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Expansion of production depends on fundraising.

Author | Xiao Se

Editor | Xiaobai

On July 4, Tesla's second-generation humanoid robot Optimus was officially unveiled at the 2024 World Artificial Intelligence Conference.

Compared to the first generation, the second generation Optimus not only has a lighter weight and faster upright walking speed, but also has the ability to grasp objects. Its progress can be said to be quite rapid.

Prior to this, Musk said at Tesla's (TLSA.O) 2024 shareholders meeting that humanoid robots will become the mainstay of industry in the future, with the number expected to surpass that of humans, reaching 10 billion to 20 billion units. Tesla's goal is to produce 1 billion units per year, accounting for more than 10% of the market share.

Based on a selling price of $20,000 per unit, humanoid robots will bring Tesla an incremental market of $25 trillion to $30 trillion.

There are also A-share listed companies among the suppliers of parts for humanoid robots. One of them, which has had a long-term partnership with Tesla, provides printed circuit boards (PCBs) for Optimus.

This company is Shiyun Circuit (603920.SH).

40-year PCB veteran sells to Shunde State-owned Assets for RMB 3.4 billion

The founder of Shiyun Circuit is the current chairman and general manager She Yingjie. She Yingjie is a Hong Konger who worked in a small circuit board factory in Hong Kong in 1978 and founded a circuit board trading company in 1982, supplying most of the multimeter circuit boards in the country.

After tasting the sweetness of the industry, in 1985, She Yingjie invested 300,000 Hong Kong dollars to establish Hong Kong World Win Circuit Board Co., Ltd., which is the predecessor of World Win Circuit.

Subsequently, due to the need to expand production, She Yingjie moved the factory to Shenzhen in 1991. After inspection, he finally decided to invest and build a factory in Heshan City, Guangdong Province in 2005, and Shiyun Circuit came into being.

At that time, household appliances were being popularized and the demand for circuit boards was very strong. Shiyun Circuit's business volume continued to grow. Since 2011, it has successively expanded the second and third factories, and in 2012 it also proactively deployed new energy vehicle electronic products.

By 2017, Shiyun Circuit was successfully listed on the Shanghai Stock Exchange.

After the listing, She Yingjie has always firmly controlled the company. As of the end of the first quarter of 2024, Xinhao International, controlled by him, held a 58.4% stake in Shiyun Circuit.

However, after the additional shares were listed in April, its shareholding ratio was diluted to 47.9%.

(Source: Shiyun Circuit Announcement)

This time, the private placement also introduced Shunde Pushun Investment Fund under the State-owned Assets Bureau of Shunde District, Foshan City. The latter holds a 3.3% stake, becoming the second largest shareholder of Shiyun Circuit, which also lays the groundwork for subsequent transactions.

On July 5, Xinhao International and Shunde Holdings signed an equity transfer agreement, intending to transfer 170,546,596 shares of Shiyun Circuit to Shunde Holdings Group at a price of RMB 20.20 per share, accounting for 25.9% of the total share capital.

If the transaction is finally completed, Xinhao International, which will cash out about 3.445 billion yuan, will only hold 22.0% of the shares and will become the second largest shareholder. The Shunde District State-owned Assets Bureau will then control 29.2% of the shares of Shiyun Circuit and become the new actual controller.

Why sell it to state-owned assets for no reason?

Focusing on automotive electronics, achieving record high performance

For a long time, Shiyun Circuit's business has been mainly based on overseas markets, with overseas revenue accounting for more than 80% for many years, reaching 3.634 billion in 2023, while domestic revenue in the same period was only 630 million.

(Source: Choice Terminal, Chart: Market Capitalization APP)

In terms of product structure, Shiyun Circuit has long specialized in PCB products. In 2023, its PCB revenue was 4.263 billion, accounting for 94.3% of its revenue.

It is worth mentioning that the item "other income" mainly consists of the sale of scraps, waste liquids and waste materials, etc., which will reach a scale of 200 million in 2023. Since it is not allocated to costs in accounting treatment, the gross profit margin is close to 100% all year round.

(Source: Choice Terminal, Chart: Market Capitalization APP)

According to the downstream application fields, the current PCB products of Shiyun Circuit can be divided into six categories: automotive, wind power storage, consumer, manufacturing industry, communications and medical.

(Source: Shiyun Circuit official website)

In 2016, before the IPO, home appliance PCBs were the largest source of revenue for Shiyun Circuit, accounting for about 30%. However, with the continued prosperity of the new energy industry, the proportion of automotive and wind, solar and storage PCBs continued to increase, and automotive electronics is now the downstream with the highest share.

According to data from China Caitong Securities, in the first three quarters of 2023, the combined revenue contribution of automobiles and wind, solar and storage PCBs exceeded 60%.

01 Binding with Tesla and continued expansion of production

The overall business scale of Shiyun Circuit is not very large.

According to the ranking of the world's top 40 PCB suppliers in 2023 released by Prismark, it ranks 32nd in the world and 9th in mainland China (including Hong Kong). In the field of automotive electronics, according to NTI data, in 2022, Shiyun Circuit is the 9th in the world and the 2nd in China's automotive PCB supplier.

In terms of scale, the current A-share listed company is Jingwang Electronics (603228.SH), which has a revenue scale of about 4 billion for automotive PCB, which should be the largest in China. In addition, Shanghai Electric Co., Ltd. (002463.SZ) and Chaoying Electronics, which is in the IPO, both have a scale of about 2 billion, which is not much different from Shiyun Circuit.

Compared with traditional PCB application fields such as home appliances and consumer electronics, automotive electronics not only require PCB products with better performance, but also require suppliers to diversify their processes.

Generally speaking, a new energy vehicle has 50 to 70 PCB application material numbers, involving processes including high frequency, high voltage, high heat dissipation, etc.

(Source: Chaoying Electronics prospectus)

In addition, the certification cycle in the automotive industry is as long as 2-3 years. After passing the certification, automobile manufacturers generally do not easily change suppliers. In addition, the life cycle of automobile products is several years to more than ten years, so automotive PCB is a field with a higher entry threshold.

After more than ten years of experience accumulation, Shiyun Circuit has almost achieved full coverage of automotive PCB products. Compared with its peers, Shiyun Circuit has advantages in the number of product lines and application scope.

(Source: company announcements, official websites)

As of the end of 2023, Shiyun Circuit's automotive customers include Tesla, BMW, Volkswagen, Porsche, Chrysler, Mercedes-Benz, Xiaopeng, GAC, Great Wall and other automobile brands.

Among them, the customer with the closest cooperative relationship is Tesla, which has been the largest automotive terminal customer of Shiyun Circuit since 2019.

Shiyun Circuit not only provides PCB products in the "three-electric" field of new energy vehicles, but also participates in Tesla's emerging business areas such as photovoltaics, energy storage, and even supercomputers and humanoid robots based on technical homology, which also indirectly confirms its technical strength.

With both products and customers, Shiyun Circuit has continued to expand its production in recent years. From 2018 to 2023, the annual PCB production capacity has increased from 3.065 million square meters to 5.381 million square meters.

According to its plan for a 3 million square meter production base at its headquarters in Heshan, the 1 million square meter Phase I project, which was completed in 2023, is in the ramp-up stage, and the 1.5 million square meter Phase II project will also be put into construction in 2024. Coupled with the 500,000 square meter Phase III project, the production capacity will be in a steady growth trend in the next few years.

Affected by this, its PCB production and sales volume has also increased significantly, but the growth has stagnated in the past two years. In 2023, the production and sales volume were 4.1742 million square meters and 4.2591 million square meters respectively. In the future, attention should be paid to the problem of capacity digestion.

(Source: Shiyun Circuit Announcement, Map: Market Capitalization APP)

02 Profitability recovery

Since its listing, Shiyun Circuit has achieved revenue growth every year, increasing from 2.167 billion to 4.519 billion between 2018 and 2023, with a CAGR of approximately 15.8%.

(Source: Market Capitalization APP)

The overall trend on the profit side is also upward. Between 2018 and 2023, the net profit attributable to the parent company increased from 226 million to 496 million, with a CAGR of approximately 17.0%. It has also set new records in the past two years.

(Source: Market Capitalization APP)

According to its recently released performance forecast, the net profit attributable to shareholders of the parent company in the first half of 2024 will be approximately 275 million to 315 million yuan, a year-on-year increase of 40.34% to 60.75%.

However, the net profit attributable to the parent company fluctuated significantly during the period. In 2021, when production and sales were booming and revenue increased rapidly, there was a year-on-year decline of 31.0%. On the contrary, in 2022, when sales growth stagnated, it achieved a year-on-year increase of 107.0%.

One of the reasons is the upward trend in costs.

In the PCB industry chain, the upstream mainly includes copper clad laminates, copper foils, copper balls, inks, etching solutions, etc. Among them, copper clad laminates are the most important raw materials, accounting for about 30% of the cost and more than 50% of direct materials.

Starting from 2021, affected by the rise in upstream copper prices, the procurement cost of copper clad laminates of Shiyun Circuit has increased significantly, and it was not until 2023 that it eased.

(Source: Shiyun Circuit Announcement, Map: Market Capitalization APP)

Therefore, the unit cost of PCB products in 2021 was as high as 723 yuan per square meter, an increase of 25% year-on-year. However, in 2022, when the price of copper clad laminates stabilized, the unit cost still increased further to 723 yuan, an increase of 18%, which was attributed to the introduction of high-end products from Shiyun Circuit.

(Source: Shiyun Circuit Announcement, Map: Market Capitalization APP)

Benefiting from this, its PCB sales unit price also increased by about 23% in the same year, reaching about 1,000 yuan per square meter, and continued to maintain this level in 2023 when costs declined.

In terms of profitability, Shiyun Circuit's comprehensive gross profit margin and net profit margin fell sharply in 2021, and then continued to recover, returning to 21.3% and 10.3% respectively in 2023.

(Source: Choice Terminal, Chart: Market Capitalization APP)

First release AI

As the support body of electronic components, PCB is known as the "electronic aircraft carrier". Its downstream is very broad. In addition to automobiles, it also includes consumer electronics, computers, servers, communications, industrial control, medical equipment, aerospace, etc.

According to data from 2023, the automotive electronics sector is already the third largest PCB market, accounting for about 13.1%, followed by mobile phones and PCs.

(Source: Prismark, Chart: Market Capitalization APP)

After two consecutive years of high prosperity, 2023 was a year of shrinking PCB market demand. The global total output value was approximately US$69.5 billion, a year-on-year decrease of approximately 15.0%.

(Source: Prismark, Chart: Market Capitalization APP)

Looking at the downstream industries, the demand for calculators, mobile phones and other consumer electronics has declined most significantly. In contrast, the automotive sector is relatively strong, with a year-on-year decline of only 3.5%, second only to military/aerospace in all downstream industries.

(Source: Prismark, Table: Market Capitalization APP)

This also corresponds to the stagnation of sales growth of World Sports Circuit in 2023.

Looking into the future, according to Prismark's forecast, the CAGR of global PCB output value will be about 2.0% by 2027, of which the CAGR in the automotive field will be 4.8%, which is significantly higher than the industry average.

(Source: Prismark, Chart: Market Capitalization APP)

The main driving force behind the growth in PCB demand comes from the promotion of new energy vehicles. Generally speaking, a single fuel vehicle uses about 0.6-1 square meters of PCB, while a single new energy vehicle uses up to 5-8 square meters of PCB, and the demand is mainly for multi-layer boards with greater stability and higher unit prices.

At present, the penetration rate of new energy vehicles worldwide is still at a stage of more than 10%, and the growth expectation of automotive PCB is self-evident.

In addition, we can note that the most prosperous sub-field in the next few years is expected to be server/data storage, with a CAGR of approximately 6.5% between 2022 and 2027.

This is mainly due to the surge in computing power demand under the booming development of artificial intelligence. According to IDC data, the global AI server market is expected to grow from US$19.5 billion in 2022 to US$34.7 billion in 2026, with a CAGR of approximately 17.3%.

Shiyun Circuit also has a layout in this field, which started with its participation in the Tesla Dojo project in 2020.

Dojo is a supercomputer developed by Tesla itself. It is mainly used for artificial intelligence machine learning and computer vision training. It was originally planned to be used in the field of autonomous driving, and later expanded to new scenarios such as humanoid robots.

Currently, Shiyun Circuit is the main PCB supplier of Dojo, and its supplied products are mainly used for training modules (Tiles), and supply has started since the second quarter of 2023.

(Source: Tesla AI DAY)

In addition, in 2023, Shiyun Circuit also entered the NVIDIA (NVDA.O) supply chain, has now achieved mass supply, and is cooperating with the latter to develop the next generation of products.

At present, it has the mass production capacity of products such as 24-layer hard boards, 5-level HDI, and 6oz thick copper multi-layer boards, which basically cover the technical requirements of mainstream AI servers. With the support of customer resources, it is expected to create new growth points for AI products.

Overall, from home appliances to automobiles to AI, Shiyun Circuit has seized the rotation of the highly prosperous downstream PCB industries.

Expansion depends on fundraising

Shiyun Circuit's profitability realization capability is also relatively good, with a net cash ratio above 1 all year round. One of the important reasons for this is that overseas customers pay back quickly, with the payment period generally within 3 months.

Between 2018 and 2023, its operating cash flow totaled a net inflow of more than 4 billion. However, with continuous expansion, free cash flow was a net outflow in four of the six years.

It was not until 2023, when capital expenditure intensity declined significantly, that free cash flow achieved a net inflow of 1.206 billion.

(Source: Choice Terminal, Chart: Market Capitalization APP)

The money used by Shiyun Circuit for expanding production basically comes from market fundraising. The main fundraising projects for the IPO in 2017, the issuance of convertible bonds in 2021, and the private placement in 2024 are all for investing in new factories.

(Source: Shiyun Circuit Announcement)

Therefore, Shiyun Circuit is not short of money. At the end of 2023, it had about 2 billion in monetary assets on its books. At the end of the first quarter of 2024, after the additional funds were in place, the amount was close to 4 billion. During the same period, its interest-bearing liabilities on its books were almost only 1 billion in convertible bonds.

Finally, it should be noted that the 2024 additional shares of Shiyun Circuit will be unblocked in October of the same year, totaling 118 million shares, accounting for 21.8% of the current circulating share capital. Except for the Shunde District State-owned Assets Bureau, the unblocked shareholders are mainly public funds. The risk of reducing holdings at that time is still very significant.

Disclaimer:This report (article) is an independent third-party research based on the public company attributes of listed companies and the information disclosed by listed companies in accordance with their legal obligations (including but not limited to interim announcements, regular reports and official interactive platforms, etc.). Market Capitalization strives to be objective and fair in the content and views contained in the report (article), but does not guarantee its accuracy, completeness, timeliness, etc. The information or opinions expressed in this report (article) do not constitute any investment advice, and Market Capitalization shall not bear any responsibility for any actions taken as a result of using this report.

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