China’s top maker of analog IC patterned wafers posted strong revenue and profit growth from 2020 to 2022, but the rates slowed sharply this year.

China’s top maker of analog IC patterned wafers posted strong revenue and profit growth from 2020 to 2022, but the rates slowed sharply this year

Key Takeaways:

  • BaTeLab has been approved for a Hong Kong IPO, gaining momentum after selling 4.81% of its shares to BYD for 50 million yuan in June
  • The maker of analog IC patterned wafers has been profitable for the last three years, though its heavy reliance on two distributors remains a big risk factor

 

By Fai Pui

China’s semiconductor companies are “strengthening” themselves, often with financial and other assistance from Beijing, as Washington increasingly restricts their access to key technology. At the same time, local demand for less sophisticated, but still vital, analog chips that are less affected by the restrictions continues to grow, with China emerging as the world’s top consumer of such chips last year.

The market is huge, but also intensely competitive. The top five Chinese providers of analog IC patterned wafers took up just 5% of the market last year, suggesting a high level of fragmentation, according to third-party data in the IPO prospectus from BaTeLab Co. Ltd., which is aiming to list in Hong Kong. The top Chinese provider of analog IC patterned wafers took an important step to completing that listing with its recent passing of a hearing at the Hong Kong Stock Exchange.

BaTeLab might be top dog among its peers in China, but even so, it commanded just 1.7% of the market by revenue last year. It’s hoping it can boost that figure using IPO funds, which it plans to use to strengthen its R&D and production capabilities, develop new product lines, and explore potential strategic investments and acquisitions, according to its prospectus.

So, why is BaTeLab so eager to list even as the Hong Kong stock market remains in the doldrums? A closer look at its performance of the last few years might provide some clues.

The company’s revenue has grown steadily, quadrupling from 88.7 million yuan ($12.4 million) in 2020 to 353 million yuan last year, or roughly doubling each year. But the growth slowed sharply this year, rising just 26.1% in the first half of the year to 204 million yuan, as the global chip sector slowed after several years of tight supply during the pandemic. Its gross margin has remained stable, ranging between 54.9% in 2020 and 56.5% last year, and staying within that band at 55.2% in the first half of 2023.

The company is also quite profitable and improving, with its profit increasing from 14 million yuan in 2020 to 95.3 million yuan last year, representing 160% annual growth over that time. But like its revenue, its profit growth also slowed sharply in the first half of this year, up just 7.3% to 45.9 million yuan, as pandemic-era shortages eased.

Despite the slowdown this year, the overall results look good enough. But a closer look reveals that BaTeLab’s cash flow could be cause for concern. What’s more, its customer base is very limited, meaning the loss of just one or two customers could seriously hurt its business.

The company had negative net operating cash flow for two of the three years between 2020 and 2022, including negative 41.5 million yuan in 2020, then turning slightly positive at 8.8 million yuan in 2021, before backsliding to a negative 31.4 million yuan last year. Continuing that see-saw pattern, the figure turned positive again in the first half of this year to the tune of 50.1 million yuan.

The company explained that last year’s negative cash flow was mainly the result of increased inventory, trade, accounts receivable and, above all, an increase in its advance payments. Its purchase of additional raw materials resulted in an advance payment increase of 127 million yuan, and an increase in 19.8 million yuan worth of inventory.

BaTeLab also faces risk due to its heavy reliance on distributors for most of its sales. Its sales to those distributors accounted for 95.2% of its total in 2020, though the figure came down to 80.2% by last year. Its two largest distributor customers accounted for 83.7% of its revenue in 2020, and the full 80.2% of sales that went to distributors in 2022.

To reduce that risk, BaTeLab may be seeking to raise new money now to help it expand its customer base, with the company likely to seek more direct end-users of its products. The company already appears to be moving in that direction, with the share of its revenue generated through such direct sales growing from 4.8% in 2020 to 19.8% last year.

Overvalued?

Like many high-growth tech companies, BaTeLab has been a fundraising machine in recent years. It conducted four financing rounds from 2015 to 2021, with its value rising from 100 million yuan to 478 million yuan over that time.

That valuation more than doubled in July 2021, when a 40 million yuan investment by Pingtan Fengyuan Juxin Equity Investment Partnership raised the figure to just over 1 billion yuan. Just before filing for its IPO in June this year, the company received a new 50 million yuan investment from new energy vehicle (NEV) giant BYD (1211.HK; 002594.SZ), which received 4.81% of BaTeLab’s shares for its investment.

The latest investment left BaTeLab’s valuation roughly the same at about 1.04 billion yuan, with BYD becoming its 13th largest shareholder.

China’s broader chip market is expected to get strong government support as Beijing looks to build up chip-hungry related technologies like 5G, the internet of things (IoT) and cloud computing. The market is projected to reach nearly 2.2 trillion yuan by 2027, growing by 9.5% annually from 2022 to 2027, according to third-party data in the prospectus. Within that, the analog IC patterned wafer market is expected to reach 52.2 billion yuan.

Market fundamentals appear to favor BaTeLab, meaning it should be able to seize opportunities with any new funds. That’s probably why it still wants to list even when the Hong Kong stock market remains weak and recent IPOs have met with lukewarm receptions.

BaTeLab could face a similar fate, since Hong Kong-listed semiconductor stocks haven’t performed well this year. Leading contract chip maker SMIC’s (0981.HK; 688981.SH) shares have risen more than 20% this year, but other companies like Hua Hong Semiconductor (1347.HK) and Shanghai Fudan Microelectronics (1385.HK) have fallen significantly. The three have a relatively low average price-to-earnings (P/E) ratio of about 9 times.

Annualizing BaTeLab’s first-half net profit and using a P/E ratio of 9 would value the company at just 830 million yuan, well below the 1 billion yuan figure from earlier this year. That means the deal’s lone sponsor, CICC, may need to work overtime to help BaTeLab get a valuation that matches or even beats the previous figure.

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