In the world of semiconductor manufacturing, Xi'an Yiswei Materials is attempting to carve out a niche for itself as it heads toward its initial public offering (IPO). According to the prospectus submitted by the company, it plans to issue no more than 538 million new shares, which would bring its total capital stock to a maximum of 4.038 billion shares after the listingThe funds raised, amounting to 4.9 billion yuan, are earmarked exclusively for the second phase of its silicon industry base project in Xi'anThe company has enlisted CITIC Securities as its sponsor and KPMG Huazhen as the auditing firm.
However, it's crucial to highlight that so far, Xi'an Yiswei Materials has yet to turn a profitFrom 2021 to 2023, as well as in the first three quarters of 2024, the company has experienced consecutive losses with amounts expanding annuallyThis situation has made it the first unprofitable enterprise to be accepted by the Shanghai Stock Exchange for an IPOThis raises significant questions about the company’s motives for going public amid such substantial financial setbacks and the hurdles it currently faces.
A notable factor influencing Xi'an Yiswei's decision to proceed with its IPO is its capital-intensive business model, which presents a massive funding gapAs disclosed in their prospectus, the primary focus of Xi'an Yiswei is the research, production, and sale of 12-inch silicon wafersThese wafers have extensive applications in various chip manufacturing processes, including NAND flash, DRAM, logic chips, and power management systems, ultimately serving devices such as smartphones, personal computers, data centers, and intelligent vehicles.
By the end of the third quarter in 2024, Xi'an Yiswei's consolidated production capacity reached 650,000 wafers per month, accounting for approximately 7% of the global capacity for 12-inch silicon wafersAccording to SEMI statistics, demand for 12-inch silicon wafers is expected to exceed 10 million per month globally by 2026, with the mainland Chinese market alone projected to surpass 3 million wafers per month
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Through technological innovations and efficiency improvements, the company's first factory has increased its output from 500,000 wafers per month to over 600,000. By 2026, both its first and second factories combined are anticipated to achieve a capacity of 1.2 million wafers per month, potentially satisfying 40% of the local mainland demand and capturing over 10% of the global market share.
When considering Xi'an Yiswei's financing history, the company has completed at least five rounds of external financing from 2019 to 2023, totaling over 10 billion yuanThe second round of financing in July 2021 saw the registered capital at merely 1.2037 million yuanFollowing multiple funding rounds and the transition to a joint-stock corporation, as of the date the prospectus was signed, the total capital stock has reached 3.5 billion yuanHowever, the semiconductor silicon wafer industry is intensely capital-intensive, requiring considerable investments for equipment and raw materials procurement.
On one hand, the construction of factories demands significant financial resourcesThe disclosed total investment for the company's first factory amounted to 11 billion yuan, while the planned funding for the second factory reaches 12.5 billion yuanOn the other hand, silicon wafer production necessitates rapid capital turnoverIn the first three quarters of 2024, the direct materials and direct labor costs of production added up to 520 million yuan, constituting 37.89% of the total costs of their main operations.
Moreover, the semiconductor industry continually grapples with challenges in raw material turnover and inventory managementAs the company expands its production capacity, the scale of its inventory has surged markedlyIn 2021, Xi'an Yiswei's inventory stood at just 204 million yuan, but by the end of the third quarter in 2024, this figure had skyrocketed to 1.119 billion yuan, nearly a fivefold increase in less than three yearsSuch high inventory levels inevitably tie up substantial amounts of cash.
The intensity of investment in 12-inch silicon wafer production ranks second only to that of wafer fabs within the semiconductor manufacturing supply chain
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Thus, even after numerous rounds of financing, a substantial funding gap persistsAccording to its prospectus, Xi'an Yiswei stated that insufficient funding has become a major bottleneck in the company’s development, creating an urgent need for financial support to expand production.
This heavy asset investment has inevitably led to a swift increase in the company's fixed assetsBy the end of 2021, the combined value of fixed assets and construction projects amounted to 4.045 billion yuan, accounting for 55.88% of total assetsBy September 30, 2024, this figure rose to 11.105 billion yuan, now making up 64.70% of total assetsConsequently, this heavy asset model has also adversely affected Xi'an Yiswei's net profit and overall asset health.
The prospectus reveals that in 2021, manufacturing costs reached 300 million yuan, representing 72.73% of their main business structureBy the first three quarters of 2024, manufacturing costs surged to 1.084 billion yuan, accounting for 79.15%. Excessive depreciation costs have severely eroded the company's net profitsAs the first domestic company to achieve large-scale sales of 12-inch silicon wafers, Hu Silicon Industry has faced similar issues, posting a net loss of 537 million yuan in early 2024, a staggering decline of 352.4% year over year, predominantly due to the soaring depreciation expenses.
On the asset front, considering that Xi'an Yiswei is currently in a capacity ramp-up phase, the high per-unit fixed costs of its products, combined with fluctuations in the semiconductor industry, have contributed to increases in inventory write-down losses directly impacting profit and loss from 2021 to the first three quarters of 2024, which were noted as 98 million yuan, 267 million yuan, 332 million yuan, and 187 million yuan, respectively.
The oligopolistic quality of the semiconductor silicon wafer industry presents an additional challenge for Xi'an YisweiThe top five 12-inch wafer manufacturers globally have predominantly been established overseas for over 15 years
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In 2023, these firms accounted for over 85% of global shipments, solidifying a long-standing oligopolistic structure.
With its heavy asset investment model compounded by this oligopolistic environment, Xi'an Yiswei faces inherent disadvantages as a newcomerOne of the first hurdles the company must overcome is its lack of strong bargaining power with upstream suppliers and downstream clientsAccording to the disclosed information, as of the prospectus signing date, domestic suppliers accounted for approximately 50% of the materials required for production, and over 40% of equipment requiredDespite years of collaboration and cultivation, a significant portion of essential materials still relies on foreign suppliers.
For instance, regarding the most significant procurement item, electronic-grade polysilicon, there are only four to five companies worldwide with mature technology that can provide substantial production capacityConsequently, Xi'an Yiswei has minimal leverage in negotiations with these suppliers, forcing them to agree to prepayment arrangements for procurement, which increases their material inventory and the risk of impairment caused by holding excess stock.
The company disclosed potential risks associated with agreements with specific electronic-grade polysilicon suppliers in their IPO prospectusIn 2022, they signed a long-term agreement with a supplier that set guiding prices and procurement volumes for the years 2024 to 2026, accompanied by an upfront paymentAs of September 2024, the outstanding balance for those material prepayments reached approximately 76 million yuanDue to the company's production and procurement plans, there is a risk that it may not meet the annual minimum procurement volume for 2024, which could further inflate its raw material inventory and adversely affect operational and financial performance.
On the down-stream side, Xi'an Yiswei candidly recognizes that the industry concentration in the 12-inch silicon wafer market is notably high, and the top five global manufacturers, including clients such as TSMC and Samsung, have well-established relationships with their suppliers, extensively evolving over the past fifteen years
Thus, the barriers to entry for a new player like Xi'an Yiswei are exceedingly formidable.
Moreover, the company faces limitations in multiple spheres due to a perceived lack of maturityIn terms of technology and processes, Xi'an Yiswei not only has to expedite equipment debugging and production ramp-up while continuously enhancing yield and optimizing costs but must also align with evolving technological pathways of downstream clienteleThe need for continuous investment in core processes—such as crystal pulling, shaping, polishing, cleaning, and epitaxy—only adds to the challengeEstablished international competitors exhibit more mature production processes, higher yield stability, and impose stringent patent barriers, providing them with a first-mover advantage.
On the pricing front, the high depreciation costs erode the company's net profitability, thereby limiting its ability to develop competitive pricing strategies in the marketIn contrast, established competitors have already amortized their previous equipment investments, thereby alleviating cost pressureThe semiconductor industry benefits significantly from economies of scaleHowever, Xi'an Yiswei's first factory currently operates at roughly 90% of capacity and isn't fully utilized, while the second facility is still being constructed—factors which collectively hinder its ability to wield pricing power effectively.
Finally, elements such as product line diversification, brand strength, patent barriers, and long-term relationships with suppliers—all classified as "soft capabilities"—require time to build and solidifyUnfortunately, Xi'an Yiswei's current performance metrics display concerning patternsThe company has incurred losses for consecutive years, with amounts increasing each timeThe net profit attributable to the parent company, adjusted for non-recurring expenses from 2021 to the first three quarters of 2024, has been recorded as -348 million yuan, -416 million yuan, -692 million yuan, and -606 million yuan respectively.
The company's gross profit margins have fluctuated dramatically, occasionally dipping into the negative range
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