Yitang Semiconductor Division Chuangban IPO further responded to disclose these questions in the first round.

A few days ago, Beijing Yitang Semiconductor Technology Co., Ltd. (hereinafter referred to as "Yitang Semiconductor") completed the first round of Science and Technology Innovation Board's inquiry and reply. The manufacturer of semiconductor special equipment, which ranked first in the global market share of degumming equipment in 2020, took a step further to Science and Technology Innovation Board.

Yitang Semiconductor was founded in December 2015, the main business is to provide 12-inch wafer factories with dry degumming (DryStrip), dry etching (DryEtch), rapid thermal treatment (RTP), millisecond rapid thermal treatment (MSA) and other special equipment and application solutions.

It is worth noting that the core technical strength of Yitang Semiconductor mainly comes from the US semiconductor equipment manufacturer Mattson Technology Inc. (MTI), which was privatized with US $300m in 2016. It is understood that this is one of the few cases in which Chinese capital successfully acquired international semiconductor equipment companies. After completing the acquisition, MTI has also become the main business body of Yitang Semiconductor.

According to the prospectus, Yitang Semiconductor's revenue during the reporting period mainly came from overseas, accounting for nearly 70% in 2019. However, while the sales revenue of overseas customers maintained a three-year compound growth rate of 5.72% during the reporting period, the company's revenue share in mainland China rose to 42.12% by 2020.

In addition, judging from the first round of inquiries on Yitang Semiconductor on the Shanghai Stock Exchange, most of the concerns are still focused on the business operation of the overseas part of Yitang Semiconductor and the core processes such as overseas procurement, production and distribution.

Is there effective control in overseas subsidiaries?

In October 2018, Lu Haoan, director, president and CEO of Yitang Semiconductor, publicly said that MTI suffered a loss in the second quarter after the company's acquisition news was officially announced. It is reported that some of its customers are worried that due to changes in shareholder attributes, trade secrets will be lost and orders will be cancelled, resulting in a sharp decline in MTI revenue. In 2016, MTI's revenue was just $103 million, 60 per cent of that of the previous year.

In addition to the performance pressure, in the first round of inquiries, the Shanghai Stock Exchange focused on whether there is effective control over its overseas subsidiaries after Yitang's acquisition of MTI, and what the control effect is. Yitang Semiconductor replied that the company has a certain voice and binding force in the development strategy, business, finance and senior management of MTI.

According to the inquiry, the five executives currently serving in Yitang Semiconductor, as well as the overseas subsidiary MTI, are responsible for the supply chain and business lines such as production, sales and service, products and technology.

As Lu Haoan joined MTI as President and CEO, in June 2016 and gradually established a senior management team with Lu as the core, MTI achieved remarkable results while rapidly integrating into the Chinese market.

In 2017, Yitang Semiconductor's revenue rose 150% from the previous year to $252 million (1.6 billion yuan), with a net profit of $205 million (130 million yuan). The prospectus further shows that the company's revenue in the three years from 2018 to 2020 is 1.518 billion, 1.574 billion and 2.313 billion, with an annual compound growth rate of 23.41%.

Yang Xiaoli, CTO of Yitang Semiconductor, also served as the chief technical officer of MTI. The company said that it had formulated relevant business process system documents in R & D, and its parent and subsidiary companies at home and abroad refer to its implementation, which can ensure consistency at home and abroad in terms of operating norms and quality standards.

According to the prospectus, Yitang Semiconductor currently holds many patents in core technologies such as dry degumming, heat treatment, dry etching and so on. As of May 31, 2021, the company has authorized 309 invention patents and undertakes two major national scientific research projects.

April 2018 is an important node after Yitang Semiconductor acquired MTI. Relying on the core technology of overseas subsidiaries, the company started construction of its factory in Beijing, which was completed and put into production in September 2018. It is understood that the factory has the ability to assemble products locally, such as degumming, etching and millisecond annealing, and the first equipment was officially offline in October of that year.

What is the overseas impact of raw material supply chain?

In addition to the team, Yitang Semiconductor raw material supply is also a major concern of Science and Technology Innovation Board's first round of inquiries. According to the prospectus, the procurement concentration of the main suppliers decreased year by year during the reporting period, and the total purchase amount of the top five suppliers accounted for 34.76%, 31.07% and 28.20% of the total procurement respectively.

It is worth noting that Yitang's main suppliers are from overseas.

According to Yitang's production bill of materials, among the product models with the largest sales of dry degumming equipment, rapid heat treatment equipment and dry etching equipment, the proportion of raw materials from abroad is 99.28%, 100.00% and 99.90%, respectively. The main sources of raw materials are the United States and Germany.

Yitang believes that at present, the company purchases raw materials for major special equipment from suppliers in the United States and Germany, and the export restrictions imposed by the two countries have little impact on its production and operation.

At the same time, Yitang further disclosed in its inquiry and reply that the localization of the company's dry degumming equipment supply chain is in the trial stage, under the premise of not changing the process and fully compatible with the design of the customer's existing production line, core raw materials such as wafer transmission system, wafer transmission manipulator, gas control cabinet and other core materials have local alternative suppliers.

According to the current progress, according to its current production bill of materials, the raw material coverage of local suppliers of dry degumming equipment is expected to exceed 70%. In addition, the company also expects to complete the internal certification of key domestic industrial replacement parts for the main models of dry degumming equipment in the second half of 2021, and to achieve mass production of domestic parts in 2022.

As the composition of raw materials of dry etching equipment is close to that of dry degumming equipment, Yitang is also calculated according to the company's current production bill of materials, and the coverage of raw materials from alternative suppliers of dry etching equipment is expected to reach a higher proportion. In terms of rapid thermal treatment equipment, the localization of the supply chain was officially launched in the second half of 2021 and is expected to be completed by 2023.

Why is the industry concentration of downstream customers high?

As early as November 2019, a research report showed that Yitang Semiconductor alone achieved the localization rate of 81% of the degumming equipment in the domestic market. At the same time, the market has been paying close attention to the offline and related order trends of Yitang degumming equipment in recent years. In the past two months, Yitang Semiconductor won two orders for a total of 15 degumming equipment for Yangtze River Storage, plus 4 etching equipment and 2 heat treatment equipment.

According to the inquiry from the Shanghai Stock Exchange and the company's reply, the semiconductor special equipment sold in mainland China during the reporting period has the ability to cover mature and advanced processes.

Among them, in the field of logic chips, the company chooses to lay out advanced processes, and the proportion of sold equipment used in 28nm and less processes is 97.65% in 2020. The process coverage in the field of flash memory chips is more balanced, and advanced technology node devices account for more than 40% of the total equipment sold in the field of flash memory chips. In the field of DRAM chips, 1y-2x nm range process equipment accounts for more than 95% of the total sales of devices in the field of DRAM chips.

In terms of the company's main customers, the prospectus shows that during the reporting period, the total sales of the company's first five customers accounted for 68.14%, 60% and 71.40% of the total sales respectively, with a high degree of concentration. This matter was also specifically mentioned in the inquiry of the submission office.

In response to inquiries and questions from public opinion, Yitang said that due to the large capital investment and high technical difficulties in the integrated circuit manufacturing industry, the major integrated circuit manufacturers at home and abroad show the industry characteristics of large operating scale but small quantity, resulting in a high degree of concentration in the industry where the downstream customers of the issuer are located.

It is understood that among the comparable enterprises in the field of R & D and manufacturing of semiconductor equipment, medium and Micro, which is currently listed in Science and Technology Innovation Board, has an annual customer concentration of about 60% from 2018 to 2020. Huahaiqingke's customer concentration was even as high as 99% in 2018, and then dropped to 85.71% in 2020 year by year. The Shanghai Stock Exchange shows that the audit status has been submitted for registration, and Shengmei, which is only one step away from the landing Kechuang board, has also maintained a high customer concentration of about 85% in the past three years.

Semiconductor industry insiders said that compared to customer concentration, for advanced technology semiconductor equipment enterprises, customer quality is actually more important. In response to the inquiry, Yitang also said that the company's main customers during the reporting period included Samsung Electronics, TSMC, Micron Technology, Hynix, SMIC, Cheung Kong Storage, Huahong Group and so on.

According to a statistical data of Gartner, the market share of dry degumming equipment and rapid heat treatment equipment of Yitang Semiconductor ranks first and second in the world respectively in 2020. LamResearch estimates that the global demand for WFE will grow rapidly in the second half of 2021, and the market will exceed $75 billion for the whole year, driven by the migration of flash chips to higher levels, the strong capital expenditure of DRAM and the continued increase in capital expenditure of Foundry/Logic.