Examining China’s Semiconductor Self-Sufficiency 17 November 2020 Present and Future Prospects Equity Research Asia Pacific Research Analyst Randy Abrams, [email protected] DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Examining China’s Semiconductor Self-Sufficiency Present and Future Prospects China building a domestic tech supply chain, although semis have lagged Domestic market is 60% of IC consumption, but only 25% of end demand Policy support through the IC fund, grants, tax breaks, Sci-Tech listings China suppliers having varying traction taking share: gaining in some IC categories and back-end, mixed in foundry and lagging in equipment Domestic investment poised to continue in-spite of US resistance High valuations a cheap source of funding for domestic suppliers CREDIT SUISSE, Equity Research, Asia Pacific 2 China building out its tech and semi ecosystem Semi Semi Cap Components Materials Equipment TV Brands Substrate: Access, Exposure: SMEE Panel: BOE, Tianma, CEC Panda, Fastprint, SCC Deposition: Naura, CSOT TV: Skyworth, Wafer: AST, Ferrotech Casing: BYDE, Ju Teng, Tongda, FII Piotech Changhong, Haier, JV, ESWIN, Simgui, Inspection: Grand, Touch/Fingerprint: O-Film, Truly, Q- Zing Semi, Zhonghuan Tech Hisense, Konka, Raintree TCL Lithography related: Etch: AMEC, Naura Lens: Sunny Optical, AAC Kempur, Ruihong Photoresist processing: Acoustic: Goertek, AAC Sputtering: KFMI Kingsemi Connector: Luxshare, Everwin, FIT Smartphone CMP Slurry: Anji Clean: ACM Surveillance: Hikvision, Dahua Brands Chemicals: Runma, Antenna: Luxshare, Sunway Jingrui, Huayi, Sinyang LEDs: Sanan Handsets: Huawei, Oppo, Vivo, Xiaomi, Back-end ZTE, Coolpad, Tech Foundries package & test Lenovo, TCL CM / ODMs Downstream SMIC, Hua Hong, JCET, Tianshui Distributors Shanghai Huali, Huatian, Tongfu, ASMC, CSMC, SiEN, China Wafer Level Synnex (Taiwan Huaqin, Wingtech, listed), Digital Silan, CanSemi, CR CSP, SJ Semi, TINNO, BYD, PC Brands Micro, Yantai Raytron Kaifa, Biwin Longcheer, USI China, VST PC / Server: Fabless IC Design Lenovo, Inspur, Mobile Processor: HiSilicon, Spreadtrum, ASR, Pinecone, ZTE (Sanechip) Dawning, Razer, Servers/AI: HiSilicon, Cambricon, Montage, Alibaba, Eeasy Tech, Huaxinton, Big IC Distributors Huawei Fish, ThinkForce, Illuvatar, Cambricon, Bitmain, Zhaoxin, Loongsan, eBang End GPU: Jingjia, Zhoaxin Networking Consumer MCU: Gigadevice, Ingenic, Unigroup Guoxin, SinoWealth, Silan, Goodix, Datang, HQ Mart, Will Semi, Fortune Huada, Giantec, Yixin, MindMotion, Winner Micro Tech, Wuhan P&S, INtron, OEMs RF IC: RDA, Vanchip, Huawei, Maxscend, Sanechips Apex Ace, Smart-core, Retail: Consumer: Rockchip, Allwinner, Amlogic, Actions Networking: Techtronics, Wisewheel, Gome,Suning Touch/Fingerprint IC: Goodix, Silead, Fortsense, Betterlife, Chipone, BYD Huawei, ZTE CMOS image sensor: Will Semi (OVT), GalaxyCore, Superpix, Artivision Sunray Online: Alibaba, Analog: Awinic, SG Micro, BYD , OnBright, Silergy, Nexperia, Huada, Chipone JD.com Driver IC: SinoWealth, Solomon Systech, Chipone Smartcard: Tongfong Guoxin, Datang, Huada, Nationz, Fudan, Hua Hong IC Memory: GigaDevice, YMTC, Changxin, Fujian Jinhua, Reliance Memory (Rambus/Giga JV), ISSI, Giantec Surveillance/Video: Huawei, Fullhan, Vimicro, Ingenic, Artosyn, Goke, Eeasy, EDA Tools Dahua, Yitu, Horizon Robotics FPGA: Gowin, Fudan Micro, Unigroup Guoxin, Huada Hyperform Source: Company data, Credit Suisse CREDIT SUISSE, Equity Research, Asia Pacific 3 China ~25% of tech demand, 30-40% hardware units China as a market about 25% of tech product demand China domestic suppliers gaining higher global share Units (mn) / Capex (US$bn) China share China market Share 350 70% 70% 300 60% 60% 250 50% 50% 40% 200 40% 30% 150 30% 20% 100 20% 10% 50 10% 0% 0 0% TV units PC units xEV units Auto units BAT capex (US$bn) Smartphones China TV vendors China PC vendors China Wireless Wireless capex 5G Smartphones China vendors Server China switch vendors Units (mn) % of total Infrastructure (US$bn) China built smartphones Source: IDC, Omdia, Company Data, Credit Suisse Estimates CREDIT SUISSE, Equity Research, Asia Pacific 4 China targeting ICs to close its gap to consumption China semiconductor sales at US$150bn as of 2019, but includes shipments re-exported as final products to other geographies China IC manufacturing still far lagging consumption CREDIT SUISSE, Equity Research, Asia Pacific Source: SIA 2020 Factbook – WSTS Statistics, IC Insights 5 China providing policy support for its IC industry Target sector Change New Old Previous Policy 1st 5 years profit tax exempt & 50% Waive the 1st 10 year corporate reduction in the next 5 years for ICs <65nm Notice on Corporate income tax for IC manufacturing set up after 1/1/18 or ICs <250nm set up Income Tax Policies for IC Added companies or projects for 28nm before 12/31/17; 1st 2 years of profit tax IC Manufacturing manufacturing or below if in operations for over exempt & 50% reduction in the following 3 Companies (2018), 15 years years for IC <130nm set up after 1/1/18 or Caishui Circular (2018) ICs <0.8 micro set up before 12/31/17. Waive the first five-year Announcement on corporate income tax after Waive the 1st 2 years of corporate income Corporate Income Tax IC design and Changed turning profitable, and lower the tax after turning profitable, and cutting in Policies for IC Design software income tax thereafter to 10% (vs half to 12.5% for the next 3 years and Software normal rate of 25%) Companies (2019) Waive import tariffs for raw Adjustment to the list of IC Waive Import tariffs for certain raw materials, consumables and semi import tariff waiver for manufacturing, materials, consumables and some Added equipment <65nm, specialty raw materials & packaging, equipment for ICs <500nm (some apply to logic < 250nm, and compound consumable parts of IC materials ICs <250nm or investment > Rmb8 bn). semi & advanced OSAT <500nm companies (2015) MIIT and China’s 2nd National IC fund in 2019 1st National IC fund in 2014 (US$20bn) + IC Industry Expanded Ministry of Finance (US$29bn) US$150bn of municipal/private funding Support Encourage and support IC A Basket of Measures companies to IPO in Sci-Tech All IC to Further Boost the Added Board or Growth Enterprises List in Hong Kong, US as an A-Share companies Software and IC Industry Source: China State Council Market, with an accelerated IPO (2011) review process 6 CREDIT SUISSE, Equity Research, Asia Pacific Source: China National Council, Company Data China funding for advanced foundry growing SMIC’s government funding for R&D ramping up Government grants recognized continues to grow US$mn US$mn % of net income 1,000 350 250% 900 300 800 200% 700 250 600 200 150% 500 150 100% 400 100 300 50% 200 50 100 0 0% 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2011 2012 2013 2014 2015 2016 2017 2018 2019 P&L grants - other operating income P&L grants - interest expense Government funding on the balance sheet New government funding on R&D projects P&L grants - R&D expenses Grants as % of Net Income Source: Company data, Credit-Suisse estimates CREDIT SUISSE, Equity Research, Asia Pacific 7 China listed semiconductor sales rebounding China Semis: Trade/Tech war has moderated growth China Fabless: Sales growth decelerated in 2019-20 China semiconductor sales (US$mn) China semiconductor sales YoY China IC Design sales (US$mn) China IC Design sales YoY $40,000 80% $12,500 80% $35,000 70% 70% $10,000 $30,000 60% 60% $25,000 50% $7,500 50% $20,000 40% 40% $15,000 30% $5,000 30% $10,000 20% $2,500 20% $5,000 10% 10% $0 0% $0 ($5,000) -10% 0% ($2,500) -10% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020E 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 China listed semiconductor sales China semiconductor organic sales 2019 2020E China listed semiconductor sales YoY China listed semiconductor organic sales YoY China listed IC Design house sales China listed IC Design organic sales China IC Design house sales YoY China IC Design house organic sales YoY China foundry: Rebounding in 2020 China Back-end: M&A boosted 2015-16, rebounding in ‘20 China foundry sales (US$mn) China foundry sales YoY China back-end sales (US$mn) China back-end sales YoY $6,000 120% $8,000 160% $5,000 100% $7,000 140% $6,000 120% $4,000 80% $5,000 100% $3,000 60% $4,000 80% $2,000 40% $3,000 60% $2,000 40% $1,000 20% $1,000 20% $0 0% $0 0% ($1,000) -20% ($1,000) -20% 2012 2003 2004 2005 2006 2007 2008 2009 2010 2011 2013 2014 2015 2016 2017 2018 2019 2004 2008 2019 2003 2005 2006 2007 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2020E 2020E China listed foundry sales China listed foundry organic sales China listed back-end sales China listed back-end organic sales China foundry sales YoY China foundry organic sales YoY China back-end sales YoY China back-end organic sales YoY Source: The BLOOMBERG PROFESSIONALTM service, Company data CREDIT SUISSE, Equity Research, Asia Pacific 8 China has been gaining industry share in semis Semiconductor sales (US$mn) China market share (%) 300,000 30% 250,000