Comments on the Management of Demingli’s 2022 Annual Board of Directors
(Original title: Management Review of Demingli’s 2022 Annual Board of Directors)
Demingli’s (001309)2022 annual review of the board of directors is as follows:
I. The industry in which the company is located during the reporting period.
1. Storage is one of the largest market segments of semiconductor, with obvious periodicity and remarkable growth.
The integrated circuit industry is the foundation of modern information industry. Since 2000, the Chinese government has identified the integrated circuit industry as one of the pillar industries of the national economy. With the increasing global demand for mobile intelligent terminals such as smart phones, computers and smart wearable devices, the global memory market has increased. According to WSTS data, the global semiconductor market has grown from $142.2 billion in 2002 to $580.1 billion in 2022, with a compound annual growth rate of 7.28% in 20 years. The scale of global integrated circuit market has increased from $121.9 billion in 2002 to $480 billion in 2022, with a compound annual growth rate of 7.09% in 20 years. The global memory market has grown from $27.3 billion in 2002 to $134.4 billion in 2022, with a compound annual growth rate of 8.30% in 20 years. In 2022, due to the complicated internal and external environment, weak downstream demand and other factors, the global semiconductor and integrated circuit market scale rose slightly, and the memory market scale declined. According to WSTS forecast data, the year-on-year growth rates of the three markets were +4.4%, +3.7% and -12.6% respectively.
Semiconductors are mainly divided into integrated circuits, photoelectric devices, discrete devices, sensors, etc. Integrated circuits are mainly divided into memory, logic circuits, analog circuits, microprocessors, etc. Among them, memory is one of the basic products of integrated circuits with the widest application and the highest market share, and it is also one of the largest market segments of semiconductors. According to WSTS data, the global memory accounts for 32.5%, 33.2% and 28.0% of the integrated circuit market in 2020-2022, respectively. It accounts for 26.7%, 27.7% and 23.2% of the semiconductor market. Semiconductor is an industry in which cycles and growth coexist. The global semiconductor industry has experienced many cycles, and semiconductors and storage show similar cycles, but storage is the most obvious subdivision track in the semiconductor industry.
In many semiconductor tracks, storage is also the most significant growth. According to WSTS data, the compound growth rate of storage in 2011-2021 and 2016-2021 was 9.7% and 14.9%, respectively, which were the best products of semiconductor growth. In the long run, memory chips are expected to continue to grow driven by factors such as the Internet of Things, smart cars, industrial robots and AI computing power. According to Yole data, the market size of memory chips is expected to reach $263 billion in 2027, with a compound growth rate of 8% from 2021 to 2027.
2. With the evolution towards high storage density, NAND Flash has entered the 200-tier era.
With the rapid development of technologies such as 5G, AI, and cloud services, the demand for storage performance, power consumption optimization, and unit capacity of terminal applications such as PC, mobile phone, server, and smart car continues to grow, which promotes the evolution of NAND Flash to high storage density. With the help of 3D NAND segmented stack and CuA/PuC/Xtacking architecture, the storage density and transmission performance of NAND Flash have been further improved, and the unit cost has been continuously optimized. According to the statistics of CFM flash memory market, among the world’s mass-produced NAND Flash, the leading stack number has climbed from 128 to 176, and the original storage factories have successively launched higher-level NAND Flash, such as Meguiar’s 232-layer NAND, Samsung’s 236-layer NAND,SK Hynix’s 238-layer NAND Flash, etc., and the global NAND Flash has gradually entered the 200-layer era.
3. The upstream NAND Flash industry is highly concentrated, and the supply is dominated by the five original storage factories.
In the NAND Flash industry, the international original storage factory dominated by Korea, Japan and the United States directly affects the capacity and price of memory chips. According to CFM flash memory market data, in the second quarter of 2022, Samsung, SK Hynix, Xia Xia, Western Digital and Micron accounted for about 95% of the global NAND market share, among which Samsung ranked first with more than one third of the market share. At the end of 2021, SK Hynix announced the completion of the acquisition of Intel NAND Flash business, and its market share jumped to 20.1% in the second quarter of 2022. Domestically, Changjiang Storage achieved a breakthrough in domestic 3D NAND in 2019, and currently accounts for more than 4% of the global NAND Flash market share.
4. NAND Flash is mainly based on embedded storage and solid state drives, and mobile phones, PCs and servers are the main application fields.
As the main data storage medium, NAND Flash is mainly shipped in the form of embedded storage and solid-state hard disk, among which eMMC/UFS is mainly used in mobile devices, and SSD is mainly used in the fields of servers and PCs. From the product category of NAND Flash, embedded storage and solid-state disk are widely used in NAND Flash. According to CFM flash memory market data, in 2020-2022, the total proportion of embedded storage and solid-state hard disk is 83%, 86% and 82%, which is more than 80% stable, and the proportion of memory card and storage disk products is about 10%. From the application field of NAND Flash, mobile phone, PC and server are the three driving forces of terminal demand. According to Trend Force’s estimation, in 2023, smartphones will remain the largest demand for terminals in NAND Flash market, accounting for 38%, while PCs and servers will account for 21% and 23% respectively.
5. In 2022, the downstream demand for storage was weak, and the price went down all the way, so the original storage factory reduced the supply.
In 2022, global macro uncertainty increased, leading to "low demand and high inventory" throughout the year. Looking back on 2021, the world experienced "lack of core", and downstream manufacturers increased orders, expanded inventories, and competed for production capacity, which led to a substantial increase in the memory chip market. Since the second half of 2021, the demand for consumer electronics such as smart phones and PCs has continued to be weak, and terminal shipments have dropped significantly. In 2022, the storage price continued to fall. According to the CFM flash market data, the NAND Flash price index fell by 41.35% in 2022. Companies in the industry generally experienced a significant decline in performance or losses, and the industry entered the stage of active destocking in the fourth quarter of 2022. Since the second half of 2022, in order to cope with the continuous decline in storage prices caused by the weak market situation, most original storage plants have adopted ways such as reducing capacity utilization and reducing capital expenditure to reduce the supply of storage bits, so as to alleviate the situation of oversupply. In 2023, the global economy will pick up, and the downstream demand is expected to gradually recover. As the memory chips continue to go, the storage price is expected to stabilize.
6. The continuous growth of global traffic has given birth to the demand for data storage, and the recovery of traditional demand and the development of new technologies are expected to drive the continuous growth of the storage industry.
With the emergence of a new generation of information technologies such as cloud computing, Internet of Things and artificial intelligence, the global data demand shows a trend of sustained and rapid growth, which has spawned a large number of data storage needs. According to IDC’s forecast, by 2025, the global data volume will increase from 60ZB in 2021 to 175ZB, of which China’s data volume will increase to 49ZB, accounting for 27.8% of the global data circle, making it the largest data circle in the world.
In the future, in terms of the demand of the three terminals of NAND Flash, the increase of mobile phone storage capacity, PC storage capacity, SSD loading rate, server demand and single-machine loading capacity will boost the demand for NAND Flash bits to continue to grow. In addition, with the intelligent upgrade of automobiles, the on-board NAND Flash is expected to usher in a high increase; The development of AI models such as Chat GPT will also drive the scale of computing power and the demand for memory chips in the long run. According to Meguiar’s prediction, the capacity of an artificial intelligence server NAND Flash is three times that of an ordinary server. With the continuous penetration of new energy vehicles and AI-related markets, the demand for memory chips will be further improved, and the storage industry is expected to continue to benefit.
II. Main businesses of the Company during the reporting period
(1) Main business
The company is a national high-tech enterprise specializing in integrated circuit design, R&D and industrial application. Since its establishment, the company’s main business mainly focuses on the design and research of flash memory master chip, the development and optimization of storage module product application scheme, and the sales of storage module products. Based on the independent design and research and development of the flash memory master chip, the company forms a perfect storage management application scheme by combining the firmware scheme of the master chip, the development of mass production tools, the testing of storage modules, etc., and effectively realizes the data management and application performance improvement of NAND Flash storage particles. The company’s products mainly include mobile storage, solid state drives and embedded storage, and related products are widely used in consumer electronics, industrial control equipment, household appliances, automotive electronics, smart homes, Internet of Things, servers and data centers.
(2) Main products
The company’s storage business is based on the research and application of flash memory technology. Based on the design and research of flash memory master chip, combined with the firmware scheme of master chip, the development of mass production tools and the testing of storage module, a perfect storage management application scheme is formed. At present, the company has developed and mass-produced a number of storage master chips, and finally achieved sales through the form of storage module products. The company’s products can be divided into the following categories:
1. Mobile storage
(1) Memory card module
Memory card is a kind of memory that uses flash memory technology to store data and information. It is small in size and mostly in the form of cards. The specific product forms include SD card, Micro SD card, etc. It is mainly used as a storage medium in consumer electronic products such as mobile phones, GPS devices, digital cameras, drones, security cameras, smart speakers, electronic game machines, etc.
The company’s storage management application scheme widely supports the related storage wafer products of Samsung Electronics, Kaixia, Western Digital, Hynix, SanDisk and Changjiang Storage, and efficiently realizes the data management and application performance improvement of NAND Flash storage particles, further expanding the compatibility of memory card module products, improving the reading and writing speed and stability of memory cards, and reducing the power consumption of the whole machine products.
(2) storage disk module
Memory disk (U disk) is a kind of portable data storage device which transmits data through USB interface and uses NAND Flash memory chip for storage. At present, it has become one of the most commonly used mobile storage media in people’s daily life.
The company’s storage disk module product scheme has good performance and cost advantages, and widely supports related storage wafer products of Samsung Electronics, Armored Man, Western Digital, Hynix and Changjiang Storage.
2. Solid-state hard disk
Solid-state hard disk is made of solid-state memory chip array, which is a storage medium to meet the needs of large-capacity storage application scenarios. It mainly includes SSD (solid-state hard disk), PSSD (mobile solid-state hard disk) and other product forms, and is widely used in PC, data center, artificial intelligence, industrial control, security, network terminals, medical care, aerospace, military industry and many other fields.
At present, the company has three types of SSD products: 2.5 inch, M.2 and mSATA. In addition to SATA interface, M.2 covers two protocol interfaces: SATA3 and PCIe. The product adopts high-quality NAND Flash resources provided by the original factory, combined with customized high-performance master control and independent firmware, which can ensure compatibility and stability, and also meet various customization requirements. Solid-state hard disk products can significantly improve the performance of desktop, personal and commercial computers, and also have excellent performance in enterprise, server system and data center applications. Facing the localization trend, the company will give full play to its local advantages, speed up the certification and import process of localization platforms, and help the globalization process of SSD.
3. Embedded storage
Embedded storage is widely used in intelligent terminals, such as smart phones, tablets, smart TVs, set-top boxes, etc. In recent years, with the vigorous development of smart cars, automotive devices such as ADAS, IVI and DASH-CAM have also become the main battlefields of embedded storage. At present, the company’s eMMC product line has a complete layout of vehicle specifications, engineering specifications, high durability and commercial specifications, and is oriented to differentiated markets. It adopts the mainstream specifications of eMMC 5.1, with rich flash memory and master control schemes, and deeply applies scenarios to meet market demand. In addition, for high-speed and large-capacity applications, the company has planned the UFS 3.1 product line with a capacity of 256GB-1TB, and actively carried out product verification and market introduction. In the future, the company will also develop its own embedded storage master to promote the localization process of embedded storage products.
(3) Business model
1. Profit model
The company mainly purchases NAND Flash memory wafers, packages and tests them with flash memory master chips to form storage modules, and then sells the storage modules to downstream brands, manufacturers, customers or channel distributors to make profits.
In the storage module, the cost of NAND Flash storage wafer is relatively high, and the utilization level of storage wafer has a great influence on the business benefits of enterprises, and the utilization level of wafer puts forward higher requirements for the matching flash memory master control technology and firmware scheme. The company is one of the few chip design and operation companies in Chinese mainland that have mastered the continuous and stable procurement resources of storage wafers and the technical capabilities of flash memory master chip design and chip firmware development.
2. R&D mode
Product design and R&D are the core processes of the company’s operation. The company has formed a standardized R&D process and quality control system, which is constantly improved and updated according to the actual implementation, covering all stages of product project feasibility study, evaluation, implementation, product throwing, engineering verification and quality verification, mass production, etc., to ensure that the whole process of product development is effectively monitored and achieved the expected goal.
(1) Chip development process
The company has always taken R&D and innovation as the core business strategy to drive the development of enterprises. Since its establishment, it has continuously regarded technology upgrading as an important factor to improve market competitiveness, followed closely the development trend of market industries, and constantly researched and developed new technologies and designed new products. For the research and development of flash memory master chip, the company continues to invest in resource innovation and change. The company’s research and development is based on the evolution state and future development trend of the new generation NAND Flash storage technology, with higher performance, lower power consumption, more advanced process and superior compatibility and cost performance as the chip design and research goals, following the update law of science and technology, and constantly iterating chip products based on Moore’s Law cycle and industry development trend. The specific process of the company’s chip research and development includes project startup stage, project planning stage, project implementation stage, engineering and quality verification stage. After the above process, the marketing department and R&D department will organize a mass production review meeting, and then evaluate the competitiveness, manufacturing cost, economic benefit and factory capacity of the chip products and decide the mass production plan. After the mass production review passed, the products began mass production.
(2) Development process of storage module management scheme
The company’s storage module management scheme is based on the model characteristics of NAND Flash chip resources, and it is adapted to the flash memory master chip as the core, including firmware scheme and mass production tools to form a system solution. During the research and development of the storage module management scheme, the company developed an adaptive firmware debugging scheme and mass production tools according to the model and quantity of NAND Flash chip resources in the market, experimental data and the performance characteristics of the main control chip to be used, so as to adapt the product performance of NAND Flash chip under optimal conditions, enhance product competitiveness and meet the requirements of high quality and low cost at the same time.
The specific process of the company’s storage module management scheme development includes market demand investigation, resource arrangement and scheme target setting, scheme development, scheme sample, monitoring, compatibility verification and debugging, and mass production.
3, procurement and production mode
The products or services purchased by the company in the procurement or production process mainly include NAND Flash flash chips, flash master chip manufacturing services or flash master chip products and packaging and testing services.
The company’s products are mainly produced by entrusted processing, in which the entrusted processing procedures of mobile storage module products mainly include flash memory chip production and testing procedures and storage module packaging and testing procedures; The commissioning process of solid-state hard disk module products mainly includes chip particle packaging test process and module product patch integration and test process.
In 2019, the company set up its own big wave test center, mainly for front-end storage wafer testing, as well as back-end solid-state hard disk module patch and storage module product testing. With the erection of the company’s big wave testing and processing production line and the increase of equipment and production capacity, the company’s storage wafer testing process was partially completed by its own production line. After 2020, the company’s SSD chip integration process is mainly completed in its own production line.
4. Sales model
According to the characteristics of the industry and the needs of downstream customers, the company mainly adopts the sales model of "combining direct sales with channel distribution". Through this sales model, the company can better focus on product design and research and development, and improve the efficiency of division of labor and cooperation in the industrial chain.
(1) Direct selling mode
Under the direct selling mode, the company’s products are directly sold to terminal brand customers or downstream OEM manufacturers. Relying on the quick response to customer needs and stable and reliable product quality, the company has gained a good industry reputation and strong product competitiveness in the segmentation field.
(2) Channel distribution mode
Under the channel distribution mode, the company provides various storage products to the downstream market through channel customers. The company has established a mature and perfect channel customer management system, and selects channel customers by comparing factors such as reputation, financial strength, market influence, customer service level, industry background and terminal resources. At the same time, the company will conduct on-the-spot visits and surveys to channel customers from time to time, and conduct off-sale sales to channel providers.
(4) Analysis of business conditions
In 2022, faced with the complicated internal and external environment, the original factory inventory in the upstream of the superimposed storage industry was high and the downstream demand was weak. The company actively responded to various challenges brought by the macro environment and the cyclical downturn of the storage industry. While deeply cultivating the mobile storage market, the company began to lay out the embedded storage business, and finally the company’s operating income achieved contrarian growth. During the reporting period, the company achieved an operating income of 1,190,656,500 yuan, a year-on-year increase of 10.27%; Among them, the mobile storage business realized an operating income of 588,131,500 yuan, a year-on-year increase of 40.04%. The company continued to increase investment in technology research and development and production equipment. Due to the downward trend of the industry cycle and the downward trend of product prices in the storage industry during the year, the company’s net profit in 2022 declined year-on-year. During the reporting period, the company realized a net profit attributable to shareholders of listed companies of RMB67,191,600, a year-on-year decrease of 31.56%.
1. Self-developed storage main control chips are introduced in mass production, and the competitiveness of the company’s products is steadily improved.
The company takes the self-developed main control chip as the core, and introduces the company’s module products after mass production, constantly consolidating the competitiveness of the company’s module products. During the reporting period, the company successfully streamed TW8581(USB3.2 ultra-high speed 5GHZ storage control chip) in Taiwan Province UMC in January 2022. The storage disk controller TW8581 supports mainstream 3D flash memory such as Samsung Electronics, Armored Man, Hynix and Changjiang Storage. ECC hardware engine with high performance and high error correction ability; Self-developed efficient IOPS algorithm and supporting hardware acceleration module; Built-in DC-DC and other power management modules, dynamically reduce the power consumption of the whole machine. The company’s self-developed main control chip TW8581 was mass-produced in the first half of 2022 and successfully introduced into the company’s mobile storage module products. During the reporting period, the self-sufficiency rate of the main control chip in the company’s mobile storage module products gradually increased. The further mass production of the company’s self-developed main control chip has effectively improved the stability and cost advantage of the company’s module products, and the competitiveness of the products has been improved.
2. Acquisition of embedded storage brands to expand the product matrix and accurately cut into the industry storage market.
At the beginning of its establishment, the company mainly focused on the consumer mobile storage market. In 2019, it began to lay out the SSD market, and at the end of 2022, it acquired the UDStore brand to further cut into the embedded market. The company and UDStore brand are expected to cooperate with each other in terms of supply chain resources, customer resources and product and solution experience, effectively shortening the time for the company to explore new markets, and the company will quickly and accurately cut into the industry storage market. At present, the company has formed three complete product lines: mobile storage, solid state drive, embedded storage and industrial storage, covering all types of NAND Flash flash applications. While maintaining the advantages of resources and technology in the original mobile storage market, the company has developed rapidly into the solid-state hard disk, embedded and industrial application storage market with broader market space.
3. Deeply cultivate the original customers, improve the value, and actively explore new customers in new fields and new markets.
The company continues to improve the domestic and international sales network system, deeply cultivating existing customers and opening up new customers go hand in hand. On the one hand, the company deeply cultivated its original customers, actively explored new business opportunities, and improved the single-customer value of some customers. During the reporting period, the company’s products have been imported into Netac, Aigo, Banq, Eaget, Magnesium Shark (MIXZA), Kingfast, Leike Defense (002413), SZ.
On the other hand, the company set up a sales team for new high-end solid-state drives and embedded storage products, focusing on application fields such as consumer electronics, automotive electronics, servers and data centers, and vigorously exploring industry customers. In addition, the company actively seeks business opportunities in overseas markets, further broadening the market coverage of the company’s products.
During the reporting period, the company established subsidiaries such as Xunkaitong and Fuzhoucheng with joint venture partners with industrial background, which promoted the business development of the company’s industrial market and overseas market. At present, the verification of customers in some industries and the introduction of products are gradually carried out.
4. Promote the landing of fundraising projects as planned, continuously increase investment in research and development, and consolidate technological advantages.
The company’s fundraising projects are progressing smoothly, and the R&D of main control chips and the construction of R&D centers are continuously promoted. The company was successfully listed on the main board of Shenzhen Stock Exchange in July, 2022, and the raised funds will be mainly invested in the technical transformation and upgrading project of 3D NAND flash memory master chip and mobile storage module solution, the technical development, application and industrialization project of SSD master chip, the construction project of R&D center and the supplementary liquidity project. During the reporting period, the company newly established Chengdu R&D Center, which is mainly used for the research and development of the company’s main control chips. It not only enriches the company’s technical reserves, but also provides a technical basis for the mass production and import of the main control chips in the company’s products.
The company continued to increase R&D investment, actively introduced high-end R&D technical talents, accelerated the transformation of technological achievements, guaranteed the company’s continuous R&D innovation capability, and consolidated the technological leading edge of the company’s products. In 2022, the company’s R&D expenditure was 66,928,200 yuan, an increase of 21,148,000 yuan, with a year-on-year increase of 46.19%. As a technology-intensive enterprise, the company attaches great importance to the construction of R&D team. During the reporting period, the company vigorously expanded the number of scientific and technical personnel in the field of chip design. By the end of the reporting period, the number of R&D personnel of the company was 140, an increase of 35.92% year-on-year.
5. Invest in the intelligent manufacturing project of memory to further improve the advanced manufacturing level of the company.
The company set up its own big wave test center in 2019. At present, the processing links such as testing and program debugging of the company’s storage wafers and storage module products, as well as the production links of solid-state hard disk module patches, are partially completed by its own production line. With the recovery and growth of the demand of the downstream storage industry, the capacity of the original Dalang Test Center may not meet the rapid development of the company’s storage business.
Based on the rapid development of the main storage business, in order to realize the informationization, automation, specialization and process management of the company’s storage products manufacturing, and strive to build the advanced manufacturing competitiveness of the global storage industry, the company plans to lease the 1st-7th floors of No.6 Zhongchu Comprehensive Factory, Bagua 4th Road, Bagua Ling, Futian District, Shenzhen, for the construction of the intelligent manufacturing (Futian) storage products industrial base project. The estimated investment of the project is no more than 240 million yuan, which is mainly used for site engineering construction and intelligent manufacturing software and hardware purchase. After the renovation of the above-mentioned projects is completed, in order to improve efficiency and centralized operation, the company’s current Dalang branch will also be relocated to the 1st-7th floors of No.6 comprehensive factory building in Zhongchu.
(V) Performance drivers
1. The overall growth of the global semiconductor market drives the company to develop well.
The global semiconductor market is growing, and the growth of the industry is conducive to the further expansion of the company’s business scale. According to WSTS data, the global semiconductor sales increased from $142.2 billion in 2002 to $580.1 billion in 2022, with a compound annual growth rate of 7.28% in 20 years, and the market was steadily upward. In addition, the sales share of the company’s main storage products in the global market is still relatively low, and there is broad room for growth in the future. According to WSTS data, the global storage market in 2022 is estimated to be 134.4 billion US dollars, and the market scale is huge. In 2022, the operating income of the company’s storage products is 1,183,467,400 yuan, which is relatively low, and there is huge room for future development.
2. Forming product cost advantage through technology addition.
In the storage industry, the upstream storage factory is in an oligopoly state, which leads to the market showing the characteristics of resource-based seller’s market, and the cost of storing particles in various storage modules is high. Therefore, for companies in the middle and lower reaches of the storage industry chain, ensuring long-term, stable and large-scale procurement channels for NAND Flash memory chips and particles, and maximizing the utilization rate or sufficient capacity and performance level of storage particles through research and development and technology addition are the keys for companies to gain competitive advantages and ensure high profit margins.
Under the relatively weak accumulation of flash technology in China, based on the market situation and the competitive situation of the industry, the company has deeply cultivated the storage management application schemes such as flash memory master chip design and firmware scheme development of storage products, and gradually extended them to various fields of storage business on the basis of ensuring long-term and stable procurement channels for storage wafers. By relying on the storage chips with high value, the company realized profit realization by selling storage module products, which maximized the value of the company’s technical schemes and improved the company’s profitability.
3. Perfect product matrix helps to meet the diverse needs of various customers.
Through the acquisition of UDStore brand, the company quickly cut into the industry customer market and applied the market layout of solid-state hard disk and embedded storage to industries with broader market space. At present, the company has formed three product lines: mobile storage, solid state disk, embedded storage and industrial storage, covering all types of flash memory products. The perfect product matrix enriches the application scenarios of the company’s products, which helps the company to respond to the multi-type product needs of some existing customers, or expand new customers in various downstream application fields to meet the diversified needs of various customers.
Third, the core competitiveness analysis
1. Focus on the flash memory master chip+firmware scheme, and lay a solid foundation for technology research and development.
The company attaches great importance to independent innovation and has been focusing on the design and commercial application of integrated circuits. Since its establishment, the company has mainly focused on the research and development and design of storage management application schemes for flash memory master chips, memory cards, storage disks, solid-state hard disks and other products. The main personnel of the company’s R&D team have more than ten years of industrial background or experience in integrated circuit research and development, and have rich experience in chip design and development. Through years of technology accumulation and R&D reserves, the company’s R&D team has formed a perfect control and management optimization scheme for the original storage wafers such as SK Hynix, San Disk and SAMSUNG, and adopted the self-developed flash memory master chip and chip firmware scheme, including the company’s self-developed error correction algorithm, low-power technology and other independent IP. The company develops a storage management application scheme with the main control chip as the core, and combines the main control chip, firmware scheme and mass production tool program, which makes the company’s products have strong competitive advantages in storage wafer utilization rate, full capacity rate, product stability, reading and writing speed and so on. In addition, the company adopts advanced process to realize the continuous updating iteration of the main control chip to ensure that the performance of the self-developed main control chip maintains the advanced level in the industry.
In recent years, the company has established a sound R&D system, and gradually formed an international management and R&D team that brings together scientific research talents from Chinese mainland, Taiwan, China, South Korea and Singapore. With perfect technical reserves and high-end R&D talent team, the company has successively developed and launched a variety of flash memory master chips with high transfer rate, high stability and high plasticity. By the end of the reporting period, the company has been granted 125 patents (including 42 invention patents) and is applying for 111 patents (including 99 invention patents); Have 6 exclusive rights of integrated circuit layout design; With 71 software copyrights, the company’s technology research and development achievements have shown a trend of centralized release in recent years. Therefore, the company has a strong technological R&D advantage, and a sound R&D system, high-quality R&D team and rich R&D experience have provided a solid foundation for the company to open up markets and enhance product competitiveness.
2. Covering and perfecting the industrial chain, with the main control chip as the core, maximizing the commercial value of the company’s chip technology.
The company has been deeply involved in the storage industry, especially in the industrial chain fields such as memory cards and storage disks, and has accumulated rich industry resources and operating experience. The company has established a stable and trusted cooperative relationship with the original storage factory, domestic and foreign packaging and testing outsourcing manufacturers, storage product distributors and brands. Through collaboration, division of labor and cooperation with industrial chain enterprises, the company has deeply optimized and integrated market resources and technical resources within the industry ecosystem. And gradually formed a chip design and operation company model covering a perfect industrial chain, such as "wafer resource integration, master chip design, firmware scheme development, storage module sales". On this basis, the company realized profit realization by selling storage modules by relying on storage wafers with higher value independently developed based on flash memory master chip, which maximized the value of the company’s technical scheme.
3. Memory module products with cost performance and competitiveness contribute to the smooth cycle risk of profit security cushion.
At the initial stage of the company, we differentiated to use Partial Wafer to make storage products, and adapted the characteristics of Partial Wafer wafer through self-developed master control technology to form cost-effective and competitive products. Through this kind of business characteristics, the company has formed a relatively high gross profit margin business, which has smoothed the performance fluctuation of the industry downturn cycle. Judging from the previous performance, the company also has a good profit safety mat and anti-risk ability under the downward situation of the industry cycle.
In addition, the rapid research and development capability of the company’s technology platform and excellent utilization rate of storage wafers make the company’s storage products have strong market competitiveness under the same capacity, reading and writing speed and other parameters. In the future, with the delivery of the company’s intelligent manufacturing storage product industrial base, the company’s production cost will be further reduced, thus further enhancing the company’s competitiveness.
4. Stable storage wafer procurement resources, long-term cooperation in external processing sealing and testing, and provision of capacity supply protective cover.
The company is one of the few chip design and operation companies in Chinese mainland that have mastered the continuous and stable procurement resources of storage wafers and the technical capabilities of master chip design and chip firmware development in the field of NAND Flash. The storage industry is essentially an "upstream resource-based" industry. As the global NAND Flash storage wafers are mainly supplied by the original storage plants, the supply scale of the main storage plants accounts for more than 99% of the global market share, forming an oligopoly market. Therefore, the procurement channels of the original storage plants have an important impact on the ecological distribution of the industry and the development of companies in the industry.
Through years of operation and resource accumulation in the storage field, the company has formed a stable procurement channel for NAND Flash, and established a long-term strategic cooperative relationship with major distributors of original storage factories such as SK Hynix and Western Digital. With the development of the company’s business scale, the company’s market competitiveness has been continuously enhanced, and its influence in Chinese mainland, Taiwan, China and Hong Kong, China has gradually been recognized by the original storage factories. In addition, after years of R&D and equipment investment, China’s Yangtze River Storage (YMTC) has gradually started mass production and supplied NAND Flash chips to the market, which fundamentally broke the long-term monopoly of NAND Flash chips by foreign manufacturers. In November 2020, the company became the gold medal ecological partner of Yangtze River Storage (YMTC)Xtacking 3D NAND, and began to purchase and verify products in batches, which is expected to realize 100% localization of mobile storage products from wafers to flash memory master chips as soon as possible. The company’s advantages in purchasing channels have been continuously strengthened, which has provided a guarantee for the further expansion of the company’s business scale.
The company does not directly participate in chip production and processing processes such as wafer production, packaging and testing. The company’s products are mainly produced by outsourcing, and the company has formed a perfect supply chain system through years of operation. The company has established close cooperative relations with top chip foundry manufacturers such as SMIC and UMC in Taiwan Province, as well as leading packaging and testing manufacturers of memory cards and storage disks at home and abroad. At the same time, with the rapid growth of business scale, the company has become an important customer of upstream outsourcing manufacturers, effectively stabilizing the company’s capacity supply, reducing the impact of industry capacity fluctuation on the company’s product output and supply cycle, effectively ensuring the company’s production plan and market sales forecast, and providing a stable supply chain guarantee for the company to become bigger and stronger.
IV. Prospects for the future development of the company
(A) development strategy
The company has always insisted on achieving business expansion through "technology-driven profitability and capital-driven scale". In terms of chips, the company aims to achieve full coverage of all-flash mainstream master chips by 2025. In terms of products, the company always insists on independent innovation as the driving force, self-developed chips as the product foundation, storage products as the main business force, and tamps the competitiveness of products through self-developed main control chips and firmware solutions.
The company will realize the vertical development from the mobile storage market to the mobile phone smart terminal market, PC and other electronic terminals market, automotive electronics market, embedded storage market such as cloud storage in servers and data centers, and high-end solid-state hard disk market in a planned and step-by-step manner, and actively reserve and horizontally lay out a new generation of information technology industry based on data storage business, aiming to become an internationally influential chip R&D and product application solution provider.
(2) Business plan
1. Continue to focus on the research and development of the master control chip, adapt to the original storage particles, and improve the self-sufficiency rate of the master control chip.
The company continues to carry out synchronous R&D layout according to the long-term iterative evolution plan of the original NANDFlash technology, and introduces products after mass production of the main control chip to improve the core advantages of the products. When planning the R&D scheme, the company fully communicates and considers the technical path of the original storage factory in the next few years, so as to improve the adaptability of the company’s main control chip to future storage wafers. In 2023, the company plans to invest in three main control chips, corresponding to memory cards, solid state drives and embedded storage respectively. The details are as follows:
2. Meet the requirements of customized product development around the self-developed master control and firmware scheme.
The company always puts customer needs first, and actively invests in module research and development to meet the special requirements of customers in different application scenarios. According to different customers and market application scenarios, the company independently develops high-performance, stable and reliable main control chips to meet customers’ personalized needs in high speed, low power consumption and large capacity, and enhance product competitiveness. The company constantly improves the development level of its own firmware, and through the optimization and upgrade of software algorithms, it customizes solutions suitable for its specific application needs, such as highly customizable data protection, data reduction, storage management and data security.
The company will continue to pay attention to market trends, actively participate in various industry exchange activities, understand the latest technology development trends and customer needs, make full use of internal technical resources and cooperation opportunities with upstream and downstream enterprises in the industrial chain, realize rapid technology iteration and product innovation, provide customers with better and more personalized storage solutions, and further consolidate the market position.
3. Insist that innovation is the first driving force, and build the R&D team with an international vision.
The company attaches great importance to independent innovation and has been focusing on the design and commercial application of integrated circuits. The company will continue to focus on its main business and the technological advantages accumulated in the early stage, further intensify research and development, and reserve more core technologies. The company will continue to explore cutting-edge technologies and industry trends, actively establish cooperative relations with top enterprises, universities and research institutions in the world, jointly research and develop innovative technologies, continuously improve its technological leading position, and inject new impetus into the development of the industry (300152). In terms of talent construction, the company will expand the scale of R&D team, and equip R&D personnel at different levels while absorbing some top talents, so as to further enhance the company’s innovation ability and technical level, so as to ensure the realization of various technological upgrading and product R&D goals. In addition, the company will continue to improve the talent incentive mechanism, attract more outstanding talents to serve the company for a long time, further enhance and consolidate the international R&D team covering domestic and international scientific research talents in many regions and fields, build and continuously improve the R&D system with an international vision, and form more fruitful R&D achievements.
4. Deepen the market of mobile storage products, focus on the application scenarios of industry customers, and vigorously explore new customers.
Since it was listed on the main board of Shenzhen Stock Exchange on July 1, 2022, the company has actively integrated resources through endogenous growth and extensional development, and achieved the improvement of comprehensive competitiveness. In the future, in order to build products with more core competitiveness, the company will adopt the development layout of "vertical integration, horizontal expansion, and dual-track parallel OEM and brand", continue to deepen the original mobile storage market, further increase market development efforts, tap the overseas market space while consolidating the domestic market, and improve the global market layout with the help of the company’s products and experience advantages. In addition, the company will focus on the application scenarios of industry customers with the help of newly merged high-end solid-state drives and embedded storage product lines, actively lay out industry customers, and conduct customer verification to realize product import.
5. Upgrade and expand the industrial chain resources, and deepen the cooperative relationship with the original storage factory, foundry and sealing and testing factory.
After the acquisition of UDStore brand, the company will carry out deep integration in 2023, and fully integrate the existing channel resources, scheme experience and sales network of both parties, which is expected to produce synergy in the cooperation relationship between upstream storage original factories, customer resources and product advantages. Specifically, in terms of original resources, the company will expand the proportion of WesternDigital and SAMSUNG resources, and introduce Micron and YMTC resources according to strategic needs; In packaging testing, the company will evaluate and develop domestic packaging factory resources, and with the release of its own testing center capacity, it will further improve the company’s product yield and quality level.
6. Continue to promote the intelligent manufacturing project of storage, and build the advanced manufacturing competitiveness of the global storage industry.
The company plans to continue to promote the intelligent manufacturing project of storage, expand production and intelligently upgrade on the basis of the company’s existing storage product line, so as to expand the production and operation scale of the company, improve the advanced manufacturing level of the company’s storage products and enhance the company’s leading position in the storage industry. The project plans to use the renovation of Chinese Kitchen Building to build eMMC product line and R&D center. The project is planned to be completed in the third quarter of 2023 and enter the mass production stage. At that time, the production capacity of the company’s series of storage modules will be expanded on the basis of the original capacity of Dalang Factory. In addition, the company will realize the informationization, automation, specialization and process management of the manufacturing of storage series products, which will run through many links such as raw material inspection, testing, SMT and packaging, which will help the company to implement higher quality standards and help the company to expand enterprises and server end customers with higher product quality requirements in the future. By promoting the implementation of intelligent storage manufacturing project, the company will improve the manufacturing capacity, delivery efficiency, product performance and quality level of storage products, and further consolidate the company’s core competitiveness and advanced manufacturing power.
(III) Risk factors and countermeasures of the company
1. Iterative risk of technology upgrading
The technology upgrading and product upgrading of integrated circuit design industry are fast, and the development direction is uncertain. The design of storage master chip and firmware scheme mainly focus on the product architecture and technical parameters of NANDFlash storage particles. Therefore, the company needs to correctly judge the technical development trend of the industry and upgrade the existing main control chip design and corresponding scheme in combination with the technical development direction of NANDFlash storage particles and the rhythm of new technology introduction. In the future, if the iterative progress and achievements of the company’s technological upgrading fail to meet expectations, resulting in the technical level falling behind the upgrading level of the industry or failing to follow the technological development rhythm of NANDFlash, it will affect the competitiveness of the company’s products and miss the market development opportunities, which will adversely affect the company’s future business development.
In view of the above risks, the company plans to take the following measures: (1) pay close attention to the development of the industry and adjust and optimize the research and development of new technologies in a timely manner according to market demand and technological development trends; (2) Strengthen cooperation and communication with the original factory of NANDFlash.
2. Risk of R&D failure
Integrated circuit design companies need to continuously upgrade their existing products and develop new products to meet the changing market demand. The company needs to determine the research and development direction of new products in combination with technological development and market demand, and continue to invest a lot of money and personnel in the research and development process. Because the industrialization and marketization of technology are always uncertain, in the future, if the company fails to make a correct judgment on the direction of R&D, fails to achieve a breakthrough in key technologies during R&D, fails to meet expectations in performance indicators, or fails to gain market recognition in the developed products, the company will face the risk of R&D failure, and the previous R&D investment will be difficult to recover, which will adversely affect the company’s performance.
In view of the above risks, the company plans to take the following measures: (1) pay close attention to the market development trend and keep up with the market demand; (2) Continue to strengthen the construction of R&D team, increase R&D investment and strengthen R&D management.
3. Risk of core technology leakage
For a long time, the company’s continuous product research and development and technological innovation have accumulated rich technological achievements for the company. Except that some intellectual property rights have been protected by applying for patents, software copyrights and exclusive rights in layout design of integrated circuits, a number of technological achievements independently developed are kept in the form of technical secrets and non-patented technologies. Although the company has taken various measures to protect its core technologies and intellectual property rights, if a large number of core technologies that have not applied for intellectual property rights protection are leaked in the future, it may make the company lose its technological competitive advantage and adversely affect its sustainable profitability.
In view of the above risks, the company intends to take the following measures: (1) Strictly implement the internal control system and management authority related to core technologies, and prohibit irrelevant personnel from contacting protected technical secrets; (2) Sign confidentiality and non-competition agreements with R&D technicians and relevant insiders.
4, raw material price fluctuation risk
The company’s products are mainly NANDFlash storage modules, and the cost of finished products accounts for a relatively high proportion of NANDFlash storage wafers, and the NANDFlash storage wafers on the market are mainly produced and supplied by a few large storage original factories. With the continuous progress of NANDFlash technology and the continuous production of new technologies and new technology production lines, the total storage equivalent supply in the market has increased rapidly. At the same time, with the progress of social science and technology and the rapid development of digitalization and intelligence of electronic products, the demand for storage equivalent in all sectors of society has also increased. Therefore, due to the upstream and downstream technological progress and the capacity expansion plan of the original storage factory, the overall supply and demand situation of the market changes, and the prices of NANDFlash storage wafers and storage products show the characteristics of periodic changes. Although the price change of NANDFlash storage wafer and the price of downstream storage products will affect each other and show a consistent trend, due to the influence of price transmission and production cycle, if the price of NANDFlash storage wafer fluctuates greatly in the future, the profit rate of storage products will fluctuate greatly, and even a large amount of depreciation reserve may be required for the company’s inventory and other assets, thus greatly reducing the company’s profit, and in extreme cases, it may lead to a periodic decline in the company’s operating profit or even a loss.
In view of the above risks, the company plans to take the following measures: (1) timely understand the market price situation and formulate the purchasing strategy according to the market information, inventory situation and production situation; (2) Adjust the sales price in time according to the fluctuation of material price; (3) Optimize product structure, strengthen quality management, improve yield and save quality cost.
5. Supply chain integration risk
The company focuses on integrated circuit design and technology research and development, and entrusts professional manufacturers with chip manufacturing, packaging testing and other production or processing links. This model conforms to the characteristics of vertical division of labor in the integrated circuit industry, which is conducive to improving the company’s R&D technical ability, reducing product production costs and improving the company’s capital use efficiency.
In the daily operation of the company, the company needs to effectively integrate the supply chain according to the supplier’s capacity and the company’s technology research and development and marketing rhythm, so as to ensure the company’s product production efficiency and timely market supply. The company has established long-term and stable cooperative relations with a number of chip foundries and packaging and testing plants. However, in the peak season of product production, there may be a risk that the chip foundries or packaging and testing plants are saturated and cannot guarantee the timely supply of the company’s demand, which will have a certain adverse impact on the company’s operating performance.
In view of the above risks, the company plans to take the following measures: (1) according to the principle of economic benefit and the demand for product quality, it is independently equipped with a certain production and testing capacity; (2) Strengthen cooperation and communication with existing foundries; (3) Develop new OEM resources.
6. Risk of macroeconomic environment change
With the change of macroeconomic situation, the market prosperity of downstream application fields of storage products may fluctuate, especially in the macro environment of international trade friction and economic and trade confrontation, global economic development is facing new uncertainties, which will adversely affect global economic growth, and the change of macroeconomic environment will further affect the market prosperity of downstream application fields of storage products, which will further affect the profit level of storage industry. The sales of the company’s products include domestic sales and export sales. The domestic customers are mainly concentrated in Shenzhen and surrounding areas, and the export customers are mainly concentrated in Hong Kong, and they radiate and serve global consumers through the logistics and trade platforms in Hong Kong. The deterioration of the macro-economic environment will reduce the demand of downstream customers, which will adversely affect the company’s operating performance.
In view of the above risks, the company plans to take the following measures: (1) pay close attention to geopolitical changes, trade frictions, import and export and tariff policies, and changes in cooperation with domestic and foreign suppliers, predict the impact of environmental changes in advance, and formulate effective coping mechanisms; (2) Increase investment in research and development, form product competitiveness through technology research and development, and stabilize the basic business of the company; (3) Continue to explore new downstream application fields and reduce the uncertainty risk caused by weak demand in a single downstream application field.
7. Risk of not fully obtaining NANDFlash storage wafers.
The NANDFlash memory wafer is the main raw material of the issuer’s products. As the global suppliers of NANDFlash memory wafers are only a few large enterprises such as SAMSUNG, SKHynix, Micron, WesternDigital, SanDisk and KIOXIA, the NANDFlash market is characterized by oligopoly, and the supply of goods is subject to the production capacity and implementation of the original storage factories mentioned above. Benefiting from the country’s increasing attention to memory chips, with the high support of national industrial funds and policies, domestic manufacturers of memory chips, such as YMTC and Hefei Changxin, have gradually grown up. Among them, after years of R&D and equipment investment, YMTC has gradually started mass production and supplied NANDFlash chips to the market, which fundamentally broke the market structure that NANDFlash chips have been monopolized by foreign manufacturers for a long time. However, if in the future business development process, due to geopolitics or other reasons, the issuer cannot obtain a continuous and stable supply of NANDFlash storage wafers, which will adversely affect the company’s production and operation.
In view of the above risks, the company plans to take the following measures: (1) broaden the procurement channels; (2) Strengthen cooperation and communication with existing suppliers to ensure stable supply.
8. Operating cash flow risk
During the reporting period, the net cash flow generated by the company’s operating activities was-330,737,100 yuan, and the net cash flow generated by the company’s operating activities was negative, mainly because the storage industry was a capital-intensive industry. In order to maintain technological advancement and enhance market competitiveness, the company continued to invest in research and development and expand its scale, and the cash investment in operating activities was large. The company mainly uses equity financing and creditor’s rights financing as an effective supplement to working capital and scale expansion. If the cash flow of the company’s operating activities cannot be effectively improved, or the company’s external financing channels are not smooth, the company’s working capital will face certain pressure, which may adversely affect the company’s cash flow.
In view of the above risks, the company intends to take the following measures: (1) improve the credit policy and speed up the recovery of accounts receivable; (2) Strengthen fund management and improve fund turnover rate; (3) Strengthen cooperation and communication with financial institutions and maintain an appropriate credit scale.
9. Risk of changes in tax incentives and government subsidy policies
The strategy of integrated circuit industry is becoming more and more important, and the government has also implemented relevant tax incentives and project subsidy policies to support the development of the industry. The company was recognized as a national high-tech enterprise in November 2016 and December 2019 respectively. In terms of tax incentives, in accordance with the Enterprise Income Tax Law of People’s Republic of China (PRC) and related regulations, the company enjoyed the preferential policy of collecting enterprise income tax at the rate of 15% during the reporting period. At the same time, according to the Enterprise Income Tax Law of People’s Republic of China (PRC) and the Notice on Increasing the Pre-tax Deduction Ratio of R&D Expenses (Caishui (2018) No.99), the actual R&D expenses incurred by the company in R&D activities can be deducted. In the future, if the preferential tax policies change or the issuer cannot meet the conditions for continuing to enjoy preferential tax policies, it will affect the profitability of the issuer. In terms of government subsidies, because some of them are not sustainable, if there is a big change in the preferential policies or the amount of government subsidies in the future, the company will face the risk that the government subsidies will decrease and affect its profits and losses.
In view of the above risks, the company intends to take the following measures: (1) apply for the re-certification of national high-tech enterprises as required; (2) Pay attention to relevant policies and their changes dynamically; (2) reduce costs and increase efficiency, and improve the profitability of enterprises; (3) Optimize product structure and improve product profit rate.
10. Risk of exchange rate fluctuation
During the reporting period, the company’s export income amounted to 584,498,800 yuan, accounting for 49.09% of the total operating income of the current period, and the company’s export income accounted for a relatively high proportion. The company’s overseas sales area is mainly concentrated in Hong Kong, and mainly settled in US dollars and foreign currencies. The company’s subsidiary Hong Kong Yuande correspondingly holds monetary assets and liabilities in US dollars and other foreign currencies. Therefore, during the reporting period, it was affected by the constant fluctuation of the exchange rate of foreign currencies such as the US dollar against RMB. During the reporting period, the Company mainly reduced the impact of exchange gains and losses on operating performance by balancing the scale of foreign currency monetary assets and liabilities. However, if the settlement exchange rate of relevant foreign currencies against RMB fluctuates greatly in the future, the Company will face the risk that its operating performance will be greatly affected by exchange rate fluctuations.
In view of the above risks, the company intends to take the following measures: (1) timely understand the exchange rate policy and make reasonable arrangements for foreign exchange settlement and sale; (2) conducting foreign exchange hedging business; (3) Increase the flexibility of exchange rate conversion space during sales pricing.
11. Risk of inventory depreciation
At the end of the reporting period, the book value of the company’s inventory was 755,446,800 yuan, accounting for 45.38% of the current assets. The inventory scale meets the requirements of the company’s business strategy. However, in the future, if the market demand changes adversely, resulting in a backlog of inventory, the company will face difficulties in capital turnover. Or if the market price of products continues to fall, the company will face the risk of inventory loss, which will adversely affect the company’s financial situation and operating results.
In response to the above risks, the company plans to take the following measures: (1) pay close attention to the development of the industry, enhance the status of the industry, adjust the stocking strategy in time, and enhance the ability to resist risks; (2) Improve product manufacturing capacity and speed up inventory turnover.
12. Risk of performance decline
During the reporting period, the company realized an operating income of 1,190,656,500 yuan, and the net profit attributable to shareholders of listed companies was 67,191,600 yuan. The company’s profitability decreased compared with 2021. In the future, if there is macroeconomic depression, intensified market competition, falling market prices, shortage of raw materials, intensified trade friction, outsourcing processing risk or overseas operation compliance risk, it may bring the risk of company performance decline or even loss.
In response to the above risks, the company intends to take the following measures: (1) closely grasp the market development trend and adjust the business strategy in time; (2) Consolidate the company’s technological advantages and enhance product competitiveness; (3) Refined management to reduce costs and increase efficiency.