Zhongxin Wafer terminates IPO

On July 3, 2024, the Shanghai Stock Exchange announced the decision to terminate the review of the initial public offering and listing of Hangzhou Zhongxin Wafer Semiconductor Co., Ltd. (hereinafter referred to as "Zhongxin Wafer") on the Science and Technology Innovation Board. The reason is that Zhongxin Wafer's financial information has expired and has not been updated for three months. Therefore, according to the relevant provisions of Article 63 of the "Shanghai Stock Exchange Stock Issuance and Listing Review Rules", the review of Zhongxin Wafer's issuance and listing was terminated.

According to the information, the Shanghai Stock Exchange accepted the application documents of Zhongxin Wafer for the initial public offering and listing on the Science and Technology Innovation Board on August 29, 2022, and conducted inquiries on September 26, 2022. Zhongxin Wafer originally planned to raise approximately 5.47 billion yuan in this Science and Technology Innovation Board IPO, which will be invested in 6-inch, 8-inch, and 12-inch production line upgrade and renovation projects, semiconductor research and development center construction projects, and replenishment of working capital projects.

According to information, Ferrotec was established in 2017 and was formed by integrating the semiconductor silicon wafer business within the Ferrotec Holdings Corporation, a Japanese semiconductor silicon wafer manufacturer. In 2020, Ferrotec Holdings announced that it would sell 60% of the shares of its semiconductor silicon wafer subsidiary Ferrotec for approximately 29.6 billion yen (approximately 1.97 billion yuan). The buyers included Chinese local governments and private investment funds.

In November 2020, Zhongxin Wafer announced the completion of its "mixed reform". Linxin Investment, as the lead investor, formed a Chinese buyer group with several institutions to realize Zhongxin Wafer's "mixed reform" and expansion and capital increase round investment. The project transaction amount was nearly 4 billion yuan.

Zhongxin Wafer's main business is the research and development, production and sales of semiconductor silicon wafers. Its main products include 4-inch, 5-inch, 6-inch, 8-inch, 12-inch polished wafers and 12-inch epitaxial wafers. The company is also engaged in the entrusted processing of semiconductor silicon wafers and the sale of single crystal silicon rods.

After the current production and under-construction capacity of Zhongxin Wafer is released, it will have an annual production capacity of 4.8 million small-diameter (6 inches and below) polishing wafers, 4.8 million 8-inch polishing wafers and 2.4 million 12-inch polishing wafers (including 600,000 12-inch epitaxial wafers).

In addition to meeting the needs of customers in mainland China, Zhongxin Wafer's products are also sold to Taiwan, the United States, Japan, South Korea, Europe and other countries or regions. It has a good market reputation and influence, and has been recognized by mainstream semiconductor enterprise customers at home and abroad. At present, it has established cooperative relations with well-known semiconductor companies such as TSMC, Global Wafers, Customer A, Silan Microelectronics, Shanghai Silicon Industry , Epistar Technology, Hefei Changxin, Yangtze Memory, Hefei Jinghe, Shaoxing SMIC , Qingdao Xinen, China Resources Microelectronics, Huahong Semiconductor, Innoscience, Guangzhou Yuexin, Customer B, Global Foundries, Infineon, Onsemi , Fuji Electric, Toshiba, etc.

The cumulative loss in three and a half years was 1.07 billion yuan, and the gross profit margin was lower than the industry average

In terms of financial data, Zhongxin Wafer's revenue in 2019, 2020, 2021, and the first half of 2022 was 387 million yuan, 425 million yuan, 823 million yuan, and 702 million yuan, respectively; in 2019, 2020, and 2021, the company's compound growth rate was 45.94%; the corresponding net profit attributable to the parent company in the same period was -176 million yuan, -424 million yuan, -317 million yuan, and -75.1788 million yuan, respectively. After deducting non-recurring gains and losses, the net profit attributable to the parent company's shareholders was -171 million yuan, -450 million yuan, -344 million yuan, and -105 million yuan, respectively, all of which were negative values. The cumulative loss in three and a half years was 1.07 billion yuan.

As of June 30, 2022, the company's audited parent company's financial statements showed undistributed profits of RMB -399.2644 million, and the undistributed profits in the consolidated financial statements were RMB -1026.6522 million, and the profits available for distribution to shareholders were negative.

In terms of main business, during the reporting period, the main business income of Zhongxin Wafer was RMB 381,036,500, RMB 417,292,600, RMB 817,900,200 and RMB 699,310,700 respectively, and the proportion of main business income to operating income in each period was above 98%, and the main business was outstanding. The company's other business income mainly came from the sporadic sales of materials such as crucibles and wafer boxes, with a small amount and proportion.

In terms of gross profit margin, in 2019, 2020, 2021 and January-June 2022, Zhongxin Wafer's gross profit margin was 10.15%, -15.26%, -11.80% and 9.58% respectively, and the gross profit margin has just turned from negative to positive. It is worth noting that the gross profit margin in January-June 2022 increased by 15.00 percentage points compared with 2021.

与同行可比公司相比，中欣晶圆毛利率也显著低于同业毛利率均值。

R&D share is higher than comparable manufacturers in the same industry

The prospectus shows that from 2019 to January-June 2022, Zhongxin Wafer's R&D expenses were RMB 50.9092 million, RMB 70.0821 million, RMB 94.7478 million, and RMB 62.6978 million, respectively, accounting for 13.17%, 16.49%, 11.51% and 8.94% of operating income, respectively. Although the proportion of R&D continued to decline, it was still higher than that of comparable manufacturers in the same industry during the same period.

In terms of R&D personnel, as of June 30, 2022, Zhongxin Wafer has a total of 1,731 employees, of which 186 are R&D personnel, accounting for 10.75% of the total number of employees. In terms of employee education level, Zhongxin Wafer has 21.72% of employees with a bachelor's degree or above, and 1,355 employees with a college degree or below, accounting for 78.28%.

As of June 30, 2022, the company has 154 authorized patents, including 32 invention patents.

The top five customers account for more than 70%

During the reporting period, the sales amount of Zhongxin Wafer's top five customers accounted for 77.90%, 73.25%, 75.46% and 67.06% of the operating income in each period respectively. The company has the risk of a high proportion of operating income from major customers and a high customer concentration. The company explained that the main reason for the high customer concentration is the high customer concentration in the downstream market of semiconductor silicon wafers, which is reasonable and in line with the characteristics of the industry.

The top five suppliers accounted for 40%

During the reporting period, the proportion of the company's purchases from the top five raw material suppliers to the total purchases was 61.08%, 65.63%, 54.75% and 40.21% respectively. The company does not have a situation where the proportion of purchases from a single supplier exceeds 50% of the company's total purchases for the year or is heavily dependent on a few suppliers.

Accounts receivable continue to grow, and there is a risk of bad debts

In terms of accounts receivable, at the end of each period of the reporting period, the balance of accounts receivable of Zhongxin Wafer was RMB 66,652,700, RMB 128,263,000, RMB 213,819,600 and RMB 332,945,500, accounting for 17.24%, 30.17%, 25.97% and 23.72% of the operating income in the same period (annualized), respectively. The accounts receivable turnover days are relatively long. If there are major adverse changes in the macroeconomic environment, customer operating conditions, etc., the company is at risk of bad debts in accounts receivable.

At the end of each period of the reporting period, the book value of the company's inventory was RMB 174.7124 million, RMB 236.3643 million, RMB 389.4939 million and RMB 512.7373 million, respectively, accounting for 3.40%, 3.44%, 4.24% and 4.70% of the total assets, respectively. The inventory turnover rate during the reporting period was 2.11, 1.48, 1.91 and 2.22, respectively (annualized).

The large amount of inventory is mainly due to the long raw material procurement cycle, the need to reserve sufficient raw materials for production, and as the company's business scale expands, production is carried out to meet the supply needs of customers, so there are more products in process and inventory at the end of the period. If the market price of semiconductor silicon wafers falls further in the future, the company will face the risk of further increase in inventory impairment provisions.

Government subsidies increase year by year

From 2019 to January-June 2022, the amount of government subsidies included in the company's current profit and loss was RMB 2.6063 million, RMB 32.9525 million, RMB 50.4852 million and RMB 30.8976 million, respectively, accounting for -1.48%, -7.78%, -15.87% and -38.68% of the total profit of each period, respectively. If the government departments weaken their support for the company's industry in the future, or the local government's government subsidy policy for the company changes unfavorably, the government subsidy funds obtained by the company in the future may fluctuate, which will have an adverse impact on the company's operating performance.

There is a controlling shareholder but no actual controller

As of the signing date of this prospectus, Hangzhou Thermo Magnetics and Shanghai Shenhe together control 28.11% of the voting rights of the issuer and are the company's controlling shareholders. Japan Magnetics Holdings indirectly controls the issuer by holding 100% of the equity of Hangzhou Thermo Magnetics and Shanghai Shenhe.

During the reporting period, there was no single shareholder of Japan Magnetic Holdings holding more than 30% of the shares, and the equity ratio was relatively dispersed; there was no single shareholder that solely controlled the board of directors of Japan Magnetic Holdings, nor was there a single shareholder that directly or indirectly held more than 25% of the voting rights of the shareholders' meeting of Japan Magnetic Holdings (according to Japan's "Company Law", "Company Law Implementation Rules", "Law Implementation Rules on the Prevention of Transfer of Proceeds from Crime" and other laws and regulations, those who directly or indirectly hold more than one quarter (25%) of the total voting rights of the company are usually referred to as "actual controllers"), or it can be considered that they have a dominant influence on the business activities of Japan Magnetic Holdings through investment, financing, transactions or other relationships. Therefore, Japan Magnetic Holdings has no controlling shareholder or actual controller, and the company has no actual controller.

The prospectus shows that after the completion of this offering, the shareholding ratio of the company's existing shareholders is expected to be further diluted. When the company needs to make major operating and investment decisions quickly, the relatively dispersed equity structure may affect the company's decision-making efficiency, causing the company to miss development opportunities, and thus causing fluctuations in the company's operating performance. In addition, the dispersed equity of the company and its controlling shareholders will also increase the potential risk of changes in the company's control in the future, affecting the stability and continuity of the company's operating decisions.

Verdict on lawsuit with AsiaSky Integrated: Compensation of more than 123 million yuan required

In June 2019, Asia Sky System Integration Technology (Suzhou) Co., Ltd. (hereinafter referred to as "Asia Sky Integration"), as the plaintiff, filed a lawsuit against the defendant Zhongxin Wafer for a construction project construction contract dispute. After the second instance of the case, on August 16, 2023, the Zhejiang Provincial High People's Court issued a "Civil Judgment" [(2023) Zhejiang Civil Final No. 547], ruling that Zhongxin Wafer must pay Asia Sky Integration the part of the project payment that was not supported in the first instance of 9,752,566.80 yuan (the part of 110,407,991.83 yuan that was supported in the first instance will continue to be maintained), and pay Asia Sky the expected interest from May 17, 2019 to the actual payment date; Zhongxin Company compensates Asia Sky for the expected profit loss of the unconstructed part and the attorney fees and guarantee fees totaling 3,203,215.33 yuan. That is, a total of more than 123 million yuan needs to be compensated to Asia Sky Integration. In addition, Zhongxin Company will bear the entire appraisal fee of RMB 244,144.00.

Some of the questions raised by the Shanghai Stock Exchange

Question 1: Regarding spin-off listing

The prospectus disclosed that the company's indirect controlling shareholder, Japan Magnetic Holdings, was listed on the Tokyo Stock Exchange in 1996. It is mainly engaged in the production, research and development, and sales of magnetic fluids, semiconductor manufacturing equipment, and liquid crystal manufacturing equipment. It conducts research and development, production, and sales of semiconductor silicon wafers through Zhongxin Wafer. This issuance and listing is the spin-off of some of Japan Magnetic Holdings' assets and businesses to be listed on the Science and Technology Innovation Board of the Shanghai Stock Exchange.

Please explain: (1) the main business, main financial data and main business layout of Japan Magnetics Holdings, Hangzhou Thermal Magnetics and Shanghai Shenhe; (2) the corresponding operating entities, main assets, main products and customers, industry status, etc. of the business segments, and the relationship between the business segments; (3) the capital operation arrangements of domestic entities, the progress of the spin-off listing of entities other than the issuer, the logic of the spin-off of the corresponding entities, and the reasons for not choosing a comprehensive listing. Please ask the sponsor, the issuer's lawyer and the reporting accountant to verify and express clear opinions

Question 2: Regarding asset restructuring

According to the filing materials, (1) the company originated from the semiconductor silicon wafer business unit established by the controlling shareholder Shanghai Shenhe in 2002. The Shanghai Shenhe semiconductor silicon wafer business unit is mainly engaged in the research and development, production and sales of 4-6 inch semiconductor silicon wafers. After business integration, the relevant assets, technologies and personnel were incorporated into the company; (2) In March 2018, Shanghai Shenhe invested RMB100 million in Ningxia Zhongxin Wafer with 100% equity of Ningxia Zhongxin; (3) During the reporting period, the controlling shareholder of the issuer, Shanghai Shenhe, operated the same or similar business as the issuer. In order to resolve the competition among peers, the company acquired 100% equity of Shanghai Zhongxin and the assets of Shanghai Shenhe semiconductor silicon wafers.

Please explain the following to the issuer: (1) In conjunction with the specific operating entity, explain the development layout of the semiconductor silicon wafer business before the reorganization, the formation of technology and product iteration; (2) The issuer's business positioning within the Japanese Magnetic Holdings system before the reorganization, the reason for selecting the issuer as the listing entity, and the business integration logic of this spin-off; (3) A table listing the issuer's main business and assets before the asset reorganization, as well as the main business, assets and corresponding acquisition purposes after all equity or asset acquisitions during the reporting period.

Question 3: Asset Independence

According to the application materials, (1) Japan Magnetic Holdings granted the company three non-transferable trademark licenses for free, with the trademark content being "Ferrotec". The license period is from March 1, 2021 to February 28, 2027. After the expiration of the license period, the two parties may extend the license period by one year after consultation. The trademark exclusive period is 10 years. During the license period, Japan Magnetic Holdings is responsible for handling the renewal procedures for the registered trademark within a reasonable period before the expiration of the registered trademark; (2) The "Trademark License Agreement" shows that both parties have the right to terminate the contract in advance.

Please explain the following to the issuer: (1) the products, revenue and proportion corresponding to the licensed trademarks, and whether the licensed trademarks are core assets required for the issuer's production and operations; (2) whether the company can continue to use the licensed trademarks in the future, and the impact of the inability to use the licensed trademarks on production and operations; and (3) the reasons and rationales for not investing the licensed trademarks in the issuer.

Question 12: On core technology and its advancement

The prospectus disclosed that (1) the company has core technologies for the entire process from semiconductor single crystal silicon rod pulling, 4-inch to 12-inch polished wafers, and 12-inch epitaxial wafer processing, covering all aspects of single crystal silicon rod and silicon wafer processing, including crystal growth, ingot cutting, slicing, chamfering, grinding, chemical etching, heat treatment, end face treatment, edge, cleaning and testing, etc., and the core technology has reached the domestic advanced level; (2) the company's semiconductor silicon wafer products have the characteristics of high flatness, high uniformity, and low defect density, and have leading advantages in technical indicators such as flatness, warpage, thickness, surface particles, surface metal content, and resistivity gradient; (3) the company has a high demand for fixed asset investment, especially the purchase cost of key equipment such as crystal growth equipment, polishing machines, epitaxial equipment, and testing equipment required for semiconductor silicon wafer production and manufacturing is high, and the investment in production line construction required for large-scale production is huge; (4) the issuer's fundraising project intends to expand SOI-related application products.

Please explain the following: (1) The specific differences between the issuer's core technology and the general technology in the industry, whether there are technical barriers, and the specific manifestations of the difficulty and advancement of the relevant technology; (2) The key technical indicators or parameters of the issuer's products, how they compare with domestic and foreign competitors in the same industry, the basis on which the core technology has reached the domestic advanced level, and the main gap with international competitors; combined with the time nodes of 8-inch silicon wafer research and development, production and sales, analyze the reasons for the low capacity utilization rate of 8-inch silicon wafers; (3) The core equipment and personnel required for the key links of product production, list the sources of core equipment in a table based on whether they are purchased from related parties or imported equipment, and analyze whether there is dependence on related parties, single source dependence or import dependence; (4) SOI silicon wafer related technology reserves and R&D progress, and compare them with major domestic and foreign competitors.

Question 26: Regarding fundraising and investment projects

The prospectus disclosed that (1) the current offering intends to raise RMB546,982.22 million, of which RMB168,975.68 million will be used for the 6-inch, 8-inch and 12-inch production line upgrade and renovation projects, RMB228,006.54 million will be used for the semiconductor research and development center construction project, and RMB150,000 million will be used to supplement working capital; (2) upon completion of the 6-inch, 8-inch and 12-inch production line upgrade and renovation projects, an additional 2.4 million pieces/year of 6-inch semiconductor silicon wafer production capacity will be added, and no additional 8-inch and 12-inch semiconductor silicon wafer production capacity will be involved; (3) the issuer's current projects under construction include semiconductor large silicon wafer (200mm, 300mm) projects and Zhongxin Wafer large-diameter silicon wafer epitaxial project.

Please explain the following to the issuer: (1) Analyze the changes in the issuer's production and operation after the implementation of the fundraising and investment projects in combination with the issuer's current fixed assets, projects under construction and business model; (2) Analyze the necessity and rationality of the additional 6-inch semiconductor silicon wafer production capacity and the risk of absorbing the additional capacity in combination with the issuer's business model, capacity utilization rate, production and sales rate, sales during the reporting period, market demand and competition, orders in hand, personnel and technology reserves; (3) Analyze the specific content of the upgrade and renovation of the 8-inch and 12-inch production lines, without involving the reasons for the additional 8-inch and 12-inch semiconductor silicon wafer production capacity.

Source: Chip Intelligence, Zhongxin Wafer's prospectus, Yaxiang Integrated Circuit's announcement, Shanghai Stock Exchange