The U.S. has restricted upgrades from Huawei’s supply side to The Syst’s chip side. On May 15, 2020, the U.S. Department of Commerce announced plans to limit Huawei’s ability to use U.S. technology and software to design and manufacture semiconductors outside the U.S. Specifically, Huawei and its affiliates on the list of entities, direct products produced by U.S. software and technology on the control list, and direct products made using semiconductor equipment on the control list outside the U.S., are required to apply for licenses when shipping to Huawei and its affiliates, which is equivalent to a further upgrade to the list of entities that will include Huawei on May 17, 2019.
But at the same time, it also sees that the announcement is only a planned and informal regulation, while the regulations will take effect after the upstream suppliers still have a 120-day buffer period. At the same time, the U.S. Commerce Department announced that it would extend Huawei’s temporary license for another 90 days until August 13, 2020. The U.S. issued its first temporary license to Huawei on May 21, 2019, and as of this is the fifth time that Huawei has extended a temporary license to import specific products and technologies from the U.S. In addition, according to Reuters, this may be the last time the license extension, also a further escalation of sanctions against China. In addition, Huawei’s U.S. suppliers may also apply for exemption from continuing to supply by proving that the product is not relevant to national security, and are not subject to the temporary licensing statute of limitations.
We believe that in the past year, Huawei has basically achieved self-research alternative or non-U.S. supplier switching in the IC design side, while the manufacturing end Huawei is still highly dependent on TSMC, and upstream semiconductor equipment, EDA software is still monopolized by U.S. manufacturers, thus becoming the focus of pressure on the U.S. side. At present, Huawei has achieved a large number of self-study of chips, but the manufacturing sector is still highly dependent on TSMC, is the main bottleneck in its industrial chain. Once the manufacturing process can not be ordered by TSMC, and SMIC technology and production capacity will still need a certain amount of time to climb, its large number of self-developed chips will not be able to achieve mass production and application, so it becomes the entry point of this U.S. sanctions policy. In addition, in semiconductor equipment, the current U.S. manufacturers occupy about 40% of the semiconductor equipment market, which in deposition, etching, ion injection, CMP, cleaning, testing and other key processes, application materials, pan-forest, Ketian and other U.S. manufacturers have leading process technology advantages and stability, after long-term mass production testing, so it is difficult to replace in the short term; The Three American companies of Mentor have a monopoly and are difficult to replace in the short term.
The de-Aization of core chips at the end of Huawei base station
The de-Aization of the core chip at the end of Huawei’s mobile phone
In extreme cases, Huawei may face short-term supply cuts after the formal regulations fall, but from the national game level, China will also respond, and Huawei itself is prepared in inventory and so on. After the earliest U.S. 517 sanctions, the U.S. semiconductor factory has briefly cut off supplies to China, followed by Intel, Selings, Qualcomm and other companies began to resume some of the supply in July, which is not related to the military, 5G and other products can also be supplied without a license.
We believe that even the subsequent formal regulations do not mean that 100 per cent of the supply is absolutely cut off, and that follow-up progress remains to be observed.
According to a Global Times editorial, if the U.S. moves to further “card neck” to prevent TSMC from supplying chips to Huawei, China will vigorously counter it, including including including the inclusion of U.S.-related companies in the “unreliable entity list”, restrictions or investigations against Qualcomm, Cisco, Apple and other U.S. companies in accordance with the law, and a moratorium on the purchase of Boeing aircraft.
In addition, after ZTE was placed on the u.S. rejection list in 2018, Huawei has begun to make preparations, including the stockof of a large number of components, Huawei’s net operating income from operating activities has long been ahead of net profit, and the trend is consistent, and in 2018, there has been a larger inflection point downward. At the same time, as can be seen from the balance sheet, Huawei’s inventory increased significantly between 2018 and 2019, mainly by raw materials, which in 2018 reached a peak of 37.5% in 2018 and a record 19.5% in 2019.
Therefore, we can reasonably infer that Huawei in 2018 and 2019 a large number of relevant components and products, in case of need. Overall, it has historically taken about 2 months for U.S. suppliers to resume supply to China from the start of sanctions to resume supply to China, and Huawei itself has a certain inventory cycle, although short-term or will face some pressure, but the high probability will not lead to a complete suspension of supply.
Supply to China by major U.S. companies
Net profit and net cash flow from operating activities (RMB 100 million)
Huawei raw materials and inventory data and ratio (RMB 100 million)
In the medium to long term, China and the United States science and technology fork, industry accelerated closed.
China’s semiconductor manufacturing market is expanding, has been paid attention to by international equipment manufacturers. On May 14th asAML of the Netherlands signed a cooperation agreement with the high-tech district government of Wuxi City, Jiangsu Province, establishing the optical machine equipment technical service (Wuxi) base. ASML will build a professional team technology center, engaged in photolithography maintenance, upgrade and other technical services, while building a supply chain service center, to provide efficient materials and logistics support, reflecting the European lithograph yme factory ASML to the Chinese market. China chip manufacturing leader SMIC to increase capital expansion of advanced technology.
SMIC announced on the evening of May 15 that SMIC South will receive capital injections for 14nm and below production capacity platforms, increasing its registered capital from $3.5 billion to $6.5 billion, reducing SMIC’s stake from 50.1% to 38.515%, and the National Integrated Circuit Fund, The National Integrated Circuit Fund II, Shanghai Integrated Circuit Fund, and Shanghai Integrated Circuit Fund II will have 14.562%, 23.077%, 12.308%, 188% shares, respectively. SMIC will still have physical control over SMIC South and will consolidate the report. The capital injection is conducive to SMIC South to establish a larger 14nm and more advanced process capacity, and to the loss of high depreciation due to the initial high depreciation of the listed company’s diluted 14nm capacity.
At present, SMIC South production capacity has reached 6000 tablets / month, the end of March for 4000 tablets / month, the end of the year will reach 15,000 tablets / month, the project target of 35,000 tablets / month. On the other hand, the United States is increasing control over advanced semiconductor technology, TSMC announced on May 15th that it intends to build and operate a 5nm advanced fab in Arizona, USA, which will begin construction in 2021 and mass production in 2024.
TSMC has previously released plans to build a plant in the U.S., which we believe is a response to the Trump administration’s concerns about the security of the advanced semiconductor process supply chain, which the U.S. can ensure that factories that make cutting-edge chips help protect its supply chain. China-U.S. trade friction trust is lost, we believe that in the core science and technology infrastructure new infrastructure area, the future china and the U.S. will be divided, forcing the domestic semiconductor rapid growth of the historic opportunity.
The chip manufacturing link in the Sino-US scientific and technological tussles is the focus of u.S. pressure, and long-term favorable semiconductor sector development. SMIC, as the core enterprise of the domestic chip manufacturing end, will carry the responsibility of the autonomy of the domestic industrial chain in the future, and its benefit from policy and financial support will be conducive to the common growth of upstream and downstream companies. We still emphasize that the core logic of the domestic semiconductor sector is the independent control of the ten-year dimension, continue to recommend SMIC, Ruitron, choose the opportunity to focus on domestic replacement related equipment, materials, design companies, such as North Huatron, Huafeng measurement and control, Shanghai silicon industry, Zhaoyi innovation, Weir shares, Sanbang shares, ZhuoShengmicro, Lanqi technology and so on.