Can the EDA company Qilun Electronics successfully pass the IPO on the Science and Technology Innovation Board?

Recently, Capital State learned that Shanghai Gailun Electronics Co., Ltd. (hereinafter referred to as “Gailun Electronics”) sprinted for an IPO on the Science and Technology Innovation Board and was accepted by the Shanghai Stock Exchange.

Image source: Official website of the Shanghai Stock Exchange

Gelun Electronics is an EDA company. The company’s main business is to provide customers with EDA products and solutions that have been widely verified and used by the world’s leading integrated Circuit design and manufacturing companies for a long time. The main products and services include manufacturing EDA tools, design EDA tools, semiconductor device characterization instruments and semiconductor engineering services, etc. The company’s main customers include TSMC, Samsung Electronics, SK Hynix, Micron Technology, UMC, SMIC and other world-leading integrated circuit companies.

Image source: Company prospectus

Financial data shows that the company’s revenue in 2018, 2019, and 2020 were 51.9486 million yuan, 65.4866 million yuan, and 137 million yuan respectively; the corresponding net profits in the same period were -7.9032 million yuan, – 877 million yuan and 27,891,700 yuan.

The issuer intends to apply the listing criteria in Article 2.1.2 (1) of the “Science and Technology Innovation Board Listing Rules” “the estimated market value is not less than RMB 1 billion, the net profit in the most recent year is positive and the operating income is not less than RMB 100 million yuan”.

The company’s operating income in 2020 was 137,483,200 yuan, the net profit attributable to the company’s ordinary shareholders was 29,012,900 yuan, and the net profit attributable to the company’s ordinary shareholders after deducting non-recurring gains and losses was 21,325,900 yuan; During the reporting period, the post-investment valuation of the issuer’s latest financing company was 7.9 billion yuan, and the company’s estimated market value was not less than 1 billion yuan. Therefore, the company meets the market value and financial indicators specified above.

This time, it plans to raise 1.21 billion yuan for modeling and simulation system upgrade construction projects, design process collaborative optimization and storage EDA process solution construction projects, R&D center construction projects, strategic investment and mergers and acquisitions integration projects, and supplementary working capital.

Image source: Company prospectus

As of the signing date of this prospectus, LIUZHIHONG (Liu Zhihong) is the controlling shareholder and actual controller of the company.

The list of general electronics shareholders includes Intel, which holds 5.41% of the shares.

Gelun Electronics admits that the company has the following risks:

(1) The competitive risk caused by the relatively limited size of the EDA market, the current market structure, and the low product variety of the company

According to SEMI and WSTS statistics, the global EDA market1 in 2020 is about US$11.5 billion, a year-on-year increase of about 12%. Compared with the global integrated circuit market of more than US$360 billion, the EDA market accounts for a small proportion. According to GIA forecast data, the compound growth rate of the global EDA market is about 8.7% from 2020 to 2027, and the compound growth rate of the Chinese EDA market is about 11.7% during the same period. EDA tools have a very obvious scale effect. The global EDA market is basically in an oligopolistic pattern, dominated by Synopsys, Kengteng Electronics, and Siemens EDA, with a high degree of industry concentration. Under the current oligopolistic market competition pattern, the company has a gap in comprehensive competitiveness compared with international competitors. Whether it can continue to expand new customers and form new products by relying on the technology and channel foundation of existing products to achieve sustainable business growth, has greater uncertainty.

At the same time, the company’s current main EDA products include manufacturing modeling tools and design simulation tools. Compared with international competitors such as Synopsys, Kengteng Electronics, and Siemens EDA, the company has obvious differences in product variety. gap. The rich and diverse product categories of the aforementioned international competitors can meet the various needs of downstream customers and provide them with one-stop purchasing options. Compared with international competitors, the company’s product categories are less, which makes the company at a disadvantage in terms of product sales synergy, and it is difficult to diversify the risk of product failure in the company’s operation.

(2) Risk of intellectual property infringement

The company’s business income mainly comes from the authorization of EDA tools. Intellectual property rights with core technologies are the key for the company to maintain its own competitiveness. At present, the company has formed professional core technologies and related technical reserves with independent intellectual property rights.

In the EDA industry, there are many cases where intellectual property rights have been stolen or used improperly. The company has protected its independent intellectual property rights by applying for patents, software copyrights, etc. risk. If the intellectual property rights are infringed by others, it will be detrimental to the normal business operation of the company.

At the same time, the company always attaches great importance to the research and development of independent intellectual property rights and avoids infringement of third-party intellectual property rights, but it is still unable to completely rule out the infringement of third-party intellectual property rights caused by factors such as deviations in the company’s employees’ understanding of intellectual property rights, as well as competitors or competitors. The risk that other stakeholders take malicious litigation and other improper means to hinder the normal development of the company’s business.

(3) Iterative risk of technology upgrade

The integrated circuit industry needs to be driven by innovation. The EDA industry is at the top of the integrated circuit industry, and its own innovation is particularly important. The development of the EDA industry needs to be in line with the technological development trend of the integrated circuit industry, and the existing technologies should be upgraded in a timely manner according to market demand changes and technological level development, so as to continue to maintain product competitiveness. Most of the company’s downstream customers are world-renowned companies in the integrated circuit industry, and they have high requirements for the technological leadership of EDA tools. The company needs to continuously meet the needs of the dynamic development of the industry, and always face the technical competition of rapid upgrades and iterations of international competitors’ products.

In the future, if the company’s technology upgrade iteration progress and results fail to meet expectations, resulting in the technological level falling behind the industry upgrade iteration level, the company’s product competitiveness will be affected and market development opportunities will be missed, which will have an adverse impact on the company’s future business development.

(4) Risks that R&D results fail to meet expectations or R&D investment exceeds expectations

The EDA industry where the company is located belongs to the intellectual property-intensive field with high technology content, which has the characteristics of large R&D investment and long R&D cycle. Companies need to continuously invest a lot of money and personnel in the upgrade of existing products and the development of new products to adapt to changing market demands. The company has continued to increase R&D investment in recent years, and is expected to maintain a relatively high proportion of R&D investment in the future.

During the reporting period, the company’s R&D expenses accounted for 36.83%, 54.55%, and 36.10% of its operating income (after deducting the impact of share-based payments).

Under the circumstance that the company’s R&D investment is relatively high, if the company’s research and development of new products or the upgrading of existing products is not as effective as expected, the products developed by the company cannot meet the needs of downstream customers or are at a disadvantage compared with competitors’ products, the company will face R&D. The risk that the investment is difficult to recover, which in turn affects the subsequent further R&D investment, and has an adverse impact on the company’s performance and competitiveness.

At the same time, in the face of the rapidly changing development of the integrated circuit industry and the increasing technological level of competitors, the company’s R&D investment in the development of new products or the upgrade of existing products may exceed expectations, which may lead to the company’s short-term R&D investment and R&D investment. The resulting revenue imbalance will adversely affect the company’s short-term operating performance.

(5) The risk of not being able to form large-scale sales because the research and development results have not been recognized by the market

Due to the key role of EDA tools in the integrated circuit industry, the EDA industry has the characteristics of difficult product verification and high market threshold, especially for internationally renowned customers, which have a high threshold for verification and approval of new enterprises and new products.

Therefore, in order to transform the R&D results of the EDA industry into products that are recognized by the international mainstream market, not only a large amount of R&D investment is required to form products that have reached an advanced level in technology, but also strong brand influence, channel capabilities, and rapid iteration capabilities are required. Wait. If the company develops products that have reached an advanced level in technology but cannot be verified and recognized by the international mainstream market, the research and development results will still not be able to form large-scale income, which will also have an adverse impact on the company’s operating performance.

(6) Risk of loss of technical personnel and rising costs of technical personnel

The EDA industry is a typical technology-intensive industry, and its R&D strength is mainly high-quality EDA talents. The complexity and development difficulty of EDA tools determine the strictness of its requirements for relevant talents. Talents in the EDA industry are relatively scarce worldwide, and the competition for talents in the industry is very fierce.

If the company cannot maintain the stability of the R&D team and continue to attract outstanding technical personnel to join, it may not be able to maintain the competitive advantage of existing technologies or continue to develop new technologies and products, which will affect the company’s normal operation, research and development progress, and market competitiveness. and adverse effects on future development.

At the same time, with the rapid improvement of relevant policies and industry environment in recent years, on the one hand, it is conducive to the convergence of global EDA industry talents to the domestic market, and the return of Internet, artificial intelligence and other industry talents to the EDA industry, enriching the domestic EDA industry talent pool, but on the other hand It may lead to an increase in the salary of relevant technical talents, especially high-end talents, which may lead to an increase in the cost of attracting or retaining relevant talents for the company, thereby adversely affecting the company’s operating performance.

(VII) Risk of goodwill impairment

As of December 31, 2020, the company formed a goodwill of RMB 59.9969 million due to the acquisition of 80% equity of Boda Micro in December 2019. Bodawei’s main business is device modeling and PDK-related EDA tool authorization, semiconductor engineering services, and sales of semiconductor device characteristic testing instruments. After the acquisition, the company has integrated its technology research and development, sales channels, etc. , Boda Micro will operate well in 2020, and there is no sign of goodwill impairment.

At the same time, the potential targets of the merger and acquisition business and the optimization and integration will be an important part of the company’s future development strategy. It is expected that with the continuous merger and acquisition in the future, the company will continue to form new goodwill. If expected, the issuer has the risk of impairment of goodwill, which may have an adverse impact on the company’s current profitability.

(VIII) Risk of Gross Profit Rate Fluctuation

During the reporting period, the gross profit margins of the company’s main business were 96.99%, 95.86%, and 89.81%, respectively, a slight decrease. The company’s business mainly includes the authorization of EDA tools, the sales of related semiconductor device characteristic testing instruments and semiconductor engineering services.

On the one hand, if the proportion of the company’s future EDA tool authorization business changes, it will cause the company’s main business gross profit margin to fluctuate accordingly; The company must continue to iteratively upgrade and innovate technology based on market demand. If the company fails to correctly judge changes in downstream demand, stagnant technological strength or decline in industry status, the gross profit margin of these businesses may decline, which in turn will lead to a decline in the gross profit margin of the company’s main business. . The above factors may cause fluctuations in the gross profit margin of the company’s main business, which in turn will affect the company’s operating performance.

(9) Risk of small business scale

The global EDA market is basically in an oligopolistic pattern. Synopsys, Kengteng Electronics, and Siemens EDA have relatively high market shares. Other EDA companies are generally limited by market competition and generally operate on a smaller scale.

During the reporting period, the company’s operating income was 51,948,600 yuan, 65,486,600 yuan and 137,483,200 yuan, respectively. The small operating scale limits the company’s R&D, sales, mergers and acquisitions and other activities to a certain extent. The total investment, and the company’s financial data is likely to fluctuate greatly with changes in the external economic environment or its own business activities.