The state of the chip industry? Just look at the bottom line

China’s top semiconductor firms, especially those listed on the Nasdaq-style Shanghai STAR Market, posted record profits and revenue for the first half, benefiting from surging demand for chips used in smartphones, computers, cloud computing and industries like automaking.

Even the novel coronavirus pandemic hasn’t knocked China’s integrated circuit industry off its rising trajectory.

In the first six months, domestic industry-wide revenue hit 353.9 billion yuan (US$50.5 billion), a 16 percent gain from a year earlier, according to the China Semiconductor Industry Association.

Driven by government support, a vast market and increasing research and development spending, the Chinese mainland chip industry has joined Japan, South Korea and China's Taiwan in becoming what is known as the "Big Four" of Asia. They rank among the world's top five by revenue, Deloitte said in a recent report.

The Asia-Pacific is also the world's biggest market for chips, accounting for 60 percent of global sales.

The bottom lines of industry players tell the story.

Semiconductor Manufacturing International Corp (SMIC), the mainland’s biggest chipmaker, and Advanced Micro-Fabrication Equipment (AMEC), China’s top semiconductor equipment vendor, tripled net profit in the first six months of 2020. The two companies, with headquarters in Shanghai's Pudong New Area, are listed on the year-old STAR Market, where they rank in the top five. 

“The financial results bolster investor confidence in semiconductor companies,” said Zhang Hui, an analyst at Huatai United Securities.

Semiconductor Manufacturing is now the biggest capitalized company on the STAR Market, valued at about 500 billion yuan. Its listing in July was the biggest on any mainland market in a decade.

For the first six months, the company reported that net profit jumped 329 percent from a year earlier to 1.39 billion yuan, on a 29 percent rise in revenue to 13.16 billion yuan. For the whole of 2020, SMIC forecasts revenue growth at between 15 percent and 19 percent.

Its share price has jumped 143 percent since the company debut.

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Analysts said its listing and dominant market status will help the company consolidate its industry position and obtain more investment support.

Advanced Micro-Fabrication posted first-half profit of 120 million yuan, up 292 percent from a year earlier. The company ranks the fourth in capitalization on the STAR Market.

The company’s shares have risen 101 percent this year.

AMEC Chief Executive Officer Gerald Yin has predicted that the company will be a “world-class semiconductor firm within a decade.”

That goal is helped, no doubt, by a semiconductor industry on a roll. New wafer plants are opening and existing plants are expanding capacity.

Although the global industry is still dominated by multinational US, European and Japanese chipmakers like Tokyo Electron and Applied Materials, China is making progress in its plans to establish its own strong industry and rely less on imports.

That focus is particularly critical now amid frayed relations between the US and China. The US has banned certain technology exports to China and has become increasingly hostile toward some Chinese technology and digital companies.

Huawei Technologies, which has developed advanced mobile chip technologies, has been a particular target of the US government, which claims there are security concerns surrounding its 5G equipment. The company has denied all allegations, but it is suffering from more limited access to some Western markets.

China has declared the integrated circuit industry as “essential” to the nation’s future. Yang Xudong, a senior executive with the Ministry of Industry and Information Technology, said China must “optimize” its integrated circuit industry and deepen the integration between research and application of new technologies.

One part of that national strategy is to give advanced technology companies easier access to capital. Listing requirements for the STAR Market and the Shenzhen Growth Enterprise Market have been relaxed.

“With the new registration system for initial public offerings on STAR and other bourses, more companies will be seizing the opportunity to raise funds,” said Huatai United’s Zhang.

Currently, over 30 semiconductor-related firms have listed on the STAR Market, accounting for 20 percent of member companies. The results to date have been positive if not sometimes dazzling.

Montage Technology, an artificial intelligence and memory chip designer, reported a 33 percent rise in net in the first half to 601 million yuan, citing strong demand for chips used in cloud computing.

The company ranks fifth on STAR Market capitalization.

Ti Gong

JCET Group, the top chip assembly and testing company, posted net profit of 230 million yuan in the second quarter, a record high in the past five years.

“The rapid development of 5G communications and high-performance computing applications has increased demand for advanced packaging technologies and manufacturing processes,” JCET Chief Executive Zheng Li said in a statement.

Research firm TrendForce is predicting that JCET, Huatian and TFME — three top Chinese mainland chip assembly and testing firms — had sales growth of 30 percent or more in the second quarter, thanks to demand for smartphone and electronics chips.

Even loss-making companies with strong potential are part of the national strategy.

Companies such as STAR-listed National Silicon Industry Group, whose six-month net loss widened to 82.6 million yuan from 75 million yuan a year earlier, are deemed to be important links in the formation of a complete and reliable industry chain in China.

The Shanghai-based company sells silicon wafers, a key material in chip manufacture.

Despite its negative bottom line, National Silicon has been called the “real star of the STAR Market” by individual investors. Its shares have surged 10-fold since the company listed.

Cambricon Technology, which designs artificial intelligence chips, listed on STAR last month. It posted a net loss of 202 million yuan in the first half.

More chip design firms are waiting to list. Shanghai-based Unisoc has filed application documents for an IPO.

Design industry revenue jumped 24 percent to 149.1 billion yuan in the first half, higher than general growth in the wider industry.

In the future, giant firms and smaller companies will coexist in capital markets and advance the national strategy, Huatai United’s Zhang said.

However, some industry watchers are also warning against the semiconductor market becoming overheated and too duplicative. They said the government and investors must focus their attention on companies with projects that have solid market orientation.

Ti Gong