In recent years, North Huachuang has made significant strides in the semiconductor equipment sector by continuously solidifying its diverse platform that spans various fieldsDespite the performance downturn experienced by global chip companies, North Huachuang has successfully leveraged the growth opportunities presented by high-end integrated circuit processes in China, resulting in explosive growth in its performance metrics.

In the realm of equipment manufacturing, North Huachuang stands out as a company with one of the fastest growth ratesLeading up to 2021, as the downstream industries underwent phases of rapid commercialization with technologies such as 5G, photovoltaic energy solutions, and the scaled production of semiconductor products, the company benefited substantially

The advancements in photovoltaic cell technology, the expansion of efficient lithium battery production capacities, innovations in lighting technologies, the development of third-generation semiconductors, and the flourishing integrated circuit market created a rich environment for the company's rapid growth.

North Huachuang's half-year report for 2024 is expected to reflect a continuation of its prior stellar performance, seemingly unaffected by the cyclical downturn of the downstream marketSince 2020, the semiconductor industry has faced numerous fluctuations, initially disrupted by the pandemic which shattered supply chains, with chip companies experiencing unprecedented growth and subsequently increasing capital expendituresHowever, by the latter half of 2022, a downturn ensued, lasting into 2023, where chip manufacturers slashed capital expenditures

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Now, as we look toward 2024, global semiconductor wafer fabrication capital expenditures are set to rebound, coupled with accelerated advancements in domestic wafer fabrication processes, thereby driving demand for upstream semiconductor equipmentAnalysts predict an upward trajectory in capital expenditures moving forward.

The semiconductor equipment industry is characterized by high barriers to entry and significant customer loyaltyRecently, North Huachuang's return on equity has been rising steadily, with expectations for high revenue growth and even greater net profit growth in the first half of 2024. The scale of the company, now more robust than ever, has enhanced its capability to withstand risks, ensuring that temporary fluctuations in the semiconductor cycle do not impact overall performance significantly.

At one point, the company's stock price witnessed a tenfold increase over three years.

Between 2019 and 2021, North Huachuang's operating revenue skyrocketed from 4.058 billion yuan to 9.683 billion yuan, with its net profit soaring from 70.16 million yuan to 807 million yuan

The stock price, which began the year of 2019 at below 40 yuan, reached an all-time high of 450.70 yuan in November 2021. In retrospect, North Huachuang has positioned itself well within the semiconductor equipment and photovoltaic sectors, enjoying the dividends of domestic semiconductor production expansions, thus establishing a storied narrative of a tenfold stock increase.

Currently, North Huachuang's product offerings encompass lithium battery equipment and semiconductor equipment, also extending into areas such as high-energy physics, aerospace, vacuum devices, photovoltaic materials, and high-end magnetic materialsTheir lithium battery equipment supports the lithium-ion power and energy storage sectors, with established partnerships with leading domestic lithium battery manufacturersThe company's key process equipment in the field of third-generation semiconductors, including SiC etching, GaN etching, and various deposition machines, have become essential in industry-standard configurations

New display technologies continue to complement production lines, while custom vacuum solutions are increasingly sought after by high-end clients.

By 2021, the company successfully achieved mass production of key products, including etching machines, PVD equipment, CVD technologies, oxidation/diffusion furnaces, and cleaning systems in both the integrated circuit and broader semiconductor fieldsIts integrated circuit equipment addresses logic, storage, power, and advanced packaging, with mainstream chip production lines purchasing the company’s technology in bulkFurthermore, various novel processing technologies in the storage segment are moving toward production validationThe advanced packaging sector has realized multi-product layouts, establishing collaborations with primary packaging manufacturers in the countryIn the power device segment, North Huachuang has engaged deeply with upscale domestic manufacturers, solidifying its role as a premier supplier in the industry.

Overall, the rapid time frame from market introduction to mass shipment for North Huachuang’s diverse products, often within two years, mirrors not only its production efficiency but also reflects the vigorous market demand

The year 2019 marked the advent of 5G commercialization in China, as well as the year's pivotal moment for cost-effective photovoltaic energy developmentIn recent years, technological iterations in photovoltaic cells, the expansion of lithium battery capabilities, and developments in semiconductor technologies have continually benefitted upstream equipment manufacturers.

The rise in net assets return is noteworthy.

By 2022, marking a landmark phase, North Huachuang began ramping up production for integrated circuit equipment with significant orders for 12-inch etching, epitaxy, and cleaning systemsThis progress has been closely linked to capital market support, as evidenced by the company’s fundraising efforts through non-public offerings, which amassed 2 billion yuan in 2019 and 8.5 billion yuan in 2021. The 2019 fundraising targeted advanced integrated circuit equipment R&D and industrialization with projected annual sales revenues reaching 2.638 billion yuan and an anticipated annual profit of 538 million yuan by full production

As of 2023, this project’s investment completion rate stands at 99%, yielding 205 million yuan in profits for the yearConversely, the 2021 fundraising for enhancing the semiconductor equipment industrialization base foresees an average annual sales revenue of 7.460 billion yuan, with projected annual profits of 807 million yuanBy 2023, this project stands at a 51.58% completion rate with future profitability anticipated.

Despite the dilution from equity financing, North Huachuang’s return on equity continues to improve, boasting net diluted ROEs of 10.67% in 2022 and 14.70% in 2023. Basic DuPont analysis reveals enhancements in net profit margin, asset turnover, and equity multiplier, showcasing robust sales and production efficacyAs the company grows, its gross margin stabilizes around 40%, with decreasing selling expenses

Both gross margin and expense ratios sit below the median of A-share semiconductor equipment firms, reinforcing the effectiveness of its platform strategy.

The semiconductor equipment industry poses considerable barriers, necessitating substantial capital investments in R&D and the procurement of raw materials and componentsNotably, wafer fabrication equipment requires significant R&D expertise, capital, and time to developWith a high customer retention following vendor certification, companies possessing first-mover advantages can better maintain and consolidate their market positionNorth Huachuang’s ratio of capitalized R&D spending exceeds 50%, with development expenditures rising from 3.332 billion yuan in Q1 2022 to 7.050 billion yuan in Q1 2024, comprising 12.53% of total assetsThis exceeds the scale of intangible assets, leading to increased amortization pressures

Nonetheless, the scale benefits the company has gained can partially cushion the cost pressures associated with amortizing its intangible assets.

A cyclical recovery alongside high-end process expansions

Within the capital expenditure of a newly built wafer fabrication facility, semiconductor equipment constitutes approximately 80% of the investment and is a significant contributor to wafer fabrication expansionAmong global expenditures on wafer fabrication equipment, etching machines, thin-film deposition systems, and photolithography machines represent the top three categories, accounting for 22%, 22%, and 17% of the total value, respectively.

The global equipment spending for wafer fabrication has reportedly hit a bottom and is expected to rebound

Industry associations project that in 2024, global equipment expenditures for wafer fabrication will experience a 15% increase year-on-year, reaching approximately 97 billion USDFurthermore, it is predicted that spending on equipment for 300mm wafer plants in mainland China will reach 16.1 billion USD by 2026. The ongoing recovery in global wafer fabrication capital expenditures, combined with the accelerated pace of breakthroughs in domestic advanced process fabrication, is anticipated to effectively stimulate demand for upstream semiconductor equipment.

The global semiconductor equipment market exhibits an exceptionally high concentrationCompanies from the United States, Japan, and the Netherlands lead in production technologies and market shares due to sustained investments in R&D and accumulated industry expertise

However, the stringent export controls imposed on semiconductor equipment to China force a shift toward domestic alternatives for advanced process equipment and componentsChina has made considerable advancements in the processes for semiconductor equipment at the 28nm node and above, achieving substantial domestic production rates in the markets for photoresist stripping, CMP, etching, and cleaning equipment, having surpassed double-digit coverage.

North Huachuang's product offerings tailored for 300mm wafer fabrication continue to break new groundThe TSV (Through Silicon Via) metallization equipment is designed for advanced packaging sectors such as 2.5D/3D integration and Chiplet technologiesCurrently, North Huachuang's TSV etching machines are widely utilized in leading domestic wafer and advanced packaging facilities, positioning the company as a key player in the domestic TSV production market

Furthermore, their 12-inch high-density plasma chemical vapor deposition equipment has officially entered client validation stages, while the capacitively coupled plasma and edge etching machines have passed customer testingThe plasma stripping machines and high-dielectric constant atomic layer deposition equipment have successfully achieved mass production across multiple domestic clients, with the reduction pressure epitaxy equipment securing stable production status and repeat ordersMoreover, the integrated circuit aluminum backing sputtering equipment has been mass-produced efficiently.

However, sectors such as photolithography machines, measurement and testing devices, ion implantation systems, and coating/developing equipment still exhibit a domestic production rate of less than 10%. The overall domestic manufacturing rate for semiconductor equipment remains relatively low, highlighting the lengthy and challenging journey ahead for domestic replacements in high-end equipment

For the first half of 2024, North Huachuang's process coverage and market share for its etching, thin-film deposition, cleaning, furnace, and rapid annealing technologies in the integrated circuit sector are set to continue their steady upward climbRevenues are projected to range between 11.41 billion yuan to 13.14 billion yuan, representing a year-on-year growth of 35.40% to 55.93%. Its net profit attributable to the parent company is predicted to be between 2.44 billion yuan to 2.81 billion yuan, reflecting an impressive annual growth of 51.64% to 74.63%. The company anticipates ample growth space for the demand for domestic semiconductor equipment in the upcoming two to three years as application needs expand.

As an equipment manufacturer, the current orders serve as an indicator of future income scale, where clients typically make partial payments upon placing orders, establishing contract liabilities on the company’s balance sheet