Still purchasing a large number of chips from outside, where is the "scientific and technological innovation" attribute of Galaxy Microelectric?

With the successful launch of the Science and Technology Innovation Board, the enthusiasm of domestic semiconductor companies to enter the capital market has been aroused. Semiconductor companies that were previously rejected at the IPO meeting, including Galaxy Microelectric, Jingfeng Mingyuan, and Mingwei Electronics, have once again started their journey to listing.

As of now, Jingfeng Mingyuan has successfully listed on the Science and Technology Innovation Board, and the Science and Technology Innovation Board applications of Mingwei Electronics and Galaxy Microelectronics have also been accepted by the Shanghai Stock Exchange.

It is worth noting that some companies have not properly resolved the problems that have been questioned. Take Galaxy Microelectronics as an example. Galaxy Microelectronics is a professional supplier in the domestic semiconductor discrete device industry. Chips are the core components of semiconductor discrete devices, but Galaxy Microelectronics needs to purchase a large number of chips from outside. The China Securities Regulatory Commission's Issuance Examination Committee once questioned Galaxy Microelectronics' reliance on purchased core technologies or products and components, which has a major adverse impact on the company's continued profitability.

To date, one and a half years have passed since Galaxy Microelectric's listing on the ChiNext was rejected. However, Galaxy Microelectric's ability to manufacture its own chips has not improved much. The situation where it purchases a large number of chips from outside, packages and tests them itself, and then successfully "transforms" them into its own products for external sale still exists.

Under this circumstance, I wonder where does Galaxy Microelectric get the confidence to start its journey to be listed on the Science and Technology Innovation Board?

Core technology under question

Perhaps because its core technology has been questioned, Galaxy Microelectric repeatedly emphasized in its prospectus that the company mainly relies on core technology to carry out production and operations.

Galaxy Microelectronics pointed out that the production of the company's small signal devices, power devices, and optoelectronic devices relies on different core packaging and testing technologies according to different varieties. Devices using self-made chips also involve core technologies related to chip manufacturing. In 2017, 2018, and 2019, the company's revenue from production and operation based on core technologies was RMB 596,746,400, RMB 567,844,500, and RMB 510,996,600, respectively, accounting for 99.05%, 98.93%, and 98.73% of the main business revenue, respectively, which is at a relatively high level.

According to the prospectus, Galaxy Microelectric's core technologies are packaging testing and chip manufacturing capabilities.

In terms of packaging, Galaxy Microelectric currently has mastered the design technology and manufacturing process of more than 20 categories and nearly 80 types of packaging products, and has mass-produced more than 8,000 specifications and models of discrete devices. It is one of the companies with the most complete product types in the subdivided industry. The packaging specifications and models it masters are at the same level as those of leading domestic companies, and the models of small-signal devices and power diodes are more complete than those of other companies.

In terms of product failure rate, Galaxy Microelectric's average failure rate of discrete devices is already less than 5 parts per million.

Obviously, Galaxy Microelectric has reached the domestic advanced level in the packaging of discrete devices. In 2019, it was rated as one of the "Top Ten Companies in China's Discrete Device Packaging Capacity" by the Packaging Branch of the China Semiconductor Industry Association. Therefore, in terms of packaging capabilities, Galaxy Microelectric has never been questioned.

However, it is well known in the industry that the difficulty and technical content of chip manufacturing are far higher than packaging and testing, and Galaxy Microelectric's ability in chip research and development and manufacturing is the main reason why it is questioned.

Judging from the development overview of Galaxy Microelectric's main products and process technologies from 2006 to 2020 disclosed in the prospectus, Galaxy Microelectric already has table chip production lines and research and development and mass production of planar chips.

Galaxy Microelectronics said that through the company's table chip production line and process platform, it can meet the company's demand for more than 1,000 types of chips.

It is disclosed that the types of chips that Galaxy Microelectronics is capable of making are as follows:

As can be seen from the above figure, Galaxy Microelectric mainly has the ability to manufacture diodes, but the products it produces are far more than just diodes.

Still outsourcing a lot of chips

According to the prospectus, Galaxy Microelectric's core products include small-signal devices with complete specifications and some categories of power devices (mainly diodes, transistors, and rectifier bridges). It also produces optoelectronic devices such as automotive LED lamp beads, optocouplers, and a small number of other electronic devices such as three-terminal voltage regulator circuits and linear voltage regulator ICs.

Chips are the core components of semiconductor discrete devices, but Galaxy Microelectric needs to purchase a large number of chips from outside to meet the company's daily needs. This was also the key issue questioned by the China Securities Regulatory Commission during the previous IPO meeting.

Judging from Galaxy Microelectric's procurement of raw materials, it is obvious that there is a reliance on purchasing core technologies or products and components from outside.

As a company with chip manufacturing capabilities, the purchase of silicon wafers generally accounts for the largest proportion of its total material purchases. Taking China Resources Microelectronics, another domestic discrete device manufacturer, as an example, its raw material purchases mainly include silicon wafers, chemicals, lead frames, plastic packaging materials, etc., and the top five suppliers are mainly silicon wafer suppliers.

Although Galaxy Microelectric has stated in its prospectus that the company is based on its packaging and testing expertise, continuously advancing R&D innovation, and has strong device integrated design and production integration capabilities.

However, from 2017 to 2019, among the raw materials purchased by Galaxy Microelectric, the purchase of silicon wafers did not enter the ranks of its main raw materials, while the purchase of chips accounted for 35% to 40% of its total material purchases.

According to the prospectus, the main raw materials of Galaxy Microelectronics include chips, frames/leads, copper materials, plastic packaging materials, etc. The main material purchase amount and the total material purchase amount in each period of the reporting period are as follows:

During the reporting period, the main suppliers of Galaxy Microelectronics were Kangqiang Electronics, Jiangsu Xinhai High-conductivity New Materials Co., Ltd., Yangzhou Jingxin Microelectronics Co., Ltd., Jiangsu Huahai Chengke New Materials Co., Ltd., Shanghai Rijing Microelectronics Co., Ltd., Hangzhou Liang Microelectronics Co., Ltd., and Anxin Electronics.

Among the above-mentioned raw materials, the frame/lead supplied by Kangqiang Electronics, the copper material supplied by Jiangsu Xinhai High-conductivity New Materials Co., Ltd. and the plastic packaging material supplied by Jiangsu Huahai Chengke New Materials Co., Ltd. are all raw materials required for packaging. Yangzhou Jingxin Microelectronics Co., Ltd., Shanghai Rijing Microelectronics Co., Ltd., Hangzhou Liang Microelectronics Co., Ltd. and Anxin Electronics are all chip suppliers.

It can be seen from this that what Galaxy Microelectric wrote in its prospectus, "relying on core technology to carry out production and operations", is mainly relying on packaging and testing technology, and there is still room for breakthroughs in chip manufacturing.

Relying on packaging and testing technology to carry out production and operation, in other words, is to purchase chips from other companies, package and test them by themselves, and then sell them under their own brand.

Final Thoughts

The above situation is not uncommon among domestic semiconductor companies. Some leading domestic semiconductor companies have also gained a firm foothold in the market by mastering packaging technology, gradually developing chips one by one, and thus mastering chip design and production technology.

It is worth noting that Galaxy Microelectric mainly produces diodes, triodes, rectifier bridges and other devices. These chips are products in which domestic companies have achieved breakthroughs, and are not high-end chips that have not yet been mastered in China.

Since Galaxy Microelectric purchases from domestic chip suppliers and its chip purchases are relatively scattered, it can be seen that there are already many domestic suppliers of the chips it purchases. However, the fact that Galaxy Microelectric still needs to purchase from outside also fully demonstrates the fact that its technology is backward.

Without mastering the core technology of its products, Galaxy Microelectric purchased chips from other domestic companies, packaged and tested them on its own, and sold them under its own brand, in order to get listed on the Science and Technology Innovation Board. I wonder if the threshold of the Science and Technology Innovation Board is too low, or if it is too confident in its own packaging and testing technology?