BYD Semiconductor passed the review: Can the "first stock in automotive chips" shoulder the responsibility of localization?

On January 27, domestic wafer manufacturing company BYD Semiconductor finally passed its initial public offering on the Growth Enterprise Market.

As a company that has received investments from many platforms including Xiaomi Group, Sequoia Capital, and SAIC Investment, BYD Semiconductor is back on track after going through a series of events including preparations for a split listing, rapid financing, and delisting.

As the first listed company in the automotive chip industry, what are BYD Semiconductor's main businesses? What opportunities and challenges are shown in the company's financial report? Amid the ongoing chip shortage in the automotive industry, can BYD Semiconductor seize the opportunity to become the first listed company in the domestic production of automotive chips?

Hot sales of new energy vehicles and chip shortages led to a sharp increase in revenue, while the proportion of R&D investment decreased slightly 

According to the prospectus, BYD Semiconductor was established in 2004, and its main businesses are divided into five major sectors: power semiconductors, intelligent control ICs, intelligent sensors, optoelectronic semiconductors, manufacturing and services. The company plans to issue no more than 50 million shares, accounting for more than 10% of the total share capital after issuance. The funds raised will be used to invest in key technology research and development projects for power semiconductor chips, high-performance MCU chip design and testing technology research and development projects, high-precision BMS chip design and testing technology research and development projects, and replenish working capital.

According to BYD Semiconductor's latest financial report data, the company's operating income in the four reporting periods from 2018 to 2020 and from January to June 2021 reached 1.34 billion yuan, 1.096 billion yuan, 1.441 billion yuan, and 1.235 billion yuan, respectively, and its net profit reached 103 million yuan, 85 million yuan, 58 million yuan, and 184 million yuan. There were relatively fluctuations from 2018 to 2020, and the momentum was good in the first half of 2021.

BYD Semiconductor officially stated that the main business income in the latest reporting period has increased significantly, mainly due to the increase in downstream new energy vehicle sales, which has driven a substantial increase in the company's automotive-grade product sales. Businesses such as automotive-grade power semiconductors, automotive-grade MCUs in the intelligent control IC segment, and in-vehicle image sensor modules and electromagnetic sensors in the intelligent sensor segment have increased in volume as the demand for new energy vehicles has increased.

In addition, due to the tight global chip supply, downstream home appliance, industrial control and other customers have increased their purchases from domestic chip manufacturers to ensure the security of the supply chain, and the company's industrial-grade power semiconductor products, industrial-grade MCU chips and other revenues have increased significantly. Previously, Chen Gang, general manager of BYD Semiconductor, also told Shell Finance reporters that the company is currently supplying semiconductors to home appliances and other industries.

The company's total assets also increased from 1.308 billion yuan in 2018 to 4.525 billion yuan in January-June 2021, which indirectly reflects BYD's support for expanding its semiconductor business; in terms of the proportion of R&D investment to operating income, the company's R&D investment ratio fluctuated slightly during the four reporting periods, which were 8.2%, 8.87%, 9.42% and 7.86% respectively.

The five major businesses have mixed results, and wafer manufacturing capacity utilization is low

At present, power semiconductors are an important part of BYD's semiconductor business, accounting for 38.07% of its revenue, higher than the other four items. In 2018, 2019, 2020 and January-June 2021, BYD Semiconductor's power semiconductor business revenue was 438 million yuan, 297 million yuan, 461 million yuan and 465 million yuan, respectively, accounting for 33.04%, 27.7%, 32.41% and 38.07% of the total revenue, respectively.

Institutional data show that in the IGBT field, BYD Semiconductor ranked second in the world among new energy passenger car motor driver manufacturers for two consecutive years in 2019 and 2020, and ranked first among domestic manufacturers, with a market share of 19%, second only to Infineon.

The company said that its power semiconductor products mainly include SiC modules, IGBT modules, IPM, single tubes, etc. Its direct and indirect purchasers include BYD Auto, Xiaokang Auto, Yutong Auto, Foton Motor, Ruiling Auto, Beijing Times, INVT, Blue Ocean Huateng, Huichuan Technology and other companies.

Zhang Xiang, an automotive analyst, told a reporter from Shell Finance that BYD Semiconductor has a deep accumulation of automotive-grade high-power components IGBT, and with the rapid development of new energy vehicles, sales in 2022 may increase by 79% year-on-year, with broad market prospects, and the scale of the semiconductor market will further expand. At the same time, as an important part of the national development strategy, chips have also received attention and support from many parties.

The fluctuation of intelligent control IC is relatively large, with its gross profit margins being 23.28%, 29.19%, 26.32% and 38.97% respectively since 2018. Officials said that the main products of this business are MCU chips and power ICs, among which the revenue share of MCU chips has increased year by year. The decline in 2020 was mainly affected by the insufficient supply of upstream raw materials; from January to June 2021, due to increased market demand, the unit price of MCU chips and power ICs increased, and at the same time, the sales revenue share of high-gross-margin products MCU chips increased, driving the gross profit margin level to increase.

In terms of smart sensors, the company's products mainly include CMOS image sensors, vehicle-mounted image sensor modules, electromagnetic sensors and embedded fingerprint sensors. The overall gross profit margin has limited changes, with a larger fluctuation point between 2019 and 2020. The company explained that the main reason is the increase in the sales proportion of low-gross-profit industrial-grade products.

The optoelectronic semiconductor business mainly includes LED light sources, LED applications and smart optoelectronics. During the reporting period, the gross profit margins of optoelectronic semiconductors were 22.08%, 26.61%, 29.39% and 23.66% respectively. The slight decline in gross profit margin from January to June 2021 was mainly due to the intensified market competition for some LED light source products and the increase in the proportion of revenue from the fiercely competitive smart optoelectronics business.

At the 2022 (7th) China New Energy and Intelligent Connected Vehicle Innovation Conference held in Haikou on January 6, 2022, Huang Yonghe, senior chief expert of the China Automotive Technology Research Center, mentioned that the production of wafers in the chip industry is mostly carried out abroad. In order to promote the autonomy and control of the chip industry, it is recommended that the industry promote the localization of wafers.

BYD Semiconductor, as one of the few companies in China with wafer manufacturing business, did not perform well in its financial report. The company mentioned that due to the poor performance of the wafer manufacturing business, the gross profit margin of manufacturing and services has gradually declined, from 37.05% in 2018 to 27.91% in 2020, and rebounded slightly in the first half of 2021, reaching 29.98%. From 2018 to 2020, BYD Semiconductor's wafer manufacturing provided external capacity utilization rate was low, especially in the first half of 2020, due to the impact of the new crown epidemic, orders decreased, and fixed expenses such as manufacturing expenses increased.

There are risks such as excessively high proportion of related-party transactions and increased uncertainty in the international trade environment.

It is worth mentioning that BYD Semiconductor's products are currently mainly sold to BYD Group, which has accounted for more than 50% since 2018. The risk warning section of the prospectus also mentioned that the proportion of related-party transactions of enterprises is currently high, and there is a risk that the expansion of third-party customers will not meet expectations.

In this regard, BYD founder Wang Chuanfu once said in an interview, "It is not a skill for a subsidiary to only make money from BYD. It is a skill to make money from the market, which means that the product is competitive. So we have the marketization 1.0 strategy, that is, the separation of parts business. Motor, battery, powertrain and other businesses will be launched in the form of business units to compete with peers."

In addition, although the company's export expansion is on an upward trend, due to the long customer certification cycle, the overall scale of domestic and foreign sales in the short term is still difficult to achieve; on the other hand, with the gradual increase in sales and market share of new energy vehicles of major customers (such as BYD Auto), the company's sales concentration may even increase further. Once the operating conditions of major customers undergo major adverse changes due to the macro-economy or market competition, sales decline or replacement of suppliers, it will also have an adverse impact on the company's operations and performance.

BYD Semiconductor's main raw material procurement situation

The risk of international trade disputes has also brought uncertainty to corporate expectations. Since the semiconductor industry is the foundation of the electronics industry, it is a strategic industry that all countries attach great importance to. In recent years, international trade disputes have continued to escalate, the uncertainty of the international trade environment has increased, and the development of my country's semiconductor industry has been impacted to a certain extent. According to official data from BYD Semiconductor, in 2018, 2019, 2020 and January-June 2021, the company's overseas procurement accounted for 31.12%, 30.84%, 27.25% and 21.43% of the total procurement in each period, respectively. Although the import share is decreasing, if there are major adverse changes in the international trade environment in the future, wafer foundry, high-end equipment, etc. may experience supply shortages, price increases, import restrictions, etc.