Optical chip IDM factory Yuanjie Technology plans to go to Science and Technology Innovation Board to raise 980 million yuan to expand production in recent years to meet explosive growth

Optical chip provider Shaanxi Yuanjie Semiconductor Technology Co., Ltd. (hereinafter referred to as "Yuanjie Technology") recently submitted a declaration to Science and Technology Innovation Board IPO. According to the prospectus, Yuanjie Technology's optical chip design and production adopts IDM mode, and its business covers the core links of optical chips such as wafer epitaxy, and has a certain mass production capacity of high-speed optical chips.

It is worth noting that there are many signs that Yuanjie Technology won a suspected order from Huawei in 2020 and officially entered the latter's optical chip supply chain. As a result, superimposed with the promotion of the 5G policy and the high prosperity of the downstream industry in that year, the company's return net profit in 2020 soared nearly 6 times compared with the same period last year, while revenue also exceeded 230 million yuan from more than 8000 yuan in 2019 to more than 230 million yuan a year later.

Some analysts pointed out that Huawei's strategic investment in Yuanjie Technology in 2020 will play a certain role in promoting the adoption of Yuanjie's products by optical module manufacturers. However, since the beginning of 2021, factors such as the slowdown in domestic 5G base station construction have jointly reduced Yuanjie Technology's comprehensive gross profit margin by nearly 10% in the first half of 2021, and the company's sustained performance growth remains to be seen.

Wafer epitaxy is the core link of optical chip

Yuanjie Technology's main products include 2.5G, 10G and 25G and a series of higher-speed laser chips, which are mainly used in optical fiber access, 4G/5G mobile communication networks and data centers.

It is understood that at present, China's optical communication industry is in its infancy, only realizing the mass production and application of optical communication chips of 10G and below, and high-speed chips of more than 10G still rely on imports. Among them, 25G laser chips are shipped in bulk only by a small number of manufacturers such as optical communication technology, and most manufacturers are still in the stage of research and development or small-scale trial production of laser chips with a rate of more than 25g.

The limited development of domestic high-end optical chips lies in the core epitaxial technology and other links. Domestic optical chip manufacturers generally have back-end processing capabilities in addition to wafer epitaxial links, and the required high-end epitaxial wafers are mainly purchased from international epitaxial factories.

Bu Rixin, a partner of Chuangdao Consulting, said in an interview with Science and Technology Innovation Board Daily that optical communication laser chips belong to the category of compound semiconductor chips, which are different from digital chips in the pursuit of high process. Compound semiconductor chips pay more attention to the Know how, of process links, in which the process control of epitaxy and long film is particularly important. "the technology in this area is still hoped to be in the hands of chip design companies, so the IDM model is a more common model in the industry."

From the perspective of core technology, Yuanjie Technology also grasps related technologies such as wafer epitaxy and wafer technology, and holds 12 invention patents that can form main business income. According to the prospectus, Yuanjie Technology has several independent and controllable production lines covering MOCVD epitaxial growth, grating technology, optical waveguide fabrication, metallization process, end coating, automated chip testing, chip high frequency testing, reliability testing and so on, as well as IDM business systems for chip design, wafer manufacturing, chip processing and testing.

This visit to Science and Technology Innovation Board IPO, Yuanjie Technology plans to raise 980 million yuan, of which 570 million will be used for 10G and 25G optical chip production line construction projects, 120 million and 140 million will be used for 50G optical chip industrialization construction projects and R & D center construction projects, and 150 million will be used for replenishment.

Or enter Huawei's optical chip supply chain as early as 2019.

From the perspective of industrial chain, optical chips, electrical chips, structural components and other basic components constitute the upstream of the optical communication industry, while the middle reaches of the industry are optical devices, including optical components and optical modules, and the lower reaches of the industry are assembled into system equipment. finally applied to the telecommunications market.

According to the prospectus, Yuanjie Technology has achieved batch supply to downstream customers A1, Hisense Broadband, and mainstream optical module manufacturers listed in A shares, such as Zhongji Xuchuang, Bochuang Technology, Mingpu Optomagnetism, etc., and the final products are also used in customer A, ZTE, Nokia and other large domestic and foreign communications equipment manufacturers, and finally used in China Mobile, China Unicom, China Telecom, AT&T and other domestic and foreign well-known operator networks.

There are many signs that customer An and customer A1 are suspected of Huawei and its subsidiaries. Huawei may have become a direct or indirect customer of Yuanjie Technology as early as 2019, according to the prospectus.

In 2020, Yuanjie Technology was financed by D-round, led by Hubble Investment, China Development Fund and China Development Science and Technology Innovation. After the transfer of the shares of the original shareholders, a total of more than 5000 million more capital, the final Hubble Investment held a total of 4.36% of Yuanjie Technology.

According to the core customers disclosed by Yuanjie Technology during the reporting period, since 2020, customer A1 has entered the company's top five customer list, contributing more than 20 million to the revenue performance of that year. In the first half of 2021, customer A1 became the largest customer of Yuanjie Technology.

According to the reference related party transactions further disclosed by Yuanjie Technology, customer A1 and A2, which are not in the top five customers, are related parties of a shareholder of Yuanjie Technology. In addition, regular or occasional related party transactions are more transparent.

It is worth noting that Yuanjie's entry into Huawei's optical chip supply chain may date back to 2019 at the earliest. The prospectus also disclosed that the sales framework agreement of laser chip series signed by Yuanjie Technology and customer A1 will be implemented from November 2019.

In addition, a reporter from Science and Technology Innovation Board Daily noted that Shenzhen Armenstone Electronics Co., Ltd., the fifth largest customer of Yuanjie Technology in 2019, mainly provides supply chain services for well-known electronic manufacturing enterprises. According to the 2018 and 2019 annual reports of New Asia process, a wholly owned subsidiary of A-share listed company, Huawei is its largest customer.

Tengjing Technology, an optical communication components company, disclosed to regulators and investors during Science and Technology Innovation Board's listing and examination that it could not supply products directly to Huawei until it was certified as a direct supplier by Huawei. Therefore, it needs to supply products to Huawei and its wholly-owned subsidiary Haise Optoelectronics Co., Ltd.

The cooperation between Yuanjie Technology and Huawei may also be based on this model. However, as of the press release of Science and Technology Innovation Board Daily, no contact has been made with Yuanjie science and technology.

Huawei has previously "manipulated" a number of Science and Technology Innovation Board listed companies, in addition to Tengjing technology, the market is still impressed by the Cambrian AI chip merchants. In 2019, Huawei chose to develop its own smart processors and stopped purchasing Cambrian terminal smart processor IP products, causing the latter's related licensing business to plummet from more than 90 per cent of revenue to 15.49 per cent.

It is worth noting that in the field of optical communications, downstream enterprises such as Huawei are extending to the upstream fields such as optical chips and devices by virtue of their strong capital and talent advantages. In 2020, Huawei capped the Hisguang chip factory project (Phase II) with a total investment of 1.8 billion in Wuhan.

A number of factors contributed to the surge in performance in 2020

From 2018 to 2020, the operating income of Yuanjie Science and Technology was 70.4111 million yuan, 81.3123 million yuan and 23337.49 yuan respectively, and the net profit of returning mother was 15.5318 million yuan, 13.207 million yuan and 78.8449 million yuan respectively. Among them, the revenue in 2020 increased 2.87 times over the previous year, and the net profit increased nearly 6 times. The company explained that the main reason is the substantial increase in demand for the company's 25G laser chip series in the downstream market driven by the 5G policy.

In 2020, the sales value of Yuanjie Technology 25G laser chip series exceeded 100 million yuan, while the figure in 2019 was only 686200. In 2020, the company's sales of 10G laser chips tripled from the previous year. Affected by the increase in sales of mid-and high-end products, Yuanjie Technology's comprehensive gross profit margin rose to 68.15% in 2020 from 44.99% in 2019.

From the perspective of customers, in 2020, in addition to customer A1, Suzhou Xuchuang Technology Co., Ltd. has also newly entered the top five customers list of Yuanjie Technology, contributing more than 4200 million in revenue. During the same period, Dongguan Mingpu Optical Magnetic Co., Ltd., the company's largest customer from 2018 to 2019, also nearly doubled its purchases.

Bu Rixin believes that the outbreak of Yuanjie Semiconductor has something to do with Huawei's strategic investment in 2020. "although the downstream of the optical communication chip is the optical module manufacturer, the end customer is the optical communication equipment manufacturer like Huawei, which plays a certain role in promoting the optical module manufacturer to adopt Yuanjie's products."

However, in the first half of 2021, Yuanjie Technology's 25G optical chip sales reached only more than 1200 yuan, and the company's comprehensive gross profit margin also fell by nearly 10%. Yuanjie Technology said that during the period, the domestic 5G base station construction slowed down, while the data center market developed rapidly, and the company adjusted its downstream product structure, resulting in a decline in the overall average price of 25G laser chip products.

Yuanjie Technology also revealed that because a customer adjusted the test conditions of 25G CWDM 4-band DFB laser chips, the production cycle of the products became longer and the cost increased, which also affected the performance in the first half of 2021 to a certain extent.