Pay attention to six major trends! Investment outlook for the global semiconductor market in 2021

After nearly a year of the pandemic, which has caused global consumption and work flow to be disrupted and some governments to shut down, the demand for online meetings, videos, low-priced teaching laptops, and Chrome books has increased significantly. The global technology semiconductor product supply chain is afraid of out-of-stock and has increased inventory levels. In addition, the U.S. Department of Commerce has imposed a full technical blockade on Huawei and HiSilicon, and has included more domestic technology leaders in the Entity List. The U.S. Department of Commerce's Bureau of Industry and Security has directly sent administrative letters to some key U.S. equipment, materials, and software suppliers of SMIC to obtain shipping licenses. Although these volatile international situations have caused a sharp decline in demand for 4G mobile phones, automotive and industrial semiconductors in the first half of the year, and a plunge in corporate and government data center investment in the second half of the year, this has led to sluggish demand for upstream and downstream industry chains such as server remote control chips, DRAM memory modules, SSD flash memory devices, and memory interface chips.

Although the epidemic is still severe, since the global economic activities have gradually recovered, the demand for automotive and industrial semiconductors has rebounded significantly in the second half of the year. Coupled with the shortage and price increase of power management chips and 8" wafer foundry driven by 5G and laptops, the global logic semiconductor industry has grown steadily by 10-11% year-on-year this year, and the global wafer foundry has increased significantly by 28% year-on-year. In addition, next year, the demand for cloud servers that rely on advertising fees for enterprises, governments, and automotive and industrial semiconductors will fully recover, and the demand for automotive and industrial semiconductors will accelerate. We estimate that the global semiconductor industry in 2021/2022 will grow healthily by 8%/10%, the global memory market will grow by 13%/15%, and the global logic chip market will grow by 6.3%/8.2%. The domestic semiconductor industry will accelerate domestic substitution and technological independence. We expect the compound growth rate to exceed the global by nearly 50%.

In this 2021-2022 Guojin Semiconductor Outlook and Investment Strategy Report, in addition to emphasizing that global semiconductor inventory is reasonable, we see six trends such as:

1. A strong return in server chip demand is expected in 2021-2022; 2. The era of high-price, high-growth PCIE Gen 4.0/5.0 Retimer is coming; 3. AMD's acquisition of Xilinx accelerates the use of large-substrate 3D packaging heterogeneous integration; 4. The recovery of auto market demand after the epidemic, coupled with autonomous driving, the proportion of electric vehicles has increased; 5. The change of WiFi and game consoles - WiFi 6 and PS5/Xbox series X; 6. From domestic design and manufacturing substitution to equipment and material substitution - non-US-controlled semiconductor production lines are about to take shape, and domestic, Japanese, Korean, and European equipment manufacturers will benefit.

The number of global inventory months has declined reasonably: Although the semiconductor industry and investors are worried that global semiconductor inventories will soar due to the worsening epidemic, according to the exclusive global semiconductor data statistics of Guojin Securities Research Institute, the number of global logic chips, fabless design, IDM, and memory inventory months in the third quarter of 2020 did not increase but decreased, mainly due to the surge in demand for laptops, desktops, game consoles, Chromebooks, cloud service data centers, automotive, industrial power and digital logic semiconductors in the third quarter of 2020.

Global logic chip inventory months: from 3.02/3.23 months in 3Q19/2Q20, which was flat year-on-year, and decreased by 7% month-on-month to 3.01 months in the third quarter of 2020;

Global fabless design inventory months: decreased by 6% year-on-year and 22% quarter-on-quarter from 2.80/3.38 months in 3Q19/2Q20 to 2.46 months in the third quarter of 2020;  Global IDM inventory months: decreased by 8% year-on-year and 9% quarter-on-quarter from 4.25/4.31 months in 3Q19/2Q20 to 3.91 months in the third quarter of 2020;

Global DRAM/3D NAND memory inventory months: decreased by 6% year-on-year and 2% quarter-on-quarter from 4.22/4.04 months in 3Q19/2Q20 to 3.95 months in the third quarter of 2020;

Global NOR/SLC NAND/Mask ROM memory inventory months: from 3.83/4.88 months in 3Q19/2Q20, which was flat year-on-year, and decreased by 22% month-on-month to 3.82 months in the third quarter of 2020;

1. Server chip demand is expected to return strongly in 2021-2022

Guojin Securities Research Institute estimates that the global computer semiconductor (server, desktop computer, laptop x86 CPU, GPU, AI) market will grow 4%/8%/8% year-on-year in 2021/2022/2023, but the entire market is expected to be driven by a 20%/14%/10% year-on-year increase in server industry demand, which was subject to major demand/inventory corrections in the third quarter of 2020 (Xinhua's third-quarter revenue declined 19% month-on-month, +7% y/y; Intel server chips -17% q/q, -7% y/y; Lanqi server memory interface chips -36% q/q, -25% y/y). This is driven by Intel's 10nm, 8 memory channels, PCIE Gen 4-supporting x86 CPU Ice Lake, which will be launched in the first quarter of 2021, and the 10nm, DDR5 and PCIE Gen 5-supporting chip Sapphire Rapids, which will be launched in the first quarter of 2022, and of course from AMD AMD's upcoming 7nm/5nm EUV CPU Milan/Genoa benchmark products. China Great Wall's Feiteng chip, Xinhua and Nuvoton's server remote control chip BMC (Baseboard Management Controller), Cambrian's AI ASIC, Nvidia's AI GPU, Lanqi's memory interface chip, Xilinx's edge computing AI chip have driven more than 10% year-on-year revenue growth.

At a time when server chip inventories are being sorted out, server assembly giant Wiwynn has seen cloud customers urging for goods, production capacity is in short supply, and revenue in the fourth quarter increased by 10% to 20% month-on-month. It seems that demand for cloud server-related chips is relatively strong (Guojin's latest data shows that data center capital expenditures in the third quarter increased by 17% month-on-month and 32% year-on-year; server manufacturers increased by 5% month-on-month and 9% year-on-year in the third quarter). We expect inventory to be liquidated smoothly. We reiterate our previous expectation that server chip demand will rebound in the first quarter of 2021. We will closely monitor ASUSTEK's revenue in December and January, and whether Intel's fourth-quarter guidance will be updated, and when the global epidemic will ease to allow governments and companies to restart procurement.

Of course, the recovery of the server and server semiconductor market will also drive the recovery of the memory DRAM, flash memory 3D NAND market, as well as the x86 CPU large-scale motherboard, server CPU socket (Jia Ze), server x86 CPU wafer foundry (TSMC 7nm, 7nm+, 5nm), and packaging and testing (Tongfu Micro-AMD) markets.

2. PCIE Gen 4.0/5.0 Retimer Era is Coming

With the x86 CPU of AI server, PCI Express (PCIe) Gen 4.0 (16 Gb/s) and Gen 5.0 channels leading to AI GPU/ASIC accelerator, and AI GPU/ASIC accelerator are getting faster and faster, the number of channels is increasing, the amount of data transmitted is getting larger and larger, and the problem of signal attenuation on PCB will become more and more serious. Taking PCIe Gen4 as an example, the signal transmission distance on a general PCB will be attenuated and deformed if it exceeds 15 inches. If PCIe Gen5 is used, the signal transmission distance will be shortened to more than 10 inches before it will be attenuated and deformed. Adding a retimer (Retimer) of the PCIe signal transmission distance on the signal path to reorganize the signal to its original state before transmitting it is a better solution.

Of course, you can also use ReDriver signal repeaters/regulators, but ReDriver can only adjust and slightly correct the integrity of the signal on the transmission end, but the original signal is still severely lost. PCIe Switch and high-speed PCB boards are also solutions, but they are also relatively expensive, so we believe that PCIe Retimer, PCIe Switch, and high-speed PCB boards will be mixed in the future.

Retimer is a high-speed serial/deserializer (SERDES) with digital signal processing (DSP) capability. Even if the received PCIe signal has been coupled with noise, the Retimer can still reconstruct a clean PCIe signal through DSP function and send a copy of the signal to the destination.

We believe that Retimer will become a common supporting solution for future servers and high-speed network switching equipment motherboards. Currently, Gen 4.0 mainly includes x4, x8, and x16 Retimers. A Retimer chip can support 4/8/16 PCIe bidirectional channels at the same time. The number of channels supported by a chip is different, and the unit price is different, but the price of x4, x8, and x16 is not a multiple growth. Generally speaking, x8 is about 1.5 times that of x4, and x16 is about 1.5 times that of x8. We preliminarily estimate that in 2021, the market demand for PCIe Gen 4 retimer will be about 2.5 million in 2021 with the launch of Intel's Ice Lake CPU and AMD's Milan CPU in the first quarter of 2021. Calculated at an average unit price of US$20, the output value of TAM Total addressable market is about US$50 million.

We estimate that Astera Labs' market share is about 60%. In the first quarter of 2022, Intel will mass-produce Sapphire Rapids CPU, and it is estimated that there will be a total of 6-8 million PCIe Gen4/Gen5 Retimers. Based on the average unit price of US$22, the output value is about US$132-176 million. Astera Labs' market share is about 50%, and the remaining market share is shared by Parade and Lanqi.

Astera Labs (formerly the Texas Instruments team) previously worked with Intel to develop the PCIe Gen 4.0/5.0 specifications, and was also the first in the industry (August 2020) to mass-produce PCIe Gen4 retimers. According to industry chain information, Astera Labs delivered the second version of the Gen5 retimer sample in May this year, and is expected to go into mass production in the first quarter of 2021.

Parade's Retimer chips have already entered the market of major server OEM/ODM manufacturers such as Inventec, Quanta, and Invicta, and it is estimated that shipments will begin in the first half of 2021. As for the new generation of PCIe Gen5 Retimer products, they are expected to be launched in 2021 and become a new growth driver in 2022 or 2023.

Montage has completed the tape-out of engineering samples of PCIe 4.0 Retimer chips. Samples have been sent to potential customers and partners for testing and evaluation in the first half of 2020. The chip design is being optimized based on the feedback from potential customers and partners. It is expected that the development of mass production version chips will be completed in the second half of 2020, and mass production and shipment should be possible in 2021. It is estimated that the market share will be 5-10% in 2021 and 10-15% in 2022. This may contribute 3%/6% to Montage's revenue in 2021/2022.

3. AMD acquires Xilinx - the era of 3D packaging heterogeneous integration is accelerating

As Moore's Law slows down, integrating logic and memory chips of different process nodes on a large semiconductor substrate through heterogeneous packaging stacking will be an excellent solution to improve performance, reduce energy consumption, reduce chip area, increase yield, and reduce costs. The earliest product to implement the small chip large substrate architecture was Xilinx's FPGA, which used TSMC's CoWoS (Chips on Wafer on Substrate) packaging technology to complete 3D packaging, followed by AMD's 7nm Rome CPU, which used Tongfu Micro's packaging technology to package 8 7nm 64mm2 CPU core chips and a 14nm north bridge controller into a 75.4x 58.5mm2 8-core CPU chip.

After AMD took over nearly 6.6% of Intel's server and 20% of laptop/desktop CPU market share in two or three years, the company announced on October 27, 2020 that it would exchange 1.7234 AMD shares for one share of FPGA leader Xilinx for US$35 billion. This is different from Nvidia's announcement of a US$40 billion acquisition of ARM, in which this case was an American company buying British/Japanese technology. In addition, AMD once established Haiguang Microelectronics and Haiguang Integrated Circuits in a joint venture with Inspur, and is friendly with scientific research institutions in mainland China. Therefore, the Chinese Ministry of Commerce has a higher chance of approving this acquisition.

So why did AMD want to buy Xilinx, and what impact will it have on it?

AMD has supplemented the FPGA chip design technology needed for edge computing in data centers and base stations. Otherwise, if Intel integrates the CPU and FPGA into a single chip through system packaging, Intel will monopolize the edge computing inference market (CPU + inference accelerator);

We estimate that Xilinx business will contribute nearly $3.4 billion or 31% of AMD's revenue and 47% of Non-GAAP profit next year;

The huge difference between the purchase price of tens of billions of dollars and the book value of $2.3 billion will be amortized over the next five years - the value of goodwill and patents, which will affect US GAAP earnings;

AMD wants to issue 425 million additional shares, or dilute existing shareholders by 34%, to acquire Xilinx because its $1.8 billion in cash on hand is clearly insufficient.

AMD will control a larger order volume and obtain lower-priced production capacity from wafer foundry TSMC, and packaging and testing manufacturers ASE and Tongfu Microelectronics.

Of course, Intel is not to be outdone. Through its EMIB (Embedded Multi-Die Interconnect Bridge) signal connection technology and Foveros packaging technology, it has launched various chiplets (chiplets) large-substrate architecture FPGA products (FPGA+HBM DRAM) products Agilex, and CPU products, such as the 10nm ++ Sapphire Rapids and 7nm Granite Rapids CPUs of the server Eagle Stream platform to be launched in 2022/2023, and the Ponte Vecchio cloud artificial intelligence computing training AI GPU (75.5mmx49mm=3696mm2) that integrates 8 250mm2 7nm GPU cores, or directly integrates two Sapphire Rapids and 6 AI GPU Ponte Vecchio on a large board;

In the future, it is also possible to integrate CPU+FPGA+HBM high-bandwidth memory to accelerate edge computing reasoning. These changes are beneficial to Teradyne, a major system chip packaging and testing equipment manufacturer, advanced packaging and testing (TSMC, Intel, Samsung, ASE, Changdian) and ABF (Ajinomoto Build-up Film) large substrate industry and its leading manufacturers Ebiden, Unimicron, Nanya PCB. ABF resin substrate is a material dominated by Intel, suitable for high-pin count, fine-line, high-transmission, high-temperature resistant x86 CPU packaging. We expect that in the next five years, the number of layers of large substrates will increase, the area will increase, the yield will deteriorate, and the price growth can be expected.

4. The demand for the auto market has recovered after the epidemic, and the proportion of electric vehicles has increased due to autonomous driving.

Due to the COVID-19 pandemic, global automakers' revenue this year has declined by more than 10% year-on-year, with gasoline car giants Nissan of Japan, Ford of the United States, and Fiat of Italy experiencing the most severe year-on-year decline of nearly 20%. However, domestic electric car giant BYD and global electric car leader Tesla saw year-on-year growth of more than 20 percentage points.

Although the second wave of the epidemic is still expanding in Europe and the United States, the sales of private cars have rebounded due to the restart of production lines in unsealed areas and more and more consumers wanting to maintain social safety distance and reduce the use of buses, taxis, and subways. In the third quarter, global auto dealers' revenue reversed, with month-on-month growth from -26% in the second quarter to 56% in the third quarter, and year-on-year growth from -36% in the second quarter to -1% in the third quarter.

We believe that after the COVID-19 vaccine is gradually introduced next year, global demand for gasoline and electric vehicles will rebound across the board, and automakers' revenue will grow by 10-15% year-on-year. The continued increase in global electric vehicle share will significantly increase the demand for semiconductor power discrete devices such as Power MOSFET, IGBT, SiC (mainly used in DC/AC inverter), GaN (mainly used in DC/DC and AC/DC converter rectifiers), and assisted driving will evolve to SAE 3, 4, and 5 autonomous driving (Tesla has recently provided SAE 4.0 fully autonomous driving Beta software updates to some users, allowing their cars to have enhanced functions based on the control of traffic lights and parking signs, and can allow Tesla vehicles to automatically turn at intersections. In the future, various self-driving cars will be driven by the demand for AI, MCU, CPU, GPU/FPGA/ASIC, sensors, millimeter-wave radar, lidar, camera CIS, WiFi, Bluetooth, wired network, power management PMIC, and memory semiconductors. Guojin Securities Research Institute estimates that the global automotive semiconductor market will grow from 2020 to 2025. The year-on-year decline is expected to be 8%, and the compound growth rate will be 15-20% from 2021 to 2025.

Value-added automotive semiconductors: Unlike the mobile phone semiconductor market, the year-on-year growth in 2020/2021 exceeded the year-on-year increase in mobile phone shipments, mainly because the value of semiconductors used in each 5G mobile phone is more than twice the value of semiconductors in 4G mobile phones. The value of semiconductors used in each SAE Level 5 autonomous electric vehicle may be more than 10 times the value of semiconductors in a gasoline car driven by a person in 2020. We initially estimated that the most basic Power MOSFET will require more than 10 times the increase, cameras, CIS, radar sensors, MLCC, and power management chips will require five times the increase, and there will be 2 times the sensors, not to mention a large number of RF power amplifiers, wired communications, artificial intelligence, and a variety of power chips. This will be the main reason for the 10% compound growth rate of the global automotive semiconductor market in the next 20 years. The value of semiconductors per car will increase year by year from less than 3% in 2020, even if the global gasoline/electric vehicle shipments increase by < 5% year-on-year in the next 20 years.

Electric vehicles may once again boost the demand for high-end MLCCs: Electric vehicles require a 5-fold increase in MLCCs. The resumption of growth in electric vehicles in 2021/2022 should significantly improve the oversupply of MLCCs, reduce market inventory, stabilize prices, and allow the MLCC industry to gradually recover. We recommend focusing on leading MLCC manufacturers such as Fenghua High-Tech and Sanhuan Group in mainland China, Yageo and Walsin Technology in Taiwan, Vishay in the United States, and Murata and Taiyo Yuden in Japan.

5. The evolution of WiFi and game consoles - WiFi 6 and PS5/Xbox series X

Unlike 5G, which is a revolution in transmission speed, WiFi 6 was released in 2019. It uses IEEE 802.11ax and has a maximum transmission rate of 9.6Gbps, which is only higher than the 6.9Gbps ​​of the previous generation 802.11ac. However, it has the advantages of low latency, multi-person multi-tasking, low power consumption, wide coverage, and multi-device connection (OFDMA Orthogonal Frequency Division Multiple Access allows multiple users to transmit data at the same time to solve the problem of latency) to match 5G mobile phones. Although the use of 5G personal hotspots in indoor networks can replace WiFi, 5G personal hotspots will use a large amount of 5G bandwidth, which is not welcomed by operators and will increase the basic usage fee.

It can be seen that WiFi technology has not declined in the 5G era, but has become more important. It can also be seen that WiFi ranks first in the top ten wireless technology trends released by Gartner in 2019 and beyond. The Strategy Analytics report pointed out that the annual compound growth rate of WiFi 6 product shipments from 2020 to 2024 is as high as 57.8%, and the penetration rate has also increased from 16.6% in 2020 to 81% in 2024. The price of WiFi 6 modules is also 1.5 to 2 times higher than that of WiFi 5.

Currently, WiFi 6 has been installed in laptops, desktops, mobile phones, tablets, and routers. In addition to baseband chips, it also needs to integrate PA power amplifiers, LNA low-noise amplifiers, and SW antenna switches. The key beneficiary manufacturers include Qualcomm (baseband), Broadcom (baseband, RF front-end chips), MediaTek (baseband), Realtek (baseband), Richtek (RF front-end modules), Espressif (WiFi6 iot baseband, RF front-end modules), Bolu Intelligent (WiFi6 iot baseband), and Kangxi Communication (already has WiFi 6 fem-router end).

The CPUs of both PS5 and Xbox Series X use AMD's latest generation Ryzen "Zen 2" CPU. With 8 cores and 3.5-3.8GHz specifications, it is roughly between the Ryzen 7 3700X and 3800X on PC. Judging from the current market computer configuration, it is already above the mid-range specification. This is different from the situation when the CPU performance of PS4 and Xbox One was already lagging behind when they were first launched, and it should give PS5 and Xbox Series X a better starting point. Like the CPU, the GPUs of PS5 and Xbox Series X use customized GPUs built based on AMD's RDNA 2 architecture. This architecture is an improvement on the 1st generation RDNA architecture of the latest Radeon RX 5000 series GPU products for personal computers. The biggest feature is the first introduction of hardware-accelerated ray tracing processing functions in AMD GPUs to simulate the reflection, refraction, and transmission of real light, similar to the "RT core" of NVIDIA GeForce RTX series.

The Xbox Series X ray tracing has a performance of 380 billion intersections per second. If shader software is used for calculation, it will consume up to 13TFLOPS of performance, which means that even if the performance of the entire GPU is exhausted, it will not be enough. Therefore, after the introduction of this hardware accelerator, the performance of the entire GPU is equivalent to 12+13 = 25TFLOPS. The PS5's RDNA 2 GPU is equipped with 36 CUs (Control Units), each of which contains 64 stream processors, and 36 CUs contain 2304 stream processors. Using a variable operating clock, it can provide 10.3TFLOPS of floating-point computing performance at a maximum clock of 2.23GHz, which is equivalent to the Radeon RX 5700 XT overclocked version, the highest-end graphics card of AMD RDNA architecture, and the memory bandwidth is exactly the same (448GB/s). The Xbox Series X's RDNA 2 GPU is equipped with 52 CUs and a total of 3,328 stream processors, running at a fixed clock of 1.825 GHz, so it can provide 12 TFLOPS of floating-point computing performance, slightly higher than the 10.3 TFLOPS of the PS5, and higher than all current RDNA architecture graphics cards.

The biggest winners from the launch of the new game consoles Sony PS5 and Microsoft Xbox Series X this year should be AMD, the supplier of the exclusive 8-core Zen 2 CPU and RDNA 2 GPU graphics processor, TSMC, the wafer foundry that provides 7nm process technology, and Tongfu Microelectronics, which is responsible for the packaging and testing of AMD CPU/GPU. Guojin Securities Research Institute expects that by the end of 2021, PS5 sales should exceed 15 million units, and Xbox Series X/S sales should exceed 7 million units, reaching a global sales peak in 2022.

6. From domestic design substitution, manufacturing substitution, to equipment and material substitution - the era of non-US production lines is coming

Since the Trump administration of the United States blocked ZTE, Huawei, Sugon, Hygon, Hikvision, Dahua, iFlytek, Megvii, SenseTime, Meiya Pico, Yitu, E-Tech, Infinity, Weiyi Measurement & Control, FiberHome, Precision, Daco, Zhongyun Rongxin Technology, Qihoo 360 Technology, CloudWalk, EastNet, DeepNet, and Yinchen Intelligence with American technology, we have seen the design substitution of domestic chips in progress, especially domestic system manufacturers, who have since tended to adopt non-US substitution strategies, with the priority of semiconductor design in mainland China, followed by Taiwan, South Korea, Japan, and finally Europe. This will also cause the market share of Qualcomm, Skyworks, Qorvo, Broadcom, Texas Instruments, and Micron in mainland China to decrease quarter by quarter, but the market share of MediaTek, Realtek, Win Semiconductors, Sanan, Maxsun Microelectronics, Shengbang, Samsung, and Hynix to increase in the opposite direction. Although this will not affect the year-on-year growth of the overall market, it will have a positive impact on the growth of domestic and non-US semiconductors. As for the changes in the proportion of TSMC and SMIC's customers from the United States and mainland China over the past decade, especially after the Sino-US technology blockade war worsened, the proportion of mainland China customers has increased significantly.

However, since the U.S. Department of Commerce further imposed a complete blockade on HiSilicon on September 15, 2020, even TSMC and SMIC, which use U.S. semiconductor equipment, cannot help HiSilicon produce semiconductor chips. We estimate that starting from the fourth quarter of 2020, the proportion of mainland customers of TSMC and SMIC will drop significantly, and domestic design substitution will gradually transform into manufacturing substitution.

But the good times did not last long. On September 25, the Bureau of Industry and Security of the U.S. Department of Commerce sent a letter to SMIC's key equipment and material suppliers, requiring each supplier to obtain a license before shipping to SMIC. We have sorted out some of the impacts.

Most of the equipment orders placed before September 25 will be delivered in succession, but in 6-9 months, it will be impossible to purchase advanced semiconductor process equipment from the United States, especially CMP chemical mechanical planarization polishing (>70%), Ion Implantation ion implantation equipment (>70%), CVD chemical deposition (Lam plus Applied Materials account for more than 50%), Etch etchers (Lam plus Applied Materials account for more than 70%), Epitaxy epitaxial equipment (>90%), and PVD physical thin film deposition dominated by Applied Materials (>85%). Therefore, we estimate that SMIC's 14/12/7-8nm production capacity will not exceed 30,000 wafers per month in the short term if it cannot obtain a license;

After SMIC lowered its capital expenditure this year from $6.7 billion to $5.9 billion, we estimate that its capital expenditure in 2021 will be significantly lowered to less than $4 billion, and depreciation expenses will be significantly lowered in the next few years. The gross profit margin will be significantly improved from the current 20% or less, and the overall profit may be neutral to positive.  Unlike Huawei, because the United States does not control semiconductor material technology, SMIC's revenue compound growth rate in the next five years will be lowered from the previously estimated 18% (the compound growth rate of volume is about 10-12%, and the price is about 5-6%) to 0-4% (the compound growth rate of volume is about 0-2%, and the price is about 0-2%).

American EDA tools, equipment consumables (2-3 years of inventory can be established), second-hand equipment and components for mature process technology are available, and repairs are not a big problem. Large silicon wafers and various chemical materials should be purchased as non-American products or obtained through various channels.

Although SMIC is currently only hindered in expanding production, if SMIC is completely blocked by the Bureau of Industry and Security of the U.S. Department of Commerce similar to Huawei, TSMC, UMC, World Advanced, and Huahong (SMIC has a 13-15% share in 8”, a 10% share in 12” mature processes, and a 1-2% share in 12” advanced processes) will benefit significantly. We believe that in the next 5-10 years, SMIC, Huahong, Yangtze Memory Technologies, and Hefei Changxin should increase the proportion of domestically produced equipment and materials in each non-critical process step from 5-10% to more than 30%. Of course, the position of non-U.S. semiconductor equipment suppliers in China will become more important.

If the Biden administration comes to power without changing the ban issued by the U.S. Department of Commerce's Security Bureau on SMIC's key U.S. equipment and material suppliers, we estimate that starting from the second half of 2021, SMIC will not be able to continue to expand production, and domestic manufacturing substitution will be transformed into domestic semiconductor equipment and material substitution. Regardless of whether it is SMIC or TSMC's internal plans or Huawei's Tashan plan, it may be possible within five years, through some domestic, Japanese, Korean, Taiwanese, European equipment and second-hand equipment from the United States, to form 8 "special processes and 12" mature processes (90nm-40nm) of semiconductor production lines that are not regulated by the U.S. Department of Commerce's Security Bureau.

1. Foundry industry - 5G, game consoles, servers, automotive semiconductors, Apple M1

There are more than 120 million 5G mobile phones in China, with a penetration rate of more than 60%. There are more than 200 million 5G mobile phones in the world, with a penetration rate of more than 18%. HiSilicon and some system manufacturers have built up semiconductor inventories. The new coronavirus epidemic has greatly driven the demand for consumer electronics such as LCD TVs, laptops, Chromebooks, and game consoles, and the price of 8" wafer foundry has increased. Power management and large-size driver chips are out of stock. TSMC helps AMD as a wafer foundry and grabs nearly 20% of Intel's laptop/desktop and 6.6% server CPU share. The wafer foundry industry grew 28% year-on-year in 2020, better than the 11% year-on-year growth of the global semiconductor logic chip industry, mainly driven by TSMC's 31% year-on-year growth.

However, with the continued demand for 5G mobile phones (it is expected that the domestic 5G mobile phone penetration rate will exceed 80% in 2021, and the global 5G mobile phone will increase by more than 500 million units year-on-year, with a chance of exceeding 40%, and the global 5G mobile phone penetration rate will exceed 50% in 2022), game consoles (AMD 7nm CPU/GPU supply is expected to be relaxed and released), PCIE Gen 4.0/5.0 (from 2.5 million in 2021 to 6-8 million chips in 2022), and WiFi 6, as well as the expected full recovery of government and enterprise servers (the global server market is expected to grow by 20% year-on-year) and automotive power and self-driving car semiconductors (the global automotive semiconductor market is expected to grow by more than 10% year-on-year), the demand for LCD TVs, laptops, and Chromebooks has also slowed down due to the easing of the epidemic, and HiSilicon/Huawei has been unable to place new wafer foundry orders due to selling mobile phones and chip inventories for more than half a year.

Guojin Securities Research Institute estimates that the global wafer foundry market will grow by 9%/13% year-on-year in 2021/2022, attributed to the fact that SMIC will not be able to purchase advanced semiconductor process equipment from the United States to expand production capacity starting in the second half of 2021. It also estimates that domestic wafer foundry production sales will slow down to 8%/7% year-on-year growth in 2021/2022, and the self-sufficiency rate will slowly decline from 20% in 2019 to 17%/16% in 2021/2022.

TSMC will continue to increase capital expenditure: In order to meet the demand for Apple's self-made laptop CPU chip M1, AMD's 7nm game console CPU/GPU, 7nm laptop CPU/GPU, 7nm EUV/5nm server chips, and Intel's 7nm AI GPU Ponte Vecchio and 7nm Granite Rapids CPU outsourcing capacity needs, as well as Apple, Qualcomm and MediaTek's 7nm EUV, 5nm EUV 5G application processor/baseband chip demand, we estimate that TSMC will continue to increase capital expenditure from US$17 billion in 2020 to more than US$20 billion in 2021/2022, so that capex to sales in 2021/2022 will be increased from 37% in 2020 to about 40% in 2021/2022.

In addition, we estimate that TSMC's wafer foundry prices will gradually increase at a year-on-year rate of 3-5% (the average unit price increased by 8% year-on-year in 2019 and 6% year-on-year in 2020). In addition to estimating that TSMC's revenue will only increase by 9% year-on-year next year due to its higher revenue base this year, we expect TSMC to revise its revenue compound growth rate for the next five years from the past 5-10% to 10-15%. Because the price of wafer foundry for advanced process technology increases every year, and the speed of Moore's Law miniaturization (the increase in the number of chips per wafer due to miniaturization) is slower than the price increase of wafer foundry, we expect the foundry cost of chips of the same size to increase year by year.

SMIC's capacity expansion is limited: Although SMIC helped HiSilicon mass produce the last 14nm process order in the third quarter of 2020, allowing the company to revise its full-year revenue growth from 20% to 23-25% year-on-year, and the revenue share of 14/28nm increased from 8% in the second quarter to 14.6% in the third quarter, or 14nm increased from 1-2% in the second quarter to 8-9% in the third quarter, but after SMIC lost HiSilicon's high-priced orders, depreciation expenses continued to increase, and there were no new game consoles and Apple 5G chips to make up for it. SMIC's fourth-quarter revenue (a decline of 10-12% quarter-on-quarter) and gross profit margin (from 24% in the third quarter to 16-18% in the fourth quarter) guidance were significantly lower than the 1-6% quarter-on-quarter growth guidance of TSMC, UMC, Huahong and World Advanced.

Coupled with the uncertainty of the US Department of Commerce's control over SMIC's key equipment and material suppliers, we estimate that SMIC's capital expenditure will be less than 4 billion next year and may be less than 2 billion the year after. It will be difficult to expand production capacity next year, and the shortage of materials and consumables will make it difficult for the company's revenue to grow year-on-year. The revenue growth rate in the next two years has been revised down to 0-4% or lower.

Hua Hong's revenue is rising: Since SMIC is restricted by capacity expansion, Hua Hong is expected to rise. Hua Hong's fourth quarter revenue guidance is US$269 million (6% QoQ growth, 11% YOY growth), which is significantly better than the 1-3% QoQ growth guidance of benchmark companies TSMC, UMC, and World Advanced and SMIC's 10-12% revenue decline guidance. We attribute this to Hua Hong's 10-point price increase for new orders for 8" wafer foundry and a significant recovery in demand for discrete devices. In the third quarter, the monthly capacity of 12" wafer foundry continued to increase to 14,000 pieces (from 10,000 pieces in the second quarter), and quarterly shipments continued to increase to 40,000 pieces (from 22,000 pieces in the second quarter), but because the gross profit margin of 12" foundry continued to deteriorate to -18% (from -13% in the second quarter), we believe that Hua Hong will continue to face pressure to revise its gross profit margin. Due to the gradual resumption of work in European and American factories and the recovery of power demand, Hua Hong's overseas automotive power semiconductors, automotive analog, The revenue guidance of its MCU customers has gradually improved. The fourth-quarter revenue guidance of its key overseas customers such as STMicroelectronics, OnSemi, Microchip, Alpha&Omega, and Diodes are all nearly 3-9 percentage points higher than market expectations.

World Advanced and UMC will benefit from the recovery of 8-inch wafers, and price increases are expected: this is attributed to the fact that the demand for 6-7 power management chips for 5G mobile phones is twice that of 4G mobile phones. In addition, the application of distance learning, remote conferencing, and online games in laptops, Chromebooks, and OLED/LCD TVs driven by the epidemic has increased the demand for large-size driver chips for 8" wafer foundry, as well as the demand for automotive power semiconductor chips and under-screen fingerprint chips for 8" wafer foundry. Wafer foundries like World Advanced and UMC have begun to increase prices for new 8" orders by around 10% as it is difficult to expand production capacity, and gross profit and operating profit margins are expected to improve.

2. Logic packaging and testing industry - recovery continues, pay attention to inventory changes

Despite the disruption caused by the epidemic, the logic packaging and testing industry recovered strongly as expected in 2020. After the partial supply chain was interrupted due to the epidemic, component and terminal manufacturers increased their inventory levels to ensure the security of the supply chain. In terms of terminal demand, the demand for working and entertainment at home increased the demand for related semiconductors such as laptops, desktops, tablets and game consoles. HiSilicon urgently ordered goods, and mobile phone manufacturers increased their inventory to compete for Huawei's market share. Factors such as 5G infrastructure construction have enabled the packaging and testing industry to continue the recovery trend that began in the third quarter of 2019. In the first three quarters, the revenue of leading manufacturers increased significantly year-on-year. The comparable caliber of Changdian Technology increased by 33% year-on-year, Tongfu Microelectronics increased by 23%, Huatian Technology declined slightly by 3%, ASE increased by 12%, and Amkor increased by 28%. The mobile phone market is expected to recover in 2021, the penetration rate of 5G mobile phones continues to increase, the server market has returned to the growth track after adjustments, and the global 5G base station construction has been fully launched. Against the background of a comprehensive recovery in terminal demand, we expect the logic packaging and testing industry to continue its high prosperity in 2021.

Packaging and testing equipment shows continued strong demand: From the perspective of packaging and testing equipment, data from ASM Pacific, the world's largest packaging and testing equipment manufacturer, also shows a sign of recovery in continued strong demand for packaging and testing. Benefiting from the shift to working from home, the construction of 5G infrastructure, and the demand for HPC represented by servers, the group's BB value has been above 1.0 for four consecutive quarters, indicating strong demand for packaging and testing equipment orders. The amount of new orders for the materials division, which is leading most of the time, remains high, with a significant year-on-year increase. From the perspective of equipment that serves as a leading indicator, we believe that the high prosperity of the logic packaging and testing industry may continue until 2020.

The increase in 5G penetration increases the demand for RF packaging and testing and SiP . 5G mobile phones support more frequency bands than 4G mobile phones. Considering that 5G mobile phones will continue to be compatible with 4G, 3G, and 2G standards, the complexity of the RF front-end of 5G mobile phones will be greatly improved compared to 4G. According to Qorvo data, compared with 4G mobile phones, the number of filters in 5G mobile phones will increase from 40 to 70, the frequency bands will increase from 15 to 30, the receiver transmitter filters will increase from 30 to 75, and the RF switches will increase from 10 to 30. According to Yole's forecast, the overall market size of the RF front-end will grow from US$15.2 billion in 2019 to US$25.4 billion in 2022, with a compound annual growth rate of 11%. The 2020 millimeter wave version of the iPhone 12 uses SiP integrated millimeter wave antennas. We estimate that as millimeter wave solutions mature, the penetration rate of terminal devices compatible with millimeter wave and sub 6G solutions will increase. Yole predicts that by 2025, AiP will generate an additional $1.4 billion in RF packaging and testing demand.

Impact of HiSilicon sanctions on the domestic packaging and testing industry : HiSilicon's accelerated non-US substitution is an important reason for the accelerated localization of this round of IC industry chain, especially the packaging and testing industry. In the first half of 2020, HiSilicon's revenue was US$5.2 billion, a year-on-year increase of 49%, making it the tenth largest semiconductor company in the world. Domestic packaging and testing companies such as Changdian Technology are the main beneficiaries of the transfer of HiSilicon's packaging and testing orders. We expect HiSilicon's orders to account for 15% of Changdian Technology's revenue in 2020. We believe that HiSilicon not only brings orders to domestic packaging and testing companies, but is also an important demander of advanced packaging technology. Together with domestic companies, we will make process improvements and technology upgrades to narrow the gap in packaging technology with overseas companies. The sanctions on HiSilicon and the market reshuffle will not only temporarily idle the production capacity built by domestic packaging and testing plants for HiSilicon, but will also temporarily suppress the demand for advanced packaging technologies such as Fan-out, which will more or less affect the revenue growth of the packaging and testing industry by several points in the next two years.

AMD's market share continues to expand, and packaging and testing plants benefit : In 2019, AMD launched PC processors and server processors based on TSMC's 7nm process and ZEN 2 architecture, achieving process leadership for the first time compared to Intel's 14nm process; and with the launch of the ZEN 3 architecture desktop platform in 2020, the ZEN 3 notebook platform in 2021, and AMD's 5nm process mass production in 2021, we believe that in 2021, AMD will still maintain its leading edge in architecture and process over Intel products using the 10nm process.

If TSMC's 2nm advanced process makes a breakthrough and can be officially mass-produced in 2024, we expect AMD, which cooperates with TSMC, to maintain its process lead over Intel for a considerable period of time in the future, thereby helping AMD's server CPU market share to increase from about 10% in 2020 to 20%-25% in 2022, and its laptop and desktop CPU market share to increase from 18%-20% in 2020 to 25%-30% in 2022. As AMD's main packaging and testing supplier, Tongfu Microelectronics will still benefit from the increase in AMD's market share in 2021, but the long-term risk is that TSMC is expected to directly package AMD's CPUs through the CoWoS packaging method when it manufactures AMD's 5nm Genoa or 3nm CPUs.

TSMC strengthens its packaging and testing layout, and the trend of collaboration between packaging and testing and wafer foundry is clear : As the difficulty of chip process miniaturization increases, the effect of increasing chip transistor density through advanced packaging methods such as wafer-level packaging and 2.5D/3D packaging is immediate. TSMC launched the packaging technology service 3DFabric at the end of August 2020, which is divided into two parts. On the one hand, there are "front-end" chip stacking technologies such as CoW (chip-on-wafer stacking) and WoW (multi-wafer stacking, Wafer-on- Wafer), and on the other hand, there are "back-end" packaging technologies, such as InFO (Integrated Fan-Out) and CoWoS (Chip-On-Wafer-On-Substrate).

TSMC's packaging technology can be combined in the same product to create new product categories by simultaneously implementing front-end and back-end packaging, enabling customers to design their products in a microchip system manner to provide key advantages in time to market, performance and efficiency, size and appearance, yield and cost relative to designing larger single chips. In terms of capacity deployment, TSMC's Zhunan Advanced Process Packaging and Testing Plant, with a total investment of 72 billion yuan, is expected to start operation in the first phase of the plant in 2021, and mass production will begin as early as 2022. Since advanced packaging represented by three-dimensional packaging requires the use of wafer foundry back-end equipment, wafer fabs have more advantages than OSATs in terms of capital investment and understanding of equipment processes. From a domestic perspective, the strengthening of collaboration between Changdian Technology and SMIC is also in line with the trend that packaging plays a more important role in improving chip performance.

Pay attention to changes in terminal inventory: In the second half of 2020, as mobile phone manufacturers increased their inventory to compete for the market, the inventory of packaging and testing plants also increased in response to strong downstream demand. Although the current industry inventory is still at a healthy level, due to the relatively stable growth of terminal demand, if the terminal demand in 2021 is lower than expected due to factors such as the epidemic, the total inventory of the industry may take longer to consume due to the inventory superposition effect from terminal plants to semiconductor device plants and then to upstream packaging and testing plants.

Benefiting from the slowdown of Moore's Law, the chiplet architecture of server chips has driven TSMC and Intel's more 3D IC packaging and testing, substrate demand, the continued upward cycle of semiconductor customers, the one-stop model of domestic semiconductor replacement, 5G SiP/AiP, game consoles, PCIE Gen 4.0 Retimer, UWB, WiFi 6, under-screen fingerprint, TWS, AR glasses' new packaging and testing needs, but coupled with the easing of the epidemic, the demand for LCD TV, laptops, and Chromebooks has also slowed down, and HiSilicon/Huawei has been selling mobile phones and chip inventories for more than half a year and is unable to place new wafer foundry orders. In addition, the expansion of SMIC is not easy for downstream packaging and testing factories to benefit equally.

Guojin Securities Research Institute estimates that the global logic packaging and testing market will grow by 15%/10% year-on-year in 2021/2022, and estimates that domestic logic packaging and testing production and sales will grow by 18%/13% year-on-year in 2021/2022, and the global share will gradually increase from 21% in 2020 to 22% in 2021/2022.

3. Memory industry - global recovery awaits reversal of server industry

Benefiting from the continued increase in global 5G market penetration, global government agencies and enterprises (private cloud) will restart server capital expenditures after large-scale vaccination and the easing of the epidemic next year. As the global memory inventory months gradually rationalize and memory inventory bottoms out and reverses year-on-year, we expect the memory industry to gradually recover in the second quarter of 2021 with rising memory prices and increasing volumes.

However, before a clear recovery in the second quarter of 2021, we must continue to observe whether the DRAM/3D NAND inventory months (3.9 months), DRAM/3D NAND module inventory months (3.4 months), and NOR, SLC NAND/mask ROM inventory months (3.8 months) of major memory manufacturers can continue to decline, and whether the year-on-year capital expenditure and revenue ratio of memory manufacturers will reverse. At present, the spot prices of various memory DRAM, 3D NAND, SLC NAND, and NOR in the fourth quarter have stabilized and stopped falling, but the contract prices are still slightly corrected.

We expect demand and prices in the memory industry to rise across the board starting from the second quarter of 2021. In addition, as major domestic memory wafer manufacturers gradually start mass production, Guojin Securities Research Institute estimates that the global memory market will grow by 13%/15% year-on-year in 2021/2022, and estimates that domestic memory chip production and sales will increase by 146%/108% year-on-year in 2021/2022. The self-sufficiency rate of memory chips is expected to increase rapidly from 3% in 2020 to 7/12% in 2021/2022.

Domestic memory capital expenditure is becoming more important : According to market research firm TrendForce, global DRAM manufacturers will reduce capital expenditure by 3% year-on-year to US$19.5 billion in 2021, and global NAND manufacturers will increase capital expenditure by 15% year-on-year to US$24.3 billion. We believe that DRAM will be more stable than NAND spot and contract prices in the next two years, and DRAM supply and demand will be tighter than NAND. It is worth noting that Yangtze Memory is obviously more active in expanding production than Hefei Changxin. We expect it to reach a monthly production capacity of 85,000 pieces by the end of 2021 faster. We attribute this to the development of Changxin's 3D NAND technology. There is no doubt that Xtacking 3D NAND technology is leading, while the source of Changxin's 1X 19nm DRAM technology is still controversial.

The expansion of domestic memory production is beneficial to equipment, packaging and testing, modules, and clean room general contracting design : Although we expect that domestic 3D NAND giant Yangtze Memory and Mobile DRAM giant Hefei Changxin will not be able to make profits in the short term due to the gap in design and wafer manufacturing technology and huge depreciation costs, but unlike the wafer foundry industry, which is always waiting for orders from semiconductor design customers, customers often change chip designs, and customers will only transfer orders when they require a reduction in wafer foundry prices. The right to speak is in the hands of IC design customers. Domestic memory giants will control their own R&D design and the iterative evolution of advanced process technology, repeatedly manufacture highly standardized products, and improve yield through mass manufacturing. The right to speak is in their own hands.

4. Semiconductor equipment and materials industry - localization continues to deepen

With the shortage of 8" wafer foundry driven by large-size driver chips, power management chips, and power chips, and the surge in demand for 5nm/7nm processes driven by 5G mobile phones and base stations, game consoles, servers, laptops, mining machines, and artificial intelligence, global semiconductor equipment will fully recover year-on-year in the second half of 2020, from a year-on-year decline of 8% in 2019 to a year-on-year growth of 19%/10%/11% in 2020/2021/2022.

However, in terms of monthly revenue of semiconductor equipment in the United States, the year-on-year head appeared in September 2020 with a 36% increase, which was significantly higher than the 5% year-on-year revenue growth of the global semiconductor industry announced by SIA/WSTS. We attribute the difference to 1. Automotive and industrial power semiconductors declined by nearly 10 points this year, offsetting part of the growth momentum of global semiconductor revenue, but they rarely use advanced processes, which has little impact on the revenue of semiconductor equipment in the United States. 2. The extension of the Sino-US technology blockade war has caused SMIC and Huahong to accelerate the purchase of key semiconductor equipment and materials in the United States in advance.

Unlike the global semiconductor equipment recovery driven by the foundry industry, the domestic equipment industry will benefit from the continued expansion of production by major memory wafer manufacturers in the next two years. However, the expansion of SMIC has been temporarily suspended. Guojin Securities Research Institute estimates that domestic semiconductor production and sales will increase by 35%/33% year-on-year in 2021/2022, and the self-sufficiency rate of semiconductor equipment is expected to increase from 15% in 2020 to 17%/20% in 2021/2022.

The new round of equipment bidding for Yangtze Memory continues to advance, and the localization rate of equipment continues to increase. According to data from the China International Bidding Network, the local companies that Yangtze Memory intends to win the bid from August to now are: China Microelectronics (12 etching machines), North Huachuang (1 PVD equipment, 9 etching machines, 28 heat treatment equipment), Shanghai Precision (3 measurement equipment), China Science and Technology Feice (1 measurement equipment), Shengmei Shares (8 cleaning machines), Huahai Qingke (10 CMP equipment), Yitong (3 etching machines, 16 degumming equipment). From August to October, domestic manufacturers accounted for 21% of the new equipment for the five major domestic wafer production lines. In the past three months, the overall localization rate of major domestic wafer production lines has increased by 2%. As of the end of October, the localization rate of CMP, etching, cleaning and heat treatment in these five lines exceeded 20%.

Under the influence of the external environment, the localization rate has increased, and the progress of mass production verification of advanced process equipment has slowed down. On October 5, SMIC issued an announcement stating that the Bureau of Industry and Security of the U.S. Department of Commerce has further restricted the export of some U.S. equipment, accessories and raw materials to SMIC, and it is necessary to apply for an export license in advance before continuing to supply SMIC. We judge that in the short term, SMIC's normal production pressure will increase, and its capital expenditure for the whole year of 2020 will shrink from US$6.7 billion to US$5.9 billion, and the subsequent shipment of domestic equipment to SMIC will also be affected.

However, in the long run, the United States will strengthen its technology export controls, strengthen its determination to fully localize the entire semiconductor industry chain, and increase the willingness of downstream wafer fabs to purchase domestic equipment. Huawei and SMIC will use equipment suppliers from Japan, South Korea, Europe, Taiwan, and second-hand equipment from the United States to form mature semiconductor production lines that are not prohibited or controlled by the Bureau of Industry and Security of the U.S. Department of Commerce within 3-5 years. In this way, the localization rate of 8" and 12" mature process equipment of local wafer fabs is expected to accelerate, but advanced process equipment must be verified and strengthened through training by TSMC, the domestic memory industry and Huali's expansion of production.

The capital expenditure of packaging and testing plants has rebounded, and domestic testing machine technology and market have continued to break through. The packaging and testing industry is synchronizing the production capacity of wafer fabs, and the capital expenditure of packaging and testing plants is recovering, driving the market demand for testing equipment. The capital expenditure levels of Changdian Technology, Huatian Technology, and Tongfu Microelectronics increased from 2.5 billion yuan to 6.9 billion yuan from 2014 to 2019. In the first half of 2020, capital expenditure increased by 26.3% year-on-year, and the growth rate rebounded. The domestic market has a high localization rate of analog/discrete devices, and breakthroughs have been made in areas such as SoC/storage.

Huafeng Testing & Control, Changchuan Technology, and Hongce Semiconductor analog/digital-analog hybrid testers account for about 85% of the domestic analog tester market share, among which Huafeng Testing & Control's domestic analog tester market share exceeds 50%; Liandong Technology and Hongbang Electronics' discrete device testers have a total domestic market share of more than 90%; SoC tester chips are of many types and are difficult to develop, and are currently still mainly dependent on imports. Huafeng Testing & Control's power SoCs have already been shipped; in the field of memory chip testers, Jingce Electronics has cooperated with South Korea's IT&T to establish Jinghong Electronics, with the goal of filling the gap in the domestic memory testing field, and has currently received small batch orders.

With the commissioning of domestic wafer fabs, the demand for semiconductor materials has been opened up. In 2019, against the backdrop of sluggish downstream demand and declining global demand for semiconductor materials, China's semiconductor materials market still achieved positive growth. In addition, domestic substitution has become the main demand of China's semiconductor industry, and downstream manufacturers have a stronger desire to provide markets for semiconductor material manufacturers. Under the current background, domestic semiconductor material manufacturers will enjoy the dual dividends of expanding market size and increasing market share.

Domestic large silicon wafers are actively planning large-scale production expansion, and import dependence is expected to decline. In the second half of 2020, as 5G, AI, and IoT drive the demand for smart terminals such as data centers and consumer electronics, the 8- and 12-inch production capacity of global semiconductor foundries remain fully loaded. According to Digitimes, the price of 12-inch silicon wafers is expected to increase by 5% in 2021Q1. According to SEMI data, global silicon wafer shipments are expected to increase by 2.4% year-on-year in 2020, continue to grow in 2021, and hit a record high in 2022. Domestically, the oligopoly has caused my country's dependence on silicon wafer imports to remain high. According to data from the China Fortune Land Development Industry Research Institute, among the production lines of mass production disclosed by various companies in my country, the current production capacity of 8-inch mainland suppliers has reached 960,000 pieces/month; the 12-inch production capacity is only 200,000 pieces/month.

According to data from the Core Thought Research Institute, my country has announced as many as 20 large silicon wafer projects, with an investment of more than 140 billion yuan in new silicon wafer manufacturers. Companies such as Shanghai Silicon Industry, Super Silicon Semiconductor, Jinruihong, and Zhonghuan Semiconductor have begun to build or plan to build silicon wafer processing plants. If implemented as planned, by 2023, the total planned production capacity of 8-inch silicon wafers will reach 3.45 million pieces/month, and the total planned production capacity of 12-inch silicon wafers will reach 6.62 million pieces/month, and the dependence on silicon wafer imports will drop significantly.

The consumption of CMP polishing materials increases with the growth of wafer output and the increase of manufacturing difficulty. American companies have a high share, and localization needs to be improved urgently. CMP polishing materials include polishing liquid and polishing pads. According to SEMI, the global CMP polishing material market size is expected to increase to US$1.98 billion in 2020, with US$450 million in China, accounting for 23% of the world. More advanced logic chips have put forward new requirements for CMP polishing materials. For example, the key CMP process of logic chips below 14nm reaches more than 20 steps, and the polishing liquid used will increase from five or six polishing liquids for 90nm to more than 20 kinds, and the types and usage will increase rapidly. The transformation of memory chips from 2D NAND to 3D NAND technology will also nearly double the number of CMP polishing steps.

In the global market, American companies Dow and Cabot account for 41% and 84% of polishing liquid and polishing pad respectively. Under the severe external environment, the localization rate of polishing materials needs to be improved urgently. At present, Anjie Technology, the leading polishing liquid company in China, has successfully broken the foreign monopoly and achieved mass production at the 130-14nm technology node, and the research and development of 10-7nm technology node products has been steadily advancing; Dinglong Co., Ltd., the leading polishing pad company, has continued to make breakthroughs in the fields of storage and advanced logic, and has received orders for 28nm.

As semiconductor circuit graphics become smaller and smaller, the demand for photoresist is also increasing, and domestic companies are making plans. Photolithography is the core process in chip manufacturing. According to the forecast of the Forward-looking Industry Research Institute, the global photoresist market was US$9.1 billion in 2019 and is expected to reach US$10.5 billion in 2022; the Chinese photoresist market is 8.8 billion yuan, and is expected to reach 11.7 billion yuan in 2022, with a CAGR of 15%. The downstream applications of photoresist are mainly PCB, display panels, LED and integrated circuits, and high-end integrated circuit photoresists are almost all imported. Four Japanese manufacturers-Tokyo Ohka, JSR, Shin-Etsu Chemical, and Fujifilm account for 72% of the market share. Domestic manufacturers are accelerating their layout. KrF photoresist Jingrui Co., Ltd. has completed pilot production, and Shanghai Xinyang is in the research and development stage; ArF photoresist Nanjing Optoelectronics is conducting customer testing, and Shanghai Xinyang is in the research and development stage.

5. Domestic semiconductor design industry without HiSilicon - sharing the market

Ever since the Trump administration of the United States announced that Huawei, HiSilicon and all their subsidiaries are prohibited from using any U.S. technology, equipment, and materials, and put Sugon, Tianjin Haiguang Advanced Technology, Chengdu Haiguang Integration, Chengdu Haiguang Microelectronics, Hikvision, Dahua, iFlytek, Megvii, SenseTime, Xiamen Meiya Pico, Yitu, Yixin Technology, Intenlifei, Weiyi Measurement & Control, Fiberhome Technology, Precision Technology, Daco Technology, Zhongyun Rongxin Technology, Qihoo 360 Technology, CloudWalk Technology, Oriental Network Technology, DeepNet Vision, and Yinchen Intelligence on the Entity List, and banned the sale of U.S. semiconductor product technology and application software/operating system software, domestic product system companies have suddenly realized and accelerated the shift to cultivating, supporting, and accelerating the certification of non-U.S. core product design companies. Of course, domestic semiconductor product design companies are the first choice to try their best to undertake.

But if the technology gap is too big, choose design companies from Taiwan, South Korea, Japan, and Europe to replace the core designs of the United States. For example, use Unigroup Zhanrui, MediaTek (replace Qualcomm), Sanan, Zhan Shengwei (replace Avago, Skyworks, Qorvo), Wingtech Anshi, Shengbang, Silergy (replace Ti, Maxium, On Semi, Diodes, Analog Devices), Goodix, Egis (replace Synaptics, FPC), GigaDevice, Beijing Ingenic (replace Micron, Cypress), Yangtze Memory, Hefei Changxin, Samsung, Hynix (replace Micron), Montage (replace IDT/Renesas, Rambus' memory interface chips and Astera's PCIE Gen 4.0/5.0Retimer), Feiteng, Loongson, Shanghai Zhaoxin (replace Intel, AMD's x86 CPU).

However, since September 15, 2020, HiSilicon has been unable to find manufacturing capabilities that do not use American semiconductor equipment in foundries such as TSMC, SMIC, and Samsung. Before Huawei's semiconductor self-production Tashan plan is successful, we believe that HiSilicon's share will be greatly eaten up in 2021/2022.

Due to our estimate that HiSilicon has more than 50% of the domestic semiconductor design share, and its chip inventory should be less than a year's worth of inventory, Guojin Securities Research Institute estimates that HiSilicon's share loss and inventory depletion will cause the domestic semiconductor design industry to decline from a year-on-year growth of 7% in 2020 to a year-on-year decline of 22%/18% in 2021/2022. China's mainland fabless design industry's global share will decline from 15% in 2019 to 9%/7% in 2021/2022, and may not exceed the 15% achieved in 2019 until 2025. The self-sufficiency rate of China's mainland fabless design industry will decline from 26% in 2019 to 15%/11% in 2021/2022.

However, because other companies will share HiSilicon's market share and some HiSilicon design teams will start new companies or join other design companies, if HiSilicon's revenue is not taken into account, Guojin Securities Research Institute estimates that the domestic semiconductor design industry will grow by 35%/31%/25% year-on-year in 2020/2021/2022, which is much better than the global pure semiconductor design sales growth rate of 25%/12%/9% in 2020/2021/2022, and 11% 5-year CAGR. The main growth drivers in China are Shengbang and Xilijie of analog chips, Zhuoshengwei of mobile phone RF, GigaDevice, the leader of NOR flash memory, Beijing Ingenic of special memory, and Lanqi of memory interface and PCIE Gen 4/5 Retimer.

6. Power IDM - Strong demand and high profit elasticity under tight supply

Create an integrated IDM model of design, manufacturing, and packaging to improve profit elasticity. Since power semiconductor circuits are relatively simple, wafer manufacturing and packaging have a relatively large impact on the final performance of the product and have a relatively higher technical content. Therefore, the manufacturing links including front-end wafer manufacturing and back-end packaging have a higher added value in power semiconductors. However, the chip design, IP, instruction set, control chip architecture, design software tools and other links that have a high added value in digital chips have a relatively low added value in power semiconductors. Therefore, for power IDM manufacturers such as China Resources Microelectronics, we expect that improving their packaging processes and production capacity through fixed increase projects will increase the gross profit margin by 3-5 points.

As the epidemic becomes normalized, the prosperity of power devices has recovered with the recovery of industrial and automotive demand ; global work-from-home and online education have increased the demand for desktops, laptops, and tablets, thereby driving the demand for driver ICs; as mobile phone specifications are improved, the demand for power management ICs has increased from 1-2 per mobile phone to a maximum of 8-9 per mobile phone. On the supply side, due to the preemption of production capacity by CIS and the limited influence of second-hand equipment on overall production capacity, it is difficult to expand. We believe that this round of power device prosperity is expected to continue until the first half of next year.

As the pressure on costs increases, the advantages of the IDM model are revealed. Under the shortage of production capacity, the delivery cycle of power devices such as MOS has lengthened, and some wafer foundries have raised their foundry prices, which may cause power fabless companies to face upward pressure on costs. However, power companies in the IDM model can guarantee their own production capacity needs, and their performance will be more flexible when the prices of similar products rise.

Global power semiconductors rebound in 2021 : Affected by the global COVID-19 pandemic, global power semiconductors will decline in 2020. QYResearch predicts that the market size will be US$36.7 billion in 2020, a year-on-year decline of 9.1%, and the market size will be US$39.6 billion in 2021, a year-on-year increase of 8.1%. In 2019, China's power semiconductor market was US$14.48 billion, accounting for 35.9% of the global power semiconductor market. QYResearch predicts that it will reach US$13.8 billion in 2020, a year-on-year decline of 4.7%.

Automobiles are the largest application market, and the proportion of consumer electronics has increased . From the perspective of global product segments, power ICs account for the largest proportion, and the proportion has increased in recent years, followed by MOSFET. Affected by IGBT substitution, the growth has slowed down; the proportion of diodes is generally stable, the IGBT market has grown steadily, and the proportion continues to increase. Automobiles are the most important market for power semiconductors, followed by industry and consumer electronics. In recent years, new energy vehicles have developed rapidly, and automotive electronics and intelligence have developed rapidly. The proportion of the automotive field has continued to increase. In 2019, the automotive industry's demand for power semiconductors accounted for 35.4% of the total scale. The proportion of consumer electronics has also maintained a relatively stable upward trend, reaching 13.2% in 2019.

In 2019, China's power semiconductor market accounted for 35.9% of the global market : China is the world's largest consumer of power devices, and the market share of several major power device products in China ranks first. Similar to the entire semiconductor industry, compared with overseas power device IDM manufacturers, the annual sales of domestic power device leading companies (China Resources Microelectronics, Star Semiconductor, New Clean Energy, Yangjie Technology, Hua Microelectronics, Silan Microelectronics, etc.) are very different from those of international giants, and the product structure is low-end, indicating that the market size of China's power devices is seriously mismatched with the autonomy rate, and there is huge room for domestic substitution. At present, China's power semiconductor industry is developing rapidly. Wingtech Technology has acquired Anshi Semiconductor. A number of power semiconductor companies such as Star Semiconductor, China Resources Microelectronics, and New Clean Energy have been listed one after another and are growing and developing.

The value of power semiconductors for new energy vehicles has increased significantly : the value of new power devices mainly comes from the "three-electric" system of the car, including power control, electric drive and battery system. In the power control unit, IGBT or SiC modules convert high-voltage DC into AC to drive the three-phase motor; IGBT or SiC, MOS, SBD single tube, or GaN are used in the on-board charger AC/DC and DC/DC DC converters; IGBT single tubes or modules are used in high-voltage auxiliary controllers such as electric power steering, water pumps, oil pumps, PTC, air conditioning compressors, etc.; MOS single tubes are used in low-voltage controllers such as ISG start-stop systems and electric window wipers. According to Infineon data, in 2020, 48V mild hybrid vehicles will need to increase power semiconductors by $90, and electric vehicles or hybrids will need to increase power semiconductors by $330.

BloombergNEF predicts that the global new energy vehicles are expected to reach 11 million in 2025, with China accounting for 50%, 28 million in 2030, and 56 million in 2040. By then, electric vehicle sales will account for 57% of all new car sales.

The third generation of compound semiconductors ushered in new development opportunities Opportunities : After nearly a hundred years of development, semiconductors have now formed three generations of semiconductor materials. The third generation of semiconductor materials are mainly wide bandgap semiconductor materials represented by silicon carbide (SiC), gallium nitride (GaN), zinc oxide (ZnO), diamond, and aluminum nitride (AlN), among which SiC and GaN are the most important. Driven by electric and hybrid vehicles, charging piles and industrial power applications, silicon carbide (SiC) will maintain rapid development. The market size in 2020 is about US$700 million. Yole predicts that it will reach US$3.8 billion in 2025, with a compound growth rate of 35% from 2020 to 2025. Many smartphone manufacturers, including Samsung, OPPO, and Xiaomi, have launched fast chargers that integrate power GaN devices. There are also other brands. The fast charging market is developing rapidly. Driven by the demand for 5G base stations and other factors, the power GaN market will show a rapid development trend. The GaN market was approximately US$100 million in 2020. Yole predicts that it will reach US$500 million in 2025, with a compound growth rate of 42% from 2020 to 2025.

The global power semiconductor market is dominated by Europe, the United States and Japan : According to Infineon statistics, the global power semiconductor device and module market size was US$21 billion in 2019, with Europe, the United States and Japan presenting a three-way competition. Infineon ranked first, accounting for 19%, followed by ON Semiconductor, accounting for 8.4%. The top ten companies had a combined market share of 58.3%.

In 2019, the global MOSFET market size reached US$8.1 billion, and IGBT was US$3.31 billion: Infineon ranked first in the global MOSFET market with an absolute advantage, with a market share of 24.6%, and the top five companies had a market share of 59.8%. Anshi Semiconductor, acquired by Wingtech, and China Resources Microelectronics, which grew up in China, entered the top ten, accounting for 4.1% and 3.0% respectively. Infineon also ranked first in IGBT, with a market share of 35.6%, and the top five companies accounted for a total of 68.8%. Star Semiconductor, a leading IGBT company that grew up in China, has developed rapidly in recent years and entered the top ten. It ranked eighth in 2019 with a market share of 2.5%.

China's power semiconductor industry has a good opportunity for development: my country's semiconductor manufacturers are mainly IDM models, with a relatively complete production chain. Their products are mainly concentrated in low-end fields such as diodes, low-voltage MOS devices, and thyristors. IGBT has gradually made breakthroughs, with mature production processes and cost advantages. The leading companies in the industry have a much higher profit level than Taiwanese manufacturers. In the fields of high-end products such as new energy, electricity, and rail transportation, only a very small number of domestic manufacturers have production capabilities, and the high-end product market is mainly monopolized by European, American, and Japanese manufacturers such as Infineon, ON Semiconductor, Renesas, and Toshiba.

At present, the domestic and foreign IGBT markets are still mainly occupied by foreign companies. Domestic IGBT companies led by Star Semiconductor are developing rapidly, gradually making breakthroughs in industrial control, electric vehicles, wind power, photovoltaics, electricity and high-speed rail, and continuously increasing their market share. In 2019, Star Semiconductor's electric vehicle IGBT modules accounted for 14% of China's electric vehicle field. At present, the domestic power semiconductor industry chain is becoming more and more complete, and technology is also making breakthroughs. China is the world's largest power semiconductor consumer, accounting for 35.9% of global demand in 2019, and the growth rate is significantly higher than the global demand. In the future, under the demand for new energy (electric vehicles, photovoltaics, wind power), industrial control, variable frequency home appliances, IOT equipment, etc., China's demand growth rate will continue to be higher than the global demand.

The COVID-19 epidemic continues to worsen : Although COVID-19 vaccines have been launched in various countries since the end of the year, insufficient production may allow only a few key personnel to be vaccinated and will not achieve improvement in global immunity. The global COVID-19 epidemic may continue to worsen and affect the demand for mobile phones and automotive chips.

The technological competition between China and the United States is intensifying : the market believes that the Biden administration’s technological competition and blockade of China’s technology industry will change from a comprehensive crackdown to advanced technology competition and blockade, but if Sino-US relations continue to deteriorate, it may affect global semiconductor demand in 2021-2022.

Will the demand for laptops, Chromebooks, desktops, LCD TVs, and game consoles be unsustainable? The expansion of the epidemic has caused a surge in demand for replacement of consumer electronic products such as laptops, Chromebooks, desktops, LCD TVs, and game consoles in 2020, but we believe that this may not be sustainable in the second half of 2021, reducing global and domestic demand for foundry, packaging and testing, memory, and logic chips.

Inventory increases instead of decreases : Although the number of months of global chip inventory decreased in the third quarter, after Huawei/HiSilicon orders dropped sharply after September 15, 2020, the number of months of global logic and memory chip inventory may increase instead of decrease in the next few quarters.

Valuations are too high: Valuations of global and domestic semiconductor companies are generally too high, and the risk of decline is increasing.