Cambrian Breakthrough: A high level of customer concentration expands scale due to R & D

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CambrianBreakthrough:AhighlevelofcustomerconcentrationexpandsscaleduetoR&D
OntheafternoonofMarch26,theShanghaiStockExchangedisclosedanewcopyofthescienceandtechnologyboardreplacemententerprise,andthesemiconductorcompanyZhongkeCambrianTechnologyCo.,Ltd.(hereinafterreferredtoas”Cambrian”)wasamongthem.Inthepastfewyears,becauseofitsbackingtotheChineseAcademyofSciences,theCambrianhasbeenadoptedbyHuawei’sannualflagshipmachine,whichonceattractedattentionfromtheoutsideworldandbecameaunicorncompanyinthefieldofartificialintelligence.  Accordingtotheprospectus,Cambrianplannedtoissuenomorethan40.1millionsharesforfinancing28.RMB110,000,CITICSecuritiesisthesponsorandleadunderwriter,CICC,GuotaiJunanSecuritiesandAnxinSecuritiesarethejointleadunderwriters.Thefundsraisedfromthisissuancewillbeusedforanewgenerationofcloudtrainingchips,cloudinferencechips,edge-endartificialintelligencechipsandtheirrespectivesystemprojects,aswellassupplementaryworkingcapital.  Sincethecompanyhasnotbeenprofitableinthepastthreeyears,thecompanyhasselectedtheSSE’sscienceandtechnologyboardstocklistingrules,whichisexpectedtohaveamarketvalueofnotlessthan1.5billionyuan,andanoperatingincomeofnotlessthan200millionyuaninthemostrecentyear,andthelastthreeTheratioofgradualR&Dexpendituretothecumulativeoperatingincomeinthelastthreeyearsisnotlessthanthestandardof15%.TheprospectusdisclosedthattheproportionofR&Dinvestmentinoperatingincomeinthelastthreeyearswas380respectively.73%,205.18%and122.32%.  From2017to2019,theCambrianannualoperatingincomewas784.RMB330,000,1.RMB1.7billion,and4.44trillionyuan,theincreasein2018and2019is1392comparedtothepreviousyear.05%and297.35%;thenetpurityis3.RMB8.1billion,4104.RMB650,000,and11.7.9billionyuan.Forthefluctuationofnetclarity,theprospectusexplainedthatitisessentiallyaffectedbynon-recurringprofitandlossitemssuchasshare-basedpaymentandR&Dexpenses.  UndertheblessingoftheChineseAcademyofSciences,theprospectusofentrepreneursthatcameoutshowedthattheCambrianwasestablishedinMarch2016andcompletedthecompanychangeinNovember2019from”LimitedCompany”to”LimitedCompany”.Thecompany’smainbusinessisdistributedclassifiedcloudservices,R&D,designandsalesofintelligentcorechipsforedgecomputingequipmentandterminalequipment,providingcustomerswithproductsandsystemsolutions.  ChenTianshi,bornin1985,isthefounderofthiscompany,thecontrollingshareholderandtheactualcontroller.Hedirectlyholds33shares.19%,indirectshareholding1.16%,holding34sharesintotal.36%.ChenTianshiattendedthejuvenileclassoftheUniversityofScienceandTechnologyofChinainhisearlyyearsandeventuallyobtainedadoctorateincomputersoftwareandtheory.HeworkedattheInstituteofComputerScience,ChineseAcademyofSciencesfromJuly2010toSeptember2019.In2019,hisannualsalaryintheCambrianwas108.RMB0.96million.  InadditiontoChenTianshi,deputygeneralmanagerLiuShaoli,chiefoperatingofficerWangZai,anddeputygeneralmanagerLiuDaofuwereincludedinthefoundingteammembers.Thesemembers,likeChenTianshi,onceworkedattheComputerInstituteoftheChineseAcademyofSciences.Notonlythat,thewholly-ownedChinesecomputingsourceoftheInstituteofComputingoftheChineseAcademyofSciencesisthecompany’ssecondlargestshareholderwith18shares.twentyfour%.  TheprospectusdoesnotintroduceChenYunjiseparately,butmentionshimintherelatedpartyassettransferintherelatedpartytransactionchapter.InFebruary2019,theCambriansignedwithChenTianshiandChenYunjifor42.420,000transferredthe100%shareholdingofSuHangzhouAiCambrianheldbythetwo.IntheearlyCambrianperiod,heonceintroducedthatthecompanywasjointlyfoundedbyChenTianshiandChenYunjibrothers,andChenYunjiwasadmittedtothejuvenileclassoftheUniversityofScienceandTechnologyofChinaattheageof14,andthenenteredtheInstituteofComputingTechnologyoftheChineseAcademyofSciences.  Theprospectusshowsthatthescaleofthereport,Cambrianisbasedontheneedsofresearchanddevelopmentandbusinessdevelopment.ItalsoobtainedasmallnumberoftechnicalauthorizationsfromtheInstituteofComputingTechnologyoftheChineseAcademyofSciencesandpaidpaymentfees.190,000yuan,15in2019.Thepricingmethodis910,000yuan.ThepricingmethodisbasedontheroutineproceduresoftheInstituteofComputingTechnologyoftheChineseAcademyofSciencesandisdeterminedthroughconsultationbetweenthetwoparties.Inaddition,in2018,theCambrianentrustedtheInstituteofComputingTechnologyoftheChineseAcademyofSciencestoparticipateinthedevelopmentoftheBangla.  Alargenumberofshareholderseats,Ali,Lenovo,HKUSTXunfeiappearedintheprospectus,sincethefirstcapitalincreaseinAugust2016,theCambrianhasexperiencedsixcapitalincreases,andsinceApril2016,thecompanyhasalsocompletedThreeequitytransfers.Beforethisoffering,Cambrianhad32individualandinstitutionalshareholdersdirectlyholdingshares,andduetochangesintheshareholdingrelationship,shareholderswithindirectsharesandconcertedactionrelationshipsalsoexisted.  Onthesigningdateofthefinalprospectus,ChenTianshi,ZhongkeSuanyuan,andAixiPartnerswerefirmlyseatedinthetopthreeshareholders.Amongthem,ChenTianshiisageneralpartnerofAixiPartners,whileotherexecutives,personnelandemployeeswithlong-termlaborcontractswiththecompanyarelimitedpartners.NanjingCMBandHubeiCMBheldsharesinChinaMerchantsBankInternationalCapitalManagementandChinaTelecomSystemIntegrationCorporation.42%;SDICFundandNingboHangoholdatotalof7.35%;PaleozoVenturesandZhishengKexunholdatotalof5.04%.  Inaddition,existingcompanieswithhighershareholdervisibilityappearintheshareholderseatsorhidebehinddirectshareholders.AlibabaVentureshasinvestedinthethirdandfifthcapitalincrease,1trillionand4995respectively.520,000yuan.Onthesigningday,AliVentureCapitalsatfirmlyonthetenthlargestshareholderwithashareholdingratioof1.94%.LenovoSustainableHubeiLenovoandNaYuanmingzhienteredthegame.Thelattertwohaveaconcertedrelationshipandhold2shares.39%.  AlthoughHKUSThasbeenintheshareholders’seatsincethefirstcapitalincreaseinAugust2016,ittransferred0toGuangzhouHuixinginthesecondallocationtransferinMay2019.25%equity.Onthedayofsigning,HKUST’sdirectshareholdingratiois1.19%.  Inaddition,atthefirstlevel,JinshiYinyi,awholly-ownedsubsidiaryofleadunderwriterCITICSecurities,directlyholdsshares1.19%,whileholdingCITICSecurities15.CITICIndustrial,awholly-ownedsubsidiaryofCITICGroupwitha47%stake,holdsNingboHango8.33%equity,whileNingboHangoholdsCambrian3.43%equity.FundsmanagedbyCICCCapital,awholly-ownedsubsidiaryofCICC,theleadunderwriter,alsoholdsharesthroughCICCanddirectlyholdshares119%.  LargecustomerHuaweipaid1inthepastthreeyears.8.6billionpoundsofmodernartificialintelligencetechnologyhasbeenappliedinthecloud,edgeandterminal,andCambrianproductsmeettheneedsofthesethreedifferenttypesofequipment.Theprospectusshowsthatin2019,theproportionofbusinesswillbeexpanded,newbusinesseswillbelaunched,andthenumberofreportswillbereported.Themaincustomersarechipdesignmanufacturers,servermanufacturers,andlocalgovernmentsinneedofdatacenterconstruction.  TheinitialproductoftheCambrianistheterminalintelligentprocessorIPCambrian1Aprocessorin2016,followedby1Hand1Min2017and2018,respectively,withimprovedperformanceandcorrespondingexpansionofthemodel.Boththecloudandtheedgehavelaunchedchipsandsmartaccelerationcardsinthecloud.Amongthem,thecloud-basedSiyuan290isbeingtestedinsamples,whiletheedge-sideSiyuan220andtheacceleratorcardreleasedin2019havenotyetlaunchedactualsales.Inaddition,theCambriancontinuedtodevelopandupgradebasicsystemsoftwareplatformstoadapttonewchips.  Theprospectusshowsthatthenumberofreports,in2017and2018,morethan98%oftherevenuecamefromthelicenserevenueoftheterminalsmartprocessorIP,andin2019,thesystembusinesswasobtainedthroughthecloudsmartchipandtheaccelerationcardbusinessandintelligentcomputingWuji’smainbusinessincomehasincreasedsubstantiallybynearlyfourtimes.In2019,terminalrevenueaccountedfor15%oftotalrevenue.49%,thecloudaccountedfor17.77%,theintelligentcomputingsystemaccountedfor66.72%.  Forthedeclineintheterminalside,thereasonisthatthemid-to-high-endequipmentthatadopteditsIPachievedlarge-scaletransformationin2018,butatthesametime,theCambriandeliveredIPtocompanyA,whichcausedadeclinein2019.Thispartofthebusinessdoesnotsellphysicalchips,onlyIP.SustainablecompanyAisamajorcustomeroftheCambrian.From2017to2019,theCambriansalestocompanyAtotaled1.8.6billionyuan,accountingfor98%ofrevenue.34%,97.63%,and14.34%.AlthoughtheCambrianProspectusnolongerdisclosesthesalesamountofCompanyA,itscustomerisHuaweiinthepublicityofthebattle.  Obviously,asasemiconductorcompanyfocusingonthedesignandsalesoftheFablessmodel,CambrianalsoincludedHuaweiHiSiliconinitsscopeandriskwarning.Infact,thedeputygeneralmanagerholdingthecompany’sshares,CTOLiangJunjoinedtheCambrianin2017,andinphysics,heworkedatHuaweiandHisiliconandservedasaseniortechnicalexpert.LiangJunandChenTianshi,LiuShaoliandLiuDaofuwerelistedasthecoretechnicalpersonneloftheCambrian,buttheyweretheonlynon-foundingteammembers.  Theintelligentcomputingaccumulationsystemwillbecustomizedanddevelopedaccordingtocustomerneeds.In2019,theCambrianandXi’anFengdongYixiangTechnology,theShanghaiBrainScienceandBrain-likeResearchCenter,andtheCommerceBureauoftheHengqinNewDistrictManagementCommitteeofZhuhaiCityreachedarelevantcooperationtostartgeneratingrevenueinthispartofthebusiness.  However,companyB,whichenteredthetopfivecustomersin2019,accountedfor14%ofrevenue.34%,Cambrianneverannounceditsname,butsaidthecompanywasarelatedparty.  Thethree-yearsteepincreaseinresearchanddevelopmentexpenses,thesalaryaccountedforinthebigprospectus,from2017to2019,theresearchanddevelopmentexpensesoftheCambrianwere2986respectively.RMB190,000,2.4billionyuanand5.RMB430,000,withR&Dexpenseratesof380respectively.73%,305.18%and122.32%.Thecompanysaiditwillcontinuetoinvestinresearchanddevelopmenttoensurethatitstechnologyisforward-looking,leadingandcorecompetitiontoincreaseprofits.Theprospectuslistsatotalof8projectsatthedevelopmentstage,andthecumulativeexpenditureisexpandedto6.5.5billionyuan.  ItcanbeseenthatthehighestproportionofR&Dexpensesisemployeecompensation,whichis74inthreeyears.16%,41.21%and52.15%.AsofDecember31,2019,therewere680CambrianR&Dpersonnel,accountingfor79ofthetotalnumberofemployees.25%,andmorethan70%oftheR&Dpersonnelhavemaster’sdegreeandabove.Obviously,thecompanyhasapart-timejobasamemberoftheInstituteofComputingTechnologyoftheChineseAcademyofSciences.  Inaddition,thetestingandprocessingcostshavealsobeenreducedsince2018toreduceresearchanddevelopmentcosts,comparedwith36in2019.15%and22.92%.Theprospectusshowsthatthispartofthecostismainlythecostofthetapeusedforresearchanddevelopment,whichisthekeyconversionofthechipfromdesigntomassproduction.  However,intheriskalert,researchanddevelopmentisalsooneofthepotentialsourcesofriskintheCambrian.DuetoR&Dexpenditures,whiletheproductisstillinthemarketdevelopmentstage,andreportstheriskfacedbytheCambrianduetothesharepaymentamountduetoequityincentives.  Notonlythat,beforethesalesrevenuegeneratedbyartificialintelligencechipproducts,thecompany’sexpandedresourcesincreasedduetothedependenceontheCambrianoperatingcapital.Therefore,expansionbeyondthefinancingamountwillcausepressureandcannotmaintainsufficientcashflow.Itwillbeaffected,resultingin,willaffectthesalary,thusaffectingtheintroductionoftalentandthestabilityoftheexistingteam.  ThelossofR&DpersonnelwasexcludedfromtheriskfactorsoftheCambrian.Thecompanysaidthatifvariouscircumstancesinthefuturecausethecompany’sspendingpoliciesandlevelstobeinsufficientlycompetitiveandattractiveinthesameindustry,itwillbedifficulttorestoretherecruitmentofmorehigh-endtechnicaltalents,andevencausethelossofexistingR&Dpersonnel.  Riskfactors:Unprofitable,intensifiedcompetition,andhighsupplierconcentration.Duetothelargeamountofcapitalexpenditurerequiredforsmartchipresearchanddevelopment,theCambrianhasbeeninanetpollutionstateforthepastthreeyears,anduntilDecember31,2019,thecompanyhasaccumulatedThedistributionprofitis8.5.5billionyuan.Asofthesigningdateoftheprospectus,thecompanyhasnotyetmadeaprofitandthereareunreplacedreplacementsthathaveoccurred.TheCambrianremindedthatitmaynotbeabletomakeprofitsordistributeprofitswithinacertainperiodinthefuture.  Onthetipsaboutriskfactors,Cambrianalsopointedoutthattheriskofitscoretechnologyupgradealternatingwiththeindustry’sfuturetechnologicaldevelopmentdirection,thereasonisthattheindustry’stechnologicalupgradesandproductupgradesarefaster,andthedevelopmentdirectionhascertainuncertainties.Infact,theresearchanddevelopmentworkdidnotmeetexpectations,technicalleaks,andintellectualpropertyriskareriskfactors.  Risksthatadverselyaffectitsoperationsalsoincludetechnologylicensingandincreasedmarketcompetition.TheCambrianstatedthatthereportedintelligence,thecompany’sintegratedcircuitIPandEDAtoolsuppliersaremainlyARM,Synopsys,Cadence,etc.Ifduetoforcemajeurefactors,theabovesuppliershavestoppedthetechnologyauthorizationfromthecompany,whichwillhaveanadverseimpactonthecompany’soperation.  SharingwithforeignmanufacturersNvidia,Intel,AMD,Cambrianstillhasconflictingdifferencesinoverallscale,financialstrength,R&Dreserves,saleschannels,etc.,anddomesticcompaniessuchasHuaweiHiSiliconandotherchipdesigncompaniesaregraduallyenteringthisInonemarket,theCambrianisfacingasituationofincreasingcompetition.Ifeffectivecountermeasurescannotbeimplemented,theCambrianwillfaceasituationwherethesalesofmajorproductsarelowerthanexpected,andtheproductgrossprofitmarginisreduced.  Inadditiontothefactthattherevenueofthetopfivecustomersaccountedforarelativelyhighrisk,thehighconcentrationofsuppliersandthedifficultyofreplacingsomesuppliersarealsorisksoftheCambrian.Accordingtotheprospectus,thetotalpurchaseamountofthetopfivedirectsuppliersaccountedfor92%ofthepurchasescaleoverthesameperiod.64%,82.53%and66.49%.Somesupplierproductsarescarceandexclusive.  Inaddition,inresponsetotheriskscausedbythenewcoronavirusepidemic,theCambriandisclosedthatifthesupplycapacityofthesupplierenterpriseisaffected,itmaycausethecompanytofailtoperformthecontractwiththepartnerintimeandfailtoprovideon-sitesupporttothecustomer;itmaycausesomeintelligentcomputingTheimplementationofthebusinessexpansionhasbeendelayed,ortheintroductionofchipproductshassloweddownsignificantly.Sauna,NightnetEditorLiangChenYueCaizhouSunYongproofreadingHeYan