ZTE Corporation acquires shares in Chip subsidiary to develop 5G Chip

SMM: last night, ZTE issued a notice that the company intends to issue shares to buy 18.8219% of the company's controlling subsidiary ZTE Microelectronics held by Hengjian Xinxin and Huitong Rongxin. At the same time, it is proposed to raise no more than 2.61 billion yuan in matching funds for non-public issuance of shares from no more than 35 specific investors, and the total amount of supporting funds raised shall not exceed 100% of the transaction price of the underlying assets to be purchased by issuing shares. the number of shares involved in this transaction shall meet the relevant regulations of the CSRC and other regulatory agencies, and meet the requirements of general authorization. After deducting the fees of relevant intermediary agencies and related taxes and fees, the matching funds raised this time will be used for 5G key chip research and development projects and supplementary liquidity projects, of which the proportion used to supplement current funds shall not exceed 50% of the total supporting funds raised.

The announcement further pointed out that before the deal, ZTE and its subsidiaries, Saijiaxun and Renxing Technology, collectively held an 81.1781% stake in ZTE Microelectronics. After the completion of the transaction, ZTE held a total of 100% stake in ZTE Microelectronics.

What does ZTE Microelectronics do?

According to the announcement, in 2013, ZTE Kangxun and Juxian Investment jointly signed the articles of Association of Shenzhen Zhongxing Microelectronics Technology Co., Ltd., agreeing to jointly contribute to the establishment of ZTE Microelectronics in the form of currency, with a registered capital of 15 million yuan. ZTE Kangxun contributed 13.5 million yuan, accounting for 90%, and Juxian Investment contributed 1.5 million yuan, accounting for 10%. The announcement pointed out that it specializes in the design, development and sale of integrated circuits, covering wireless, wired and other communication chips, and has independently developed and successfully developed more than 100 commercial chips, covering the field of "access, loading and terminal" of the communication network.

Revenue performance of ZTE Microelectronics

As can be seen from the announcement, during the reporting period, ZTE Microelectronics sales revenue mainly came from chip products and technical services. In 2018, 2019 and January-June 2020, ZTE microelectronic chip products and technical services sales revenue were 5.184 billion yuan, 5.004 billion yuan and 6.025 billion yuan respectively; the total sales amount of the first five customers accounted for 93.27%, 96.62% and 98.94%, respectively. During the reporting period, ZTE Microelectronics accounted for 88.82%, 88.35% and 95.10% of sales revenue to ZTE (including subsidiaries), respectively.

From January to June 2020, the net profit of ZTE Microelectronics was 306.6956 million yuan. according to the performance and market conditions after the period, ZTE Microelectronics sales revenue and net profit are expected to increase significantly, with sales revenue increasing by about 78% compared with 2019. Net profit increased by about 160%, or about 500 million yuan, compared with 2019.

In terms of personnel composition, the announcement pointed out that as of June 30, 2020, ZTE Microelectronics R & D personnel exceeded 2000. The R & D personnel of ZTE Microelectronics make their own contributions to the company's business and technology development in their respective positions, and there is no significant impact of any single R & D personnel on ZTE Microelectronics.

The announcement further pointed out that considering the market demand brought about by 5G commerce, with reference to the historical growth rate of the integrated circuit industry and the expected growth of sales revenue of ZTE Microelectronics in 2020, ZTE Microelectronics sales revenue is expected to increase by about 15% over the previous year in 2021; with reference to the historical gross profit margin of ZTE Microelectronics, ZTE Microelectronics is expected to have a gross profit margin of about 30% in 2021. With reference to the historical expense rate of ZTE Microelectronics, the annual expense rate of ZTE Microelectronics in 2021 is estimated (the financial expenses are predicted based on the expected principal and interest rate of the loan), and with reference to the actual tax rate and taxable amount of ZTE Microelectronics, analyze and forecast ZTE Microelectronics business tax and income tax expenses for 2021. To sum up, it is estimated that the net profit of ZTE Microelectronics in 2021 is about 750 million yuan, and the net profit after deduction is expected to be 520 million yuan.

ZTE's strength on 5G chips

The announcement said that at present, the world is in a critical period of accelerated development of 5G commercial network construction and industry applications. Since 2020, domestic operators have accelerated the launch and completion of 5G bidding, and 5G network has entered the stage of large-scale deployment. With the deployment of 5G network, consumer electronics, industrial manufacturing, ports, mines, energy, rail transit, education, new media and other industries have ushered in a new round of development opportunities. At the same time, global 5G investment is accelerating. According to GSA (Global Association of Mobile equipment suppliers), as of June 30, 2020, 84 operators in 36 countries and regions around the world have launched 5G retail services. The types and number of 5G terminals have increased, and 5G services have begun to popularize. It is expected that in the next five years, the global 5G business deployment will enter a comprehensive and accelerated development stage, the industrial chain will mature rapidly, innovative applications will emerge vigorously, and the communications industry will enter a new round of prosperity.

The company takes 5G as its core development strategy, continues to invest and innovate for many years, and has the capability of complete 5G end-to-end solutions. with the advantages of leading technologies, products and solutions in wireless, core network, bearer, chip, terminal and industry applications, we will accelerate the global commercial scale deployment of 5G. The company ranks in the first camp of global patent layout and is a major contributor and participant in global 5G technology research and standard setting. As of June 30, 2020, the company has about 76000 global patent applications and holds more than 36000 valid authorized patents. Among them, there are more than 4100 applications for chip patents. The company's global patent layout of 5G strategy exceeds 5000 pieces, ranking in the first camp of 5G global strategic layout. According to a report released by IPLytics, a well-known international patent data company, in February 2020, the company has disclosed 2561 families of necessary patents of 5G standard to ETSI, ranking among the top three in the world.

The announcement further pointed out that chip design and development are the key components of 5G technological innovation, and the company is based on the "5G first camp" to continuously increase investment in chip core technology, maintain technological advantages, strengthen product safety, and ensure commercial sustainability. The target company, ZTE Microelectronics, as a holding subsidiary of the company, is the main body of the company engaged in chip design and development. In the field of wireless products, ZTE Microelectronics 5G 7nm core chips have been commercially available. High-performance and full range of wireless products based on 7nm self-developed chips help operators to build cost-effective and smoothly evolved 5G networks; in the field of wired products, the listing of ZTE Microelectronics core core dedicated chips has realized high integration, high performance and low power consumption of products, and greatly enhanced the competitiveness of wired products. According to the "Top Ten Chinese Integrated Circuit Design Enterprises in 2019" issued by the China Semiconductor Industry Association, ZTE Microelectronics is one of the leading chip design and development enterprises in China.

At present, the company and its subordinate enterprises Sai Jiaxun and Renxing Technology hold a total of 81.1781% of ZTE Microelectronics. Based on the early cooperation with Fang Hengjian Xinxin and Huitong Rongxin, the other party holds a total minority stake of 18.8219% in ZTE Microelectronics. In the critical period of accelerated development of 5G commercial network construction and industry applications, considering that chip design and development are the key components of 5G technological innovation, maintain and continue to strengthen the management and control of ZTE microelectrons and increase R & D investment, it is of great significance for the company's overall 5G development core strategy.

The announcement further pointed out that the main body of the 5G chip project carried out by fund-raising is ZTE Microelectronics and its wholly-owned subsidiaries. The project focuses on the technology and product research and development of key chips of 5G communication equipment, including 5G wireless access key chip technology and product research and development, 5G carrier network key chip technology and product research and development, etc.

The 5G wireless access chip aims at the iterative requirements of stronger computing power, larger storage capacity, richer interfaces and higher integration for 5G wireless access technology and product research and development, including baseband, intermediate frequency, radio frequency and other key chips. Among them, the baseband chip supports the existing protocol standards of 5G, meets the requirements of enhanced mobile broadband scenarios, and continuously evolves to support the needs of subsequent protocols and scenarios; if chips support the application requirements of future 5G devices for multi-channel, large bandwidth and low power consumption; RF chips support different frequency band applications to meet the overall performance, power consumption, cost and other dimensional competitiveness requirements of 5G base stations.

The 5G bearer network chip carries out technology and product research and development for the iterative requirements of 5G bearer, such as larger capacity, larger bandwidth, lower delay, programmability and so on, including a new generation of high-capacity switching chip, programmable network processor and microengine.