In the overall situation of the chip, can we rely on Chiplet to “cut corners”?

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The consumer electronics boom cycle has peaked, and what are the opportunities for Tongfu Microelectronics, which is clinging to AMD’s “thighs”?

Starting from 2022, except for automotive chips, the A-share market has lost interest in all semiconductor sectors.

However, a series of recent external policy changes have brought new impacts to the domestic investment market.

On August 9, US President Biden signed the “2022 American Chips and Science Act”. 16 days later, Biden once again signed the bill to implement the executive order for the rapid implementation of the bill. This, together with recent policies such as the EDA (Electronic Design Automation Technology) export ban, clarified the principle of the US government’s “exclusive” subsidies to the semiconductor field.

It is self-evident that the United States hopes to realize the reshoring of manufacturing industry and decouple its semiconductor industry from China.

According to the analysis of Founder Securities, this will set the tone for the development of the global semiconductor industry in the futureā€”that is, from the framework of supply and demand competition to the framework of national science and technology competition, from the globalization of labor to the anti-globalization of long-term integration, and from free market competition to national capital support.

Correspondingly, the investment boom for domestic substitution of A-share semiconductors has been ignited again.

In the recent changes in the “big environment”, the market has begun to discover another track for “overtaking on curves”.

This track is semiconductor packaging and testing, an industry that once achieved the “Davis double-click” in A shares when the 5G cycle kicked off in 2019. Jingfang Technology (603005.SH), Changdian Technology (600548.SH), Huatian Technology (002185.SZ), and Tongfu Microelectronics (002156.SZ) have thus won the reputation of “Four Little Dragons in Packaging and Testing”.

But in 2022, when the market recognizes that the consumer electronics cycle has peaked, the packaging and testing sector will once again rely on the “black technology” of Chiplet to soar. Among them, AMD’s packaging and testing plant, Tongfu Microelectronics, gained 3 consecutive boards by relying on the Chiplet concept, and its stock price doubled at the bottom.

Chiplet is called core particle in Chinese, also known as a small chipset. It is a 3D advanced packaging process. Simply put, it is to stack and package multiple chips into one chip. For example, it can combine a type of die that satisfies a specific function (a die is a small piece of semiconductor material that manufactures a given functional circuit on an integrated circuit) through the die-to-die internal interconnection technology to realize multiple module chips and the bottom layer. The base chip is packaged and eventually made into a system-on-a-chip.

When Moore’s Law of the chip is approaching the limit, a new solution path for the packaging and testing end – advanced packaging, is put under the spotlight of the market. Chiplets, which belong to the same advanced packaging technology as wafer-level packaging and testing, system-level packaging and testing, 2.5D packaging, and 3D packaging, are naturally regarded as a life-saving straw.

Compared with other advanced packaging technologies, Chiplet can separate and integrate different components, and has a shorter product launch cycle, which has become the focus of attention in the capital market and industry.

Will the popular Chiplet bring unexpected surprises to the packaging and testing side? Can the consumer electronics cycle that has peaked be reversed?

The Wind A-share semiconductor index once rose by 85% in 2019 and 90% in 2020. After the stock price of Tongfu Microelectronics doubled at the bottom, and then fell back by 20%, can it reproduce the glory of 2019-2020?

It is a series of question marks on the market.

Perhaps from the technical route of packaging and testing, competition barriers, and the dimensions of the entire semiconductor industry, one can get a glimpse of the leopard.

01 The blade of beta testing breaks through the shackles of Moore’s Law

Everything starts with the closed beta.

From the perspective of the industrial chain and manufacturing process, the integrated circuit industry chain can be divided into three major links from top to bottom: upstream IC design, midstream wafer manufacturing, and downstream packaging and testing. Among them, packaging and testing is the post-process of integrated circuit product manufacturing.

With the continuous evolution of chip technology, the development of silicon-based material technology is slowly approaching its physical bottleneck. From the previous 28nm to 5nm and 3nm level, the chip manufacturing technology has approached the limit of “Moore’s Law”. In the “post-Moore era” that has come, “advanced packaging” that can improve product functions while reducing costs will be the mainstream development direction.

At this stage, the packaging and testing industry is transforming from traditional packaging (SOT, QFN, BGA, etc.) to advanced packaging (FC, FIWLP, FOWLP, TSV, SIP, etc.).

The boundary between advanced packaging and traditional packaging needs to be distinguished by whether to bond or not. Advanced packaging mainly includes flip chip (FC) structure packaging, wafer level packaging (WLP), 2.5D packaging, 3D packaging, etc.

Advanced packaging has two obvious key points for technological improvement.

The first is miniaturization. Because 3D packaging breaks through the traditional planar packaging, through multiple stacking in a single package, the storage capacity is increased, thereby increasing the ratio of the chip area to the package area.

Followed by high integration. System-in-package SiP can integrate digital and non-digital functions, silicon-based and non-silicon-based materials, CMOS, optoelectronics, biochips and other different components into one package. In this way, the integration level can be further improved on the basis of not relying on the manufacturing process, and finally adapted to the thinning of electronic products.

Therefore, the highly integrated packaging technology route has become a breakthrough for the semiconductor industry to break Moore’s Law. The path of Chinese semiconductor companies overtaking in curves has also been placed high hopes by the capital market.

02 Chiplet: A life-saving straw for advanced packaging?

In the implementation of multifunctional integration, SoC is a mainstream technology, but with the increase of transistor density, power consumption, power supply, heat dissipation and other aspects are facing huge challenges, which brings many technical difficulties.

Chiplets, which are similar in principle to SoC but have more technical breakthrough significance and possibility, have fallen into the attention of the market.

Many investors may think that Chiplet and SoC are very similar. It is true that SoC is to manufacture multiple circuit modules responsible for different functions on the same chip through photolithography, and mainly integrate computing units with different functions such as CPU, GPU, DSP and many interfaces.

Chiplets are different from SoC technology structures. Chiplet splits a feature-rich and large-area chip die into multiple chips, and advanced packaging of these chips with specific functions improves design flexibility.

As early as the end of 2020, Chiplet began to attract attention at the industry level, but the reason why it ushered in the “high light” in A shares in August was mainly because the “Chiplet and Science Act” officially signed by the United States on August 9 clearly stipulated that the future It will provide US$52.7 billion in subsidies for the US semiconductor industry, and at the same time restrict relevant companies from increasing production of advanced process chips below 28nm in China within 10 years.

This news, the A-share market responded enthusiastically. In the context of seeking breakthroughs in domestic technology, Chiplet ushered in a short-term explosion under the expectation that “advanced packaging technology can achieve rapid improvement in chip performance”.

Advanced packaging technology can break through Moore’s Law, but in the final analysis, whether a packaging and testing plant can achieve a substantial leap in performance ultimately depends on two points: one is to embrace someone’s thigh, and the other is the big cycle of consumer electronics.

03 Choose thick thighs and embrace them, AMD achieves Tongfu Microelectronics

As the packaging and testing link downstream of the industry chain, there has also been a phenomenon of being robbed of business by upstream manufacturers in recent years.

Under this trend, the packaging and testing companies are either doing special packaging and testing technology, or clinging to the thigh of a big customer and doing packaging and testing business for it. To put it bluntly, “who does it for” the packaging and testing determines how much the packaging and testing factory can earn.

If packaging and testing factories want to hold tight to their thighs, in addition to technology, the “proximity principle” is also very important-that is, to choose a production that is conducive to participating in the chip design process, understanding customer needs, improving market adaptability, and shortening the product development and production cycle. The base is based on the principle of being close to upstream customers.

As one of the leading semiconductor packaging and testing companies in mainland China, Tongfu Microelectronics has always been a familiar presence in the A-share market. This company naturally conforms to the above principles in terms of technology, product capabilities, and customer structure. Next, we try to analyze the competitiveness of Tongfu Microelectronics in order to explore its development and competitive advantages.

Tongfu Microelectronics was established in 1997 and is headquartered in Nantong, Jiangsu. At present, Tongfu Microelectronics has technically realized WLCSP (wafer-level chip-scale packaging), FC (flip-chip), SiP (system-level packaging and testing), high-reliability automotive electronic packaging technology, BGA substrate design and packaging The industrialization of technology is currently one of the enterprises with the most packaging technology in China.

In terms of product capabilities, Tongfu Microelectronics has high-end packaging technologies and mass production platforms such as FCBGA (rigid multi-layer substrate), FCPGA (flip-chip pin grid array), and FCGLA. Technologies and products can be widely used in high-end processing Device chips (CPU, GPU), memory, Internet of Things, power modules, automotive electronics and other fields.

It can be said that with these technical capabilities and product blessings, Tongfu Microelectronics has been recognized at the industrial level and the capital market. But in addition to technology and products, the company’s “leader” and business model are the core factors for a company to truly gain a foothold in the industry.

As a recognized semiconductor leader in the industry, Shi Mingda, chairman of Tongfu Microelectronics, played a directional role in the development of the company. His understanding of production and technology has become the cornerstone of the development of Tongfu Microelectronics in the future.

After graduating in 1968, Shi Mingda entered Nantong Transistor Factory and started as a production line technician. In 1974, his team successfully developed a 16-bit shift register, leading Nantong Transistor Factory into its first glorious period. After that, Shi Mingda served as the director of the factory in 1990, vigorously promoting integrated circuits, and actively promoted the cooperation between Nantong Transistor Factory and Japan’s Fujitsu in 1994.

In 1996, Nantong Transistor Factory was restructured to establish Nantong Huada Microelectronics Co., Ltd. From 1997, a joint venture with Fujitsu of Japan, Nantong Fujitsu Microelectronics Co., Ltd. (the predecessor of Tongfu Microelectronics) was established, and then officially bound to AMD in 2016. Shi Mingda has been grasping the development plan of Tongfu Microelectronics.

From Nantong Transistor Factory to Huada Microelectronics, from Nantong Fujitsu to Tongfu Microelectronics, although the company name has been changed many times, Shi Mingda believes that what has remained unchanged is his and his colleagues’ dedication to the semiconductor business.

In terms of business model, Tongfu Microelectronics has become the core packaging and testing plant of AMD AMD through the acquisition of AMD’s packaging and testing bases in Suzhou and Malaysia.

AMD’s packaging orders are mainly undertaken by TSMC, Tongfu Microelectronics, and Silicon Products, each of which has its own division of labor. Among them, since the server CPU adopts the CoWos packaging process, it is directly completed by TSMC after the front-end wafer manufacturing process. AMD’s desktop and mobile CPU and GPU packages are mainly in the form of FCBGA and FCPGA, which are undertaken by Tongfu Microelectronics.

At present, more than 90% of AMD’s domestic CPU chips are packaged and tested by Tongfu Microelectronics. Therefore, its performance flexibility comes from the sales growth of AMD’s high-performance processors.

The most important reason why AMD chose Tongfu Microelectronics instead of other mainland packaging and testing factories is that Tongfu Microelectronics is the only company in China that has mastered high-end CPU packaging and testing technology. The packaging and testing technologies of Tongfu Microelectronics listed above also meet AMD’s packaging requirements.

According to the agreement between Tongfu Microelectronics and AMD, since the Suzhou factory and the Penang factory both implement the “joint venture + cooperation” model in which AMD holds 15% of the shares and Tongfu holds 85% of the shares, AMD CPU and GPU nearly 80-90% of the orders are handed over to Tongfu Microelectronics for production.

When it comes to the development path of AMD leading Tongfu Microelectronics to the high-gloss moment, we have to mention a series of products that AMD surpassed Intel.

Back to June 2015. At that time, AMD released a major strategic plan related to future development. The most important thing is to focus on the original high-performance computing and graphics technology, the three major growth markets of games, data centers and immersive platforms.

Now looking back at these three major business decisions, they have hit the main positions of consumer-grade chips without prejudice – game hardware, AI, and AR/VR. AMD, which had suffered a net loss for six consecutive quarters before, had conflicts at the financial level that broke out in 2016. It was at this time that Tongfu Microelectronics ushered in a good opportunity for development.

In 2016, AMD completed the research and development of a brand-new Zen architecture processor, and authorized this architecture to the Chinese company Tianjin Haiguang, and obtained a licensing fee of up to 293 million U.S. dollars. Foreshadowing. At the same time, AMD and Tongfu Microelectronics jointly established a packaging company and transferred 85% of the equity to Tongfu Microelectronics. At the same time, they received 371 million US dollars in cash from Tongfu Microelectronics.

Being able to get this fund is also one of the important reasons why AMD chose Tongfu Microelectronics. Because, at that time, not all domestic packaging and testing factories could accept AMD’s cooperation model.

On this basis, AMD launched the Zen architecture-based Ryzen processor in 2017, bringing global players a CPU with the same price as Intel but more powerful performance; The most cost-effective data center processors, GPUs and other products on the market.

AMD has become the largest customer of TSMC’s 3nm production capacity. Even under the premise that the consumer electronics cycle has peaked, it still maintains a relatively high market share and performance growth.

Benefiting from AMD’s effective product iterations and massive shipments, and with the help of the A-share semiconductor wave that began in 2019, Tongfu Microelectronics has also logically achieved a substantial rise in stock price.

It is worth mentioning that Tongfu Microelectronics previously stated on the investor interaction platform that 70%-80% of AMD game console processor chips are in the company’s packaging and testing, and the agreement has been renewed until 2026.

As AMD’s packaging and testing plant, Tongfu Microelectronics has always held on to its thighs and enjoyed the nourishment brought by AMD because of its advanced packaging technology. Tongfu Microelectronics’ investor research shows that the company’s capacity utilization rate remains above 90%. In other words, we can also calculate the net profit growth rate of no less than 20% in 2022 and 2023 through the company’s existing production capacity.

In the overall situation of the chip, can we rely on Chiplet to “cut corners”?

Tongfu Microelectronics profit forecast, source: Wind Financial Terminal

However, A-shares are a market dominated by expectations, and performance can only be used as an “after-the-fact” verification of the prosperity. Just like the semiconductor sector at the end of 2018, it had already surged ahead of the industry level. When the consumer electronics cycle peaked, it is not surprising that Tongfu Microelectronics experienced a stock price correction due to the decline in performance growth.

In the overall situation of the chip, can we rely on Chiplet to “cut corners”?

Tongfu Microelectronics P/E Band, source: Wind Financial Terminal

But in the down cycle, there will also be short-term catalysts, such as the popular Chiplet technology.

AMD, a major customer of Tongfu Microelectronics, will have related products in early 2021. During the survey, Tongfu Microelectronics stated that the company has packaged and tested Chiplet products on a large scale; at the same time, the company has layout and reserves in WLP, SiP, 2.5D, 3D stacking and other aspects. Therefore, in the rebound of the semiconductor sector in early August, except for EDA design software companies, Tongfu Microelectronics became the highest riser

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