Produced by | Entrepreneur Frontier

Designed by | Li Yufei

Edited by | Song Wen

As the largest domestic foundry for automotive-grade IGBT chips and modules, Xinlian Integrated has maintained positive revenue growth relying on the rapidly developing new energy vehicle industry.

However, it is concerning that the company's revenue growth rate has slowed significantly since 2023. Amidst slowing growth in its core business, Xinlian Integrated is actively exploring a second growth curve. Furthermore, the company has accumulated losses exceeding 5.8 billion yuan after deducting non-recurring items over the past three and a half years. Influenced by factors such as the company's operating losses, Xinlian Integrated's share price has fallen significantly below its IPO price.

With the thriving new energy vehicle industry, can Xinlian Integrated turn around its fortunes?

1. Difficulty in achieving profitability due to fixed asset depreciation, with losses exceeding 5.8 billion yuan over three and a half years

Originally named SMIC Integrated, Xinlian Integrated spun off from SMIC's business unit. In 2018, Yuecheng Fund, SMIC Holdings, and Shengyang Electric Appliances signed the Articles of Association, agreeing to jointly establish SMIC Integrated with a registered capital of 5.88 billion yuan.

In 2021, Xinlian Integrated completed its shareholding system reform and submitted its prospectus one year later. Xinlian Integrated was officially listed on the STAR Market on May 10, 2023.

From inception to listing, Xinlian Integrated took only five years, a remarkable feat among chip companies. It is reported that Xinlian Integrated's primary business is wafer manufacturing outsourcing, with over 80% of its revenue coming from wafer foundry services.

The primary applications for Xinlian Integrated's wafers are in automotive and consumer electronics. In the first half of 2024, Xinlian Integrated's revenue from automotive electronics and consumer electronics accounted for over 70% of its total revenue.

Compared to traditional gasoline-powered vehicles, new energy vehicles use significantly more chips. Over the past few years, the surge in new energy vehicle sales has driven rapid growth in automotive chips.

(Image from Shutterstock, based on VRF agreement)

With the support of SMIC and various capital sources, Xinlian Integrated became the largest domestic foundry for automotive-grade IGBT chips and modules in just five years.

Driven by strong downstream demand, Xinlian Integrated's revenue has continued to grow. In 2019, the company's revenue was only 270 million yuan, but by 2023, it had grown to 5.324 billion yuan, representing a nearly 20-fold increase in four years. In the first half of 2024, Xinlian Integrated achieved revenue of 2.88 billion yuan, a year-on-year increase of 14.27%.

It is noteworthy that despite the continuous growth in revenue, Xinlian Integrated's overall losses have expanded.

Data shows that from 2021 to 2023, the company's net profit after deducting non-recurring items was in the red, with losses of 1.395 billion yuan, 1.403 billion yuan, and 2.262 billion yuan, respectively. In the first half of 2024, the net profit after deducting non-recurring items was again in the red at 778 million yuan, resulting in cumulative losses exceeding 5.8 billion yuan over three and a half years.

Xinlian Integrated's continuous losses are caused by various factors, with significant asset depreciation being a key contributor to its ongoing losses.

As a leading chip manufacturing company, Xinlian Integrated is an asset-heavy enterprise, requiring facilities and extensive equipment for wafer manufacturing. As of the end of 2023, Xinlian Integrated's fixed assets and construction in progress totaled over 22.25 billion yuan, accounting for over 70% of its total assets.

Due to the significant fixed assets, Xinlian Integrated incurred substantial depreciation expenses. In 2023, depreciation and amortization expenses amounted to 3.451 billion yuan, with most of this attributable to fixed asset depreciation.

According to the annual report, most of Xinlian Integrated's fixed assets, excluding buildings, have depreciation periods ranging from 3 to 10 years for machinery, office equipment, and infrastructure. As the company has been rapidly expanding in recent years, significant depreciation of fixed assets is expected to continue in the coming years, which will undoubtedly harm its profitability.

(Image: Company's asset depreciation method)

As an asset-heavy enterprise, fixed asset depreciation is a challenge faced by every chip company. To offset the impact of fixed asset depreciation, companies must strive to increase revenue and profit margins. For example, although SMIC and Hua Hong Semiconductor also incur depreciation on their equipment each year, their large revenue scales prevent fixed asset depreciation from causing losses.

For Xinlian Integrated, annual revenue of around 5 billion yuan is far from sufficient to offset the impact of equipment depreciation. Accelerated growth is the optimal solution for the company to achieve profitability.

2. Weak downstream demand drags down company performance, resulting in negative gross margins for two and a half consecutive years

However, as the company's revenue scale expands and the industry continues to adjust, Xinlian Integrated's revenue growth rate has slowed significantly.

Data shows that from 2020 to 2022, Xinlian Integrated's revenue was 740 million yuan, 2.02 billion yuan, and 4.61 billion yuan, with growth rates of 174%, 173.8%, and 127.6%, respectively.

In 2023, Xinlian Integrated's revenue reached 5.32 billion yuan. While still growing, the revenue growth rate declined significantly year-on-year to 15.6%. In the first half of 2024, the company's revenue growth rate declined further to 14.27% year-on-year.

The decline in the company's revenue growth rate compared to the previous year is closely related to the downstream industry's sentiment and intense competition. Classified by application areas, Xinlian Integrated's primary revenue sources are automotive electronics, industrial electronics, and consumer electronics.

(Image: Company's primary business segments in 2023)

In the consumer electronics industry, shipments of consumer electronic products such as laptops and tablets have declined, and with weak downstream demand, consumer electronics chip prices have also fallen.

As a result, Xinlian Integrated's revenue from the consumer electronics sector has also declined. Data shows that in 2022, Xinlian Integrated's revenue from consumer electronics was approximately 2.1 billion yuan, which dropped to approximately 1.25 billion yuan in 2023.

Although Xinlian Integrated's revenue from automotive and industrial electronics continued to grow, the decline in consumer electronics revenue inevitably contributed to the company's overall revenue growth slowdown.

As the penetration rate of new energy vehicles increases, domestic sales growth of new energy vehicles has begun to slow down.

In the first half of 2024, domestic sales of new energy vehicles reached 4.944 million units, an increase of 32% year-on-year, compared to a growth rate of 37.9% in 2023. As new energy vehicle sales slow, Xinlian Integrated's revenue growth from the automotive electronics sector will inevitably decline as well.

With slowing downstream demand, competition in the automotive chip supply chain has intensified.

(Image from Shutterstock, based on VRF agreement)

For example, China Resources Microelectronics is building a 12-inch specialty process IC production line in Shenzhen, which is expected to commence production by the end of 2024 with an annual production capacity of 4.8 million power chips, targeting applications in new energy vehicles. Hua Hong Semiconductor's Wuxi subsidiary continues to expand its 12-inch wafer production capacity and has obtained automotive quality management system certification.

While Xinlian Integrated remains the largest domestic foundry for automotive-grade IGBT chips and modules, it remains uncertain whether the company can maintain its market share amidst fierce competition from other players.

Goldman Sachs has released data indicating that as new energy vehicle growth slows and automotive electronics chip capacity increases, the utilization rate of domestic automotive electronics chip capacity is expected to decline over the next five years. This implies that production costs for already loss-making automotive chips will further increase.

Under the impact of slowing downstream demand and intense competition, Xinlian Integrated's gross margins have been negative in recent years. From 2022 to the first half of 2024, the company's gross margins were -0.23%, -6.81%, and -4.25%, respectively.

As nearly half of Xinlian Integrated's revenue comes from automotive electronics, slowing demand and intensifying competition in this sector are likely to negatively impact the company's performance.

3. Proposed acquisition of loss-making assets for 5.8 billion yuan, raising over 25.1 billion yuan in funding in a year and a half since listing

To reduce its reliance on automotive electronics, Xinlian Integrated is actively exploring a second growth curve.

On June 22, Xinlian Integrated announced its intention to acquire a 72.33% stake in Xinlian Yuzhou Integrated Circuit Manufacturing (Shaoxing) Co., Ltd. (hereinafter referred to as "Xinlian Yuzhou") through a combination of share issuance and cash payment.

It is reported that Xinlian Yuzhou is also a wafer foundry, specializing in silicon carbide chips. Its shipments of 6-inch SiC MOSFETs (semiconductor materials) rank first domestically. The transaction valuation for Xinlian Yuzhou is 8.152 billion yuan, with Xinlian Integrated offering 5.897 billion yuan for the proposed acquisition based on the stake to be acquired.

As a third-generation semiconductor, silicon carbide is still in its early stages of development, and its market size is expected to expand rapidly in the coming years. TechInsights predicts that the silicon carbide market will grow from 8.244 billion yuan to 36.411 billion yuan between 2022 and 2027, with a compound annual growth rate of 35%.

Xinlian Integrated's acquisition of Xinlian Yuzhou is driven by the high-growth potential of the silicon carbide market. However, due to the high cost of silicon carbide, its market demand has not significantly increased, resulting in low capacity utilization rates for related companies, and most silicon carbide enterprises are currently operating at a loss.

Xinlian Yuzhou is no exception, with net profits attributable to shareholders of -700 million yuan in 2022 and -1.116 billion yuan in 2023. If the acquisition is successfully completed, Xinlian Integrated's losses will undoubtedly widen further after consolidation.

For this acquisition, Xinlian Integrated will also need to pay a portion in cash, which may put significant pressure on the company's cash flow. As of June 30, 2024, Xinlian Integrated's monetary funds totaled 7.904 billion yuan.

However, compared to its substantial interest-bearing debt, 7.904 billion yuan in monetary funds is clearly inadequate. During the same period, the company's interest-bearing debt exceeded 14 billion yuan, and Xinlian Integrated had short-term payables and notes payable totaling 2.459 billion yuan that needed to be settled.

It is worth noting that Xinlian Integrated raised 11.072 billion yuan through its IPO in May 2023 and borrowed an additional 14.031 billion yuan from banks and other financial institutions after listing. In just over a year, Xinlian Integrated has raised over 25.1 billion yuan in funding.

(Image: Company's financing details)

Despite this significant funding, Xinlian Integrated, as an asset-heavy industry player, still requires substantial capital for continuous external investments. From 2023 to the first half of 2024, Xinlian Integrated's investing cash outflows were 9.355 billion yuan and 2.587 billion yuan, respectively.

This means that in managing its own operations, Xinlian Integrated's current financial position is not abundant, and acquiring a continuously loss-making Xinlian Yuzhou will undoubtedly increase the company's financial pressure in the short term.

Due to continuous operating losses, high debt pressure, and investor preferences, Xinlian Integrated's share price has declined steadily since reaching a high of 6.96 yuan per share in May. As of September 23, Xinlian Integrated's share price closed at 3.36 yuan per share, representing a significant decline from its peak and a substantial underperformance compared to its IPO price of 5.69 yuan per share.

For Xinlian Integrated, its core business has consistently suffered losses due to slowing industry growth and intense competition. Against this backdrop, investing heavily in loss-making assets raises questions about whether the company can survive until the automotive electronics market recovers or the silicon carbide market experiences significant growth, depending on the company's cash flow and future financing situation.

*Note: The lead image in this article is from Shutterstock, based on the VRF agreement.