Depreciation and amortization dragged down performance Xinlian Integration deducted a non-loss of more than 2.2 billion yuan last year

(Text/Xia Fenglin Editor/Xu Zhe) A few days ago, the domestic automotive-grade chip foundry company Xinlian Integration (688469. SH) handed over the company's first annual report after listing on the Science and Technology Innovation Board. Financial data shows that although the company's revenue will grow against the trend in 2023, the company's losses will expand sharply, and the gross profit margin will also decline sharply.

Specifically, during the reporting period, Innosilicon achieved revenue of 5.324 billion yuan, a year-on-year increase of 15.59%. In the same period, the attributable net profit continued to lose 1.958 billion yuan, an increase of 79.92% over the same period last year. The non-net profit loss was 2.26 billion yuan, an increase of 61.2% over the same period last year.

It is worth mentioning that among the sub-IPOs in the A-share wafer field, Innosilicon is the only company whose revenue has grown against the trend. For revenue growth, Innosilicon said that the reason is that the company has seized the opportunity of new energy market growth and domestic substitution, and the revenue growth in the automotive field has directly driven the strong growth of the company's overall revenue.

However, because the wafer foundry industry in which SINIC is located is a technology- and capital-intensive industry, it requires a large investment in fixed assets and continuous R&D investment to maintain the technological leadership of products. During the reporting period, depreciation and amortisation alone amounted to $3.4 billion. Affected by this, the company's losses expanded.

In this regard, industry insiders said that since its independent operation, Xinlian has focused its development on the new energy vehicle and energy storage market. However, the prospects of the automotive chip industry are not optimistic, the market is gradually moving towards the stage of overcapacity, and Xinlian Integration is moving towards the crossroads of seeking new growth poles after the "dividend period". To this end, the company invested more than 10 billion yuan last year to lay out the mid-to-high-end product line to create the second growth curve, and these investments are the root cause of the surge in depreciation and amortization of fixed assets.

It remains to be seen whether this layout can successfully become a new performance growth point for Xinlian Integration and help the company turn losses into profits.

In-vehicle applications drove revenue growth against the trend

Founded in 2018 and listed on the Science and Technology Innovation Board in May 2023, the company was born out of SMIC, a leading domestic wafer foundry. In just five years, SINIC has established 8-inch, 12-inch and SIC production lines, and the wafer production capacity has increased rapidly. Its main products include power devices, MEMS and RF chips, which are widely used in mid-to-high-end fields such as new energy vehicles, wind and solar storage, and power grids.

According to the financial report, the main business income of Xinlian Integration was 4.911 billion yuan, an increase of 952 million yuan over the same period of the previous year, a year-on-year increase of 24.06%. According to the downstream application field, 46.97% of the company's main revenue came from the field of vehicle application, a year-on-year increase of 128.42%, 29.46% of the main revenue came from the field of industrial control application, a year-on-year increase of 26.63%, and 23.56% of the main revenue came from the field of high-end consumption, which decreased year-on-year due to the impact of the consumer market boom.

It can be seen that during the reporting period, the automotive field contributed nearly half of the revenue to Xinlian Integration, becoming the company's revenue pillar. In this regard, the company said that it mainly benefited from the rapid growth of the domestic new energy vehicle industry and the double dividend of domestic substitution.

According to statistics from the China Association of Automobile Manufacturers, the sales volume of new energy vehicles in China in 2023 will be 9.495 million units, a year-on-year increase of 37.9%. The production and sales of new energy vehicles in mainland China accounted for more than 60% of the world's total, ranking first in the world for nine consecutive years, and the annual penetration rate of new energy vehicles exceeded 31.6%. NEV exports totaled 1.203 million units, up 77.2% y/y, both of which reached a record high.

With the rapid increase in the popularity of new energy vehicles, the demand for IGBTs, MOSFETs and other power devices for new energy vehicles and charging piles is also increasing significantly. As the core of automotive electronics, power semiconductors are the second most expensive core components in new energy vehicles after batteries.

Large capital expenditures led to a widening of losses

Although the revenue scale of Xinlian Integration has risen against the trend, the loss area has continued to expand.

On the one hand, due to the slowdown in macroeconomic growth and the impact of the industry cycle, the market demand will decline in the second half of 2023, which will make the company's operating income growth fall below expectations;

In addition, during the reporting period, the company carried out a lot of strategic planning and project layout in the 12-inch production line, SiC MOSFET production line, module packaging and testing production line, etc. The cash paid for the purchase and construction of fixed assets, intangible assets and other long-term assets was about 10.337 billion yuan, which led to a total depreciation and amortization expense of 3.451 billion yuan during the reporting period, which directly affected the company's net profit performance.

It is worth mentioning that Innosilicon is a capital-intensive and technology-intensive semiconductor industry, which requires a large amount of fixed asset investment and continuous R&D investment to maintain the technological leadership of products. Due to the erosion of profits due to high depreciation and high R&D, the company has been losing money for several years in a row, and has not yet achieved profitability since its establishment.

In fact, from 2020 to 2022, the loss side of Innosilicon has tended to narrow, and although the company's gross profit margin has been negative, it has also tended to turn positive. However, in 2023, neither of these indicators will continue to improve.

In this regard, industry insiders believe that the downward trend of the gross profit margin of Xinlian Integration reflects the cruel reality of the continuous deterioration of the competition pattern in the automotive chip market. The market is gradually moving towards the stage of overcapacity, and Xinlian Integration is heading towards the crossroads of seeking new growth poles after the "dividend period".

This may also explain why Xinlian Integration is only one step away from turning losses into profits, increasing capital investment, increasing production lines, and laying out the mid-to-high-end market.

Increase the mid-to-high-end to create a second growth point and seek to break the situation

In order to ensure the international competitiveness of its products, during the reporting period, SILINT continued to increase R&D investment in core chips and module products such as 8-inch power control, power drive, and sensor signal chain, while the company significantly increased its R&D efforts in the direction of SiC MOSFET and 12-inch products. In terms of product technology, the company has completed the technology transfer and development from 8 inches to 12 inches.

During the reporting period, Innosilicon reduced the investment amount of the IPO fundraising project "Phase II Wafer Manufacturing Project", and instead invested funds in the new SMIC Shaoxing "Phase III 12-inch integrated circuit digital-analog hybrid chip manufacturing project".

However, the domestic 12-inch power semiconductor market has become a hot spot of competition. Both local manufacturers and foreign-funded manufacturers have laid out. The SEMI International Semiconductor Association predicts that 82 new factories and production lines will operate between 2023 and 2026 as manufacturers such as TSMC, Hua Hong Semiconductor, Infineon, Intel, Kioxia, Micron, Samsung, SK hynix, SMIC, STMicroelectronics, Texas Instruments and others increase production capacity.

At the same time, Innosilicon is actively building a second growth curve and increasing the layout of silicon carbide (SiC) business. Since 2021, the company has invested in the R&D and capacity construction of SiC MOSFET chips and module packaging technologies. It is understood that the 8-inch SiC wafers and chips integrated by Xinlian plan to send samples within the year.

It should be pointed out that the third generation of semiconductor silicon carbide is also accelerating the transition from 6-inch wafers to 8-inch wafers. Not only overseas manufacturers such as Wolfspeed, Infineon, and STMicroelectronics have plans to build factories, but also many domestic manufacturers have also laid out the 8-inch silicon carbide industry chain.

According to statistics from TrendForce Compound Semiconductors, more than 10 companies have entered the stage of sample delivery and small batch production of 8-inch SiC substrates, including: Shuoke Crystal, Jingsheng Electromechanical, Tianyue Advanced, Nansha Wafer, Tongguang Co., Ltd., Tianke Heda, Keyou Semiconductor, Qianjing Semiconductor, Hunan San'an Semiconductor, Chaoxinxing, Sheng New Materials (Taiwan, China), and Yuehai Gold.

In addition to the above-mentioned manufacturers, there are currently many Chinese manufacturers of 8-inch substrates under development, such as Global Wafers (Taiwan, China), Tony Electronics, Hesheng Silicon, Tiancheng Semiconductor, Pingmei Shenma Joint Venture Zhongyi Chuangxin, etc.

In terms of investment, Shuoke Crystal, Nansha Wafer, Tianyue Advanced, Tianke Heda, Qianjing Semiconductor, Keyou Semiconductor, San'an Optoelectronics, etc. all have 8-inch substrate-related expansion plans, aiming to prepare for the supply of material production capacity for subsequent midstream and downstream customers in advance.

Since the beginning of 2024, there has been progress in the 8-inch substrate project: the 8-inch SiC single crystal and substrate industrialization project of Zhongjing Xinyuan, a subsidiary of Nansha Wafer, has been officially recorded, which has landed in Jinan, Shandong Province on June 12, 2023, and is planned to reach full production in 2025.

Manufacturers at home and abroad are rushing to seize the 8-inch silicon carbide, and whether Xinlian Integration can take the lead in completing industrialization, creating a second growth curve, and moving towards breakeven, Observer.com will continue to pay attention.