While there are many listed companies with a market value exceeding 220 billion yuan, not many of them are still incurring losses yet have managed to reach such a high valuation. Cambrian is one of them. After being abandoned by Huawei, how did Cambrian grow into a leading AI chip company with a market value exceeding 220 billion yuan?

As of the close of November 27, there are approximately 50 companies in the A-share market with a market value exceeding 220 billion yuan, among which only a handful are not yet profitable. Cambrian-U, known as the "NVIDIA of China," is one of them.

At the close of November 27, Cambrian closed up 10.01% at 534.55 yuan per share, nearing its 52-week high, with a total market value of 223 billion yuan. Compared to the year's low of 95.85 yuan per share, the increase was over 458%.

However, on the other hand, Cambrian has been incurring losses since its establishment in 2016, with cumulative losses exceeding 5.7 billion yuan.

So, what is supporting a market value of over 220 billion yuan?

Naturally, performance cannot explain it. What then can explain Cambrian's exaggerated performance? Is it consensus? Uniqueness? Without performance to back it up, does consensus and uniqueness still hold promise for continued investment?

A series of questions that no one can answer. But while investors are complaining, Cambrian's stock price continues to rise.

Behind the huge losses

Among A-share AI chip concept stocks, Cambrian has always been the most controversial.

As a leader, Cambrian currently has a market value of 223 billion yuan, ranking fourth in the Science and Technology Innovation Board, trailing only SMIC, Hygon, and BeiGene. Most people understand SMIC and Hygon, both semiconductor leaders, but Cambrian remains a mystery to many.

The reason is that in recent years, the domestic AI chip industry has experienced a major boom, with companies like Hygon, Sugon, and Huawei performing better year after year. Only Cambrian, this "oddity," has been incurring losses year after year, with its operating conditions deteriorating.

According to financial reports obtained by "Digital Intelligence Research Society," Cambrian's net loss attributable to shareholders in the first three quarters of 2024 was 724 million yuan, an increase of 10.31% year-on-year. In the third quarter alone, the net loss attributable to shareholders was 194 million yuan, with the loss margin narrowing sequentially.

From a cash flow perspective, Cambrian is relatively short on funds. In the third quarter of 2024, Cambrian's monetary funds on its balance sheet were 958 million yuan, a decrease of 3.39 billion yuan compared to the 4.348 billion yuan in the first quarter. The net cash flow generated from operating cash activities in the first three quarters was -1.81 billion yuan. Overall, Cambrian's cash flow remains tight.

Behind Cambrian's perennial operating losses and cash flow shortages lies its high research and development (R&D) investment over the years. From 2019 to the third quarter of 2024, Cambrian has invested a cumulative 5.75 billion yuan in R&D. In the first three quarters of this year alone, Cambrian's R&D expenses amounted to 659 million yuan, accounting for 355.65% of its revenue.

This is the result of Cambrian reducing its R&D expenditures and suspending projects with lower expected gross margins. In 2023, Cambrian's R&D expenditures were reduced by 26.63% to 1.118 billion yuan, and its R&D personnel were reduced by about 38% to 752. In the first half of 2024, Cambrian's R&D expenditures were further reduced, and its R&D personnel decreased by 25.

As a high-tech industry, chip design requires long-term and continuous high R&D investment. For Cambrian, reducing R&D expenditures can make its financial statements look better and reduce losses. However, in the long run, this is definitely not good news for the chip design industry, which heavily relies on high R&D investment.

Of course, it's not that Cambrian wants to reduce its R&D expenditures; rather, Cambrian's advance payments and inventories have seen significant spikes. As of the end of the third quarter, Cambrian's inventories were 1.015 billion yuan, a staggering 331.18% increase from the first half of the year; advance payments reached 854 million yuan, an increase of 54% from the end of the first half, setting a new record high.

In other words, Cambrian's core AI chip products have successively completed wafer fabrication, packaging, and testing, which may provide stable support for the company's future performance, and additional supply of future products is expected. Chen Tianshi, the founder of Cambrian, also publicly stated that the company would intensify market development efforts in the second half of the year and explore new computing power demand scenarios.

Even with extremely optimistic expectations for the future, the current surge and trend in the stock price have undoubtedly overdrawn several years of future growth. From the shareholder structure perspective, multiple ETF funds, including the STAR Market 50 ETF, ChinaAMC CSI Semiconductor Chip ETF, and CSI 300 ETF, are among Cambrian's top ten shareholders and have increased their holdings in the third quarter. It can be said that Cambrian's soaring stock price has been lifted by these ETFs.

After being abandoned by Huawei

Whoever Huawei learns from will perish; whoever learns from Huawei will also perish. This saying has been widely circulated in the tech circle.

Initially, Cambrian primarily provided chip modules for Huawei. In 2017, Huawei's high-end system-on-chip, the Kirin 970, was unveiled in Berlin, Germany, and the 970 SoC incorporated the IP license for Cambrian's first terminal NUP, named Cambrian 1A. Relying on Huawei's popularity and attention, Cambrian became an overnight sensation.

Leveraging its close relationship with Huawei, from 2017 to 2019, Cambrian's sales to Huawei Hisilicon's terminal intelligent processor IP licensing business amounted to 7.7127 million yuan, 114 million yuan, and 63.658 million yuan, respectively, accounting for 100%, 97.94%, and 92.56% of Cambrian's terminal intelligent processor IP licensing business sales revenue.

It is worth noting that in 2017 and 2018, terminal IP accounted for 9.33% and 99.69% of Cambrian's primary revenue, respectively. In other words, without Huawei, Cambrian's development would not have been as rapid.

However, unexpected events occurred, and soon Huawei chose to develop its AI chip modules in-house, abandoning Cambrian. In 2019, revenue from the terminal IP licensing business began to plummet, and by 2023, this business generated less than 234,000 yuan in revenue, which is almost negligible.

In addition to the IP licensing business, Cambrian also has three other business segments: cloud product lines, edge product lines, and intelligent computing cluster system services.

However, due to supply chain constraints, the cloud product line business, which contributed 219 million yuan in revenue in 2022, decreased by 58.7% year-on-year to 90.565 million yuan in 2023.

Cambrian had to change its business direction again and focused on intelligent computing cluster systems. After completing the AI chip design process, Cambrian's semiconductor factory begins wafer foundry, followed by packaging and testing. Circuit board manufacturers then use these chips to produce accelerator cards and sell them to customers. Once the products are fully compatible with server manufacturers and meet customer requirements, large-scale commercial use begins.

Therefore, with chip design as its core business, Cambrian has already launched three accelerator cards: MLU370-S4, MLU370-X4, and MLU370-X8, which have been adapted and applied by domestic mainstream manufacturers.

It is worth mentioning that Cambrian's cloud products have all adopted a 7nm process. Although there is a tangible gap with NVIDIA in computing power and other aspects, the difference in performance and power consumption between Cambrian and NVIDIA is not as significant.

Cambrian's core technological capabilities are evident.

On the other hand, Huawei's Hisilicon also has a product line similar to Cambrian's, such as 7nm advanced process cloud chips. However, backed by Huawei with larger R&D investments and stronger R&D capabilities, this is where Cambrian cannot compete.

Perhaps because Huawei is not listed on the capital market, investors can only bet on Cambrian. But regardless, what lies at the core of a product is its value and competitiveness.

Currently, Cambrian's performance may struggle to support a market value exceeding 220 billion yuan. However, with strong national support, the fields of information technology application innovation, domestic substitution, AI, and semiconductors need companies like Cambrian to step forward.

Although the road ahead is fraught with obstacles, the imagination space brought about by AI is vast enough.