Decoding ZTE Microelectronics

An attempt to fully take over the equity of the holding subsidiary to the parent company has revealed the performance of ZTE microelectronics business which has been hidden behind the scenes for a long time.

Similar to the positioning of Hisilicon, ZTE microelectronics, a subsidiary of ZTE, is mainly engaged in chip design. This is the reason why ZTE immediately issued an announcement denying the matter after it was misunderstood as being able to make chips on its own or even on the verge of replacing TSMC.

At present, there are many semiconductor design companies in China, covering a wide range of fields. According to the statistics of galaxy securities, according to the revenue calculation, ZTE microelectronics ranked sixth among the top ten IC design companies in China in 2019. In addition to the well-known large-scale companies such as Huawei Hisilicon and Ziguang zhanrui, ZTE microelectronics also has subdivision fields such as huiding technology for fingerprint identification chip design.

However, the industry structure is expected to change further. Galaxy Securities pointed out that if the current momentum continues, ZTE microelectronics's annual revenue ranking is expected to rise to the fourth in China. On the whole, the fourth ranking is also the conventional position of ZTE microelectronics in 2018 and before.

The product of the change of communication technology

The predecessor of ZTE microelectronics was the IC design department established by ZTE in 1996. It was formally independent as a subsidiary company. It was in the transition period from 2G to 3G in 2003. After the establishment of the company, it has officially opened the road of self-development of WCDMA chips.

Compared with ZTE's independent development, ZTE's key choice is to support its independent development in the industry.

The development of microelectronics company is undoubtedly closely related to ZTE's choice of communication technology route and coverage of business development route in decades.

ZTE microelectronics has received extensive attention recently due to the introduction made by the company's management during the shareholders' meeting. Xu Ziyang, executive director and President of ZTE, has repeatedly said that the company has realized the commercialization of 7Nm chips and the 5nm process chips will be commercially available in 2021.

Although the number of processes mentioned seems to be similar to the mobile phone baseband chips on the market, the baseband chips used for 5g base stations are actually mentioned here.

According to relevant people, the power consumption of base station can be greatly reduced by self-developed 7Nm chip and auxiliary software adjustment ability, which is the key point that operators pay close attention to. In addition, ZTE can also launch solutions for the 200m broadband demand jointly built and shared by China Telecom and China Unicom.

This is also related to the requirements of the industrial chain. Industry insiders told the 21st century economic report that one of the requirements of operators for equipment manufacturers is that they need to realize full autonomy, which is also a background for ZTE to fully support self-development of chips in wireless and other business levels.

This is just in line with the current process of large-scale deployment of 5g base stations, and is also related to ZTE's main business focus.

As early as the third quarter of this year, China has completed the original goal of building 600000 5g base stations by the end of this year, which shows that the market is showing high demand.

In the medium term, ZTE's revenue accounted for 74% of its revenue. The rapid evolution of baseband chip technology for base station is closely related to the development demands of the industry.

5g chip covers not only the base station, but also the important application market in the field of consumer terminal such as mobile phone.

According to the statistics of grand view research, in 2019, mobile electronic devices dominated by smart phones accounted for 56% of the 5g chip market size; 5g base station equipment benefited from the continuous investment in 5g infrastructure and now occupied 18% of the market share; the Internet of things accounted for 14% of the market share; and the Internet of vehicles accounted for about 6%.

In the mobile phone baseband chip level, ZTE is not involved. In the era of 2G to 3G conversion, the company has even obtained a large number of orders through in-depth research in this field.

In 2007, ZTE once said that the company was the first manufacturer in China to apply single chip solutions in mobile phone terminals. To this end, the company has also been able to capture half of China Unicom's CDMA mobile phone procurement.

According to the information at that time, ZTE related people pointed out that a single chip is different from the previous mobile phone chips. It combines baseband, radio frequency, power management and digital security systems into one chip, so that the cost of mobile phones is lower and the power consumption is less.

Today, it seems that this has become a trend, but ZTE is rarely seen in the mobile phone chip level. At present, the page of ZTE microelectronics shows that the mobile modem chip launched by ZTE in 2013 is the first domestic manufacturer to launch LTE multi-mode chip with 28nm technology, but there is no more introduction since then.

According to the latest introduction, ZTE microelectronics's business mainly focuses on the key chips of 5g communication equipment to carry out technology and product research and development, including 5g wireless access key chip technology and product research and development, 5g bearer network key chip technology and product development, etc. The product introduction on the official website of microelectronics company also includes mobile phone products and multimedia products.

The focus should still be on wired and wireless products. Specifically, in terms of 5g wireless access chips, we will carry out technology and product research and development, including baseband, intermediate frequency, radio frequency and other key chips for the iterative demand of 5g wireless access with stronger computing power, larger storage capacity, richer interfaces and higher integration.

In terms of 5g bearer network chip, it is aimed at the requirements of 5g bearer iteration, such as larger capacity, larger bandwidth, lower delay, and programmable, etc., to carry out technology and product research and development, including the new generation of high-capacity switching chip, programmable network processor and micro engine.

It should be said that the R & D Progress of ZTE microelectronics at the chip end is closely related to the iteration of the leading-edge standard and is relatively focused, which supports the parent company to accumulate more strength in the 5g era.

5g era focuses on supply itself

In the 5g era, the status of chips has become more and more important, so is ZTE. This is also a certain reason why ZTE microelectronics has been fully owned by its parent company.

At a recent investor exchange meeting, Xu Ziyang introduced that ZTE has had several key events since 2018, in which the chip was first proposed, showing that it has been highly valued.

Xu Ziyang also explained the reason for the withdrawal of the equity, which is related to the agreement reached between the company and the National IC industry fund in 2015. In that year, when the large fund invested in ZTE microelectronics, it was considered by the industry insiders that it was expected to promote the research and development of high-end communication equipment chips and the development of chips on mobile phones, which was in agreement with the achievements made at present.

After being fully owned by ZTE, according to the plan, in the next two years, the strategic focus of ZTE microelectronics is to expand the chip depth and coverage of core communication fields.

The management pointed out that depth is to strengthen the competitiveness of performance and cost, and the coverage of communication core areas is to solve the company's pain points, so as to strengthen the competitiveness of its main business. The next step is to go out to a broader market such as the consumer market.

In terms of the company's business positioning, ZTE microelectronics has also experienced a positioning adjustment period. At the previous investor exchange meeting, Li Ying, executive vice president and chief financial officer, introduced that the R & D content of ZTE microelectronics in the past few years was relatively scattered. In addition to R & D for the company, it would also undertake the related chip R & D needs of external society.

In recent years, the focus of the company's high-end chip strategy has focused on the sophisticated. "More than 90% of ZTE microelectronics's revenue comes from providing ZTE with chips needed for communication equipment. With the improvement of chip design complexity and self-control in the future, more and more chip types are provided, and the core business income is gradually increasing." She pointed out.

At present, it is also such a plan. According to Xie Junshi, executive vice president and chief operating officer, at the above-mentioned exchange meeting, ZTE microelectronics is ZTE's independent and controllable core competitiveness, and the focus in the next 2-3 years is to meet the company's own 5g product demand.

According to the financial report, in 2018, 2019 and the first half of 2020, the sales revenue of ZTE microelectronic chip products and technical services were 5.184 billion yuan, 5.004 billion yuan and 6.025 billion yuan respectively. Among them, sales to ZTE (including subsidiaries) accounted for 88.82%, 88.35% and 95.10% respectively.

It can be seen that the revenue of microelectronics companies in 2020 is expected to get a large growth rate, and the support for the parent company will be strengthened. ZTE is expected to achieve a year-on-year growth of about RMB 16 billion, which is expected to increase by about RMB 78 billion. By 2021, it is estimated that the annual sales revenue of ZTE Microelectronics will grow by about 15% year on year, and the net profit after deducting non-profit is expected to be 520 million yuan.

Of course, there are also reflections. ZTE pointed out in the announcement that the R & D expense rate of microelectronics companies is expected to remain at 15%, even so, it is still lower than other equipment manufacturers in the industry. The company will improve the performance of the whole machine through chip architecture adjustment and process adjustment, so as to accumulate strong ability for the development of follow-up equipment.

Galaxy Securities pointed out that compared with huiding technology, Zhaoyi innovation, etc., which are chip design companies, ZTE microelectronics's R & D investment accounted for a relatively high proportion. However, compared with the net interest rate, the agency found that microelectronics companies had a lower performance.