With an annual output of 1.3 billion chips, why is the small IC design giant Awinic Electronics so indebted

Recently, the IPO application of Shanghai Awinic Electronic Technology Co., Ltd. (hereinafter referred to as Awinic Electronics), a company listed on the New Third Board, was accepted by the Shanghai Stock Exchange. It is understood that Awinic Electronics was established in 2008, focusing on mixed-signal, analog, RF and other IC design, focusing on consumer electronics fields such as mobile phones, wearables, smart hardware, IoT, etc., and was recognized as a national “high-tech enterprise”, Shanghai City “Little Giant of Science and Technology” enterprise.

Huawei, Xiaomi, OPPO, vivo and other well-known mobile phone brand companies, as well as companies such as Huaqin Communication and Wingtech Technology are all customers of Awinic.

According to the prospectus, Awinic’s revenue in 2019 reached 1.018 billion yuan, while in the same year, Huawei’s HiSilicon sales reached 84.27 billion yuan. The difference is 84 times. There are still many challenges on the way to the growth of “Little Giant”.

/ 01 /

Main chip sales decline

Three-year rise in revenue depends on price increases

Awinic’s prospectus shows that from 2017 to the first half of 2020, Awinic achieved operating income of 524 million yuan, 694 million yuan, 1.018 billion yuan, and 508 million yuan respectively; The net profits of the owners were 27.8222 million yuan, 38.2975 million yuan, 90.0889 million yuan and 48.8494 million yuan respectively.

Data source: Prospectus, Node Investment Research Institute

From the perspective of operating income, Awinic has reached the threshold of 1 billion yuan, an increase of 46.67% from 2018 to 2019. Net profit in 2019 was 2.3 times that of 2018. Since 2018, Awinic has entered into a rapid growth, mainly from the industry and the market.

In 2019, the chip industry showed a trend of first decline and then growth, and changes in Sino-US relations brought huge opportunities for domestic substitution. According to data from the semiconductor Industry Association, that year, the industry-wide sales of the design industry reached 308.49 billion yuan, the first time it crossed the 300 billion yuan mark, an increase of 19.7% from 257.7 billion yuan in 2018.

Against the background of the rising industry, Awinic has seized this opportunity and achieved a take-off in performance. However, taking a closer look at the sales of Awinic’s main products, there are signs of decline.

Data source: Prospectus, Node Investment Research Institute

According to the prospectus, Awinic currently mainly sells four types of products, namely audio amplifier chips, power management chips, RF front-end chips and motor drive chips. Historically, audio amplifier chips have always been Awinic’s housekeeping skills.

As early as 2009, awinic developed the first anti-sound chip AW8145 in China, which established its own barriers. Since then, it has developed products with stronger anti-interference ability, which can completely eliminate input TDD noise and other problems. .

The prospectus shows that during the reporting period, the revenue of audio power amplifier chip products was 345 million, 380 million, 544 million and 252 million respectively. It seems that the revenue continues to grow, but the proportion of this product in the main revenue is declining, which are 65.94%, 54.74%, 53.52%, and 49.70%, respectively.

The second largest category of power management chips accounted for 18.73%, 29.39%, 32.39%, and 34.08%, respectively. In the last year, the upward trend has also slowed down. In addition, RF front-end chips also dropped from 14.03% in 2017 to 6.46% in the first half of this year. Among the four main products, the sales volume of two types has declined on a large scale, and the growth of one type has slowed down. Why has awinic’s revenue kept rising for three years?

During the same period, the purchase price of Awinic’s electronic raw materials was stable, and there was no large-scale increase. That is to say, one of the main reasons is that the unit price of chips is on the rise.

During the reporting period, the sales unit price of Awinic electronic chips was 0.31 yuan/piece, 0.34 yuan/piece, 0.42 yuan/piece and 0.47 yuan/piece. Compared with 2017, the price of each chip increased by 0.16 yuan, and based on the sales volume of 1 billion, the revenue was more than 16 million yuan.

Looking closely at 2019, the average sales price of awinic’s high-end products Smart K and Digital Smart K increased by nearly 40% compared with 2018; the average sales price of power management chips increased by more than 20% compared with 2018; the average sales price of RF front-end chip products Sales unit prices also rose nearly 30%.

The price hike guarantees revenue growth despite declining sales. However, it did not bring high gross profit margins.

Data source: prospectus

During the reporting period, Awinic’s overall gross profit margins were 35.25%, 32.68%, 34.46%, and 36.70%, respectively. In contrast to the industry, Shengbang’s gross profit margins during the reporting period were 43.43%, 45.94%, 46.88%, and 52.04%; SRIP’s gross profit margins were 50.77% and 52.01%. , 59.41%, 64.90%, in contrast, Awinic’s gross profit margin is lower than the overall level of the industry.

/ 02 /

1.3 billion chips are produced and 1 billion sold a year

High debt and large inventories

This year, the output of Awinic electronic chips was 1.382 billion, and the sales volume was 1.087 billion, which led to a decline in the production and sales rate. The prospectus shows that from 2017 to 2019, Awinic’s production and sales ratios were 89.58%, 101.74%, and 99.90%, respectively, and the production and sales ratio in the first half of this year was 78.62%.

Sales could not keep up with production, causing Awinic Electronics to have a large inventory problem. According to the prospectus, Awinic’s electronic inventory is mainly composed of raw materials, commissioned processing materials, inventory commodities and in-transit materials. At the end of 2017, the end of 2018, the end of 2019 and the end of June 2020, the book value of awinic electronic inventory was 152 million yuan, 189 million yuan, 300 million yuan and 396 million yuan respectively, and the inventory value increased significantly. The backlog of inventory will not only increase the risk of inventory depreciation, but also have an uncertain impact on Awinic’s future profitability.

From the perspective of capital, from 2017 to 2019 and the end of each period in the first half of 2020, Awinic’s short-term loans were 64 million yuan, 70.2971 million yuan, 145 million yuan and 424 million yuan respectively. Borrowings soared 6 times, which directly led to a decline in the current ratio and quick ratio of Awinic.

Data source: Prospectus, Node Investment Research Institute

During the reporting period, the current ratios of Awinic Electronics were 1.71, 1.46, 1.26 and 1.09 times, and the quick ratios were 0.94, 0.62, 0.53 and 0.55 respectively. In the same period, the industry averages were 5.12, 5.33, 6.18, and 7.45, that is to say, Awinic’s solvency was far lower than its peers.

At the same time, Awinic’s asset-liability ratio is also rising, and Awinic has risen from 53.43% at the end of 2017 to 67.94% at the end of June 2020. During the same period, the average asset-liability ratio of the same industry was 22.57%, 20.50%, 17.31% and 14.78%.

Regarding the asset-liability ratio of nearly 70%, Awinic’s reason is that it was caused by “epidemic loans”. However, compared with industry data, several other companies have maintained a stable or declining trend during the epidemic. Awinic’s statement does not seem to hold true.

Data source: prospectus

What is more noteworthy is that when the short-term liabilities increased and the solvency was weakened, the average return on net assets of Awinic after electronic deductions dropped sharply. The return on net assets was 40.86%, 21.34%, 28.58% and 13.27% respectively. Meanwhile, earnings per share were 0.46 yuan/share, 0.41 yuan/share, 0.66 yuan/share and 0.36 yuan/share. Earnings per share fell, making Awinic’s path to the Science and Technology Innovation Board full of uncertainty.

Once Awinic successfully landed on the Science and Technology Innovation Board, the issuance of new shares will dilute the earnings per share. After Awinic has invested heavily in R&D and expenses, the ROE will continue to decline in the future.

/ 03 /

R&D outperforms the industry average

Started with a copycat machine but lacked stamina

Data source: China Semiconductor Industry Association, Node Investment Research Institute

According to the statistics of the General Administration of Customs, integrated circuits are the largest imported category in my country. In 2019, 445.13 billion integrated circuits were imported, a year-on-year increase of 6.6%, and the total amount was 2,107.95 billion yuan, a year-on-year decrease of 2.1%. , accounting for 14.7% of my country’s total imports.

In terms of demand, the rapidly developing computer, network communication and consumer electronics constitute the main part of the downstream application field of the domestic integrated circuit industry.

Starting with the first dual-card dual-standby SIM chip in 2008, Awinic has been established for 12 years. From the perspective of product structure, Awinic has five product lines of “sound, light, electricity, radio, and hand”, among which, “sound” has established its own business barriers.

In fact, the development of China’s IC design companies is based on the development of the mobile phone industry. The upward trend of the overall environment is a key factor for Awinic’s performance. At present, awinic’s application direction is mainly consumer electronics, and the sales of awinic’s audio power amplifier chips, power management chips, RF front-end chips, motor driver chips and other products are mainly concentrated in the smartphone market.

With the rise of domestic “copycat machines”, Awinic has achieved success. However, the fact that water can carry a boat can also capsize, and the shrinking market demand will also lead to a decline in Awinic’s revenue.

According to Gartner’s report, the global smartphone market shipments in the second quarter of 2020 were 295 million units, down 20.40% year-on-year. The shrinking market will have an adverse impact on chip design companies like Awinic that focus on consumer electronics.

On the one hand, benefiting from the upsurge of domestic substitution, on the other hand, the demand in the field of consumer electronics shrinks. In order to come out on top in the fierce competition, it is necessary to have stronger technical barriers.

From the perspective of R&D innovation, Awinic has more than 400 chip models. However, international giants of integrated circuits in the same industry, such as Texas Instruments and Analog Devices, have tens of thousands or even hundreds of thousands of analog chip product models, covering almost all downstream application fields.

According to the prospectus, the R&D expenses of Awinic were 59.8368 million yuan, 91.3714 million yuan, 139 million yuan and 72.0897 million yuan respectively.

Data source: prospectus

In terms of the proportion of R&D expenses, Awinic has maintained a trend of increasing year by year, accounting for 11.43%, 13.17%, 13.71% and 14.19% respectively during the reporting period, but the industry average in the same period was 15.5%. 42%, 19.76%, 16.03% and 15.38%, Awinic is still lower than the industry average. Not to mention compared to international giants like Texas Instruments. It is understood that since 2014, the annual R&D expenditure of Texas Instruments has exceeded 1 billion US dollars.

There is a lag in technological development, which makes Chinese IC design companies still in a state of catching up in the foreseeable future. No matter in terms of business scale, product variety, process technology and other aspects of comprehensive strength, there is still a big gap with overseas industry giants.

The rapid growth of an IC design company must not be limited in terms of technology, quality and production capacity. From the current point of view, Awinic Electronics sells 1.087 billion chips annually, and its production capacity is guaranteed. However, from a technical point of view, the product models covered are limited. Since the launch of the Science and Technology Innovation Board, it has ushered in good news for chip companies. IC design companies have gathered to land on the Science and Technology Innovation Board, which is bound to promote the rapid development of the industry. However, competition is also intensifying. From the perspective of capital, Awinic Electronics has high debts and low solvency. Only by launching stronger products and product models covering a wider range in the future can the tension of funds be alleviated.

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