The revenue share of packaging substrates increased, and Shenzhen Nan Circuit focused on data center PCB business

On April 7, Shenzhen South Circuit held its 2021 Annual General Meeting of Shareholders. The company reviewed 11 proposals, including the "2021 Annual Report and Summary", "2021 Financial Statement Report", and "2022 Financial Budget Report".

Aijiwei attended the shareholders' meeting as an institutional shareholder and voted in favor of the above proposals. After the meeting, as an agent of Aijiwei, I had a discussion with Yang Zhicheng, chairman of Shenzhen South Circuit, on the current status and development prospects of the company's PCB and packaging substrate business.

Focusing on data centers, PCB business is expected to improve throughout the year

Not long ago, Shenzhen South Circuit released its 2021 financial report. The company achieved operating income of 13.943 billion yuan in 2021, a year-on-year increase of 20.19%; net profit attributable to shareholders of listed companies was 1.481 billion yuan, a year-on-year increase of 3.53%; basic earnings per share was 3.02 yuan. The company plans to pay a cash dividend of 9.50 yuan (including tax) for every 10 shares to all shareholders.

In terms of business, the PCB business revenue was 8.737 billion yuan, a year-on-year increase of 5.13%, accounting for 62.66% of the company's total operating income; the gross profit margin was 25.28%. Among them, the proportion of the top two customers decreased from 36% in 2020 to 19% in 2021.

China Merchants Securities stated that the above-mentioned top two customers are the top two domestic communication equipment manufacturers. It is estimated that the proportion of the company's base station-related orders in total revenue has dropped below 20%. The company has actively strengthened business diversification, and the proportion of orders for servers, automobiles, medical care, etc. has increased.

As of the end of February this year, the number of newly added 5G base stations in China in the first two months was 81,000. Together with the number of previously built base stations, the total number of 5G base stations exceeded 1.5 million for the first time, totaling 1.506 million. Not long ago, the Ministry of Industry and Information Technology stated that more than 600,000 5G base stations will be newly built this year, and the total number of base stations will reach 2 million by the end of this year.

Data shows that more than 650,000 new 5G base stations were built in 2021. In comparison, the number of base stations built this year is about 50,000 less than last year. In this case, how will Shenzhen South Circuit respond?

"From the overall domestic situation, the total volume is not much different from last year, and international demand is slightly better than before. Therefore, from the perspective of the international market, this year can be bullish." Yang Zhicheng, chairman of Shenzhen South Circuit, told the author.

It is reported that in terms of PCB business, Shenzhen Nan Circuit was previously highly dependent on communications. However, the proportion of base station revenue has gradually declined. At the same time, with the rapid growth of demand in the data center market, the company's PCB business data center orders increased by 45% year-on-year last year.

While the proportion of PCB revenue in the communications field has declined, the gross profit margin has also declined. According to the annual report of Shenzhen South Circuit, the gross profit margin of PCB business has declined by 3.14% year-on-year. In this regard, the company previously stated in an institutional survey that due to the slowdown in demand in the communications market in 2021, the overall capacity utilization rate of the company's PCB business has decreased compared with the same period in 2020, and the unit fixed cost allocation has increased; the product structure of communications PCB has been adjusted, and low-gross-profit PCB products have increased year-on-year. At the same time, due to the combined influence of factors such as the price increase of some major raw materials and the ramp-up of the connection of the new Nantong PCB factory, the gross profit margin of the company's PCB business has declined year-on-year.

Yang Zhicheng introduced that data centers have developed rapidly around the world in the past two years, benefiting from the impact of working from home and the epidemic, and overall the outlook for this year remains optimistic.

In addition, before base stations and data centers, Shenzhen Nan Circuit's PCB business has also been continuously developing in the field of automotive electronics, and it has now become one of the company's key areas of PCB business expansion.

According to the author's understanding, in terms of automotive electronics business, Shenzhen South Circuit focuses on new energy and ADAS. However, the automotive electronics business currently accounts for a small proportion, and it mainly produces high-frequency, HDI, rigid-flex, thick copper and other products. Compared with traditional automotive electronics products, the new energy and ADAS fields have higher design requirements for PCB in terms of integration, and the difficulty of process technology has increased. In the future, with the emergence of terminal applications such as the Internet of Vehicles, cars may also become a new type of mobile terminal, and the company's technological advantages in the field of communications can be further extended.

The proportion of packaging substrates is gradually increasing

According to Shenzhen South Circuit's financial report, the company's packaging substrate business achieved main business revenue of 2.415 billion yuan, a year-on-year increase of 56.35%, accounting for 17.32% of the company's total operating revenue, an increase of 4 percentage points, and a gross profit margin of 29.09%, an increase of 1 percentage point year-on-year.

Shenzhen Nan Circuit said that the company's packaging substrate business continued to grow at a high speed, and the production and supply of module-type packaging substrates remained stable; storage-type packaging substrates have made significant breakthroughs in technical capabilities, customer development and capacity release. The full-year orders for storage products increased by 140% year-on-year. The Wuxi substrate factory has been successfully ramped up and has entered a stable mass production stage.

In addition, Shenzhen Nan Circuit has successfully introduced customers in the FC-CSP field, steadily improved its technical capabilities, and achieved mass production, laying a solid foundation for the company's subsequent long-term development.

It is reported that orders for Shenzhen South Circuit's storage, application processors, silicon microphones, radio frequency, fingerprints and other types of orders have grown simultaneously, and new production capacity has been ramped up smoothly.

In the face of the continued surge in demand for packaging substrates, Shenzhen South Circuit invested in the construction of packaging substrate factories in Guangzhou and Wuxi last year. Among them, the Guangzhou packaging substrate project plans to invest 6 billion yuan, mainly for packaging substrates such as FC-BGA, RF and FC-CSP, and the project is currently in the early preparation stage; Wuxi high-end flip chip IC substrate product manufacturing project plans to invest 2.016 billion yuan, mainly for high-end storage and FC-CSP and other packaging substrates, and is expected to be put into production in the fourth quarter of 2022.

According to the author's understanding, from the demand side, in addition to traditional electronic products, the rise of application terminals such as automotive electronics, AI, VR/AR and the Internet of Things has continuously increased the requirements for advanced packaging processes and materials, promoting strong growth in demand for packaging substrates.

Against the backdrop of rapidly growing demand for innovative applications, the semiconductor industry is experiencing a sustained upsurge in prosperity. Strong demand for large-area FCBGA packaging and SiP/module packaging for high-performance computing, as well as the application of advanced packaging technologies, are also driving growth in demand for packaging substrates.

Judging from the current situation, packaging substrates are Shenzhen Nan Circuit's fastest growing business in the future. After all these projects are put into production, the company's global market share and customer level will be further improved, and the trend of high-end IC substrates being in short supply is expected to continue. As its share increases, the company's overall gross profit margin is also expected to increase.