is already a world-class enterprise with its technical strength in the field of silicon carbide.

The research and development that lasted for more than ten years was very expensive. When Tianyue Advanced carried out its equity reform in 2020, the undistributed profit on the books was negative 800 million yuan.

During the reporting period, Tianyue Advanced only achieved profitability in the first half of 2021, with a net profit of 47.91 million yuan. From 2018 to 2020, Tianyue Advanced suffered losses of 42.29 million yuan, 200 million yuan, and 640 million yuan, respectively. This is the result after Tianyue Advanced received government subsidies ranging from 10 million to 50 million yuan every year.

The biggest difficulty of silicon carbide technology is the yield rate. The melting point of silicon is 1400℃, and the melting point of carbon is as high as 3000℃. After melting them at high temperature, the silicon atoms and carbon atoms must be arranged into crystals according to a specific structure. There are more than 200 types of atomic arrangements of silicon carbide, also known as crystal forms, of which only 4H-SiC can be used as a semiconductor. There can be no mistakes in the atomic arrangement process.

After the silicon carbide ingot is made, it needs to be cut into wafers. Silicon carbide crystals are extremely fragile, and the cutting process alone will cause a loss of about 75%.

Tianyue Advanced's prospectus shows that four of its top five customers in 2018 were jewelry companies. This is because Tianyue Advanced sold products such as crystal rods and substandard substrates that did not meet semiconductor-grade requirements to jewelry companies.

The jewelry products made of these silicon carbide by jewelry companies are the so-called cheap version of diamond "moissanite". In 2018, Tianyue Advanced earned 38% of its revenue by selling these defective products to jewelry companies, which shows how low the yield rate is.

It can be said that for many years after its establishment, Tianyue Advanced had a very difficult time and profitability was nowhere in sight.

In the development history of Tianyue Advanced, two customers played a very critical role. Tianyue Advanced did not disclose the specific names of either in its prospectus, only referring to them as Customer A and Customer B. However, considering their industry status, their true identities are not difficult to guess.

First, let's talk about Customer A, which is Tianyue Advanced's first mass production customer and the only mass production customer for a long time. The prospectus disclosed that Customer A belongs to the radio detection industry, mainly serving the aerospace, positioning and navigation markets, and occupies a leading position in industry technology in these markets. In 2018, Customer A contributed 74.29 million yuan in revenue to Tianyue Advanced, accounting for 55% of the latter's total revenue.

What really made Tianyue Advanced's performance take off was Customer B. Customer B is a communications leader that purchases silicon carbide substrates from Tianyue Advanced for the manufacture of 5G RF chips. In 2019, Tianyue Advanced passed Customer B's qualified supplier system certification, signed a sales framework agreement, and began to supply it in batches. After that, Customer B's purchase volume increased rapidly. In 2019, Customer B's purchase amount was 16.33 million yuan, accounting for only 6% of Tianyue Advanced's total revenue.

In 2020, the purchase amount of customer B increased to 140 million yuan, accounting for 33% of the total revenue. In the first half of 2021 alone, the purchase amount of customer B reached 120 million yuan, accounting for 45% of the total revenue, becoming the largest customer. It was the large purchase amount of customer B that made Tianyue Advanced's revenue increase more than three times in just two years, enabling it to achieve profitability in the first half of 2021 and land on the Science and Technology Innovation Board.

If the application of 5G has pushed Tianyue Advanced to the Science and Technology Innovation Board, then after its listing, Tianyue Advanced will usher in a bigger growth point in performance, that is, new energy vehicles.

Silicon carbide is a third-generation semiconductor material. Compared with traditional silicon materials, the size of silicon carbide devices with the same performance can be reduced to one-tenth, and the energy loss is reduced by three-quarters. The excellent performance also gives silicon carbide devices a broad application field and market space, especially in the field of electric vehicles. The application of silicon carbide devices can increase the driving range of electric vehicles and greatly shorten the charging time.

In fact, new energy vehicles will be the largest growth point for silicon carbide in the next few years. According to Yolé's forecast, the global silicon carbide device market will increase from US$500 million in 2019 to US$2.5 billion in 2025, with a compound growth rate of 30%.

Among them, new energy vehicles, as the main driving force, will increase from 225 million in 2019 to 1.5 billion US dollars in 2025, accounting for 60% of the entire market, corresponding to a compound growth rate of 38%. It is no coincidence that many car companies appeared in the lineup of strategic investors in Tianyue Advanced's IPO.

In August 2019, Huawei's wholly-owned subsidiary, Habo Investment, invested 110 million yuan in Tianyue Advanced, holding 10% of the latter's shares. In other words, Tianyue Advanced's pre-investment valuation in this round was 1 billion yuan. The prospectus shows that this is the first external financing since the establishment of Tianyue Advanced.

Huawei's entry quickly made Tianyue Advanced a hot commodity in the primary market. VC/PE investors flocked to the company and its valuation began to soar.

Four months after Huawei’s investment, Tianyue Advanced completed a new round of financing of 350 million yuan, with three institutions participating. This time the pre-investment valuation increased to 1.8 billion yuan.

In May 2020, Zong Yanmin opened a round of old stock transfers. He sold 6% of the company's total share capital and cashed out 156 million yuan. In other words, the valuation of Tianyue Advanced has reached 2.6 billion yuan at this time. In June 2020, Zong Yanmin transferred another batch of old shares, selling 4% of the shares and cashing out 240 million yuan. Based on this calculation, the total valuation of Tianyue Advanced is 5.8 billion yuan.

In October 2020, Zong Yanmin transferred his last old shares before Tianyue Advanced went public. This time, he sold 6.6% of the shares and cashed out 670 million yuan, corresponding to a total valuation of 10.1 billion yuan for Tianyue Advanced. So far, in just one year, the valuation of Tianyue Advanced has increased by 10 times.

At present, the market value of Tianyue Advanced is as high as 38 billion yuan. Huawei's Habour Investment has received a return of 20 times on this investment, and the VC/PE investors who entered the last round can also get more than 3 times the return.

This battle also made Habour Investment once again sit on the throne of "the first VC in hard technology". From SiRuiPu, Canqin Technology, Dongxin Shares, JuGuang Technology to today's Tianyue Advanced, Habour Investment has won 5 IPOs in just over two years since its establishment, with the highest return of nearly 50 times for SiRuiPu.

In the fourth quarter of 2021, Haobo Investment reduced its holdings of a small amount of SiRuiPu shares and cashed out 61.25 million yuan.

In 2019, Huawei broke the principle of "not investing in suppliers" and registered a subsidiary, Habour Investment, to make large-scale investments in the semiconductor industry chain, which shocked the industry and VC circles. After several capital increases, Habour Investment's registered capital has reached 3 billion yuan, and it has invested in more than 40 companies.

Putting aside the strategic value, if we regard Habour Investment as a fund of 3 billion yuan, the financial return on its investment is also very impressive - the above five IPO projects alone have brought a book return of more than 6 billion yuan, more than twice the total size of the fund.

At present, several projects of Habour Investment, including Nasin Microelectronics, Haoda Electronics, and Changguang Huaxin, have passed the review and are waiting for listing. Among them, Nasin Microelectronics is a leading analog chip company that is comparable to SiRuiPu and is expected to reach a market value of tens of billions. The road to return for Habour Investment has just begun.