1. Global semiconductor market investment outlook and six trends in 2021-2022

After nearly a year of epidemic baptism, which has caused global consumption, work flow and partial government shutdowns, but online meetings, videos, low-priced teaching laptops, and chrome books Demand has increased sharply in the opposite direction, and the global technology semiconductor product supply chain has increased inventory levels due to fear of shortages. In addition, the U.S. Department of Commerce has imposed a full technology blockade on Huawei and HiSilicon, and more domestic technology leaders have been included in the Entity List. In addition, the U.S. Department of Commerce’s Bureau of Industry and Security has directly issued administrative letters to SMIC’s key U.S. equipment, materials, and software suppliers to obtain shipping licenses. Although these changing international situations have caused 4G in the first half of the year Demand for mobile phones, automotive and industrial semiconductors has declined sharply. In the second half of the year, corporate and government data center investment has plunged. This has sluggish demand for upstream and downstream industry chains such as server remote control chips, DRAM memory modules, SSD flash memory equipment, and memory interface chips. Although the epidemic is still severe, demand for automotive and industrial semiconductors has rebounded significantly in the second half of the year since the gradual recovery of global economic activities. Coupled with the shortage and price increase of power management chips and 8" wafer foundry driven by 5G and notebook computers, the global logic semiconductor industry has grown steadily by 10-11% year-on-year this year, and global wafer foundry has increased significantly year-on-year. 28%. Coupled with the overall rebound in demand for enterprises, governments, and cloud servers that rely on advertising fees next year, and the overall acceleration of demand for automotive and industrial semiconductors, we estimate that the global semiconductor industry will grow healthily by 8%/10% in 2021/2022, the global memory market will grow by 13%/15%, and the global logic chip market will grow 6.3% / 8.2%, and the domestic semiconductor industry is accelerating domestic substitution and technological independence. We expect the compound growth rate to exceed the global nearly 50%. We maintain a "buy" rating on the domestic semiconductor industry.
In this 2021-2022 Sinolink Semiconductor Outlook and Investment Strategy Report, in addition to emphasizing that global semiconductor inventories are reasonable, we see six trends such as:

1. Server chip demand is expected to make a strong comeback in 2021-2022;

2. High unit price, high growth PCIE Gen 4.0/5.0 Retimer era is coming;

3. AMD’s acquisition of Xilinx by AMD will accelerate the heterogeneous integration of 3D packaging using large carrier boards;

4. The auto market demand will recover after the epidemic, with the addition of autonomous driving, the proportion of electric vehicles will increase;

5. Changes in WiFi and game consoles -WiFi

6 and PS5/Xbox series We are also optimistic about the five beneficiary companies in China, such as Montage Technology (server-related 1 plus 10 DDR 5 memory interface and supporting chips, PCIE Gen 4/5 Retimer), Tongfu Microelectronics (a major AMD AMD laptop, desktop, server, game console PS5/Xbox Series X CPU/GPU packaging and testing manufacturer), Xingsen Technology (global semiconductor ABF/BT Beneficiaries of the conduction effect of shortage and price increase in the substrate industry), Sanan Optoelectronics (domestic leading manufacturer of gallium arsenide GaAs, silicon carbide SiC, gallium nitride GaN third-generation semiconductors, and mini LED), China Microelectronics (an important player in replacing etching equipment with advanced and mature semiconductor production line equipment in the United States). As far as global companies are concerned, we are optimistic about the five beneficiary companies such as TSMC (the leader in wafer foundry, which benefits from the production outsourcing of the two major CPU leaders Intel and AMD, and the leader in PS5/Xbox Series Large carrier board leader works closely with Intel to expand production), Infineon (global power MOSFET, IGBT, SiC leader), TEL Tokyo Electronics (the best beneficiary of non-US semiconductor equipment replacement such as CVD chemical deposition, ALD atomic deposition, glue developer, Etch etching, control detection). 

Reasonable decline in global inventory months: Although the semiconductor industry and investors are worried about global semiconductor inventories soaring due to the worsening of the epidemic, according to the exclusive global semiconductor data statistics of the China National Securities Research Institute, the global inventory months of logic chips, fabless designs, IDMs, and memory did not rise but fell in the third quarter of 2020. This is mainly due to the surge in demand for laptops, desktops, game consoles, Chromebooks, cloud service data centers, automotive, industrial power and digital logic semiconductors in the third quarter of 2020.

Months of global logic chip inventory: remained flat year-on-year from 3.02/3.23 months in 3Q19/2Q20, and dropped 7% quarter-on-quarter to 3.01 months in the third quarter of 2020;

Global fabless design inventory months: a year-on-year decrease of 6% from 2.80/3.38 months in 3Q19/2Q20, and a 22% month-on-month decrease to 2.46 months in the third quarter of 2020;

Global IDM inventory months: a year-on-year decrease of 8% from 4.25/4.31 months in 3Q19/2Q20, and a month-on-month decrease of 9% to 3.91 months in the third quarter of 2020;

Global DRAM/3D NAND memory inventory months: a year-on-year decrease of 6% from 4.22/4.04 months in 3Q19/2Q20, and a 2% month-on-month decrease to 3.95 months in the third quarter of 2020;

Global NOR/SLC NAND/Mask ROM memory inventory months: remained flat year-on-year from 3.83/4.88 months in 3Q19/2Q20, and dropped 22% month-on-month to 3.82 months in the third quarter of 2020;

2. Six trends in the semiconductor industry in 2021-2022

1. Server chip demand is expected to make a strong comeback in 2021-2022

The Guojin Securities Research Institute estimates that the global computer semiconductor (servers, desktop computers, notebook x86 CPU, GPU, AI) market will grow by 4%/8%/8% year-on-year in 2021/2022/2023, but the entire market is expected to be subject to major demand/inventory corrections in the third quarter of 2020 (Xinhua's third-quarter revenue declined by 19% quarter-on-quarter, +7% y/y; Intel server chip -17% q/q, 7% y/y; Montage server memory interface chip -36% q/q, -25% y/y) driven by the 20%/14%/10% year-on-year growth in server industry demand, including the 10nm, 8 memory channels that Intel will launch in the first quarter of 2021, x86 CPU Ice Lake that supports PCIE Gen 4, and the x86 CPU Ice Lake that will be launched in 2022 Sapphire Rapids, a 10nm chip that will be launched in the first quarter of this year and supports DDR5 and PCIE Gen 5, will also be supported by Sapphire Rapids, and of course the 7nm/5nm EUV CPU Milan/Genoa benchmark products from AMD AMD. China Great Wall's Feiteng chip, Xinhua and Nuvoton's server remote control chip BMC (Baseboard Management Controller), Cambrian's AI ASIC, NVIDIA's AI GPU, Montage's memory interface chip, and Xilinx's edge computing AI chip drove more than 10% year-on-year revenue growth. While server chip inventory is being sorted out, server assembly giant Wiwynn has seen cloud customers rushing for orders and production capacity is in short supply. Revenue in the fourth quarter has increased by 10% to 20% quarter-on-quarter. It seems that the demand for cloud server-related chips is relatively strong (the latest data from China International Finance Corporation shows that data center capital expenditures increased by 17% quarter-on-quarter and 32% year-on-year in the third quarter; server manufacturers increased by 5% quarter-on-quarter and 9% year-on-year in the third quarter). It is expected that inventory depletion will go smoothly. We reiterate our previous expectations for 2021 A rebound in demand for server chips can be expected in the first quarter of this year. Pay close attention to Xinhua's revenue in December and January, whether Intel has updated its guidance for the fourth quarter, and when the global epidemic will slow down and allow governments and companies to restart procurement. 

Of course, the recovery of the server and server semiconductor market will also drive the recovery of the memory DRAM, flash memory 3D NAND market, as well as the x86 CPU large carrier board, server CPU socket (Jiaze), server x86 CPU wafer foundry (TSMC 7nm, 7nm+, 5nm), and packaging and testing (Tongfu Micro-AMD) markets.

2. The era of PCIE Gen 4.0/5.0 Retimer is coming

With the x86 CPU of the AI server, the PCI Express (PCIe) Gen 4.0 (16 Gb/s) and Gen 5.0 channels leading to the AI GPU/ASIC accelerator, and the AI GPU/ASIC accelerator are getting faster and faster, the number of channels is increasing, and the amount of data to be transmitted is increasing. The problem of signal attenuation on the PCB board will become increasingly serious. Taking PCIe Gen4 as an example, the signal transmission distance exceeds 100% on a general PCB board. 15 inches will cause attenuation and deformation. If PCIe Gen5 is used, the signal transmission distance will be shortened to more than 10 inches.

It will be attenuated and deformed, and it is a better solution to add a retimer (Retimer) on the signal path to reorganize the signal and restore it to its original state before transmitting it. Of course, you can also use a ReDriver signal repeater/conditioner, but the ReDriver can only adjust and slightly correct the integrity of the signal at the transmission end, but the original signal is still seriously lost. PCIe Switch and high-speed PCB board are also solutions, but they are also relatively expensive, so we think it will be used in the future. PCIe Retimer, PCIe Switch, and high-speed PCB boards are mixed. 

Retimer is a high-speed serialization/deserialization (SERDES) with digital signal processing (DSP) capabilities. Even if the received PCIe signal has been coupled with noise, Retimer can still use the DSP function to reconstruct a clean PCIe signal and send a copy of the modified signal to the destination. We believe that Retimer will become a common supporting solution on motherboards of future servers and high-speed network switching equipment. Currently, Gen 4.0 mainly includes x4, x8, and x16 Retimers. One Retimer chip can support 4/8/16 PCIe bidirectional channels at the same time. The number of channels supported by one chip is different, and the unit price is different. However, the prices of x4, x8, and x16 do not grow exponentially. Generally speaking, x8 is about 1.5 times that of x4, and x16 is about 1.5 times that of x8. We initially estimate that the PCIe Gen 4 retimer in 2021 will cooperate with the launch of Intel Ice Lake CPU and AMD AMD Milan CPU in the first quarter of 2021. The market demand in 2021 will be about 2.5 million units. Calculated at an average unit price of US$20, the output value of the TAM Total addressable market will be about US$50 million. We estimate that Astera Labs’ share will be about 60%, and in the first quarter of 2022 Intel SapphireRapids CPU will be mass-produced. It is estimated that the total number of PCIe Gen4/Gen5 Retimers is about 6-8 million. Calculated based on an average unit price of US$22, the output value is about US$132-176 million. Astera Labs’ share is about 50%, and the remaining market share is shared by Parade and Montage. 

Astera Labs (formerly the TI team) previously worked with Intel to formulate PCIe Gen 4.0/5.0 specifications, and was also the first in the industry (in August 2020) to mass-produce PCIe Gen4 retimer. According to industry chain understanding, Astera Labs handed over the second version of Gen5 retimer samples in May this year, and is expected to be mass-produced in the first quarter of 2021. 

Parade's Retimer chips have already entered major server OEM/ODM manufacturers such as Inventec, Quanta, and Yingbang, and it is estimated that shipments will begin in the first half of 2021. As for the new generation of PCIeGen5 Retimer products, it is expected to be released in 2021 and become a new growth driver in 2022 or 2023.

Montage has completed the tape-out of engineering samples of the PCIe 4.0 Retimer chip. In the first half of 2020, the samples have been sent to potential customers and partners for testing and evaluation. The chip is being designed and optimized based on feedback from potential customers and partners. It is expected to complete the research and development of the mass production version of the chip in the second half of 2020. It should be able to mass produce and ship in 2021. It is estimated that there will be 5-10% in 2021 and 2022. 10-15% share annually. This may contribute 3%/6% to Montage’s revenue in 2021/2022.

3. AMD's acquisition of Xilinx by AMD AMD - the era of heterogeneous integration of 3D packaging is accelerating.

When Moore's Law slows down, integrating logic and memory chips of different process nodes on a large semiconductor carrier board through heterogeneous packaging stacking will be an excellent solution to improve performance, reduce energy consumption, shrink chip area, increase yield, and reduce costs. The earliest product to implement the small chip and large carrier board architecture is Xilinx's FPGA, which uses TSMC's CoWoS (Chips on Wafer on Substrate) packaging technology to complete 3D packaging, followed by AMD's 7nm Rome CPU, which uses Tongfu Micro's packaging technology to package eight 7nm 64mm2 size CPU core chips and a 14nm Northbridge controller into a 75.4x58.5mm2 8 Core CPU chip.

After AMD AMD captured nearly 6.6% of Intel's servers and 20% of notebook/desktop CPU shares in two or three years, the company announced on October 27, 2020, that it would acquire FPGA leader Xilinx for US$35 billion, or 1.7234 AMD AMD shares for one share, which is different from Nvidia's announcement of US$40 billion to acquire ARM. The case involved an American company buying British/Japanese technology, and Chaowei had jointly established Haiguang Microelectronics and Haiguang Integrated Circuit with Sugon, and was friendly with scientific research institutions in mainland China. Therefore, the Chinese Ministry of Commerce has a higher chance of approving this merger. So why does AMD AMD want to buy Xilinx, and what is the impact on it?

AMD AMD complements the FPGA chip design technology required for edge computing in data centers and base stations. Otherwise, if Intel integrates the CPU and FPGA into a single chip through system packaging, Intel will monopolize the edge computing inference market (CPU + inference accelerator);

We estimate that the Xilinx business will contribute nearly US$3.4 billion in revenue next year, or 31% of revenue, and contribute 47% of Non-GAAP profits;

?The huge difference between the purchase price of tens of billions of dollars and the book value of $2.3 billion will be amortized over the next five years - the value of goodwill and patent rights, which will affect US GAAP profits;

Chaowei will issue an additional 425 million shares, or dilute existing shareholders by 34% to acquire Xilinx, because its US$1.8 billion in cash on hand is obviously insufficient.

Chaowei will control a larger order volume and obtain lower-priced production capacity from wafer foundry TSMC, as well as packaging and testing factories ASE and Tongfu Microelectronics. 

Of course, Intel is not to be outdone. Through its EMIB (Embedded Multi-Die InterconnectBridge) signal connection technology and Foveros packaging technology, it has launched various small chip (chiplets) large carrier board architecture FPGA products (FPGA+HBM DRAM) products Agilex, and CPU products, such as the 10nm++ Sapphire Rapids and 10nm++ Sapphire Rapids of the server Eagle Stream platform to be launched in 2022/2023 7nm Granite Rapids CPU, and the PonteVecchio AI GPU (75.5mmx49mm=3696mm2) integrated with 8 250mm2 7nm GPU cores for cloud artificial intelligence computing training, or directly integrate two Sapphire Rapids and 6 AI GPU Ponte Vecchio on a large board; it is also possible to integrate CPU+FPGA+HBM in the future High-bandwidth memory is used to accelerate the reasoning of edge computing. These changes are beneficial to Teradyne, a major system chip packaging and testing equipment manufacturer, advanced packaging and testing (TSMC, Intel, Samsung, ASE, Changdian) and ABF (Ajinomoto Build-up Film) large carrier board industries and their leading manufacturers Ebiden, Unimicron, and Nanya PCB. ABF resin carrier board is a material dominated by Intel. It is suitable for high pin count, thin lines, high transmission, and high temperature resistance x86 CPU packaging. We expect that in the next five years, the number of layers of large carrier boards will increase, the area will increase, the yield will deteriorate, and the price will increase.

4. The auto market demand has recovered after the epidemic, with the addition of autonomous driving, the proportion of electric vehicles has increased.

Due to the COVID-19 epidemic, global car dealers' revenue this year has declined by more than 10% year-on-year. Among them, major gasoline car manufacturers Nissan of Japan, Ford of the United States, and Fiat of Italy have experienced a year-on-year decline of nearly 20%. However, domestic electric car manufacturer BYD and global electric car leader Tesla have increased by more than 20 points year-on-year. Although the second wave of the epidemic in Europe and the United States is still expanding, the unblocked areas have restarted production lines and more and more consumers want to maintain social distance and reduce taking buses, taxis, and MRT subways. This has led to a rebound in self-use car sales. In the third quarter, global car dealers' revenue reversed, with month-on-month growth from -26% in the second quarter to 56% in the third quarter, and year-on-year growth from -36% in the second quarter to -1% in the third quarter.

We believe that after the COVID-19 vaccine is gradually rolled out next year, global demand for gasoline and electric vehicles will fully rebound, and car dealers' revenue growth will reach 10-15% year-on-year. Global electric vehicles will continue to increase their share of Power MOSFET, IGBT, SiC (mainly used in DC/AC inverter DC to AC inverters), GaN (mainly used in DC/DC and AC/DC converter rectifiers) The demand for semiconductor power discrete devices will increase significantly, and assisted driving will evolve to SAE 3, 4, and 5 autonomous driving (Tesla has recently provided SAE 4.0 fully autonomous driving Beta software updates to some users, allowing their vehicles to have enhanced functions such as traffic lights and stop signs being controlled, and allowing Tesla vehicles to automatically turn at intersections. In the future, various self-driving cars will be developed in AI, MCU, CPU, Driven by the demand for GPU/FPGA/ASIC, sensors, millimeter-wave radar, LiDAR, camera CIS, WiFi, Bluetooth, wired network, power management PMIC, memory semiconductors, the China National Securities Research Institute estimates that the global automotive semiconductor market will decline by 8% year-on-year in 2020, to a compound growth rate of 15-20% from 2021 to 2025. Automotive Semiconductor Value Added: Different from the Mobile Phone Semiconductor Market 2020/2021 The year-on-year growth exceeds the year-on-year increase in mobile phone shipments, mainly because the value of semiconductors used in each 5G mobile phone is more than twice the value of semiconductors in 4G mobile phones. The value of semiconductors used in each SAE Level 5 autonomous electric vehicle may be more than 10 times the value of semiconductors in human-driven gasoline cars in 2020. We initially estimate that the most basic PowerMOSFET requires 10 More than twice the increase, cameras, CIS, radar sensors, MLCC, power management chips will need five times the increase, and there will be 2 times the sensor Sensor, not to mention a large number of radio frequency power amplifiers, wired communications, artificial intelligence, and a variety of electric power chips. This will drive the global automotive semiconductor market to a compound growth rate of 10% in the next 20 years. The main reason why the value of semiconductors per vehicle will increase year by year from less than 3% in 2020, even in the next 20 years Annual global gasoline vehicle/electric vehicle shipments increased by <5% year-on-year.

Electric vehicles may once again drive the demand for high-end MLCCs: electric vehicles require 5 times the increase in MLCCs. The restarted growth of electric vehicles in 2021/2022 should significantly improve the oversupply of MLCCs, reduce market inventory, stabilize prices, and allow the MLCC industry to gradually recover. We recommend focusing on Fenghua Hi-Tech and Sanhuan Group in mainland China, Yageo, Huaxinco in Taiwan, Vishay in the United States, as well as Japan's Murata, Taiyo Yuden and other MLCCs. Leading factory.

5. Changes in WiFi and game consoles - WiFi 6 and PS5/Xbox series X

Unlike 5G, which is a new generation with several times the transmission rate, WiFi 6 released specifications in 2019, using IEEE 802.11ax, with a maximum transmission rate of 9.6Gbps, only higher than the 6.9Gbps of the previous generation 802.11ac, but it has low latency, multi-person multi-tasking, low power consumption, wide coverage, and multi-device connections (OFDMA Orthogonal Frequency Division Multiple Access) Orthogonal frequency division multiple access allows multiple users to transmit data at the same time, solving the problem of delay) and other advantages to match with 5G mobile phones. Although using 5G personal hotspots in indoor networks can replace WiFi, 5G personal hotspots will use a large amount of 5G bandwidth, which operators are not happy to see and will increase the basic usage fee. It can be seen that WiFi technology has not declined in the 5G era, but has become more important. It can also be seen from the top ten wireless technology trends for 2019 and beyond released by Gartner that WiFi ranks first. The Strategy Analytics report pointed out that WiFi 6 product shipments will have a compound annual growth rate of 57.8% from 2020 to 2024, and the penetration rate will also increase from 16.6% in 2020 to 81% in 2024. WiFi 6 module prices are also 1.5 to 2 times higher than WiFi 5. 

Currently, WiFi 6 has been installed in laptops, desktops, mobile phones, tablets, and routers. In addition to baseband chips, it also needs to integrate PA power amplifiers, LNA low-noise amplifiers, and SW For the RF front-end module of the antenna switch, focus on the beneficiary manufacturers: Qualcomm (baseband), Broadcom (baseband, RF front-end chip), MediaTek (baseband), Realtek (baseband), Liji (RF front-end module), Espressif Systems (WiFi6 iot baseband, RF front-end module), Boliu Intelligence (WiFi6 iot baseband), Kangxi Communications (already have WiFi 6 fem-router side). 

The CPUs of PS5 and Xbox Series X both use AMD’s latest generation Ryzen “Zen2” CPU. Judging from the specifications of 8-core 3.5~3.8GHz, it is roughly between the Ryzen 73700X and 3800X on PC. Judging from the current computer equipment on the market, it is already considered to be mid-range or above. This is different from the situation when the CPU performance of PS4 and Xbox One was already lagging when they were first launched. It should give PS5 and Xbox Series X a better starting point.

Like the CPU, the GPUs of PS5 and Xbox Series X use customized GPUs based on AMD's RDNA 2 architecture. This architecture is an improvement from the first-generation RDNA architecture of the latest Radeon RX 5000 series GPU products for personal computers. The biggest feature is the introduction of hardware-accelerated ray tracing processing function into AMDGPU for the first time to simulate the reflection, refraction, and transmission of real light, similar to the "RT core" of the NVIDIA GeForce RTX series. Xbox Series X ray tracing

The computing performance is 380 billion intersections per second. If you switch to shader software calculations, it will consume up to 13TFLOPS of performance, which means that even exhausting the entire GPU performance is not enough. Therefore, after introducing this hardware accelerator, the performance of the entire GPU is equivalent to 12+13 = 25TFLOPS. PS5's RDNA 2 GPU is equipped with 36 CUs (Control Units). Each CU contains 64 stream processors, and 36 CU contains 2304 stream processors. Using a variable operating clock, it can provide 10.3TFLOPS of floating-point computing performance at the highest clock of 2.23GHz, which is equivalent to the overclocked version of Radeon RX 5700 XT, the highest-end graphics card based on AMD's RDNA architecture. The memory bandwidth is exactly the same (448GB/s). The RDNA 2 GPU of Xbox Series

The biggest winners from the launch of this year’s new game consoles Sony PS5 and Microsoft Xbox Series More than 7 million units, reaching a global sales high in 2022.

6. From domestic design substitution, manufacturing substitution, to equipment and material substitution - the era of non-American production lines is coming

Since the Trump administration in the United States has used American technology to block ZTE, Huawei, Sugon, Haiguang, Hikvision, Dahua, iFlytek, Megvii, SenseTime, Meiya Pico, Yitu, Yixin Technology, Yuntian Lifei, Weiyi Measurement and Control, FiberHome Technology, Jinna Technology, Dako Technology, Zhongyun Rongxin Technology, Qihoo 360 Technology, Yuncong Technology, Oriental Netpower Technology, Shenzhen Net Vision, and Yinchen Intelligence, we have seen the design substitution of domestic chips, especially domestic system manufacturers. Since then, they have tended to adopt non-American substitution strategies, with the order of

Mainland China's semiconductor design is given priority, followed by Taiwan, South Korea, Japan, and finally Europe. This will also cause the market share of Qualcomm, Skyworks, Qorvo, Broadcom, TI, and Micron in mainland China to decrease quarter by quarter, but the shares of MediaTek, Realtek, Wenmao, Sanan, Zhuoshengwei, Shengbang, Samsung, and Hynix will increase in the opposite direction. Although this will not have an impact on the year-on-year growth of the overall market, it will positively help the growth of domestic and non-U.S. semiconductors. Regarding the changes in the customer share of TSMC and SMIC in the United States and mainland China over the past decade,

In terms of culture, especially after the technological blockade war between China and the United States worsened, the proportion of customers in mainland China has increased significantly. However, since the U.S. Department of Commerce further imposed a total blockade on HiSilicon on September 15, 2020, even TSMC and SMIC, which use U.S. semiconductor equipment, cannot help HiSilicon produce semiconductor chips. We estimate that starting from the fourth quarter of 2020, the proportion of mainland customers of TSMC and SMIC will drop significantly, and domestic design substitution will gradually transform into manufacturing substitution. 

But the good times did not last long. Then the U.S. Department of Commerce’s Bureau of Industrial Security issued a letter to SMIC’s key equipment and material suppliers on September 25, requiring each supplier to obtain a license before shipping to SMIC. We have sorted out some of the impacts.

Most of the equipment orders placed before September 25th will be delivered gradually, but after 6-9 months, it will be impossible to purchase advanced US semiconductor process equipment, especially CMP chemical mechanical planarization polishing (>70%), Ion Implantation ion implantation equipment (>70%), CVD chemical deposition (Lam plus Applied Materials total more than 50%), Etch etching machine (Lam plus Applied Materials), which has a relatively high global share of US semiconductor equipment. Applied Materials totals more than 70%), Epitaxy epitaxial equipment (>90%), and PVD physical thin film deposition are dominated by Applied Materials (>85%). Therefore, we estimate that SMIC’s 14/12/7-8nm production capacity will not be able to exceed the monthly production capacity of 30,000 wafers in the short term without obtaining licenses;

After SMIC lowered its capital expenditure this year from US$6.7 billion to US$5.9 billion, we estimate that its capital expenditure in 2021 will be significantly lowered to less than US$4 billion. Depreciation expenses will be significantly lowered in the next few years. Gross profit margin will be significantly improved from the current level of less than 20%, and overall profits may be neutral to positive.

Unlike Huawei, the situation is different. Since the United States does not control semiconductor material technology, SMIC's revenue compound growth rate in the next five years will be revised down from the previously estimated 18% (the compound growth rate of volume is about 10-12%, and the price is about 5-6%) to 0-4% (the compound growth rate of volume is about 0-2%, and the price is about 0-2%).

American EDA tools, equipment consumables (2-3 years of inventory can be established), second-hand equipment and components with mature process technology, and maintenance problems are not big, large silicon wafers, and various chemical materials should be able to purchase non-American products or obtain them through various channels.

Although SMIC is currently only blocked from expanding production, if SMIC is subject to a full blockade similar to Huawei by the U.S. Department of Commerce's Industrial Security Bureau, TSMC, UMC, World Advanced Manufacturing, and Huahong (SMIC has a 13-15% share in 8", a 10% share in 12" mature processes, and a 1-2% share in 12" advanced processes) will obviously benefit. We believe that in the next 5-10 years, SMIC, Huahong, Yangtze River Storage, Hefei Changxin should mention

The proportion of domestic equipment and materials for each non-critical process step has increased from 5-10% to more than 30%. Of course, the position of non-US semiconductor equipment suppliers in China will be more important. 

If the Biden administration comes to power without changing the ban issued by the U.S. Department of Commerce’s Security Bureau on SMIC’s key U.S. equipment and material suppliers, we estimate that starting from the second half of 2021, SMIC will be unable to continue to expand production, and domestic manufacturing substitution will be transformed into domestic semiconductor equipment and material substitution. Whether it is SMIC or TSMC’s internal plan or Huawei’s Tashan plan, it will likely be through some domestic, Japanese, Korean, Taiwan, European equipment and American second-hand equipment within five years. 8" special process and 12" mature process (90nm-40nm) semiconductor production lines that are not controlled by the U.S. Department of Commerce Security Administration. We therefore recommend focusing on China Microelectronics (Etch), Northern Huachuang (PVD, CVD, ALD, Etch), Shenyang Tuojing (CVD), Wanye Enterprise (Ion Implantation), Huahai Qingke (CMP), Yitang (removal and annealing equipment), Japan's Ulvac (PVD), Tokyo Electronics (CVD, atomic deposition, coating development machine, Etch, annealing, controlled detection) , Dainippon Screen (cleaning equipment), Hitachi-High-Tech (glue removal equipment, control detection), Advantest (chip testing), and South Korea's Jusung Engineering, PSK Korea.

3. Semiconductor Industry

1. Wafer foundry industry - 5G, game consoles, servers, automotive semiconductors, Apple M1

There are more than 120 million 5G mobile phones in China, with a penetration rate of more than 60%. There are more than 200 million 5G mobile phones globally, with a penetration rate of more than 18%. HiSilicon and some system manufacturers are building semiconductor inventories. The COVID-19 epidemic has greatly driven the demand for LCD TVs, notebooks, Chromebooks, game consoles and other consumer electronics products, and the price of 8" wafer foundry has increased. Power management and large-size driver chips are out of stock. TSMC has helped AMD to gain nearly 10% of the wafer foundry market. With a 20% share of Intel laptops/desktops and 6.6% of server CPUs, the foundry industry will grow by 28% year-on-year in 2020, which is better than the 11% year-on-year growth of the global semiconductor logic chip industry, mainly driven by TSMC's 31% year-on-year growth.

However, in 5G mobile phones (the penetration rate of domestic 5G mobile phones is expected to exceed 80% in 2021, the global 5G mobile phone sales will double year-on-year to exceed 500 million units, the penetration rate may exceed 40%, and the global 5G mobile phone penetration rate may exceed 50% in 2022), game consoles (AMD 7nm CPU/GPU supply is expected to ease the volume), PCIE Gen 4.0/5.0 (from 2021 2.5 million chips in 2022 to 6-8 million chips in 2022), and the demand for WiFi 6 continues to take effect, as well as the expected full recovery of government and enterprise servers (the global server market is expected to grow by 20% year-on-year) and automotive power and self-driving semiconductors (the global automotive semiconductor market is expected to grow by more than 10% year-on-year). However, coupled with the slowdown in the epidemic, LCD TVs, laptops, and Chromebooks The demand has also slowed down, and under the mixed impact of HiSilicon/Huawei selling mobile phone and chip inventories for more than half a year and being unable to place new wafer foundry orders. The Guojin Securities Research Institute estimates that the global wafer foundry market will grow by 9%/13% year-on-year in 2021/2022. This is due to the fact that SMIC will not be able to purchase advanced US semiconductor process equipment to expand production capacity from the second half of 2021. It also estimates that domestic wafer foundry production sales will slow down to 8%/7% year-on-year in 2021/2022. The self-sufficiency rate will increase from 2019. 20%, slowly declining to 17%/16% in 2021/2022. 

TSMC will continue to increase capital expenditures: in order to meet the needs of Apple's self-made notebook CPU chip M1, AMD 7nm game console CPU/GPU, 7nm laptop CPU/GPU, 7nm EUV/5nm server chips, and the outsourced production capacity needs of Intel's 7nm AI GPU Ponte Vecchio and 7nm GraniteRapids CPU, as well as Apple, Qualcomm and MediaTek's 7nm EUV, For the demand for 5nm EUV 5G application processors/baseband chips, we estimate that TSMC will continue to increase capital expenditures from US$17 billion in 2020 to more than US$20 billion in 2021/2022, so that the capex to sales in 2021/2022 will increase from 37% in 2020 to about 40% in 2021/2022. In addition, we estimate that TSMC's wafer foundry prices will gradually increase at a year-on-year growth rate of 3-5% each year (the average unit price in 2019 will increase by 8% year-on-year, and 6% in 2020). In addition to forecasting that TSMC's revenue will only grow by 9% year-on-year next year due to its higher revenue base this year, we expect TSMC to revise upward its revenue compound growth rate for the next five years from the past 5-10% to 10-15%. And because the price of wafer foundry for advanced process technology increases every year, and the shrinkage rate of Moore's Law (the increase in the number of chips per wafer due to shrinkage) is slower than the increase in wafer foundry price, we expect that the foundry cost of chips of the same size will also increase year by year. 

SMIC's production expansion is limited: Although SMIC helped HiSilicon mass-produce the last 14nm process order in the third quarter of 2020, the company has revised its annual revenue growth from 20% to 23-25% year-on-year. The revenue share of 14/28nm has increased from 8% in the second quarter to 14.6% in the third quarter, or 14nm has increased from 1-2% in the second quarter to 14.6% in the third quarter. 8-9%, but SMIC lost HiSilicon's large unit price orders, depreciation expenses continued to increase, and there was no new game console or Apple 5G chip to make up for it. SMIC's fourth quarter revenue (a 10-12% quarter-on-quarter decline) and gross profit margin (from 24% in the third quarter to 16-18% in the fourth quarter) guidance were significantly lower than the 1-6% quarter-on-quarter growth guidance of TSMC, UMC, Huahong and World Advanced. Coupled with the variables that the U.S. Department of Commerce imposes on SMIC’s key equipment and material suppliers, we estimate that SMIC’s capital expenditures will be less than $4 billion next year and may be less than $2 billion the year after. It will not be easy to expand production capacity next year, and the shortage of materials and consumables will make it difficult for the company to grow its revenue year-on-year. The revenue growth rate in the next two years has been revised down to 0-4% or lower.

Huahong's revenue has taken advantage of the trend: Because SMIC is limited by production expansion, Huahong is expected to take advantage of the situation. Huahong's fourth-quarter revenue guidance is US$269 million (6% quarter-on-quarter growth, 11% year-on-year growth), which is significantly better than the 1-3% quarter-on-quarter growth guidance of benchmark companies TSMC, UMC, and World Advanced and the 10-12% quarter-on-quarter revenue decline guidance of SMIC. We attribute this to Huahong's revenue guidance The price of new 8" wafer foundry orders increased by 10 points and the demand for discrete devices rebounded significantly. In the third quarter, the monthly production capacity of 12" wafer foundry continued to increase to 14,000 wafers (from 10,000 wafers in the second quarter), and quarterly shipments continued to increase to 40,000 wafers (from 22,000 wafers in the second quarter). However, due to the continued deterioration of the gross profit margin of 12" wafer foundry. -18% (from -13% in the second quarter), we believe that Huahong will continue to experience downward pressure on gross profit margin. As European and American factories gradually resume operations and power demand rebounds, Huahong's overseas automotive power semiconductor, automotive simulation, and MCU customer revenue guidance has gradually improved. Its key overseas customers such as STMicroelectronics, OnSemi, Microchip, Alpha&Omega, and Diodes all have fourth-quarter revenue guidance that is nearly 3-9 points higher than market expectations.

World Advanced Micro Devices and UMC will benefit from the recovery of 8", and price increases are expected: This is due to the demand for 6-7 power management chips for 5G mobile phones being twice that of 4G mobile phones. In addition, the application of remote teaching, remote conferencing, and online games driven by the epidemic on laptops, Chromebooks, and OLED/LCD TVs. The increase in the demand for 8" wafer foundry for large-size driver chips, as well as automotive power semiconductor chips, and under-screen fingerprint chips. Due to the demand for 8" wafer foundry, wafer foundry manufacturers such as Advanced Micro Devices and UMC have begun to increase prices by about 10% for new 8" orders due to difficulties in capacity expansion. Gross profit and operating profit margins can be expected to improve.

2. Logic packaging and testing industry - recovery continues, pay attention to inventory changes

Despite the disruption caused by the epidemic, the logic packaging and testing industry will recover strongly as expected in 2020. After some supply chains were interrupted due to the epidemic, component and terminal manufacturers increased inventory levels to ensure supply chain security. In terms of superimposed terminal demand, the demand for working from home and entertainment has increased the demand for related semiconductors such as laptops, desktops, tablets, and game consoles. HiSilicon has placed urgent orders to increase shipments. Mobile phone manufacturers have increased stocking to compete for Huawei's market share. Factors such as 5G infrastructure construction have continued the packaging and testing industry in 2019. The recovery trend started in the third quarter of this year. In the first three quarters, the revenue of leading manufacturers increased significantly year-on-year. The comparable caliber of Changdian Technology increased by 33% year-on-year, Tongfu Microelectronics increased by 23%, Huatian Technology declined slightly by 3%, ASE increased by 12%, and Amkor increased by 28%. The mobile phone market is expected to recover in 2021, the penetration rate of 5G mobile phones continues to increase, the server market has returned to the growth track after adjustment, and global 5G base station construction is in full swing. Against the background of an overall recovery in terminal demand, we expect the logic packaging and testing industry to continue to be highly prosperous in 2021.

Packaging and testing equipment shows continued strong demand: Looking at packaging and testing equipment, data from ASMPacific, the world’s largest packaging and testing equipment manufacturer, also shows signs of recovery that demand for packaging and testing continues to be strong. Benefiting from the shift to working from home, the construction of 5G infrastructure and driven by HPC demand represented by servers, the group's BB value has been higher than 1.0 for four consecutive quarters, showing strong demand for packaging and testing equipment orders. Most of the time, the amount of new orders in the materials segment, which is the leading material segment, remains at a high level, with a significant year-on-year increase. From the perspective of equipment that serves as a leading indicator, we believe that the high prosperity of the logic packaging and testing industry may continue until 2020. 

The increase in 5G penetration rate will increase the demand for RF packaging and testing and SiP. 5G mobile phones support an increase in the number of frequency bands compared to 4G mobile phones. Considering that 5G mobile phones will continue to be compatible with 4G, 3G, and 2G standards, the radio frequency front-end of 5G mobile phones will be much more complex than 4G. According to Qorvo data, compared with 4G mobile phones, the number of filters in 5G mobile phones will increase from 40 to 70, the number of frequency bands will increase from 15 to 30, the number of receiver transmitter filters will increase from 30 to 75, and the number of radio frequency switches will increase from 10 to 30. according to

Yole predicts that the overall RF front-end market size will grow from US$15.2 billion in 2019 to US$25.4 billion in 2022, with a compound annual growth rate of 11%. The 2020 millimeter wave version of the iPhone 12 uses SiP integrated millimeter wave antennas. We estimate that as the millimeter wave solution matures, the penetration rate of terminal equipment compatible with millimeter wave and sub 6G solutions will increase. Yole predicts that by 2025, there will be an additional US$1.4 billion in RF packaging and testing demand due to AiP. 

The impact of HiSilicon sanctions on the domestic packaging and testing industry: HiSilicon's acceleration of non-U.S. substitution is an important reason for the accelerated localization of this round of the IC industry chain, especially the packaging and testing industry. In the first half of 2020, HiSilicon's revenue was US$5.2 billion, a year-on-year increase of 49%, making it the tenth largest semiconductor company in the world. Domestic packaging and testing companies such as Changdian Technology are the main beneficiaries of the transfer of HiSilicon packaging and testing orders. We estimate that HiSilicon orders will account for 15% of Changdian Technology's revenue in 2020. We believe that HiSilicon not only brings orders to domestic packaging and testing companies, but is also an important demander for advanced packaging technology. It will work with domestic companies to improve processes and technology, and narrow the gap in packaging technology with overseas companies. The sanctions against HiSilicon and the market reshuffle will not only temporarily idle the production capacity built by domestic packaging and testing factories for HiSilicon, but will also temporarily suppress the demand for advanced packaging technologies such as Fan-out. This will affect the packaging and testing industry's revenue growth by several points year-on-year in the next two years.

AMD's share continues to expand, and packaging and testing plants benefit: AMD launched PC processors and server processors based on TSMC's 7nm process and ZEN 2 architecture in 2019, achieving a process lead for the first time compared to Intel's 14nm process; with the launch of the ZEN 3 architecture desktop platform in 2020, the ZEN 3 notebook platform in 2021, and the mass production of AMD's 5nm process in 2021, we believe

In 2021, AMD will still maintain its lead in architecture and process compared to Intel products using the 10nm process. If TSMC's 2nm advanced process makes a breakthrough and can achieve formal mass production in 2024, we expect that AMD, which is cooperating with TSMC, will maintain a process lead compared to Intel for a long time to come. This will help AMD's server CPU market share to increase from about 10% in 2020 to 20%-25% in 2022. The notebook and desktop CPU market share is expected to increase from 2020 to 20%. It will increase from 18%-20% to 25%-30% in 2022. As AMD's main packaging and testing supplier, Tongfu Microelectronics will still benefit from the increase in AMD's market share in 2021, but the long-term risk is that TSMC is expected to OEM AMD's 5nm Genoa or 3nm CPU.

AMD's CPU will be directly packaged through CoWoS packaging.

TSMC has strengthened its packaging and testing end layout, and the trend of collaboration between packaging and testing and wafer foundry is clear: as chip process shrinkage becomes more difficult, the effect of increasing chip transistor density through advanced packaging methods such as wafer-level packaging and 2.5D/3D packaging will be immediate. TSMC launched the packaging technology service 3DFabric at the end of August 2020, which is divided into two parts. On the one hand, it is "front-end" chip stacking technology such as CoW (chip-on-wafer) and WoW (multi-wafer stacking, Wafer-on-Wafer). On the other hand, it is "back-end" packaging technology, such as InFO (Integrated Fan-Out)) and CoWoS (Chip-On-Wafer-On-Substrate). TSMC's packaging technologies can be combined in the same product to create new product categories by enabling both front-end and back-end packaging, allowing customers to design their products as microchip systems to provide key advantages in time to market, performance and efficiency, size and appearance, yield and cost over designing larger single chips. In terms of production capacity, TSMC’s Zhunan advanced process packaging and testing plant, with a total investment of 72 billion yuan, is expected to be operational in the first phase of the plant in 2021, with mass production in 2022 at the earliest. Since advanced packaging represented by three-dimensional packaging requires the use of wafer foundry back-end equipment, wafer factories have more advantages than OSATs in terms of capital investment and understanding of equipment processes. From a domestic perspective, the strengthening of collaboration between JCET and SMIC is also in line with the trend of packaging playing a more important role in improving chip performance.

Pay attention to changes in terminal inventory: In the second half of 2020, as mobile phone manufacturers compete for the market and increase inventory, packaging and testing factories also increase their inventory in response to strong downstream demand. Although the current industry inventory is still at a healthy level, as terminal demand growth is relatively stable, if terminal demand is less than expected in 2021 due to factors such as the epidemic, due to the superposition of inventory from terminal factories, semiconductor device factories, and upstream packaging and testing factories, the increased total industry inventory may take longer to be consumed. Benefiting from the slowdown of Moore's Law, the small chip architecture of server chips drives TSMC and Intel to drive more 3D IC packaging and testing, carrier board demand, semiconductor customers continue to rise in the cycle, and the one-stop model of domestic semiconductor substitution, 5G SiP/AiP, game consoles, PCIE Gen 4.0 Retimer, UWB, WiFi 6, under-screen fingerprints, TWS, new packaging and testing demand for AR eyes, but coupled with the slowdown in the epidemic, LCD TVs, laptops, Chromebooks The demand has also slowed down, HiSilicon/Huawei have been selling mobile phone and chip inventories for more than half a year and are unable to place new wafer foundry orders, and SMIC's expansion has made it difficult for downstream packaging and testing plants to be affected by the multiple influences. The Sinolink Securities Research Institute estimates that the global logic packaging and testing market will grow by 15%/10% year-on-year in 2021/2022, and estimates that domestic logic packaging and testing production sales will grow by 18%/13% year-on-year in 2021/2022, with the global share gradually increasing from 21% in 2020 to 22% in 2021/2022.

3. Memory industry - global recovery awaits a reversal in the server industry

Benefiting from the continued increase in the penetration rate of the global 5G market, global government agencies and enterprises (private cloud) will restart server capital expenditures after the large-scale vaccine rollout next year and the epidemic situation subsides. With the gradual rationalization of global memory inventory months and the reversal of memory inventory year-on-year, we expect the memory industry to gradually recover in the second quarter of 2021, with rising memory prices and volume. However, before a significant recovery in the second quarter of 2021, we must continue to observe the DRAM/3D NAND of major memory manufacturers. Inventory months (3.9 months), DRAM/3D NAND module inventory months (3.4 months), NOR, SLC NAND/mask ROM inventory months (3.8 months) can continue to decrease, memory manufacturers' capital expenditures and revenue ratio are reversed year-on-year, the current memory DRAM memory, 3D NAND, SLC NAND, NOR In the fourth quarter, spot prices have stabilized and stopped falling, but contract prices are still correcting slightly. 

We expect that the memory industry will see an overall increase in demand and prices starting from the second quarter of 2021. Coupled with the mass production of domestic memory wafer manufacturers, the Sinolink Securities Research Institute estimates that the global memory market will grow by 13%/15% year-on-year in 2021/2022, and estimates that domestic memory chip production and sales will significantly increase by 146%/108% year-on-year in 2021/2022. The memory chip self-sufficiency rate is expected to increase from 3% in 2020, rapidly increasing to 7/12% in 2021/2022. 

Domestic memory capital expenditures are becoming increasingly important: TrendForce, a market research agency, predicts that global DRAM major manufacturers will reduce capital expenditures by 3% year-on-year to US$19.5 billion in 2021, and global NAND major manufacturers will increase capital expenditures by 15% year-on-year to US$24.3 billion. We believe that DRAM will be more stable than NAND spot and contract prices in the next two years, and DRAM supply and demand will be higher than NAND. The demand is tighter. It is worth noting that Yangtze Memory is obviously more active in expanding production than Hefei Changxin. We expect it to reach the monthly production capacity of 85,000 pieces by the end of 2021 faster. There is no doubt that 3D NAND technology development we attribute to longevity, with Xtacking 3D NAND technology leading the way, while the origin of Changxin's 1X 19nm DRAM technology remains controversial. 

Domestic memory production expansion is beneficial to equipment, packaging and testing, modules, and clean room turnkey design: Although we expect that domestic 3D NAND major Yangtze Memory and Mobile DRAM major Hefei Changxin will not be able to make profits in the short term due to the gap in design and wafer manufacturing technology and huge depreciation expenses, but unlike the wafer foundry industry, which is always waiting for orders from semiconductor design customers, customers often change chip designs, and customers will only transfer orders if they ask for a reduction in wafer foundry prices. The right to speak lies with IC In the hands of design customers, domestic memory manufacturers will control the iterative evolution of their own R&D designs and advanced process technologies, repeatedly manufacture highly standardized products, and improve yield rates through mass manufacturing. The right to speak is in their own hands. Therefore, we are more optimistic about the competitiveness and huge capital expenditure learned from the expansion of the memory industry in mainland China in the next 20 years. This is beneficial to equipment (China Micro, Northern Huachuang), memory packaging and testing (Unisoc, Taichi Industrial, Tongfu Microelectronics, Payton), modules (Unisoc Storage), and clean room general contracting and design of Eleven Technology/Taiji Industrial. Our current preliminary estimate is 2022-2025 The capital expenditure of the domestic memory industry in 2024 is several times that of the logic wafer foundry industry, and the revenue of the domestic memory industry in 2024-2025 is >2 times that of the logic wafer foundry industry.

4. Semiconductor equipment and materials industry-domesticization continues to deepen

With the supply of 8" wafer foundries driven by large-size driver chips, power management chips, and electric power chips exceeding demand, and the surge in demand for 5nm/7nm processes driven by 5G mobile phones and base stations, game consoles, servers, laptops, mining machines, and artificial intelligence, global semiconductor equipment will fully recover year-on-year in the second half of 2020, from a year-on-year decline of 8% in 2019 to 2020/2021/2022 Year-on-year growth of 19%/10%/11%. However, in terms of U.S. semiconductor equipment monthly revenue, the year-on-year growth of 36% occurred in September 2020, which was significantly higher than the 5% year-on-year revenue growth of the global semiconductor industry announced by SIA/WSTS. We attribute the difference to 1. Automotive and industrial power semiconductors have declined by nearly 10% this year. This has offset some of the growth momentum of global semiconductor revenue, but it rarely uses advanced processes and has little impact on U.S. semiconductor equipment revenue. 2. The Sino-US technology blockade war has continued, allowing SMIC and Huahong to accelerate the purchase of key U.S. semiconductor equipment and materials in advance. Unlike the recovery of global semiconductor equipment driven by the wafer foundry industry, the domestic equipment industry will benefit from the successive expansion of memory wafer manufacturing plants in the next year and after. However, the expansion of SMIC is on hold. The China National Securities Research Institute estimates that domestic semiconductor production and sales will increase by 35%/33% year-on-year in 2021/2022. The self-sufficiency rate of semiconductor equipment is expected to increase from 15% in 2020 to 2021/2022. 17%/20% of the year.

Yangtze Storage's new round of equipment bidding continues to advance, and the localization rate of equipment continues to increase. According to data from the China International Tendering and Bidding Network, the local companies that Yangtze Memory plans to win the bid from August to now are: AMEC (12 etching machines), Northern Huachuang (1 PVD equipment, 9 etching machines, 28 heat treatment equipment), Shanghai Jingcei (3 measuring equipment), Zhongke Feifei (1 measuring equipment), Shengmei Technology (8 cleaning machines), Huahai Qingke (10 CMP) equipment), Yitang (3 etching machines, 16 glue removal equipment). From August to October, domestic manufacturers accounted for 21% of the bids for new equipment for the five major domestic wafer production lines. In the past three months, the overall localization rate of major domestic wafer production lines increased by 2%. As of the end of October, the localization rate of CMP, etching, cleaning and heat treatment in these five lines exceeded 20%.

Under the influence of the external environment, the localization rate has increased and the progress of mass production verification of advanced process equipment has slowed down. On October 5, SMIC announced that the Bureau of Industry and Security of the U.S. Department of Commerce has further restricted the export of some U.S. equipment, accessories and raw materials to SMIC, and requires prior application for an export license before continuing to supply SMIC. We judge that in the short term, SMIC's normal production pressure will increase. Capital expenditures for the whole year of 2020 will shrink from US$6.7 billion to US$5.9 billion. Subsequent shipments of domestic equipment to SMIC will also be affected. However, in the long run, the United States will strengthen its technology export controls, strengthen its determination to fully localize the entire semiconductor industry chain, and increase the willingness of downstream fabs to purchase domestic equipment. Huawei and SMIC will use Japanese, Korean, European, Taiwanese equipment manufacturers and American second-hand equipment to form a mature semiconductor production line that is not prohibited and controlled by the U.S. Department of Commerce and Industry Security Bureau within 3-5 years. In this way, local fabs 8" and The localization rate of 12" mature process equipment is expected to accelerate, but advanced process technology equipment depends on TSMC, the domestic memory industry and Huali's production expansion to verify and strengthen training.

The capital expenditure of packaging and testing plants has rebounded, and domestic testing machine technology and market continue to make breakthroughs. The packaging and testing industry is synchronizing the production capacity of wafer factories, and the capital expenditure of packaging and testing factories is picking up, boosting the market demand for testing equipment. The capital expenditure level of the three companies of Changdian Technology, Huatian Technology, and Tongfu Microelectronics increased from 2.5 billion yuan to 6.9 billion yuan from 2014 to 2019. In the first half of 2020, capital expenditure increased by 26.3% year-on-year, and the growth rate picked up. In the domestic market, the localization rate of analog/discrete devices is high, and breakthroughs have been made in SoC/storage and other fields. Huafon Measurement and Control, Changchuan Technology, and Hongce Semiconductor Analog/Digital-Analog Hybrid Testers account for about 85% of the domestic analog test machine market share, of which Huafeng Measurement and Control’s domestic analog test machine market share exceeds 50%; Linkage Technology and Hongbang Electronics’ discrete device tester market share exceeds 90%; SoC tester chips have many types and are difficult to develop, and they still mainly rely on imports. At present, Huafon Measurement and Control’s power SoC Shipments have been achieved; in the field of memory chip testing machines, Jingce Electronics cooperated with South Korea's IT&T to establish Jinghong Electronics, with the goal of filling the gap in the domestic memory testing field, and has currently completed small batch orders.

Domestic semiconductor equipment investment suggestions: We recommend Northern Huachuang, the leader in wafer equipment with a multi-business layout, China Microwave Co., Ltd., the domestic etching equipment leader that has entered the global supply chain, Huafeng Measurement and Control, the domestic semiconductor tester leader, and Jingsheng Electromechanical, the leader in large silicon wafer equipment; it is recommended to pay attention to Shengmei Co., Ltd., the domestic cleaning equipment leader that is about to return to the A-share listing, domestic cleaning equipment manufacturer Zhichun Technology, and domestic semiconductor testing machine suppliers Changchuan Technology and Jingce Electronics. 

With the commissioning of domestic wafer factories, the demand for semiconductor materials has opened up. Against the background of sluggish downstream demand and declining global demand for semiconductor materials in 2019, China's semiconductor materials market still achieved positive growth. In addition, domestic substitution has become the main demand of China's semiconductor industry, and downstream manufacturers have a stronger willingness to provide markets for semiconductor material manufacturers. In the current context, the country
Semiconductor material manufacturers will enjoy the double dividends of expanded market size and increased market share.

Domestic large-scale silicon wafers are actively planning for large-scale production expansion, and import dependence is expected to decrease. In the second half of 2020, as 5G, AI, and IoT drive demand for smart terminals such as data centers and consumer electronics, the 8- and 12-inch production capacities of global semiconductor foundries remain fully loaded. According to Digitimes, the price of 12-inch silicon wafers is expected to increase by 5% in 2021Q1. According to SEMI data, global silicon wafer shipments are expected to increase by 2.4% year-on-year in 2020, continue to grow in 2021, and reach a record high in 2022. From a domestic perspective, oligopoly has resulted in my country's still high dependence on silicon wafer imports. According to data from the China Fortune Land Development Research Institute, my country's companies have disclosed production capacity for their mass production lines. The current production capacity of 8-inch mainland suppliers has reached 960,000 pieces/month; the 12-inch production capacity is only 200,000 pieces/month. According to data from Core Thought Research Institute, there are currently as many as 20 large-scale silicon wafer projects announced in my country, and the investment amount for new silicon wafer manufacturers exceeds 140 billion yuan. Companies such as Shanghai Silicon Industry, Super Silicon Semiconductor, Jinruihong, and Zhonghuan Semiconductor have all begun to build or plan to build silicon wafer processing plants. If implemented as planned, the total planned production capacity of 8-inch silicon wafers will reach 3.45 million pieces/month and the total planned production capacity of 12-inch silicon wafers will reach 6.62 million pieces/month by 2023. By then, the dependence on imported silicon wafers will be significantly reduced.

The consumption of CMP polishing materials increases with the growth of wafer production and the difficulty of manufacturing. US companies have a higher share, and localization needs to be improved urgently. CMP polishing materials include polishing fluids and polishing pads. According to SEMI, the global CMP polishing materials market size is expected to increase to US$1.98 billion in 2020, with domestic US$450 million accounting for 23% of the world. More advanced logic chips have put forward new requirements for CMP polishing materials. For example, the key CMP process for logic chips below 14nm has reached more than 20 steps, and the polishing fluids used will increase from five or six polishing fluids at 90nm to more than twenty, and the types and amounts will increase rapidly. The technological change of memory chips from 2D NAND to 3D NAND will also nearly double the number of CMP polishing steps. In the global market, American companies Dow and Cabot account for 41%/84% of polishing fluids/pads respectively. Under the severe external environment, the localization rate of polishing materials needs to be improved urgently. At present, domestic polishing fluid leader Anji Technology has successfully broken the foreign monopoly, achieved mass production at the 130-14nm technology node, and steadily advanced product development at the 10-7nm technology node; Dinglong Co., Ltd., the leader in polishing pads, continues to make breakthroughs in the fields of storage and advanced logic, and has received orders for 28nm.

As semiconductor circuit patterns become smaller and smaller, the demand for photoresist is also increasing, and domestic companies have begun to deploy. The photolithography process is the core process in chip manufacturing. According to the forecast of the Qianzhan Industry Research Institute, the global photoresist market was US$9.1 billion in 2019 and is expected to reach US$10.5 billion in 2022; China's photoresist market is 8.8 billion yuan and is expected to reach 11.7 billion yuan in 2022, with a CAGR=15%. The downstream applications of photoresist are mainly PCBs, display panels, LEDs and integrated circuits. Almost all high-end integrated circuit photoresists are imported. Four Japanese manufacturers—Tokyo Onka, JSR, Shin-Etsu Chemical, and Fujifilm—occupy 72% of the market share. Domestic manufacturers are accelerating their layout. KrF photoresist Jingrui Co., Ltd. has completed pilot testing and Shanghai Xinyang is in the research and development stage; ArF photoresist Nanda Optoelectronics is undergoing customer testing and Shanghai Xinyang is in the research and development stage.

Domestic semiconductor material investment advice: In terms of global semiconductor materials, Japanese manufacturers are mainly dominant, so there are no supply concerns. However, Cabot, Dow, and Versum in the United States still dominate CMP polishing fluid and polishing pad material technology. Therefore, whether the domestic polishing fluid leader Anji Technology and the polishing pad leader Dinglong Co., Ltd. can break through the U.S. technology dominance is a top priority. Pay attention to target leader Jiangfeng Electronics, electronic special gas supplier Walter Gas, and 8-inch and 12-inch silicon wafer manufacturers Leon Micro/Jinruihong.

5. Domestic semiconductor design industry without HiSilicon - sharing the food

Since the U.S. Trump administration announced that Huawei, HiSilicon and all its subsidiaries are prohibited from using any U.S. technology, equipment, and materials, and have included Sugon, Tianjin Haiguang Advanced Technology, Chengdu Haiguang Integrated, Chengdu Haiguang Microelectronics, Hikvision, Dahua, iFlytek, Megvii, SenseTime, Xiamen Meiya Pico, Yitu, Yixin Technology, Yuntian Lifei, Weiyi Measurement and Control, FiberHome Technology, Jinna Technology, Dako Technology, Zhongyun Rongxin Technology, Qihoo 360 Technology, Yuncong Technology, Oriental Netpower Technology, Shenzhen Net Vision, and Yinchen Intelligent were successively placed on the entity list. After the U.S. semiconductor product technology and application software/operating system software were banned, domestic product system companies suddenly realized that they have accelerated the shift to training, support, and accelerated certification of non-U.S. core product design companies. Of course, domestic semiconductor product design companies are preferred to undertake the work, but if the technology gap is too large, design companies in Taiwan, South Korea, Japan, and Europe are selected in order to replace the core designs in the United States. For example, use Unisoc, MediaTek (replacing Qualcomm), Sanan, Zhuosheng Micro (replacing Avago, Skyworks, Qorvo), Wingtech, Shengbang, Silicon Power (replacing Ti, Maxium, On Semi, Diodes, Analog Devices), Goodix, Egis (replacing Synaptics, FPC), GigaDevice, Beijing Ingenic (replacing Micron, Cypress), Yangtze Memory, Hefei Changxin, Samsung, Hynix (replacing Micron), Montage (replacing IDT/Renesas, Rambus memory interface chips and replacing Astera's PCIE Gen4.0/5.0 Retimer), Feiteng, Loongson, Shanghai Zhaoxin (replacing Intel, AMD's x86 CPU). However, HiSilicon has been unable to find manufacturing capabilities that do not use U.S. semiconductor equipment in foundries such as TSMC, SMIC, and Samsung starting from September 15, 2020. Before Huawei’s semiconductor self-made Tashan plan has not yet succeeded, we believe that HiSilicon’s share will be greatly eaten up in 2021/2022. 

Since we estimate that HiSilicon occupies more than 50% of the domestic semiconductor design share, and its chip inventory should be less than a year old, the National Securities Research Institute estimates that HiSilicon's share loss and inventory depletion will cause the domestic semiconductor design industry to grow from 7% year-on-year in 2020 to a 22%/18% year-on-year decline in 2021/2022. Mainland China's fabless design industry's global share will drop from 2019 to 2021/2022. 15%, falling to 9%/7% in 2021/2022, and may not exceed the 15% reached in 2019 until 2025. The self-sufficiency rate of mainland China's fabless design industry will fall from 26% in 2019 to 15%/11% in 2021/2022. 

However, because other companies will share HiSilicon's share and some HiSilicon design teams will start new companies or join other design companies, if HiSilicon's revenue is not calculated, the China National Securities Research Institute estimates that the domestic semiconductor design industry will grow by 35%/31%/25% year-on-year in 2020/2021/2022, which is far better than the growth rate of global pure semiconductor design sales in 2020/2021/2022. 25%/12%/9%, and 11% 5-year CAGR. The main domestic growth drivers are Shengbang and Xilijie in analog chips, Zhuosheng Micro in mobile phone radio frequency, GigaDevice, the leader in NOR flash memory, Beijing Ingenic of special memory, and the rise of memory interfaces and PCIEGen 4/5 Retimer.

6. Power IDM - strong demand and high profit elasticity under tight supply

Create an integrated IDM model of design, manufacturing and packaging to improve profit flexibility. Since power semiconductor circuits are relatively simple, the wafer manufacturing and packaging links have a relatively large impact on the final performance of the product, and the technical content is relatively high. Therefore, the manufacturing links including front-end wafer manufacturing and back-end packaging links occupy higher added value in power semiconductors. However, chip design, IP, instruction sets, control chip architecture, design software tools and other links that occupy high added value in digital chips have a relatively low proportion of added value in power semiconductors. Therefore, for power IDM manufacturers such as China Resources Micro, we expect that improving their packaging processes and production capacity through private investment projects can increase gross profit margins by 3-5 points. 

As the epidemic normalizes, the prosperity of power devices recovers along with industrial and automotive demand; global work from home and online education have increased the demand for desktops, laptops, and tablets, thereby boosting the demand for driver ICs; as mobile phone specifications increase, the demand for power management ICs has increased from 1-2 per mobile phone to a maximum of 8-9 per mobile phone. On the supply side, as CIS seizes production capacity, and overall production capacity is limited by second-hand equipment, it is difficult to expand. We believe that this round of power device boom is expected to continue into the first half of next year. 

The upward pressure on costs increases, and the advantages of the IDM model are revealed. Due to the shortage of production capacity, the delivery cycle of power devices such as MOS is lengthened, and some foundries have raised their foundry prices, causing power Fabless companies to face upward cost pressure. However, power companies in the IDM model can guarantee their own production capacity needs, and their performance will be more flexible when the prices of similar products increase.

Global power semiconductors will rebound in 2021: Affected by the global new crown epidemic, global power semiconductors will decline in 2020. QYResearch predicts that the market size will be US$36.7 billion in 2020, a year-on-year decrease of 9.1%, and it predicts that the market size in 2021 will be US$39.6 billion, a year-on-year increase of 8.1%. China's power semiconductor market was US$14.48 billion in 2019, accounting for 35.9% of the global power semiconductor market. QYResearch predicts that it will reach US$13.8 billion in 2020, a year-on-year decline of 4.7%. 

Automobiles are the largest application market, and the proportion of consumer electronics has increased. From the perspective of global product segments, power ICs account for the largest proportion, and their proportion has increased in recent years, followed by MOSFETs, whose growth has slowed down due to the substitution of IGBTs; the proportion of diodes is generally stable, and the IGBT market has grown steadily, and its proportion continues to increase. Automobiles are the most important market for power semiconductors, followed by industrial and consumer electronics. In recent years, new energy vehicles have developed rapidly, and automotive electronics and intelligence have developed rapidly. The proportion in the automotive field has continued to increase. In 2019, the automotive industry's demand for power semiconductors accounted for 35.4% of the overall scale. The proportion in the consumer electronics field has also maintained a relatively stable increase, reaching 13.2% in 2019. 

In 2019, China's power semiconductor market accounted for 35.9% of the global market: China is the world's largest consumer of power devices, and the major products in the power device segment all rank first in China's market share. Similar to the entire semiconductor industry, comparing overseas power device IDM The annual sales of domestic leading power device companies (China Resources Micro, Star Semiconductor, Xinjie Energy, Yangjie Technology, China Microelectronics, Silan Microelectronics, etc.) are very different from those of international giants, and the product structure is low-end, indicating that the market size of China's power devices is seriously inconsistent with the autonomy rate, and there is huge room for domestic substitution. Currently, China's power semiconductor industry is developing rapidly. Wingtech Technology acquired Nexperia Semiconductor, and a number of power semiconductor companies such as Star Semiconductor, China Resources Micro, and Xinjie Energy have been listed one after another and are developing.
grow. 

The value of power semiconductors for new energy vehicles has increased significantly: the value of new power devices mainly comes from the "three power" systems of automobiles, including power control, electric drive and battery systems. In the power control unit, the IGBT or SiC module converts high-voltage direct current into alternating current that drives the three-phase motor; in the on-board charger AC/DC and DC/DC converters, IGBT or SiC, MOS, SBD single tubes, or GaN are used; in high-voltage auxiliary controllers such as electric power steering, water pumps, oil pumps, PTC, and air conditioning compressors, IGBT single tubes or modules are used; in ISG MOS single tubes are used in low-voltage controllers such as start-stop systems and electric window wipers. According to Infineon data, in 2020, 48V mild hybrid vehicles will require an additional $90 of power semiconductors, and electric vehicles or hybrids will require an additional $330 of power semiconductors. 

BloombergNEF predicts that the global number of new energy vehicles is expected to reach 11 million in 2025, with China accounting for 50%, 28 million in 2030, and 56 million in 2040. By then, electric vehicle sales will account for 57% of all new car sales. 

? The third generation of compound semiconductors welcomes new development opportunities: After nearly a hundred years of development, semiconductor materials have now formed three generations of semiconductor materials. The third generation of semiconductor materials mainly include wide bandgap semiconductor materials represented by silicon carbide (SiC), gallium nitride (GaN), zinc oxide (ZnO), diamond, and aluminum nitride (AlN). The most important of them are SiC and GaN. Driven by electric and hybrid vehicles, charging piles and industrial power supply applications, silicon carbide (SiC) will maintain rapid development. The market size in 2020 will be approximately US$700 million. Yole predicts that it will reach US$3.8 billion in 2025, with a compound growth rate of 35% from 2020 to 2025. Many smartphone manufacturers such as Samsung, OPPO, and Xiaomi have launched fast chargers integrating power GaN devices, as well as other brands. The fast charging market is developing rapidly. Driven by other demands such as 5G base stations, the power GaN market will show rapid development. In 2020, the GaN market will be approximately US$100 million. Yole predicts that it will reach US$500 million in 2025, with a compound growth rate of 42% from 2020 to 2025. 

Global power semiconductors show a tripartite confrontation between Europe, the United States and Japan: According to Infineon statistics, the global power semiconductor device and module market size in 2019 was US$21 billion. Europe, the United States and Japan showed a tripartite confrontation. Infineon ranked first, accounting for 19%, followed by ON Semiconductor, accounting for 8.4%. The top ten companies had a combined market share of 58.3%. 

In 2019, the global MOSFET market reached US$8.1 billion, and IGBT was US$3.31 billion: Infineon ranked first in the global MOSFET market with an absolute advantage, with a market share of 24.6%, and the market share of the top five companies reached 59.8%. Nexperia acquired by Wingtech and China Resources Micro, which grew up in China, entered the top ten, accounting for 4.1% and 3.0% respectively. Infineon also ranks first in IGBT, with a market share of 35.6%, and the top five companies collectively account for 68.8%. Star Semiconductor, a leading IGBT company grown in China, has developed rapidly in recent years and entered the top ten. In 2019, it ranked eighth with a market share of 2.5%. 

China's power semiconductor industry is facing good development opportunities: my country's semiconductor manufacturers are mainly based on the IDM model, and the production chain is relatively complete. Products are mainly concentrated in low-end fields such as diodes, low-voltage MOS devices, and thyristors. IGBTs have gradually made breakthroughs. The production technology is mature and has cost advantages. The profitability of leading companies in the industry is much higher than that of Taiwanese manufacturers. In new energy, electric power, rail transit, etc.
In the field of high-end products, only a handful of domestic manufacturers have production capacity, and the high-end product market is mainly monopolized by European, American and Japanese manufacturers such as Infineon, ON Semiconductor, Renesas, and Toshiba. At present, the domestic and foreign IGBT markets are still mainly occupied by foreign companies. Domestic IGBT companies headed by Star Semiconductor are developing rapidly and are gradually making breakthroughs in the fields of industrial control, electric vehicles, wind power, photovoltaics, electric power and high-speed rail.

To increase its share, Star Semiconductor’s electric vehicle IGBT modules accounted for 14% in China’s electric vehicle field in 2019. At present, the domestic power semiconductor industry chain is becoming increasingly perfect, and technology is also making breakthroughs. China is the world's largest consumer of power semiconductors, accounting for 35.9% of global demand in 2019, and the growth rate is significantly higher than the world. In the future, it will play an important role in new energy (electric vehicles, photovoltaic, wind power), industrial control, frequency conversion home appliances, and IOT. Under the demand for equipment and other equipment, China's demand growth will continue to be higher than that of the world. The industry will grow steadily + domestic substitution. We are optimistic about the leaders in the segmented industries. We recommend: Star Semiconductor, China Resources Micro, Wingtech Technology (Nexperia). 

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