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(Source: Shanxi Securities Research Institute).

Investment Essentials

Focusing on silicon carbide substrate products, order delivery drove revenue growth and performance to profit. The company focuses on the research and development, production and sales of silicon carbide substrates, and its products can be widely used in microwave electronics, power electronics and other fields. With the ramp-up of the production capacity of the Shanghai Lingang plant, the company has realized the batch supply of conductive substrates, the production and sales volume has gradually increased, and the order delivery capacity has continued to increase, driving the continuous growth of operating income, with a CAGR of 59.14% from 2021 to 2023. With the accelerated penetration of downstream application scenarios, the international market has a strong demand for high-quality conductive silicon carbide substrates, and the company has a strong advantage in customer resources.

Supply: The opportunity for domestic substitution of size upgrading is highlighted, and the company's share of conductive substrates ranks second in the world. With the outbreak of downstream demand for electric vehicles/charging piles, photovoltaic new energy, large-size silicon carbide substrates can reduce costs and increase efficiency, and the global silicon carbide market from 6 inches to 8 inches has made more progress than expected. Yole expects the global conductive silicon carbide substrate market to grow to $2.16 billion by 2027 and account for a major share of the market. In 2023, the global conductive substrate material market will be highly concentrated, with the market share of the company and Tianke ranking second and fourth respectively, while the market share of Wolfspeed and Coherent will decline significantly. With product quality, production capacity and stable supply capacity, the company has become the main supplier of international first-line manufacturers, and at the same time has achieved domestic substitution. With the continuous increase in the demand for 8-inch substrates in the international market, the company has significant advantages in 8-inch substrate technology and product quality, and has achieved batch sales of 8-inch substrates in 2023, leading the industry in terms of shipments.

Demand: The penetration rate of silicon carbide in vehicles is accelerating, and the company's automotive-grade conductive substrates are leading the industry. Yole expects the market size to reach nearly $10 billion in 2029, of which 70% is mainly used in the field of electric vehicles, with a high market concentration of suppliers (about 95% of CR5) and are internationally renowned manufacturers. Benefiting from cost reduction and large-scale production, the optimal combination of 800V high-voltage platform + silicon carbide electric drive system accelerates the onboarding. The company is the world's leading enterprise in large-scale mass production of conductive silicon carbide substrates, and the product quality and batch supply capacity of automotive-grade conductive substrates are industry-leading. By the end of 2023, the company has shipped more than 700,000 substrates. In terms of technology, the company has a first-mover advantage in the preparation of 8-inch products by liquid phase method. The company has stable cooperation with international well-known customers such as Infineon and Bosch, and the agreed supply is expected to account for a double-digit share of Infineon's long-term demand. At present, the company has more than 2 billion yuan of orders in hand.

Earnings Forecast, Valuation Analysis and Investment Advice: Volume Supply of Automotive-grade Substrates Drives Growth, Leading the Way in Automotive-Grade and 8-inch Products. The company has a leading edge in the large size of the substrate, technology platform and supply chain, and is now in the leading position in the industry through years of technology, customer and market accumulation, and relies on the advantage of the first release bureau to promote the transformation of the industry to 8-inch substrate. Following the market share of semi-insulating substrates ranking among the top three in the world for four consecutive years, according to the Fuji Economic Report of Japan, the company will rank second in the world in terms of global market share of conductive silicon carbide substrate materials in 2023. In 2024H1, the production capacity of 300,000 pieces of Shanghai Lingang factory reached production ahead of schedule, the long-term production capacity plan of 960,000 pieces began to be implemented, and the company's order delivery capacity continued to increase, and it is expected that the company will achieve operating income of 17.26/22.95/2.948 billion yuan from 2024 to 2026, and the net profit attributable to the parent company will be 1.92/2.89/377 million yuan, and the corresponding EPS will be 0.45/0.67/0.88 yuan respectively. Based on the closing price of 66.0 yuan on November 7, the PE of 24-26 years is 148.06X/98.15X/75.19X. We are optimistic about the company's ability to supply conductive products on a long-term scale and increase market share, and we have given an "overweight-A" rating for the first time.

Risk warning: changes in national industrial policies, intensified competition in the industry, lower than expected increase in production capacity, high concentration of customers/suppliers, geopolitical risks, risk of shareholder plan to reduce holdings, etc.

Source: Most Wen, Shanxi Securities Research Institute

[Focus on silicon carbide substrate products, abundant orders drive revenue growth].

Focus on the research, production and sales of silicon carbide substrates

Focus on the research and development, production and sales of silicon carbide substrates, and independently develop semi-insulating silicon carbide substrate products. The company is a leading manufacturer of wide bandgap semiconductor materials in China, currently mainly engaged in the research and development, production and sales of silicon carbide semiconductor materials, which can be widely used in microwave electronics, power electronics and other fields. Since 2011, the company began to focus on the research and development, production and sales of silicon carbide substrates, and the main business has not changed since then. In the context of the technical blockade and product embargo imposed by some developed countries on China, the company has independently developed semi-insulating silicon carbide substrate products to realize the independent and controllable core strategic materials in China, effectively guarantee the supply of domestic products, and ensure the stable development of China's wide bandgap semiconductor industry chain.

Figure 1: The company's business development history

Source: Company Prospectus, Shanxi Securities Research Institute

The company is a private enterprise, and the controlling shareholder and actual controller is Mr. Zong Yanmin. Shareholders holding more than 5% (inclusive) of the company's shares or voting rights include Zong Yanmin, Jinan Sinoma, Liaoning Zhongde, Hubble Investment, and Shanghai Maiming, and as of the 2024 interim report, they hold 30.09%, 9.0%, 6.88%, 6.34%, and 5.38% of the company's shares, respectively. Among them, Hubble Investment is 100% controlled by Huawei Investment, and Shanghai Maiming is the company's employee shareholding platform. At the same time, Mr. Zong Yanmin serves as the executive partner of Shanghai Maiming and Shanghai Zhuao, indirectly controlling 5.38% and 3.00% of the shares of the Company respectively, and Mr. Zong Yanmin controls a total of 38.47% of the shares of the Company and is the controlling shareholder and actual controller of the Company.

Figure 2: The company's shareholding structure (more than 2% shareholding).

Source: wind, Shanxi Securities Research Institute

Abundant orders led to revenue growth, and the performance in the first three quarters of 2024 turned losses into profits

The company's main business products are silicon carbide substrates, and other business products are mainly crystal rods and unqualified substrates. From 2021 to 2023, the company's operating income will be 4.94/4.17/1.251 billion yuan, an increase of 16.25%/-15.56%/199.90% year-on-year, respectively, and the CAGR will be 59.14% from 2021 to 2023, of which the revenue of the main silicon carbide substrate will account for 78.4%/78.2%/86.8% respectively, increasing year by year. At first, due to the limited production capacity of the company, in the case of foreign embargo, the company gave priority to the production of semi-insulating substrates. With the ramp-up of production capacity at the Shanghai Lingang plant, the company has realized the mass supply of conductive substrates. With the increase in the production and sales of the company's conductive products, the company's order delivery capacity has been improved, driving the continuous growth of operating income, and the company's revenue in the first three quarters of 2024 will be 1.281 billion yuan/+55.34%.

Figure 3: The company's operating income and year-on-year growth rate (100 million yuan, %)

Source: wind, Shanxi Securities Research Institute

Figure 4: The company's net profit attributable to the parent company and the year-on-year growth rate (100 million yuan, %)

Source: wind, Shanxi Securities Research Institute

The strong demand for vehicle specifications + the continuous enhancement of the company's delivery drove the performance to turn losses into profits. From 2021 to 2023, the company's net profit attributable to the parent company will be 0.90/-1.75/-46 million yuan respectively, a year-on-year increase of +114.02%/-294.80%/+73.98% respectively, and the performance loss is mainly due to the management expenses of new production capacity and large R&D investment in new products. In the first half of 2024, the penetration rate of silicon carbide devices in electric vehicles is still improving, the international market has a strong demand for high-quality conductive silicon carbide substrates, and the penetration of downstream application scenarios is accelerating. From 2021 to 2023, the comprehensive gross profit margin of the company's main silicon carbide substrate will be 32.83%/-0.72%/17.53% respectively. The gross profit margin of silicon carbide substrate of 24H1 company is 27.36%/+18.04pcts, and with the gradual emergence of scale effect, the company's main gross profit margin continues to rise.

Figure 5: Revenue structure of the company's main products (%)

Source: wind, Shanxi Securities Research Institute

Figure 6: Gross profit margin of the company's main products (%)

Source: wind, Shanxi Securities Research Institute

The R&D rate is slightly lower than the average level of peers, and there is more room for improvement in gross profit margin. At present, the company is in the first echelon in the world in the preparation of silicon carbide substrates, leading the development of the industry. The company continues to increase R&D efforts, and continues to deploy in the industrialization of large-size products, forward-looking technology layout (including new technologies such as liquid phase method and crystal laser processing), and high-quality product research and development, constantly breaking through technical bottlenecks, improving product yields, and continuously reducing preparation costs. In the first three quarters of 2024, the company's R&D fee rate was 7.42%, slightly lower than the average level of comparable companies listed in the same industry. IN TERMS OF GROSS PROFIT MARGIN, THE COMPANY'S COMPREHENSIVE GROSS PROFIT MARGIN IN THE FIRST THREE QUARTERS OF 2024 WAS 25.78%, SLIGHTLY HIGHER THAN THE AVERAGE LEVEL OF COMPARABLE COMPANIES LISTED IN THE SAME INDUSTRY, AND COMPARED WITH THE 30% STEADY GROSS PROFIT MARGIN OF INTERNATIONAL GIANTS WOLFSPEED AND COHERENT, WHOSE MAIN BUSINESS IS RELATIVELY CLOSE, THERE IS STILL SOME ROOM FOR GROWTH. (SINCE WOLFSPEED AND COHERENT HAVE NOT DISCLOSED THE DATA OF THE THIRD QUARTER, 24H1 DATA IS USED AS A REFERENCE FOR PEER COMPARISON.) ）

Figure 7: Peer comparison of the company's R&D rates in the first three quarters of 2024 (%)

Source: wind, Shanxi Securities Research Institute

Figure 8: Peer comparison of the company's comprehensive gross profit margin in the first three quarters of 2024 (%)

Source: wind, Shanxi Securities Research Institute

[Supply: The opportunity for domestic substitution of size upgrading is highlighted, and the company's share of conductive substrates ranks second in the world].

Upgrading from 6 inches to 8 inches is the mainstream direction of silicon carbide substrate preparation technology

Silicon carbide substrates are located in the upstream of the industrial chain and are divided into two categories: conductive and semi-insulating. The industrial chain with silicon carbide materials as substrates mainly includes the preparation of silicon carbide substrate materials, the growth of epitaxial layers, device manufacturing and downstream application markets. On silicon carbide substrates, chemical vapor deposition (CVD) is mainly used to generate the required thin film material on the surface of the substrate, that is, to form epitaxial wafers, which are further fabricated into devices. According to the different electrical properties, silicon carbide substrates can be divided into two categories. Among them, silicon carbide epitaxial wafers are prepared by growing silicon carbide epitaxial layers on conductive silicon carbide substrates, which can be further made into power devices and used in new energy vehicles, photovoltaic power generation, rail transit, smart grids, aerospace and other fields; Gallium nitride-on-silicon carbide (GaN-on-SiC) epitaxial wafers are prepared by growing gallium nitride epitaxial layers on semi-insulating silicon carbide substrates, which can be further made into microwave RF devices for 5G communications, radar and other fields.

Figure 9: Silicon carbide substrate industry chain

Sources: YOLE, Wide Band Gap Semiconductor Technology Innovation Alliance, Experts Say Three and a Half Generations, Hantian Tiancheng Prospectus, Shanxi Securities Research Institute

8-inch silicon carbide technology has become a strategic highland for countries to compete for layout. The size of silicon carbide substrate (calculated by diameter) mainly includes 2 inches (50mm), 3 inches (75mm), 4 inches (100mm), 6 inches (150mm), 8 inches (200mm) and other specifications. Silicon carbide substrate is constantly developing in the direction of large size, globally, 8-inch silicon carbide substrate has begun to industrialize, foreign silicon carbide substrate head manufacturer Wolfspeed's 8-inch conductive silicon carbide substrate has entered the mass production stage, Wolfspeed announced in July 2023 that its 8-inch factory has begun to ship SiC MOSFETs to Chinese end customers in batches, indicating that its 8-inch substrate and MOSFET have been applied in batches; Domestically, domestic substrate manufacturers are still mainly supplying 6-inch substrates, although several domestic manufacturers have the production capacity of 8-inch silicon carbide substrates.

Figure 10: Progress of SiC substrate technology in foreign

Source: CASA Research, Third Generation Semiconductor Industry Development Report (2020), Shanxi Securities Research Institute

Figure 11: Progress of domestic SiC substrate technical indicators

Source: CASA Research, Third Generation Semiconductor Industry Development Report (2020), Shanxi Securities Research Institute

Silicon carbide is still in the stage of upgrading from 6 inches to 8 inches. From the perspective of demand, the downstream demand for electric vehicles/charging piles, photovoltaic new energy and other downstream needs has exploded, and the global SiC supply is in short supply, and major manufacturers have accelerated the promotion of 8 inches to expand supply; From the perspective of supply, large-size silicon carbide substrates can reduce costs and increase efficiency. According to estimates, the output of a single 8-inch silicon carbide substrate is about twice that of a 6-inch chip, and some of the silicon-based power chip production line equipment can be used, which can greatly reduce costs and improve efficiency. According to the industry leader Wolfspeed report, taking a 32mm² area of bare chips (chips) as an example, 448 pieces can be cut out of 6 inches, 845 pieces can be cut out of 8 inches, and the number of bare dies on 8-inch silicon carbide substrates has increased by nearly 90% compared with 6 inches; Due to the low yield of edge chips, the number of edge dies in 6 inches will account for 14%, and the proportion of 8 inches will be reduced to 7%, and the utilization rate of 8 inches will be increased by 7% compared with 6 inches. According to the calculation of silicon carbide substrate manufacturer Tianke Heda, the unit cost is expected to be reduced by 35% from 6 inches to 8 inches.

The 8-inch substrate layout is the world's leading Wolfspeed, and the company's shipments are among the top in the industry

It is expected that 8-inch silicon carbide substrates will enter the market in large quantities in 2024, and Wolfspeed is the world's leader in the layout of 8-inch substrates. At present, 8-inch silicon carbide still faces problems such as difficulty, high cost and low yield in single crystal growth and substrate processing, which inhibits the process of large-scale mass production. However, with the gradual decline in the cost of silicon carbide chips and the continuous maturity of 8-inch silicon carbide technology, the conversion time from 6 to 8 inches will be greatly advanced, and the 8-inch silicon carbide substrate market will develop rapidly. As of 2023, an industrial chain layout from 8-inch substrate to wafer manufacturing has been formed overseas, and the development and product research and development of 8-inch silicon carbide substrate technology by overseas leading manufacturers have been significantly accelerated in the past two years. In addition to Wolfspeed, which has achieved mass production, there are 7 silicon carbide substrate, epitaxy, and device factories that are expected to achieve mass production of 8-inch substrates in the next 1-2 years. Among them, Wolfspeed's 8-inch substrates and MOSFETs have been applied in batches, and the company continues to build the JohnPalmour silicon carbide substrate factory to promote the expansion of substrate production capacity and meet the expansion needs of its 8-inch wafer fab. STMicroelectronics has also invested in the 8-inch field, and it has partnered with Hunan San'an Semiconductor to build an 8-inch silicon carbide wafer fab, and San'an has built its own 8-inch silicon carbide substrate factory to ensure the stability of material supply in the joint venture plant. According to the YOLE report, 8-inch silicon carbide substrates will enter the market in large quantities in 2024. The industry expects that from 2026 to 2027, the current 6-inch silicon carbide products will be replaced by 8-inch products. According to TrendForce, the current market share of 8-inch products is less than 2%, and the market share is expected to grow to about 15% by 2026.

Figure 12: Silicon Carbide Substrate Market Forecast by Size (Sheets).

Source: Yole, the company's statement on raising funds to invest in the field of scientific and technological innovation, Shanxi Securities Research Institute

Figure 13: Fab construction at the world's major silicon carbide suppliers

Source: Yole, Shanxi Securities Research Institute

The pace of domestic mass production breakthroughs has accelerated, and Tianyue's 8-inch substrate shipments are leading the industry. At present, more than 10 companies have entered the stage of sample delivery and small batch production of 8-inch silicon carbide substrates, including Shuoke Crystal, Jingsheng Electromechanical, Tianyue Advanced, Nansha Wafer, Tongguang Co., Ltd., Tianke Heda, Keyou Semiconductor, Qianjing Semiconductor, Hunan San'an Semiconductor, Chaoxinxing, Sheng New Materials (Taiwan, China), and Yuehai Gold. In terms of investment, Shuoke Crystal, Nansha Wafer, Tianyue Advanced, Tianke Heda, Qianjing Semiconductor, Keyou Semiconductor, San'an Optoelectronics, etc. all have 8-inch substrate-related expansion plans, aiming to prepare for the supply of material production capacity for subsequent midstream and downstream customers in advance. At this stage, the gap between Chinese manufacturers and international manufacturers in the field of substrates has been significantly narrowed, and Infineon has reached long-term cooperation with Chinese manufacturers such as Tianyue Advanced and Tianke Heda, which also shows that the quality of Chinese substrate products has been recognized. Among them, Tianyue has achieved the preparation of high-quality 8-inch silicon carbide substrates through independent expansion in 2022. With the continuous increase in the demand for 8-inch silicon carbide substrates in the international market, as well as the company's advantages in 8-inch silicon carbide substrate technology and product quality, the company has achieved batch sales of 8-inch silicon carbide substrates in 2023, and the shipment volume of 8-inch silicon carbide substrates is leading in the industry.

Table 1: Production capacity of major silicon carbide substrate manufacturers in the world

Source: Electronic enthusiasts, experts say three and a half generations, electronic engineering world public account, Jingsheng Electromechanical 2024 semi-annual report, compiled by Shanxi Securities Research Institute

The mass production time of 8 inches is approaching, and Tianyue has successfully entered the top 10 in the global conductive substrate market. In recent years, manufacturers at home and abroad have actively invested in expanding the production capacity of silicon carbide substrates. At present, 6-inch silicon carbide substrates have certain advantages in quality and price, and still occupy the mainstream of the market. According to statistics, international manufacturers will contribute more than 2 million pieces of 6-inch silicon carbide substrate production capacity in 2023, and it is expected to continue to expand in the next three years; 8-inch substrates have not yet been shipped in large quantities, and the future electric vehicle market is expected to drive the demand for 8-inch wafers to continue to grow. Internationally, 8-inch wafer manufacturing has moved towards the eve of mass production, and the mass production time of 8-inch wafers from overseas manufacturers such as Wolfspeed, Infineon, Bosch, and onsemi is concentrated in the second half of 2024 to 2026. There is a certain time lag between domestic manufacturers and international manufacturers in terms of mass production time, but at present, Tianyue Advanced and Tianke Heda have successfully entered the top ten list of the global conductive silicon carbide substrate material market, and the industrial chain has been further improved and matured. It is estimated that the domestic 6-inch silicon carbide substrate production capacity in 2023 will account for 42% of the global production capacity, and by 2026, the domestic 6-inch silicon carbide substrate production capacity will account for about 50% of the global production capacity. In the future, in the 8-inch market, Chinese manufacturers will usher in more production capacity release, promote silicon carbide cost reduction and quality improvement, and accelerate market entry.

The

value of the silicon carbide substrate industry chain is high, and the market scale of conductive substrates is constantly expanding

Silicon carbide substrates account for 47% of the cost of power devices and are one of the most valuable links. Wide bandgap semiconductor devices have been applied in 5G communications, smart grids, electric vehicles, rail transit, new energy grid-connected, switching power supplies and other fields, and have shown good development prospects. The rapid development of the device and application market has generated a strong demand for silicon carbide substrate materials. From the perspective of value, the added value of the silicon carbide industry chain is concentrated upstream, and substrate + epitaxy is the most valuable link in the silicon carbide industry chain. Silicon carbide substrates account for about 47% of the cost of silicon carbide devices, epitaxial links account for 23%, and the cost before manufacturing accounts for 70% of the total cost, much higher than the proportion of traditional silicon-based device substrates and epitaxy of about 11%. The preparation of substrate + epitaxy is difficult, high technology and cost, and it is an important part of silicon carbide devices. Due to the relatively expensive price of silicon carbide substrate and epitaxy compared with silicon wafers, the penetration rate of silicon carbide power devices is low at this stage. Silicon carbide devices have the characteristics of high efficiency and high power density, and the strong demand in new energy vehicles, energy, industry and other fields is expected to drive the rapid increase in silicon carbide penetration.

Figure 14: Proportion of manufacturing cost of silicon carbide power devices (%)

Source: China Commercial Industry Research Institute, Shanxi Securities Research Institute

Figure 15: Silicon carbide penetration rate gradually increasing (%)

Source: Yole, Shanxi Securities Research Institute

New energy vehicles are the largest end-use market for silicon carbide power devices, and the penetration rate continues to increase. From the perspective of terminal application fields, silicon carbide power devices are used in new energy vehicles, photovoltaic power generation, energy storage, rail transit, ultra-high voltage DC transmission and other fields, and new energy vehicles are currently the largest terminal application market. The outbreak of the new energy vehicle market has brought about the rapid growth of the automotive semiconductor market, and the application of the "800V+SiC" high-voltage platform has accelerated the penetration of silicon carbide. In 2022, the global silicon carbide power devices used for new energy vehicles accounted for about 70% of the global silicon carbide power device market, and with the increase in the penetration rate of new energy vehicles in the future, the proportion is expected to rise to 74% in 2028; In the field of medium voltage, power devices are widely used in the industrial and energy fields, accounting for about 13% and 10% of the global silicon carbide power device market size in 2022; The field of medium and low voltage and low power power supply is mainly used in consumer electronics, etc., accounting for a relatively small proportion. Yole predicts that the silicon carbide power device industry will become the main silicon carbide market in the next five years, growing from about $2.7 billion in 23 to more than $10 billion in 2029, with battery electric vehicles (BEVs) being the main market driver, accounting for more than 70% of the market share, and industrial applications including electric vehicle charging piles and power grids are further adding impetus to the expansion of the market size.

Figure 16: Proportion of downstream application market of silicon carbide power devices (%)

Source: Yole, Shanxi Securities Research Institute

Figure 17: Global silicon carbide substrate market size (USD billion).

Source: Yole, China Business Industry Research Institute, Shanxi Securities Research Institute

The market demand for silicon carbide substrates continues to increase, and the market size of conductive substrates continues to expand. The market size of the global silicon carbide substrate industry has shown a significant growth trend in recent years. Benefiting from the growth of demand in the fields of electric vehicles, high-voltage fast charging, photovoltaics, energy storage, etc., the scale of silicon carbide power devices continues to expand, driving the market demand for silicon carbide substrates. Driven by the huge market demand, the global silicon carbide substrate production capacity has been expanding, and the market size of semi-insulating and conductive silicon carbide substrates has achieved rapid growth. According to the data of Yole and China Commercial Industry Research Institute, the global market size of conductive and semi-insulating silicon carbide substrates will reach US$684 million and US$281 million in 2023, and will reach US$1.221 billion and US$378 million respectively by 2025, and conductive silicon carbide substrates will occupy a major share of the market in the future, and the global market size is expected to grow to US$2.16 billion in 2027. According to data from the China Wide Bandgap Power Semiconductor and Application Industry Alliance, the global demand for 6-inch conductive substrates will increase from more than 80,000 pieces in 2020 to 200,000 pieces in 2025. Compared with the global market size of silicon wafers, the global market sales of silicon carbide substrates are still small, mainly because the supply-side cost of the silicon carbide industry is still high, which restricts the current market purchasing power and the release of demand. In the future, with the continuous development of the silicon carbide substrate and device manufacturing industry, the manufacturing cost is expected to continue to decline, and the silicon carbide device and system are expected to show competitiveness and be widely used and develop rapidly in the downstream industry, thereby driving the rapid development of the overall demand and market size.

The domestic share of conductive substrates has risen rapidly, and the company's market share has jumped to the second place in the world

The

semi-insulating substrate market concentration is high, and Tianyue's leading position in the market is relatively stable. According to Yole data, the CR4 of substrates in the global market will reach more than 80% in 2023, and foreign manufacturers will occupy a major share in the substrate market. In 2023, the top four suppliers in the global substrate market will be Wolfspeed, Tianke Heda, Coherent (formerly II-VI), and Tianyue Advanced. Domestic manufacturers have a stable dominant position in the global semi-insulating substrate market. In the semi-insulating silicon carbide market, the current mainstream substrate product specifications are 4-6 inches, and the global semi-insulating silicon carbide substrate market will have a high concentration in 2020. According to the company's 23-year annual report, the company's semi-insulating silicon carbide substrate market share has ranked among the top three in the world for four consecutive years.

Figure 18: Global silicon carbide substrate market competitive landscape (%)

Source: Yole, Shanxi Securities Research Institute

Figure 19: Global semi-insulating silicon carbide substrate market competition landscape (%) in 2020

Source: Yole, company prospectus, Shanxi Securities Research Institute

The market share of domestic manufacturers in conductive substrates has risen rapidly, and Tianyue ranks second. In the conductive silicon carbide market, the current mainstream substrate product specification is 6 inches. According to Fuji Economic Report, an authoritative Japanese industry research agency, from 2020 to 2022, the two American companies Wolfspeed and Coherent have been ranked first and second respectively, accounting for the vast majority of the market share, and Chinese companies have not appeared among the major manufacturers. By 2023, 2 of the top five companies in the global conductive silicon carbide substrate material market share will be from China, with Tianyue Advanced and Tianke Heda ranking second and fourth respectively, of which Tianyue Advanced has a market share of 12%; At the same time, Wolfspeed and Coherent have seen significant declines in market share, with market shares of 46% and 11%, respectively. Compared with Wolfspeed's dominance of conductive silicon carbide substrates in the world in 2020, Chinese manufacturers continue to increase their market share driven by policies and markets, empower the downstream industry chain, reduce the cost of substrate materials, and continue to seize the market share of international manufacturers.

Table 2: Global ranking of conductive silicon carbide substrates

Source: Fuji Economy, CCTV Capital Eye, Tianyue Advanced Public Account, Shanxi Securities Research Institute

With the first-mover advantage accumulated by customer resources + technology, the company will continue to increase its market share. The company is the world's leading technology enterprise in large-scale mass production of conductive silicon carbide substrates and semi-insulating silicon carbide substrates. With product quality, production capacity scale, and stable supply capacity, the company has been widely recognized by customers around the world, and high-quality silicon carbide substrate products have accelerated their "going overseas". On the one hand, the company has signed long-term supply agreements with some international first-tier manufacturers, and is the main supplier of some international first-tier manufacturers, and more than 50% of the world's top ten power semiconductor companies are corporate customers; On the other hand, the company has a first-mover advantage on 8-inch substrates. At present, the company prepares 8-inch substrates in large-scale batches by PVT method, and is one of the few enterprises in the world that has mastered the preparation technology of liquid phase method. With the continuous increase in the demand for 8-inch silicon carbide substrates in the international market, as well as the company's advantages in 8-inch substrate technology and product quality, the company has achieved batch sales of 8-inch substrates in 2023, and the shipment volume of 8-inch substrates is leading in the industry. The company not only realizes the localization of 8-inch substrates, but also takes the lead in realizing batch sales of overseas customers. In the future, the company will continue to increase production capacity, increase market share, and narrow the gap with foreign companies.

Table 3: Comparison of the main parameters of the company's silicon carbide substrate products with the international advanced level

Source: Company Prospectus, Shanxi Securities Research Institute

The company's products are at the international advanced and domestic leading level in terms of technical parameters and supply capacity. Comprehensively comparing the technical parameters of the same grade of 6-inch products publicly disclosed by Cree, II, Tianke Heda and other enterprises, there is no obvious gap between the company and the global industry leading enterprises in the same size of products in terms of technical parameters, and the overall level is at the domestic leading and international advanced level. In 2023, the company's 8-inch conductive products, 6-inch conductive products, 6-inch semi-insulated products, and 4-inch semi-insulated products will be supplied in batches, and it is one of the few high-quality enterprises in China with the ability to supply products in large quantities. Internationally, the mass production time of 8-inch silicon carbide wafers from overseas manufacturers such as Wolfspeed, Infineon, Bosch, and onsemi is concentrated in the second half of 2024 to 2026. In terms of production capacity and yield, there is a certain gap between the company and the world's leading enterprises. According to the data in Table 1, the annual production capacity of international leading enterprises is at the level of one million, and the annual production capacity of domestic enterprises is expected to reach hundreds of thousands of pieces after the expansion, and the company's production capacity is in the first echelon in China. In terms of yield, the average yield rate is 40%-50% in China and 60%-70% overseas.

The

epitaxial wafer market is highly concentrated, and the process of domestic substitution in the supply of raw materials is accelerating

The global silicon carbide epitaxial wafer market is growing steadily, and China is expected to account for more than one-third of the total. Silicon carbide epitaxial wafer refers to a specific single crystal thin film with consistent lattice, high purity and low defect grown through epitaxial process on the basis of silicon carbide substrate. According to the different electrical properties, usually the conductive type corresponds to homogeneous epitaxy, with silicon carbide epitaxy, further made into SBD, MOSFET and other power devices, mainly used in new energy vehicles inverters, converters, motor drivers and on-board chargers, etc., the vehicle specification market is the most important application scenario of silicon carbide; The semi-insulating type corresponds to heteroepitaxy, and with gallium nitride epitaxy, it can be further made into microwave RF devices such as HEMT, which is mainly used in the RF field. According to the data of QESS, the global silicon carbide epitaxial wafer market size will be about US$1.166 billion in 2022, and it is expected to continue to maintain a steady growth trend in the future, with a market size of nearly US$8 billion by 2029 and a CAGR of 32.27% from 2023 to 2029. The Chinese market has changed rapidly in the past few years, with a market size of US$310 million in 2022, accounting for about 26.56% of the world's total, and is expected to reach US$2.79 billion in 2029, accounting for 34.97% of the global total. From the perspective of product type and technology, similar to silicon carbide substrates, the industry trend of expanding from 6 inches to 8 inches is clear.

Figure 20: Global silicon carbide epitaxial wafer revenue and forecast (USD billion, %)

Source: Hengzhou Chengsi YH, Shanxi Securities Research Institute

Figure 21: Global silicon carbide epitaxial wafer market competition landscape (%)

Source: Yole, Shanxi Securities Research Institute

The

epitaxial market is highly concentrated, and the Chinese manufacturer Hantian Tiancheng has the third largest market share in the world. Most of the international suppliers of epitaxial wafers are extensions of the IDM link, and the epitaxial links in the domestic market are mostly single-linked, and although the number of enterprises is small, the planned production capacity is large. The main companies are Wolfspeed, Showa Denko (Resonac), Hantian Tiancheng, ROHM (SiCrystal), Tianyu (TYSiC), Coherent (II-VI), SKSiltron, STMicroelectronics, Nanjing Baizhi Electronics, etc., according to Yole data, the CR3 of the epitaxial wafer market in 2023 will be about 74%, and Wolfspeed ranks first with a share of 37%. Chinese manufacturer Epiworld ranks third, with a market share of about 15%, which is the leading position in China. According to the analysis of Jiwei Consulting, if the planned production capacity of epitaxial wafers in the domestic market is fully implemented, it is expected to fully meet the demand for silicon carbide epitaxial wafers in the domestic market by 2025. At present, domestic silicon carbide epitaxial wafer manufacturers such as Dongguan Tianyu, Hantian Tiancheng, San'an Optoelectronics, Hebei Puxing, and CLP Compound have achieved mass production and shipment, and the production capacity of silicon carbide epitaxial wafers will reach more than 4 million pieces per year in 2023.

Table 4: Procurement of the top five suppliers of Hantian Tiancheng

Source: Hantian Tiancheng Prospectus, Shanxi Securities Research Institute

The process of domestic substitution in the supply of raw materials has been accelerated. According to the company's procurement of the top five suppliers in 2020-2023H1, it can be seen that in the early years, due to the high technical barriers of silicon carbide substrates, Hantian Tiancheng mainly purchased raw materials from overseas leading silicon carbide manufacturers. With the gradual maturity of the domestic silicon carbide substrate industry technology, Hantian Tiancheng has increased the purchase of domestic substrates from 2022, including the purchase of substrates from Tianyue Advanced, as well as the purchase of substrates and equipment from CETC Group and Jingsheng Electromechanical, etc., and CETC Group has added the top five suppliers of Hantian Tiancheng in 23 years. At present, the main raw material suppliers of Hantian Tiancheng are mainly domestic leading substrate manufacturers, and the proportion of procurement from Guangzhou Sumitomo Corporation Co., Ltd. has decreased. In addition, in addition to the layout of substrates, Tianyue also has silicon carbide epitaxy related technologies, and continues to carry out R&D and technological innovation.

[Demand: The penetration rate of silicon carbide on board is accelerating, and the company's automotive-grade conductive substrate is leading the industry].

Silicon carbide power devices are mainly used in new energy vehicles and other fields, and gallium nitride RF devices with silicon carbide as substrate are mainly used in 5G base stations and other fields. After epitaxial growth, silicon carbide wafers are mainly used to manufacture discrete devices such as power devices and RF devices. With its excellent performance of high voltage resistance, high temperature resistance and low loss, silicon carbide power devices can effectively meet the requirements of high efficiency, miniaturization and lightweight of power electronic systems, and have obvious advantages in new energy vehicles, photovoltaic power generation, rail transit, smart grid and other fields. The preparation of silicon carbide substrate materials has a very high technical threshold, and the number of enterprises that can supply high-quality, automotive-grade silicon carbide substrates on a large scale is relatively small. GaN RF devices based on silicon carbide have both the high thermal conductivity of silicon carbide and the advantages of high-power RF output of GaN in high frequency bands, and GaN-based RF devices have gradually become the mainstream technical route of 5G power amplifiers, especially macro base station power amplifiers. With the development and promotion of global 5G communication technology, 5G construction will bring new growth momentum to RF devices. 

Silicon carbide power devices are highly concentrated, and the field of electric vehicles occupies more than seventy percent of the market

Silicon carbide power devices are mainly used in the field of electric vehicles, and about 95% of CR5 are internationally renowned suppliers. Power devices, also known as power electronic devices, are the core devices that constitute power electronic conversion devices. Power devices mainly include power diodes, power transistors, thyristors, MOSFETs, IGBTs, etc. Silicon carbide power devices have unique advantages such as high voltage, high current, high temperature, high frequency, and low loss, which will greatly improve the energy conversion efficiency of existing silicon-based power devices, and have a significant and far-reaching impact on the field of efficient energy conversion. According to TrendForce, the global silicon carbide power device market for electric vehicles is expected to reach US$1.617 billion in 2023, accounting for more than 70% of the overall silicon carbide power device market value. In 2023, the global silicon carbide power device market will maintain strong growth driven by pure electric vehicle applications, with the top five suppliers accounting for about 95% of the overall revenue, of which ST continues to lead with a market share of 33%, followed by Onsemi, Infineon, Wolfspeed, and ROHM, with market shares of 25%, 17%, 12%, and 8% in 2023, respectively. According to Yole data, the strong demand for silicon carbide power devices is mainly due to the application of electric vehicles, followed by the growth of usage in the industrial and industrial energy sectors, and the silicon carbide power device market is expected to reach nearly $10 billion by 2029, of which the main applications of electric vehicles and industrial fields will exceed $8 billion.

Figure 22: Global Silicon Carbide Power Devices Market Size: By Industry (USD Million, %)

Source: Yole, Shanxi Securities Research Institute

Figure 23: 2021-2023 Global Silicon Carbide Power Device Market Competitive Landscape (%)

Source: Yole, Shanxi Securities Research Institute

China's silicon carbide device market is growing rapidly, mainly used in new energy vehicles. According to the estimation of Jiwei Consulting, the market size of China's silicon carbide devices in 2023 will be about 13 billion yuan, and the main growth drivers will come from new energy vehicles, including the demand for new high-power DC charging piles, of which the market size of new energy vehicles will be about 8.84 billion yuan, the charging pile market will be about 2.45 billion yuan, and the wind and solar storage and industrial power supply will be 975 million yuan and 650 million yuan respectively. In the future, with a wide range of applications in photovoltaics, industrial power supplies and rail trains, including 5G infrastructure power supplies, data centers and industrial Internet and other server power supplies, UHV flexible power transmission, intercity rail transit, high-speed rail and other fields, the market size of silicon carbide devices will grow rapidly, is expected to exceed 40 billion yuan by 2028, new energy vehicles and charging pile market is still the main application field, the market size is expected to be 29.54 billion yuan, 6.11 billion yuan respectively.

Table 5: Four major silicon carbide market sizes and forecasts (unit: 100 million yuan, %)

Source: Jiwei.com, Shanxi Securities Research Institute

The rapid development of the domestic new energy vehicle market has driven the demand for silicon carbide wafers to nearly one million. At present, China's new energy vehicle consumption is changing from policy-driven to endogenously driven, with the continuous improvement of the cost performance of domestic new energy vehicles, the market is expected to maintain a rapid development momentum, is the main driving force for the growth of the third-generation semiconductor power electronics market in the next few years. In 2023, the annual production and sales of new energy vehicles in China will reach 9.5 million units, with a market share of about 31%. According to the prediction of the short-cycle trend of new energy vehicles in Science and Technology Review, it is optimistically estimated that the market share of new energy vehicles will be 40% in 2024, close to 50% in 2025, and more than 50% in 2026. According to CASA Research, the domestic silicon carbide automotive market will maintain an average annual compound growth rate of nearly 37.5% (2022-2026), converted into wafers, and the domestic demand for 6-inch silicon carbide wafers in the new energy vehicle market in 2022 will be nearly 250,000 pieces, and the demand is expected to grow to nearly 1 million pieces by 2026.

Figure 24: Market size of SiC and GaN power electronics in the field of electric vehicles (including charging infrastructure) (100 million yuan).

Source: CASA Research, 2022 Third Generation Semiconductor Industry Development Report, Shanxi Securities Research Institute

Figure 25: The demand scale of SiC and GaN wafers in the field of electric vehicles (including charging infrastructure) (10,000 pieces, equivalent to 6 inches).

Source: CASA Research, 2022 Third Generation Semiconductor Industry Development Report, Shanxi Securities Research Institute

800V+SiC reduces costs and increases efficiency, and the penetration rate of SiC MOSFETs in vehicles is accelerated

Silicon carbide power devices can help improve the performance and efficiency of electric vehicles and reduce battery costs. The demand for power semiconductor devices for electric vehicles is increasing, and silicon carbide power devices have been applied to their electric vehicles by internationally renowned car companies. Silicon carbide power semiconductors are first applied in the C-class of high-performance models, and then gradually penetrate into B-class cars and some A-class cars, and Tesla's new generation of vehicles "SiC + IGBT" use scheme will also drive the penetration of silicon carbide in the A-class car market. In terms of cost-effectiveness, while the initial cost of silicon carbide may be higher than that of traditional silicon-based devices, its long-term benefits in terms of improved efficiency and performance make this investment cost-effective, especially for mid-to-high-end vehicles that pursue high performance and efficiency. It is generally believed in the industry that the efficiency of the traction inverter can be increased by 5%-10% by simply replacing IGBT with silicon carbide. Li Auto mentioned in a conference call that 800V+SiC can increase efficiency by 15%. Based on the battery cost of $132/kWh in 2021, assuming that the use of silicon carbide improves efficiency by 10%, then a 100kWh electric vehicle can save $1,320 in battery costs for the same range. According to CASA Research data, if the price of silicon carbide wafers drops by about 10% annually, the price of SiC MOSFET6-inch wafers will reach a balance at US$3,518/piece, driving more applications of automotive inverters.

Figure 26: Roadmap for BEVs considering system voltage and power semiconductor selection

Source: Yole, Power SiC/GaN market update, Shanxi Securities Research Institute

The electric drive system is upgraded to 800V high voltage to improve energy conversion efficiency, and the installed capacity of SiC MOSFET modules is gradually dominant. The main inverter of Tesla Model 3 uses 24 silicon carbide MOSFET power modules produced by ST Half, making it the first OEM in the world to apply silicon carbide MOSFETs to commercial vehicle inverters. The 800V high-voltage system mainly serves the new generation of pure electric vehicles (BEVs), which significantly reduces the loss of current in the transmission process by increasing the working voltage, thereby improving the overall energy efficiency and promoting the upgrading of the entire electric vehicle industry chain. According to the analysis of the electrification configuration database of Gasgoo Automotive Research Institute, in recent years, in the new energy passenger car market, the sales volume and number of 800V high-voltage models have been increasing year by year, and the market penetration rate is also increasing steadily. In terms of sales, sales in 2023 reached 321,000 units, and sales in the first five months of 2024 have reached 246,000 units, and the number of 800V models has grown strongly, increasing from 37 in 2023 to 48 in the first five months of 2024. In terms of penetration, it increased from 4.4% in 2023 to 7.7% in January-May 2024. According to the forecast of Gasgoo Automotive Research Institute, the sales volume of the 800V high-voltage market is expected to increase to 2.2 million units in 2026, and the penetration rate will rise to 20%. As 800V high-voltage overcharging begins to become the standard configuration of mid-to-high-end models, silicon carbide devices with the advantages of high voltage resistance, low impedance, and no tailing current have become the first choice, which will accelerate the penetration of silicon carbide in the automotive field. In terms of the proportion of installed types of 800V electronically controlled power modules, the installed capacity of SiC MOSFET modules has increased significantly from 19% in 2023 to 63% (January-May 2024), gradually dominating.

Figure 27: 800V voltage penetration rate and brand of new energy passenger vehicles in 2023 (unit: %)

Source: Gasgoo Automotive Research Institute, Gasgoo Automotive Community, Gasgoo Automotive Research Institute Electrification Configuration Database, Shanxi Securities Research Institute

Figure 28: Installed capacity type of high-voltage 800V electronically controlled power module from January to May 2024 (unit: %)

Source: Gasgoo Automobile Community, Gasgoo Automotive Research Institute Electrification Configuration Database, Shanxi Securities Research Institute

Benefiting from cost reduction and large-scale production, the optimal combination of 800V high-voltage platform + silicon carbide electric drive system accelerates the onboarding. In the supporting relationship between silicon carbide power semiconductor suppliers and car companies, BYD Semiconductor, Xinjuneng and Infineon, as the leading enterprises, not only occupy a large market share, but also establish stable cooperative relations with a number of well-known automobile manufacturers, including but not limited to BYD Automobile, ZEEKR Automobile, Xiaomi Auto and Xiaopeng Motors. At present, 800V high voltage has been widely used in Geely Automobile, FAW Hongqi, SAIC-GM, Xiaomi Automobile, Li Auto, Zhiji Automobile and other brands of more than 200,000 yuan models. In the first half of 2024, the cost of electric vehicles using silicon carbide devices has also decreased by 15%-20%, and the unit price of silicon carbide has fallen to a level comparable to that of IGBTs. Due to the promotion of technology popularization due to cost reduction and large-scale production, from January to May 2024, BAIC New Energy and BYD Auto models below 200,000 yuan were also successfully equipped with 800V high-voltage systems. With the continuous improvement of technology and the continuous expansion of the market, 800V high-voltage system is expected to become the mainstream trend of the electric vehicle industry. Under the 800V platform architecture, the demand for silicon carbide power devices has increased significantly, and major semiconductor device manufacturers have accelerated the layout of the silicon carbide industry chain, including Infineon, Bosch, onsemi, ST and other world-renowned tier1 manufacturers have increased their investment in the silicon carbide industry chain.

The company is an industry leader in automotive-grade conductive substrates, with orders in hand exceeding 2 billion yuan

The company is the world's leader in large-scale mass production of conductive and semi-insulating silicon carbide substrates, and has a first-mover advantage in the preparation of 8-inch products by liquid phase method. The company is one of the few companies in the world that can compete in both conductive and semi-insulating silicon carbide substrate products. In terms of production capacity, the Jinan plant has been steadily advancing its production capacity, and the Shanghai Lingang plant has been able to reach the annual production capacity plan of 300,000 pieces of conductive substrates, and the company will continue to promote the second phase of the production capacity increase plan to achieve a production capacity of about 1 million pieces according to market conditions. In terms of products, 6/8-inch conductive and 4/6-inch semi-insulating silicon carbide substrates have been supplied in batches, of which the market share of semi-insulating substrates has ranked among the top three in the world for four consecutive years, and the market share of conductive substrates will rank second in the world in 2023. As of the end of 2023, the company has shipped more than 700,000 substrates, of which more than 220,000 substrates have been shipped in 2023. At present, the downstream market takes 8-inch products as the development direction, and 6-inch and 8-inch products coexist in the future for a period of time. The company has a first-mover advantage in 8-inch, and in 2023, it has achieved mass sales of 8-inch conductive substrates, and the 8-inch shipment volume is leading in the industry. In terms of technology, the company currently prepares 8-inch substrates in large quantities by the mainstream PVT method, and is one of the few companies in the world that has mastered the preparation technology of liquid phase method. The liquid-phase method has specific advantages in the preparation of large-size silicon carbide substrates. The company has successfully prepared high-quality 8-inch crystals by liquid phase method, and at the same time, the company has increased technological innovation in liquid phase preparation, and has successfully prepared N-type 3C silicon carbide substrates and P-type silicon carbide substrates for UHV and high power. Among them, P-type silicon carbide substrates for UHV and high power have broad prospects in the application field of higher voltage levels.

Table 6: Comparison of mainstream methods for the growth of silicon carbide crystals

Source: Jingsheng Prospectus, TrendForce Compound Semiconductor, Aibang Semiconductor, Qinghe Capital Investment Research Online, Shanxi Securities Research Institute

Maintain stable cooperation with internationally renowned customers, with orders in hand exceeding 2 billion yuan. As one of the earliest manufacturers engaged in silicon carbide substrate business in China, the company has formed continuous and stable cooperation with international first-tier manufacturers by virtue of product quality, production capacity and stable supply capacity, and more than half of the world's top ten power semiconductor companies are company customers. In terms of terminal applications, the company's substrate products have entered major new energy vehicle manufacturers at home and abroad. The company has signed long-term supply agreements with international well-known semiconductor companies such as Infineon and Bosch. The company will supply Infineon with 6-inch conductive substrates and ingots and support its transition to 8-inch products, with the agreement expected to account for a double-digit share of Infineon's long-term demand. In terms of orders in hand, the company signed a long-term sales framework agreement of 1.393 billion yuan with customer E for the sale of conductive products in 22 years, and signed a long-term framework contract with customer F for conductive substrates in 23 years, with a contract amount of more than 800 million yuan, including an advance payment of 100 million yuan. At present, the company has signed orders of more than 2 billion yuan, and the products are delivered in accordance with the agreement.

Table 7: The company's cooperation with internationally renowned companies and orders in hand

Source: Tianyue Advanced 2022 Annual Report, 2023 Annual Report, Announcement on the Signing of the Framework Procurement Agreement, Announcement on the Signing of Major Contracts, Shanxi Securities Research Institute

The automotive-grade conductive silicon carbide substrate product has achieved industry-leading results, and plans to raise 300 million yuan to improve the automotive-grade 8-inch technology. In 2022, the company passed the automotive-grade IATF16949 product quality management system certification, laying the foundation for the delivery of automotive-grade silicon carbide substrates. At present, the company has become a supplier of internationally renowned semiconductor companies such as Infineon and Bosch Group, and has been rigorously verified by foreign first-tier manufacturers in terms of automotive-grade silicon carbide substrates and continues to supply them in large quantities, promoting the company's performance growth. Relying on the technological innovation and leading advantages of independent diameter expansion, the company continues to promote the technical improvement of domestic 8-inch automotive-grade silicon carbide substrates. In 2023, the company's automotive-grade conductive silicon carbide substrate products will achieve industry-leading results. The company's 8-inch conductive substrate product quality and batch supply capacity are leading, promoting the head customers to actively transform to 8-inch. In July 2024, the company plans to raise 300 million yuan through equity financing for the "8-inch automotive-grade silicon carbide substrate preparation technology improvement project", aiming to continuously improve the company's automotive-grade 8-inch silicon carbide substrate material preparation process and realize the technical optimization and improvement of the engineered large-scale stable preparation capacity. This will help ensure the safety of China's industrial chain and promote the domestic application of silicon carbide semiconductor materials in new energy vehicles, new energy systems and other fields.

Table 8: The main R&D content of the company's 8-inch automotive-grade silicon carbide substrate preparation technology improvement project

Source: Tianyue Advanced's statement on the investment of the raised funds in the field of scientific and technological innovation, Shanxi Securities Research Institute

GaN RF devices are mainly used in defense and communications applications, and the demand for semi-insulating substrates is growing

The revenue proportion of gallium nitride RF devices gradually occupies the mainstream of communication base stations. RF devices are the basic components of wireless communication equipment, and gallium nitride RF devices prepared on semi-insulating silicon carbide substrates are mainly power amplifiers for communication base stations and radar applications. At present, the mainstream RF devices include gallium arsenide, silicon-based LDMOS, silicon carbide-based gallium nitride and other different types, and gallium nitride RF devices are mainly prepared based on heterogeneous substrate epitaxial materials such as silicon carbide and silicon, and will also be the main choice in the future. According to the Yole report, about 90% of GaN RF devices are fabricated on silicon carbide substrates. RF GaN prices have fallen due to the Huawei ban in the US, the impact of the pandemic, and the slowdown in base station deployments, but manufacturers are responding to the recovery in 5G deployments by accelerating the adoption of GaN in base stations. It is expected that by 2029, the revenue share of GaN on silicon carbide will surpass LDMOS, accounting for the major market share.

Figure 29: Revenue share of GaN-on-SiC in telecom infrastructure

Source: Yole, Shanxi Securities Research Institute

Benefiting from the widespread application of GaN-on-Si RF devices, the demand for semi-insulating SiC substrates will continue to grow. GaN-on-SiC RF devices have been successfully used in many fields, mainly in wireless communication infrastructure and defense applications. In terms of wireless communication infrastructure, GaN RF devices based on silicon carbide can provide the power and efficiency required by next-generation high-frequency telecom networks, and have become the mainstream choice for power amplifiers for 5G base stations. The global rollout of 5G is driving the transition from long-range radio heads (RRHs) to active antenna systems (AAS), increasing the number of RF lines per base station, with GaN-on-SiC technology leading the shift. The telecom infrastructure market size was valued at $522 million in 2023 and is expected to grow to $910 million by 2029. In the defense sector, GaN-on-Si RF devices have replaced most GaAs and some silicon-based LDMOS devices, occupying the majority of the market, with military radar and electronic warfare being the main growth drivers. The defense GaN RF market is expected to grow from $513 million in 2023 to $817 million by 2029. For satellite communication applications that require high frequency and high output, GaN devices are also expected to gradually replace GaAs solutions. According to the Yole report, the global GaN RF device market size will continue to grow and is expected to grow from $1.1 billion in 2023 to $2 billion in 2029, driven by telecom infrastructure, defense, and satellite communications applications, with a compound annual growth rate of 10% during the period.

Figure 30: RF GaN Devices Market Size Forecast ($, %) 2023-2029

Source: Yole, Shanxi Securities Research Institute

Figure 31: 2021-2022 RF GaN Devices Market Competitive Landscape (USD, %)

Source: Yole, Shanxi Securities Research Institute

The competition pattern of the RF gallium nitride device market is relatively concentrated. In 2022, SEDI, Qorvo and Wolfspeed were the leaders in the RF GaN device business, with a CR3 of approximately 54%, while NXP saw significant growth through the supply chain into the telecom market, with a market share of 9% in '22. In the defense sector, Raytheon, Northrop Grumman and CETC are leading the adoption of GaN, with Qorvo and Wolfspeed being trusted GaN foundries, while Qorvo and RFHIC are more focused on defense and satellite communications, with better business prospects and less cost pressure than the telecommunications industry. In telecommunications, Ericsson and Nokia are increasing the supply of GaN RF devices, while Samsung is working with Korean suppliers. Since U.S. sanctions, Huawei and ZTE have turned to Chinese supply chains to develop domestic capabilities.

[Earnings Forecast and Valuation].

Earnings forecasts

The volume supply of automotive-grade substrates drove the growth in performance, and the automotive-grade and 8-inch products took the lead. Focusing on its main business, the company is one of the most comprehensive and international silicon carbide substrate manufacturers in China, and is currently in a leading position in the industry through years of technology, customer and market accumulation. The company's 6-inch and 8-inch conductive substrates have been supplied in batches, and it has a first-mover advantage in the layout of 8-inch substrates, promoting the industry's transformation to 8-inch substrates. The company not only realizes the localization of 8-inch silicon carbide substrates, but also takes the lead in mass sales to overseas customers. The company actively lays out the global market, has reached stable cooperation with international head customers such as Infineon, Bosch, onsemi, etc., and helps Infineon transform to 8-inch products, and has signed orders of more than 2 billion yuan. With the continuous expansion of new energy vehicles using silicon carbide technology, 800V high-voltage fast charging will accelerate the penetration of silicon carbide in the automotive field, and the industry has a strong demand for automotive-grade products. In terms of production capacity, in the first half of 2024, the company's Shanghai Lingang plant has been able to reach the large-scale mass production capacity of 300,000 pieces of conductive substrates per year, and the long-term production capacity plan of 960,000 pieces has been implemented. With the continuous ramp-up of production capacity in the Shanghai factory, the company will continue to increase its international market share and consolidate and enhance its industry position. After the market share of semi-insulating substrates has ranked among the top three in the world for four consecutive years, according to the calculation of Fuji Economic Report of Japan, the company will surpass Coherent to rank second in the global market share of conductive silicon carbide substrate materials in 2023.

At this stage, the company's main products include 6-inch conductive substrates and 8-inch conductive substrates, and the current market is still dominated by 6-inch conductive products, and according to TrendForce, the current market share of 8-inch products is less than 2%. According to Baichuan Yingfu data, assuming that the current price of 6-inch products is 5,000 yuan/piece, it is calculated according to the annual price reduction of 20%; The current price of 8-inch products is 50,000 yuan/piece, which is calculated by 10% per year. The capacity utilization rate is measured at 85% during the company's electrical product switching period in 2021, and the production and sales rate is measured at 86% during the rapid growth of downstream demand in 2023. We calculate the company's revenue growth based on the assumptions of the company's 6-8 inch product price, capacity utilization and production and sales rate, and it is expected that the company will achieve operating income of 17.26/22.95/2.948 billion yuan from 2024 to 2026, a year-on-year increase of +38.02%/+32.97%/+28.41%; The net profit attributable to the parent company was 1.92/2.89/377 million yuan, a year-on-year increase of +518.97%/+50.85%/+30.53%, and the corresponding EPS was 0.45/0.67/0.88 yuan.

Table 9: Forecast of the company's operating income (million yuan, %)

Source: wind, Shanxi Securities Research Institute

Comparable company valuations

Most of the

companies mainly engaged in silicon carbide substrates in China are non-listed companies, and the substrate materials in listed companies are mostly one of the links extending upwards of the silicon carbide industry chain. It is estimated that the company's EPS in 2024-2026 will be 0.45/0.67/0.88 yuan, and the PE in 24-26 years will be 148.06X/98.15X/75.19X based on the closing price of 66.0 yuan on November 7. The company has leading advantages in the large size of substrates, technology platform and supply chain, and continues to steadily promote the second phase of capacity expansion, we are optimistic about the company's long-term ability to supply conductive products on a large scale and increase market share, and give an "overweight-A" rating for the first time. As the scale effect gradually emerges, the company's valuation level is closer to the comparable average level.

Table 10: Comparable Company Valuation Comparison

Source: Wind, Shanxi Securities Research Institute (closing price as of 11/07, comparable company data is Wind consensus estimate).

Risk Warning

Industry Risk

1. Geopolitical risks

At present, the international situation is becoming increasingly complex, geopolitical conflicts are frequent, and there are uncertainties in trade relations between countries. The company's product sales cover many countries and regions around the world, and the company's customers include Infineon, Bosch and other world-renowned power electronics and automotive electronics well-known enterprises. The company will continue to optimize the overseas marketing service network. If the international situation changes in the future, it cannot be ruled out that some countries will introduce regulations to restrict the import or use of Chinese products, which will affect the company's overseas business.

2. The

risk of changes in national industrial policies

The state has issued a series of policies to support and encourage the wide bandgap semiconductor industry, such as the 2020 Key Special Project of "Strategic Advanced Electronic Materials" and the "Outline of the 14th Five-Year Plan for National Economic and Social Development of the People's Republic of China and the Long-Range Objectives for 2035". If the state reduces its support for the wide bandgap semiconductor industry, or the state issues further restrictive industrial policies or window guidance and other measures, or the company's proposed investment projects are included in the scope of regulatory regulation and control of the restrictive industrial policy, resulting in the company's inability to expand its production scale, it will have an adverse impact on the company's operation, sustainable profitability and growth.

3. The

risk of intensifying competition in the industry

Due to the excellent performance of wide bandgap semiconductor materials, its importance is becoming increasingly prominent, domestic and foreign are increasing investment in the wide bandgap semiconductor industry, with the increase of participants in the industry, industry competition intensifies, if the company can not continue to maintain a first-mover advantage through technology leadership, market leadership and other measures, it will have an adverse impact on the company's future development.

Operational risk

1. The

risk that the increase in production capacity and output is less than expected

The company is increasing the construction of silicon carbide semiconductor material production capacity to seize the development opportunity of the rapid growth of demand for silicon carbide semiconductor materials in the downstream electric vehicles, energy storage and other markets.

2. The

risk of high concentration of customers/suppliers

Silicon carbide substrate products are mainly used in new energy, new generation information communication, microwave radio frequency and other fields, and the concentration of downstream leading enterprises in related fields is relatively high, and the demand for substrates is large. In terms of customers, the sales revenue of the company's top five customers accounts for a high proportion of operating income, and the customer concentration is high. If the company relies on the above customers in the future and does not carry out business development, or the expansion of new customers is not as expected, it will have an adverse impact on the company's expansion of operations. At the same time, the company's purchase amount from the top five final suppliers of raw materials accounted for a relatively high proportion of the total procurement of the year, and the concentration was relatively high. If the company is unable to find suitable alternative suppliers, once the business operations of major suppliers are adversely changed, production capacity is limited or the cooperative relationship is strained, the suppliers may not be able to ship in sufficient quantities and in a timely manner, which will have an adverse impact on the company's production and operation.

3. The

high cost of silicon carbide substrate restricts the risk of downstream application development

Compared with the mature silicon wafer manufacturing process, silicon carbide substrates will still face the challenges of difficult and costly preparation in the short term. For example, at present, the price of silicon carbide power devices is still several times that of silicon-based devices, and downstream applications still need to balance the relationship between the high price of silicon carbide devices and the comprehensive cost reduction due to the superior performance of silicon carbide devices. Silicon carbide substrate is the core link of the industrial chain, if the company and enterprises in the industry cannot continue to reduce the cost of silicon carbide substrate, it may lead to the overall development of the industry not meeting expectations, which will have an adverse impact on the company's operation.

4. Shareholding reduction plan for shareholders holding more than 5% of the shares and persons acting in concert

The company announced on October 9 that it plans to reduce its holdings. Based on their own capital needs, shareholders Liaoning Zhongde, Haitong New Energy and Haitong Innovation plan to reduce their holdings of the company's shares by a total of no more than 12,891,330 shares, that is, no more than 3.00% of the company's total share capital. Among them, the total number of shares of the company reduced through centralized bidding shall not exceed 4,297,110 shares, that is, no more than 1.00% of the company's total share capital; The total number of shares of the Company that may be reduced through block trading shall not exceed 8,594,220 shares, i.e. no more than 2.00% of the total share capital of the Company. The reduction period is 3 months after 15 trading days from the disclosure date of the announcement.

Source: Most Wen, Shanxi Securities Research Institute

Analyst: Ye Zhongzheng

Practising Registration Number: S0760522010001

Analyst: Gu Qian

Practising Registration Number: S0760518060001

Report release date: November 8, 2024

I am registered as a securities analyst with the Securities Association of China, and I undertake to issue this report independently and objectively with a diligent and professional attitude. I am responsible for the content and opinions of the securities research report, and ensure that the information sources are legal and compliant, the research methods are professional and prudent, and the analysis conclusions have a reasonable basis. This report clearly and accurately reflects my research views. I have not, and will not be compensated in any way, directly or indirectly, for the specific recommendations or opinions in this report. I undertake not to use my identity, position or information held in the course of my practice for personal gain for myself or others.

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