1. The expansion of the semiconductor industry is imminent, and the leading overseas equipment supply chain has a strong position

1.1. Market scale: A large market of 70 billion US dollars, industry expansion technology upgrades help equipment links to grow again

1.1.1. The shortage of production capacity in the semiconductor industry has triggered a wave of price hikes, and the "industry expansion equipment first" pushes up a new round of business cycle

The global semiconductor industry is currently in a period of prominent supply-demand contradiction with tight production capacity and rising prices. Under the influence of multiple factors at both ends of supply and demand, such as the impact of the epidemic, Sino-US technology friction, global industrial chain transfer, 5G demand upgrade, new energy vehicle volume, and Internet of Things wind-up layout, the global semiconductor industry is currently in short supply and the gap between supply and demand continues to widen , The prosperity of the industry is expected to rise. In terms of business continuity, TSMC, a global wafer manufacturing advanced process manufacturer, said the law will guide the state of capacity shortages to continue until 2022. The downstream market and customers are relatively fragmented, and the leading manufacturers in the packaging and testing link with relatively large product forms, including ASE, Changdian, Huatian, Tongfu, etc., have adjusted the prices of various products to varying degrees since Q4 of 2020, and expanded their packaging and testing capacity. Relatively fast, it is expected that the balance of supply and demand for packaging capacity will be achieved as early as 2023.

Global and Chinese semiconductor sales have reached new highs month by month, and the industry’s boom has continued to rise. According to SIA data, in September 2021, global semiconductor sales were 48.28 billion U.S. dollars, a year-on-year increase of 27.5%. It has been a positive year-on-year growth for 20 consecutive months. Sales in September once again exceeded the previous month's new high. In September, China's semiconductor sales amounted to US$16.72 billion, a year-on-year increase of 24.3%, which was a positive year-on-year growth for 22 consecutive months, and the global share remained at about 35.36%. Global and Chinese semiconductor sales have reached new highs, and the year-on-year growth rate has continued to climb this year. The year-on-year growth rate of China's semiconductor sales has been significantly higher than the global level, and the growth momentum has been strong. Looking forward to 2021, 5G, online applications, automotive electronics, and AIoT will be the mainstream development trends of the industry. The prospects for innovation and upgrading are promising, and the upward trend of industry prosperity is expected to continue.

The semiconductor industry's price hikes are coming, and many domestic and foreign manufacturers have extended their delivery cycles and raised product prices. Since the beginning of the year 21, the semiconductor industry has experienced general price increases from the foundry link. Foundry companies such as TSMC, SMIC, Powerchip, material end silicon wafers, packaging substrates, copper clad laminates, packaging and testing end ASE, Changjiang Electronics, etc. Price increases have occurred in all links, and they have been passed to the IC design side cumulatively. IC design manufacturers’ chip delivery cycles have lengthened and price increases have spread to various market segments downstream of the industry chain. The industry’s production capacity continues to be tight, and the industry’s supply pressure is expected to continue until 2022.

In order to alleviate the global chip shortage and respond to strong mid- to long-term demand for autonomous driving, AI, high-performance computing, and 5G communications, leading OEMs have started a new round of high-intensity capital expenditures. On the one hand, due to the prominent contradiction between supply and demand in the industry's production capacity, on the other hand, emerging tracks such as automotive electronics and AIoT have risen strongly. The global foundry leader TSMC has initiated a new round of high-intensity capital expenditure at the ten-year cycle level. Before and after the 2008 financial crisis, TSMC’s annual capital expenditure was around US$2.5 billion. From 2010 to 2018, TSMC’s annual capital expenditure increased to 6-11 billion U.S. dollars, an average of approximately 8.87 billion U.S. dollars. It took the lead in laying out the smartphone track, and working with major customers to break through advanced process iterations, and successfully build the world’s leading advanced process Foundries.

The local foundry leader SMIC has rapidly increased the intensity of capital expenditures to support the development of the local semiconductor industry after returning to the STAR Market in July 2020. In the context of Sino-US technology friction, SMIC has repeatedly announced that it needs to approve and control the procurement of US semiconductor equipment suppliers, which has brought certain resistance and uncertainty to its advanced process research and development and mature process expansion.

Capacity expansion, equipment first. The high-intensity capital expenditure of foundries will directly drive the order volume of semiconductor equipment.

Equipment shipments in major semiconductor equipment supply regions around the world have repeatedly hit record highs, with a year-on-year growth rate of 50%. According to Wind data, in September 2021, North American semiconductor equipment shipments were US$3.718 billion, a year-on-year increase of 35.53%; Japanese semiconductor equipment shipments in September were 272.388 billion yen, a year-on-year increase of 38.98%. The shipment volume of semiconductor equipment in North America and Japan continued to be high, both hitting record highs, and the year-on-year growth rate climbed to about 50% month by month. Under the influence of global chip shortages, leading manufacturers such as TSMC, UMC, SMIC and other foundries have increased capital expenditures and are determined to expand production, and semiconductor equipment will benefit first.

1.1.2. The scale of the global market continues to expand, and the proportion of the Chinese market is gradually increasing

The global semiconductor equipment market is expected to continue to expand in the next few years. As the processing area of semiconductor products shrinks exponentially and the processing difficulty continues to expand, the manufacturing equipment for semiconductor products will become more refined in the future, and the value may continue to rise. According to SEMI data, the global semiconductor equipment market in 2022 is expected to reach 101.31 billion U.S. dollars (predicted at the beginning of the year at 76.1 billion U.S. dollars), with a 20-22 CAGR of 19.29%.

The growth rate of China's semiconductor equipment market is faster than the global growth rate, and it is in a trend of rapid development. Since China's semiconductor equipment industry started late, the overall market size is still small. According to wind data, the size of China's semiconductor equipment market in 2020 is only 26.30% of the global semiconductor equipment market. However, with the continuous promotion of downstream demand and the continuous strengthening of national policy support, China's semiconductor equipment market is ushering in rapid growth. According to Wind data, from 2011 to 2020, the growth rate of China's semiconductor market was significantly greater than the global growth rate. The CAGR from 2011 to 2020 was 19.92%, which was greater than the global 5.62%.

With the third industrial transfer of the semiconductor industry, downstream industry demand and policy dividends are pushing China to gradually become the center of the semiconductor equipment market. According to SEMI data, the size of the semiconductor market in mainland China is expected to reach US$17.3 billion in 2020, with a CAGR of 27.92% from 2016 to 2020, maintaining rapid growth, and is expected to account for approximately 27.4% of the global market in 2020, surpassing China Taiwan has become the world's largest semiconductor equipment market. In the field of semiconductor wafer processing equipment, according to Gartner data, from 2014 to 2019, the proportion of the Chinese mainland market in the world has increased from 10.01% to 22.07%, and it has officially surpassed South Korea and Taiwan, becoming the world’s largest crystal Market segmentation of circular processing equipment.

1.1.3. Wafer manufacturing equipment accounts for a large proportion, and advanced process iterations bring structural differences in various process equipment

Semiconductor equipment is the cornerstone of the semiconductor industry, supporting the development of chip manufacturing and chip packaging and testing industries. The semiconductor industry is mainly divided into three links: the upper, middle and lower links. The upstream link includes IP core and design services, materials and equipment; the midstream link includes design, chip manufacturing, and chip packaging and testing; the downstream link is terminal applications, including integrated circuits, discrete components, Optoelectronics, sensors, etc. Although semiconductor equipment has an annual output value of only tens of billions of dollars, it supports a chip manufacturing industry that is 10 times larger, and has played a key role in the development of the entire information industry with an annual output value of nearly tens of trillions of dollars.

Semiconductor equipment is mainly divided into wafer processing equipment and packaging and testing equipment, corresponding to each link of wafer processing and packaging and testing.

(1) Wafer processing equipment: The wafer processing steps are mainly divided into diffusion, photolithography, etching, ion implantation, thin film deposition, polishing and so on. Taking the important photolithography in wafer processing as an example, photolithography can be subdivided into cleaning, coating, photolithography and development. The corresponding wafer processing equipment is washing machine, coating machine, photolithography machine and developing machine ( The measured CD/SEM belongs to the packaging and testing equipment). Wafer processing accuracy is high, generally in the range of a few nanometers to a few microns, which requires extremely high precision of processing equipment. Some of the processes need to be cycled many times, requiring a large amount of semiconductor equipment.

(2) Packaging and testing equipment: Packaging and testing are divided into packaging and testing. Packaging is mainly used for chip post-processing. After the wafer is manufactured, the process flow is divided into traditional packaging and advanced packaging; testing covers all links in the midstream of semiconductors. From IC design to IC packaging, testing is required. Traditional packaging equipment includes thinning machines, dicing machines, placement machines, wire bonding machines, etc.; advanced packaging equipment includes cleaning machines, sputtering equipment, lithography machines, coating equipment, reflow welding equipment, etc.; testing equipment mainly Including testing machine, probe station and sorting machine.

In the semiconductor equipment investment, the capital expenditure of wafer processing equipment is large, accounting for nearly 80%. According to Gartner's data, semiconductor equipment investment accounts for 70%-80% of the capital expenditure of fabs. In semiconductor equipment investment, wafer processing is an important and complex link in the integrated circuit manufacturing process, and related equipment accounts for a large proportion, accounting for 78%-80%. Packaging and testing equipment accounts for 18%-20% of semiconductor equipment, of which test equipment accounts for 55%-60%.

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The wafer processing equipment market continues to set a new record high, hitting the US$70 billion barrier. After the wafer processing equipment market exceeded US$30 billion in 2012-2015, it exceeded US$50 billion in 2015-2019. It is predicted that in the future 2020-2022, its wafer processing equipment will exceed 60 billion U.S. dollars, hitting the 70 billion U.S. dollar barrier. In 2018, due to the high prosperity of the semiconductor industry, the wafer processing equipment market reached a historical high value. Due to the continued imbalance between supply and demand in the semiconductor industry in 2020, the wafer processing equipment market is expected to exceed 2018 and hit the historical peak again. According to SEMI data, the market size in 2020 is expected to increase by 15% compared to 2019, to 54.9 billion U.S. dollars, exceeding the historical high in 2018. It is expected that thanks to the recovery of the storage semiconductor market and investment in advanced logic semiconductors, the wafer processing equipment market in 2021 and 2022 will increase by 4% and 6% compared with the previous year, reaching 61.8 billion US dollars and 65.5 billion US dollars.

In terms of downstream applications, the big application market for wafer processing equipment lies in logic semiconductors. According to SEMI data, in 2023, the wafer processing equipment market will reach 68 billion U.S. dollars, of which Foundry/Logic accounted for nearly half of the market share. It is worth mentioning that NAND is expected to have a high growth rate in 2020, which is expected to increase by 30% compared to 2019. In addition, the year-on-year growth rate of DRAM in 2020 is close to 20%.

The packaging and testing equipment market has begun to recover, and testing equipment once again hit a record high. According to SEMI data forecasts, the packaging and testing equipment market will reach 9.5 billion U.S. dollars in 2020, of which packaging equipment will reach 3.5 billion U.S. dollars, a year-on-year increase of 20%, and test equipment will cost 6 billion U.S. dollars, a year-on-year increase of 20%. In the future, the market size of packaging equipment will be mainly driven by the demand for advanced packaging. It is expected to increase by 8% year-on-year in 2021 and 5% year-on-year in 2022. In the future, the scale of the test equipment market will benefit from the demand for 5G and HPC, with a year-on-year growth of 4.9% in 2021 and a year-on-year growth of 6.5% in 2022.

From the analysis of growth rate and volatility, the growth rate of the wafer processing equipment market is greater than that of the packaging and testing equipment market, and the market volatility is less than that of the packaging and testing equipment market. According to SEMI data calculation, the CAGR of wafer processing equipment from 2012 to 2022 is 8.11%, and the CAGR of packaging and testing equipment from 2012 to 2022 is 4.86%. The volatility Sx for wafer processing equipment from 2012 to 2022 was 14.65, and the volatility Sx for packaging and testing equipment from 2012 to 2022 was 26.54.

In terms of the scale of the segmented equipment market, the semiconductor equipment segment has a large structural difference with the iteration of advanced manufacturing processes, and most of the market share is occupied by key segmented equipment. There are three types of semiconductor equipment with a large market share: lithography, etching equipment, and thin film deposition equipment, accounting for 21.8%, 18.1%, and 25.9% of the market respectively. The annealing equipment market share is relatively small, about 2.3%. According to the data on the proportion of various front-end equipment from 2018 to 2020, the top three semiconductor equipment market shares are lithography, etching and CVD, with a total proportion of 63%.

1.2. Market structure: Overseas oligarchs have a strong position in the supply chain, and local companies have a long way to go

In terms of market structure, the global semiconductor equipment market is dominated by international giants. According to the statistics of VLSI, the top 5 semiconductor equipment manufacturers in the world in 2020 are AMAT, ASML, Lam, TEL and KLA respectively, corresponding to market shares of 17.7%, 16.7%, 12.9%, 12.3% and 5.9%. The total sales amount is up to 60.454 billion US dollars, accounting for 65.50% of the total market. The total sales of the top 10 semiconductor equipment manufacturers totaled US$70.808 billion, an increase of 19.98% year-on-year, and their market share reached 76.60%. The head effect is obvious and a relatively stable oligopoly market has been formed.

The concentration of the global semiconductor equipment market continues to increase. According to Gartner data, the market share of the top ten semiconductor equipment companies continues to increase, with CR10 of 58.2% in 1998. In 2020, CR10 will increase to 76.6%, an increase of 18.4pct, and the market share of the top five manufacturers will reach 65.5%.

In terms of segmented equipment market structure, the market share of most equipment is monopolized by foreign companies. Calculated based on the five production lines of Yangtze River Storage, SMIC Shaoxing, Jita, Huahong Wuxi, Huali Micro and Zhuzhou CRRC, taking the market structure of etching equipment, annealing equipment and thin film deposition equipment as examples:

(1) Etching equipment:

Due to the complex etching process and high technical barriers, the market structure is highly concentrated. According to Gartner data, in 2019, Lam, TEL and AMAT accounted for the top three in the etching equipment market.

2) Annealing equipment:

AMAT occupies an absolute leading position in the global RTP (rapid heat treatment equipment) field. The annealing equipment is mainly divided into three parts: oxidation/diffusion furnace, RTP equipment and Gate Stack. Among them, in terms of RTP equipment, AMAT occupies nearly 70% of the market share and has the absolute right to speak. As a domestic company, Beijing Yitang has deep accumulation in the RTP field, occupying 10.22% of the market share, ranking second. In the internal asset line, the proportion of domestic companies such as North China Huachuang and International Electric has increased significantly. According to data from China International Tendering Network, TEL has the largest market share, accounting for 46%. Chinese companies have a total market share of 23.17%, of which Northern Huachuang accounted for 17% and Beijing Yitang accounted for 2%.

(3) Thin film deposition equipment:

AMAT, Lam and TEL have a monopoly in the field of thin film deposition equipment. Thin film deposition equipment is mainly divided into CVD, PVD and ALD. According to Gartner data, global CVD equipment is monopolized by AMAT, Lam and TEL, and the three together account for about 70% of the market.

The domestic thin film deposition equipment companies are mainly North Huachuang and Shenyang Tuojing, which are less competitive. According to data from China International Bidding Network, AMAT, Lam and TEL accounted for 69% of the internal asset line, and domestic equipment companies only accounted for 10.52%. The competitiveness is very small. Among them, North Huachuang accounted for 3% and Shenyang Tuojing accounted for 4 %.

The domestically produced alternative market for the front-end wafer processing is vast, and local leading companies challenge the monopoly of international giants. Front-end process equipment (including front-end testing) accounts for more than 80% of the investment, and it is the core main battlefield in the field of semiconductor equipment. In the front-end equipment market, leading overseas manufacturers are highly monopolized, and local manufacturers account for a relatively low proportion. The main market breakthroughs are still concentrated in local production lines. Supported by domestic policy guidance and other support, the expansion rate of local production lines is significantly higher than that of the global market. Local leading equipment companies have broken through some front-end process equipment. With years of accumulation of advanced process technology and support for the localization of production lines, local leading equipment companies are expected to challenge the monopoly of international giants in the core battlefield of front-end technology.

Local packaging and testing companies have a high global market share, and domestic packaging and testing equipment companies are expected to further increase their market share. According to core thought data, the three major local packaging companies, Changjiang Electronics Technology, Tongfu Microelectronics, and Huatian Technology, will have 11.96%, 5.05%, and 3.93% in 2020, accounting for a total of 20.94%. They are in the global supply chain system. Have a strong right to speak. Traditional packaging technology is relatively stable, and domestic equipment manufacturers already have a certain technology accumulation and share. The domestic market for advanced packaging is rapidly deployed, and domestic packaging and testing equipment companies are expected to benefit from the rise of domestic packaging and testing links and further increase their market share.

1.3. Industry characteristics: capital first, high customer stickiness, fast technology iteration

1.3.1. Capital expenditure is an effective leading indicator of the equipment link

Downstream capital expenditure is an effective leading indicator for the semiconductor equipment industry. According to Wind's data, from 2006 to 2020, the capital expenditure of the global semiconductor industry and the year-on-year growth rate of the integrated circuit wafer processing equipment market have almost the same relationship. The prosperity of the integrated circuit manufacturing equipment industry is closely related to the industry capital expenditure. , Industry capital expenditure is a leading indicator of the overall development trend of the equipment industry. This is mainly because equipment expenditures account for a large proportion of industry capital expenditures, accounting for nearly 80%, and wafer processing equipment investment has reached nearly 50% of equipment investment.

1.3.2. Long product verification cycle and high customer market stickiness

Semiconductor equipment involves multiple disciplines and has a high-tech threshold. Technical patents are the moat of the semiconductor industry, and even more so in the semiconductor equipment industry. The industry is more involved, and its design and manufacturing processes require the comprehensive application of advanced technologies in multiple disciplines such as electronics, machinery, physics, chemistry, materials, software systems, and automation. Since the technical parameters, operational stability and other indicators of semiconductor equipment will directly affect the production indicators such as the output, quality and yield of semiconductor products, new entrants in the industry need a long time of technology accumulation to make breakthroughs in this field.

Semiconductor equipment has strict requirements on technical parameters and operational stability, and is characterized by a long verification cycle. The product development and commercialization process of semiconductor equipment is mainly divided into four stages: feasibility study stage, product development and offline stage, client certification stage, mass production and life cycle maintenance stage, of which client certification is the key step. Whether it is a new entrant in the market or the mass production of new equipment, it must go through long-term process verification by downstream companies, including technical verification in specific production scenarios, continuous communication with customers, and perfect technical details. The entire verification cycle consumes an average of more than one year before the equipment supplier will be included in the customer's list of qualified suppliers. Taking Huahai Zero2 as an example, the average verification period of its Demo machines is 12.46 months, and the sales machines are secondary purchases, with a shorter acceptance period of 4.95 months.

After the semiconductor equipment has passed the product verification, the replacement cost is high, and it has strong customer stickiness. Due to the long production cycle and verification cycle of semiconductor equipment, and downstream customers have higher requirements for product after-sales service response speed and after-sales technical process support, the field of semiconductor equipment has strong customer stickiness. If not necessary, downstream Customers will not easily change the production line equipment.

1.3.3. Technological iteration drives the increase in product value and the coexistence of equipment with different accuracy levels

With the gradual advancement of advanced manufacturing processes, the complexity of wafer manufacturing has increased, and the number of process steps has increased significantly. The accuracy requirements have also been significantly improved as the line width has become smaller, which will eventually lead to an increase in the value of advanced products of semiconductor equipment. Take the etching of integrated circuit devices as an example. According to the announcement of China Microelectronics, as far as logic devices are concerned, from 40nm to 7nm, the required etching steps have been increased from 35 to 140 steps, and the main application equipment has also changed from the limited control circle. The barrel type etching machine developed to the modern plasma etching machine. Compared with logic devices, flash memory devices and dynamic memory devices have differences in performance requirements such as etching steps.

With the advancement of advanced manufacturing processes, the complexity of the manufacturing process structure has increased, and the same product on the same production line can use equipment with different accuracy levels. Taking 128-layer NAND products from domestic storage manufacturers as an example, due to the large number of product layers, there are significant differences in equipment requirements in different links. Among them, the value of a single lithography machine varies from US$3 million to US$70 million; the value of a single etching device varies from US$300,000 to US$14 million; and the value of a single CVD device varies from US$200,000 to 1100. Ten thousand dollars. The difference in the value of equipment on the one hand brings new entrants a breakthrough in the production line; on the other hand, it brings a higher moat to advanced manufacturers with high R&D investment.

2. High-intensity capital expenditure + deep localization brings historical development opportunities for local equipment companies

2.1. High-intensity capital expenditure in the manufacturing process brings room for development to the equipment industry

Benefiting from the high boom in the semiconductor industry, the capital expenditures of downstream wafer fabs and packaging and testing plants continue to expand, accelerating capacity expansion. In 2021, fabs will begin to increase capital expenditures for capacity expansion. TSMC’s 2021 capital expenditure plans to increase 66% over 2020, reaching a high of US$30 billion. The internal asset lines of Yangtze River Storage, Changxin Storage, SMIC, and Wuxi Huahong all plan to expand their production capacity significantly.

The main customers of local semiconductor equipment manufacturers are concentrated in the internal asset line and part of the Taiwan asset line, of which the internal asset line accounts for the majority of the shares. The main force for the expansion of the internal asset line is the two storage bases Changcun/Changxin, and the two major foundries SMIC/Huahong. Equipment investment accounts for a high proportion of investment in production lines. Taking SMIC, a large local wafer manufacturing foundry, as an example, the total investment of SMIC’s 12-inch chip SN1 project is 9.059 billion U.S. dollars. The installation fee reached 7.330 billion US dollars, and the related proportion of wafer manufacturing equipment reached 80.9%.

According to IBS statistics, with the continuous shrinking of technology nodes, the equipment investment for integrated circuit manufacturing has shown a significant upward trend. Take the 5-nanometer technology node as an example, its investment cost is as high as tens of billions of dollars, which is more than twice that of 14 nanometers and about four times that of 28 nanometers.

According to the calculation of the peak annual production capacity of the main local wafer manufacturing lines, the total peak capacity of the local production lines is about 300,000 pieces/month. Among them, different process production lines correspond to different investment densities. According to calculations, the annual peak equipment investment of major domestic production lines totals about 22 billion U.S. dollars. Furthermore, according to the calculation of the proportion of different process equipment in the total equipment investment, under the condition of realizing 40% localization rate, the local equipment of film deposition, lithography, etching and other links respectively corresponds to about 1.76 billion U.S. dollars in the market. With the further increase in the localization rate, the market space directly faced by local equipment manufacturers will be broader. (Report source: Future Think Tank)

2.2. Sino-U.S. technological frictions are repeated, accelerating the comprehensive and in-depth localization of equipment

In 2020, the Sino-US technology friction escalates, and the US cut off the supply of Huawei chips takes effect. On May 15, 2020, the US Department of Commerce stated that Huawei was completely restricted from purchasing semiconductors produced using US software and technology, banning the upgrade to semiconductor equipment, and setting a 4-month transition period. On September 15, 2020, the US imposed a ban on chip supply to China. On October 5, 2020, SMIC announced that the Bureau of Industry and Security of the US Department of Commerce imposed restrictions on the export of US equipment to SMIC. On December 21, 2020, SMIC announced that it was included in the “Entity List” by the US Department of Commerce and that products or technologies of 10nm and below were “presumptively rejected”.

According to the two announcements made by SMIC, the US Department of Commerce included SMIC and some of its subsidiaries and shareholding companies in the “Entity List” on the grounds of protecting the national security and diplomatic interests of the United States. After the company is included in the “entity list”, in accordance with relevant US laws and regulations, for products or technologies that are applicable to the US Export Control Regulations, suppliers must obtain an export license from the US Department of Commerce before they can supply the company; For products or technologies at 10nm and below technology nodes (including extreme ultraviolet technology), the U.S. Department of Commerce will adopt the “Presumption of Denial” approval policy for review; at the same time, the company’s provision of foundry services for some special customers may also be subject to certain restrictions. limit.

The U.S. made the “10nm technology node” as the demarcation point for SMIC’s regulations, redefining “advanced process” and “mature process”, and directly increased the traditionally recognized demarcation point of “28nm” or “14nm” to “10nm” "There is a certain degree of compromise and marginal improvement in the definition of "advanced manufacturing process" in the U.S. sanctions against SMIC. According to SIA data, logic wafer manufacturing capacity accounted for about 41% in 2019, of which <10nm wafer manufacturing capacity accounted for about 2%, and >45nm wafer manufacturing capacity accounted for about 22%. At present, the wafer production capacity of ≥10nm process accounts for as high as 98%. The US sanctions against SMIC divides the process process boundary into 10nm, which brings relatively certain development space and technology accumulation for the development of local foundry leaders. time.

In the process of Sino-US technology friction, the two pillar companies of Huawei and SMIC have been affected to varying degrees, and the localization of semiconductor equipment is expected to develop in depth and in all aspects. China's semiconductor equipment is still mainly dependent on imported equipment. Domestic companies have a relatively small market size and their self-sufficiency needs to be improved. In the context of Sino-US technological frictions, domestic policy tilts, increased willingness to localize Fab factories, active capital market injection, and equipment factories seizing historical opportunities have driven the localization of semiconductor equipment to gradually deepen and become more comprehensive. According to data from the China Semiconductor Industry Association, China's semiconductor equipment sales are expected to reach USD 21.3 billion in 2020, and the localization rate is expected to exceed 20% for the first time.

From the perspective of segmented equipment market, ICP etching equipment, CVD film forming equipment, doping equipment, measurement equipment, and lithography equipment have risen significantly. According to statistics on the bidding status of equipment announced on China International Bidding Network as of November 13, 2021, the six major production lines (Yangtze River Storage, SMIC Shaoxing, Huahong Wuxi, Huali Micro, Zhuzhou CRRC, Jita) The total purchase volume and localization rate of the first-class equipment are calculated. According to calculations, the localization rate of ICP etching equipment, CCP etching equipment, PVD film forming equipment, CMP equipment, furnace tube equipment, cleaning equipment and glue removal equipment among the six major production lines from 2020H2 to date is higher, exceeding 30%. Among them, the cleaning equipment reaches 50%. Although the localization rate of measurement equipment, lithography equipment and doping equipment with high technical barriers is very low, the upward trend is obvious

In the wave of localization of IC equipment, there are excellent local companies in all sub-sectors. Among them, Northern Huachuang's share in ICP etching equipment, PVD film forming equipment, cleaning equipment, and furnace tube equipment has increased significantly. Zhongwei Semiconductor has performed well in CCP etching equipment, and Shanghai Microelectronics has a higher technical barrier in lithography equipment. Starting to emerge, Huahai Zero2 has gradually increased its market share in CMP equipment. Especially since 2020H2, North Huachuang has reached a market share of 29.27% in the ICP etching equipment market, and has begun to compete with leading companies Lam and AMAT in this field. We expect that in the future, with the continuous advancement of domestic substitution, the localization rate of IC equipment is expected to further increase.

2.3. The capital market facilitates the development of the industry, and Fabless manufacturers build their own manufacturing links

Since the establishment of the Science and Technology Innovation Board, local semiconductor manufacturers have ushered in a historic financing window period. With the help of the capital market, large and small Fabless manufacturers have expanded their manufacturing links to varying degrees to reinforce the weak links in the production process of their products, and enhance their supply chain management capabilities and voice. During the expansion process of Fabless manufacturers, there are certain customized requirements for some equipment based on their own product characteristics. Under the influence of the epidemic, the rapid response capability of domestic equipment manufacturers is expected to accelerate the introduction of the production line in this link.

Since 2019, in the A-share Fabless and IDM corporate fundraising projects, equipment investment accounted for more than 10%. The project investment amount exceeded 43 billion yuan. Among them, the amount of equipment investment varies greatly according to product differences and corporate strategic positioning. According to statistics, the proportion of equipment investment in various projects in enterprises is between 10% and 75%.

Weir shares self-built production lines to reinforce the weak links of tape-out. As a large local Fabless listed company, Weir shares issued convertible bonds of approximately 2.44 billion yuan for the construction of wafer testing and wafer reconfiguration production projects. It plans to build 35,000 pieces/month for testing and 30,000 pieces/month in Songjiang, Shanghai. Monthly reconstruction capacity. As an internationally competitive CIS chip leader, Weir shares use the capital market to reinforce the capacity bottleneck in the CIS chip tape-out link, which helps to ensure the security of its own supply chain and enhance the barriers to competition

Fabless and IDM's enterprise financing expansion will increase the order volume of equipment links. Gekewei plans to invest 7.43 billion yuan in Shanghai for the construction of CIS R&D and industrialization projects, with equipment investment accounting for approximately 72.28%. China Resources Micro plans to invest 4.2 billion yuan in Chongqing Xiyong for the construction of power semiconductor packaging and testing base projects, with equipment investment accounting for approximately 69.76%.

In addition, some Fabless manufacturers have a relatively low percentage of equipment investment in projects funded by Fabless manufacturers, and they invest heavily in R&D. Hengxuan Technology IPO raised 4.86 billion yuan, of which equipment and hardware investment accounted for about 5%, and R&D investment was about 80%. The cost of wafer trial production and packaging and testing accounts for most of the R&D investment, and will also occupy part of the fab's capacity.

With the help of capital market funds, larger-scale Fabless manufacturers have strengthened their own supply chains. Methods such as self-built production lines, joint construction of dedicated lines, or strengthening R&D will directly or indirectly drive equipment orders. Fabless manufacturers have relatively fixed product categories, and there is a certain customized demand for some equipment in self-built or co-built capacity, which opens a new channel for local companies to introduce production lines.

2.4. Local semiconductor equipment companies usher in historic development opportunities

Opportunity 1: The semiconductor industry has a rare history of prosperity, and high-intensity capital expenditure has opened a new round of expansion cycle. The semiconductor industry has started a boom upward cycle in the second half of 2019, and started a price increase model in the second half of 2020. The shortage of products with tight production capacity has pushed up a new round of high-intensity expansion in the semiconductor industry. The semiconductor industry engine TSMC at the beginning of the year guided a three-year high-intensity capital expenditure of 100 billion U.S. dollars. A new round of industry expansion cycle started, and the semiconductor equipment sector was the first to directly benefit.

Opportunity 2: Sino-US technology friction has boosted the willingness to localize, and the bid-winning rate of local equipment has increased significantly. The Sino-US technological friction has been gradually escalating since 2018. In September 2020, Huawei's chip supply will be cut off and SMIC equipment procurement will be restricted. Policies have been introduced at the national level to tilt industrial resources, increase the willingness of local production lines to localize, local equipment factories improve efficiency and seize opportunities, and strengthen the mobility of local funds and talents. With the help of multiple parties, the bid winning rate and order volume of local equipment factories have increased significantly. Domestically produced, autonomous and controllable is still the main theme in the medium and long term.

Opportunity 3: The local giants have already passed the stage of risk trial production, and their strategic goals have shifted from “products with high yield rate” to “supply chain safety”. In the early development of the two local storage bases Wuhan Changcun and Hefei Changxin from 2017 to 2019, the primary goal is to break through the technology path and patent risks, and to increase the yield rate as soon as possible. The localization of the supply chain in the early construction process is not The primary task. At present, the production capacity of Changcun and Changxin has begun to take shape, leaping through the early stage of risky trial production, and later expanding production from the perspective of supply chain security, and the willingness and ability to localize are expected to increase. In the same way, SMIC 14nm has been in mass production for more than one and a half years, and the later expansion plan is mainly based on mature processes. The 12-inch production lines of Hua Hong Wuxi, Silan Micro Xiamen, and China Resources Micro Chongqing have all ramped up mass production in recent years, and subsequent expansions are expected to further increase the localization rate.

Opportunity 4: The localization of equipment is moving from a single-point breakthrough model to a coordinated integration of production lines. In the early days, domestic equipment manufacturers introduced the domestic asset line mainly by improving the performance of their products in line with overseas giants, and the certification cycle and certification procedures were relatively longer and more cumbersome. At present, under the background of technological friction, some domestic production lines have strengthened all-link collaboration in terms of process manufacturing, design, machine equipment, etc. for mature processes and mature products. Some domestic equipment manufacturers are expected to upgrade from a single product company to a process platform company. , We are optimistic about the deep localization of semiconductor equipment.

Opportunity 5: The capital market helps the industry develop, and Fabless manufacturers build their own or co-build manufacturing capacity. Since the establishment of the Science and Technology Innovation Board, local semiconductor manufacturers have ushered in a historic financing window period. With the help of the capital market, large and small Fabless manufacturers have expanded their manufacturing links to varying degrees to reinforce the weak links in the production process of their products, and enhance their supply chain management capabilities and voice. During the expansion process of Fabless manufacturers, there are certain customized requirements for some equipment based on their own product characteristics. Under the influence of the epidemic, the rapid response capability of domestic equipment manufacturers is expected to accelerate the introduction of this link of production lines.

Opportunity 6: The impact of the epidemic is superimposed on the strong orders for equipment, and the extended delivery period of some equipment from overseas giants has brought replacement opportunities for local companies. Semiconductor equipment factories are mainly concentrated in Europe, America and Japan, and semiconductor manufacturing links are mainly concentrated in the mainland, China Taiwan, South Korea and other regions. Under the influence of the global epidemic, overseas giant equipment manufacturers have been hindered in shipping delivery and engineer debugging. Under the strong equipment orders, some overseas manufacturers' equipment delivery time has been extended, which has brought good replacement opportunities for local companies.