Source: Times Business Research Institute

Author: Peng Yuanzhong

Edited by Zheng Lin

The

price of silicon carbide (SiC) epitaxial wafers has plunged, and it is difficult for leading enterprises to bear the pressure of price wars?

On December 23, 2024, Guangdong Tianyu Semiconductor Co., Ltd. (hereinafter referred to as "Tianyu Semiconductor") submitted a form to the Hong Kong Stock Exchange to be listed on the main board.

As a key component of the third generation of semiconductor materials, silicon carbide epitaxial wafers have been rapidly expanding in recent years in the fields of new energy vehicles, 5G communications, and industrial power supplies, which has promoted the vigorous development of the industry.

However, due to the significant expansion of production capacity and rapid technological progress, since 2019, the average selling price of silicon carbide epitaxial wafers has shown a rapid downward trend as a whole, and the supply and demand pattern has reversed, and enterprises in the industry have been forced to get involved in price wars.

Times Business Research Institute noticed that as an industry leader, after experiencing soaring performance, Tianyu Semiconductor's revenue and profit both declined in the first half of 2024, and turned from profit to loss, which seems to be difficult to withstand the pressure of the price war.

In the case of inventory backlog and capacity utilization rate plummeting, Tianyu Semiconductor still plans to raise funds in Hong Kong stocks to expand its overall production capacity. In the case of nearly seventy percent of idle production capacity, its capacity digestion capacity is doubtful.

On March 6 and 14, Times Business Research Institute sent a letter to Tianyu Semiconductor and called to inquire about related issues such as the sharp decline in performance and the risk of capacity digestion, but as of press time, the company has not replied to relevant questions.

First, it is difficult to bear the price war, and the performance has turned from profit to loss

According to the prospectus, Tianyu Semiconductor is a professional supplier of silicon carbide epitaxial wafers. In addition, according to Frost & Sullivan, in 2023, its market share in China's silicon carbide epitaxial wafer market will reach 38.8% (in terms of revenue) and 38.6% (in terms of sales), ranking first in the domestic silicon carbide epitaxial wafer industry, with a global market share of about 15%, ranking among the top three in the world.

As a key upstream material, silicon carbide epitaxial wafers have attracted much attention because of their broad market prospects. In this context, many companies in China and even around the world are constantly expanding their production capacity, the industry competition is becoming increasingly fierce, and various companies are fighting a "price war".

However, large-scale capacity expansion has led to an imbalance between supply and demand in the market, and the price of silicon carbide epitaxial wafers has fallen sharply.

According to the prospectus, the average selling price of 6-inch silicon carbide epitaxial wafers, Tianyu Semiconductor's current mainstream products, has dropped from 9,913 yuan/piece in 2021 to 8,890 yuan/piece in 2023.

Overall, the global average selling price of silicon carbide epitaxial wafers has dropped from 10,000 yuan/piece in 2019 to 8,400 yuan/piece in 2023, and is expected to further decrease to 7,200 yuan per piece in 2028. The average domestic selling price dropped from RMB 10,400 per piece in 2019 to RMB 8,800 per piece in 2023, and is expected to drop further to RMB 6,500 per piece in 2028.

At the same time, the price of silicon carbide substrate, the main raw material of silicon carbide epitaxial wafers, has also been declining, driving the price of epitaxial wafers downward.

And because the value chain of the domestic silicon carbide epitaxial wafer industry is more mature than the global market, Tianyu Semiconductor also said in the prospectus that it is expected that after 2025, the average selling price of China's silicon carbide epitaxial wafers will decline faster than the average level of the global market.

The continuous decline in prices directly erodes profits, and Tianyu Semiconductor, which is the first in the domestic industry, seems to be unable to withstand the pressure of the price war.

From 2021 to the first half of 2024 (hereinafter referred to as the "reporting period"), the gross profit margins of 6-inch silicon carbide epitaxial wafers, the main products of Tianyu Semiconductor, were 23.3%, 23.7%, 20%, and 5.7%, respectively, which began to decline from 2023 and declined sharply in the first half of 2024.

Overall, in each period of the reporting period, the gross profit margin of Tianyu Semiconductor was 15.7%, 20%, 18.5%, and -12.1% respectively, and since 2023, the gross profit margin has begun to decline, and in the first half of 2024, it has turned from positive to negative.

In terms of performance, Tianyu Semiconductor's revenue soared from 155 million yuan in 2021 to 1.171 billion yuan in 2023, with a compound annual growth rate of 175.2%, and its net profit turned from a loss of 173 million yuan to a profit of 101 million yuan in the same period.

But the good times did not last long, and the impact of the price war was directly reflected in the performance level. In the first half of 2024, Tianyu Semiconductor's performance took a sharp turn, with revenue decreasing by 14.79% year-on-year, net profit falling by 697.13% year-on-year, and another loss of 137 million yuan.

It is worth noting that the silicon carbide industry chain has begun to prepare for a new round of price reduction.

In September 2024, Tianyue Advanced (688234. SH) Chairman Zong Yanmin said at the performance briefing that due to the improvement of technology and the reduction of costs due to the scale effect, the price of silicon carbide substrates will have room to decline in the future.

Zong Yanmin also said that at present, leading enterprises at home and abroad will comprehensively consider pricing strategies according to market conditions, their own products, specific customers and other factors, and some new participants will also obtain the market through price reduction, which is in line with the development law of the industry.

Second, the inventory backlog, be alert to the risk of capacity digestion

In this IPO, Tianyu Semiconductor plans to use the funds raised to expand its overall production capacity. According to the prospectus, it is expected that the production base of the Eco Park, which is being expanded, will increase the annual planned production capacity of about 380,000 silicon carbide epitaxial wafers in 2025, bringing the total annual production capacity to about 800,000 silicon carbide epitaxial wafers.

It can be seen that Tianyu Semiconductor may hope to "roll production capacity" and reduce costs through scale effect to hedge the negative impact of price decline.

However, it should be noted that during the reporting period, Tianyu Semiconductor has experienced an inventory backlog. In the first half of 2024, its capacity utilization rate will only be about 30%.

At the end of the reporting period, the inventory balance of Tianyu Semiconductor was 94 million yuan, 90 million yuan, 395 million yuan, and 524 million yuan respectively, which has increased significantly since 2023. In the same period, the inventory turnover days of Tianyu Semiconductor were 332 days, 144 days, 113 days, and 281 days, respectively, and the inventory turnover rate in the latest period declined significantly.

Due to the decline in the market price of silicon carbide epitaxial wafer products, the inventory write-down (price decline provision) of Tianyu Semiconductor also increased significantly, which were 11.051 million yuan, 14.711 million yuan, 21.301 million yuan and 63.006 million yuan respectively during the reporting period. In the first half of 2024, the sharp increase in inventory write-downs directly led to a loss in profit.

In addition, according to the prospectus, in each period of the reporting period, the sales volume of Tianyu Semiconductor's silicon carbide epitaxial wafers were 16,900, 42,900, 127,600 and 46,100 respectively, and the capacity utilization rate has decreased from 56.5%, 89.7%, and 82.6% from 2021 to 2023 to 32.0% in the first half of 2024.

In the case of inventory backlog and nearly seventy percent of idle production capacity, Tianyu Semiconductor still plans to raise funds to expand production in Hong Kong stocks, and if the market continues to oversupply in the future, its new production capacity may face the risk of being difficult to digest.

(Full text: 2033 words).

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