In an era defined by rapid technological advancements and a growing appreciation for specialization, the semiconductor industry is proving to be a robust field of opportunityAs we delve deeper into the state of semiconductor manufacturing, it becomes clear that not only can companies excel in niche markets, but they can also make significant contributions to the overall industry landscapeThe expansion of fabrication plants, driven by artificial intelligence trends, is paving the way for another growth cycle that promises to reshape the sector in intriguing ways.

The projected growth within the semiconductor equipment market is remarkableFrom 2025 to 2027, spending on equipment is expected to rise for three consecutive years, culminating in a record high of $145 billion by 2027. With such forecasts, companies that manufacture semiconductor equipment are entering a vibrant phase, reminiscent of an industry renaissance.

By the third quarter of 2024, the contract liabilities in the semiconductor equipment sector reached an impressive 20.18 billion yuan, marking a 14% increase from the previous yearDespite the variety of equipment – over a dozen categories exist within semiconductor production – certain segments are generating heightened interest among investors and stakeholdersFor instance, etching and lithography equipment are often discussed due to their high value and significant technological barriers that limit entry for new players.

Nevertheless, it is crucial to acknowledge the importance of less-discussed categories, such as cleaning equipment, which plays a vital role in the manufacturing processCleaning tools are essential for the removal of impurities, ultimately enhancing yield rates—a paradise for efficiency-focused manufacturersCurrently, cleaning equipment accounts for about 6% of the overall market value, which is less than that of etching and deposition tools, yet it is experiencing notable vitality, with domestic production exceeding 30%.

The logic behind the rising demand for cleaning equipment is straightforward

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With fabrication plants investing heavily in expanded production capabilities paired with advanced processing techniques, the complexity of semiconductor manufacturing is rapidly increasingMore intricate operations generate greater volumes of impurities, necessitating multiple cleaning cycles to improve yield ratesThis demand is expected to propel the global semiconductor cleaning equipment market to a staggering $6.5 billion by 2027, boasting a compound annual growth rate of 6.7% from 2023 to 2027.

In recent years, several domestic companies have emerged to capitalize on this strong growth trendLeading players such as Shengmei Shanghai, Northern Huachuang, Zhichun Technology, and Xinyuan Micro have entered the fray, each vying for a share of the burgeoning market.

Shengmei Shanghai, in particular, has carved out a niche for itself, leveraging its technical advantages to become a formidable player within the industryWith a global market share of 7% and leading the domestic market with 23% share, its competitive edge lies in differentiationNotably, the company recognizes that high-end customers prioritize distinct performance characteristics in cleaning equipment, as different production lines may require specific processesEquipment that demonstrates excellent differentiated performance can significantly boost both yield and efficiency, affording clients a competitive advantage.

Over the past few years, Shengmei Shanghai has made remarkable advancements in its cleaning technology, covering over 90% of the necessary cleaning steps—the most extensive range of any manufacturer globallyTheir innovations include the world’s first SAPS and TEBO megasonic cleaning technologies, in addition to the Tahoe single-wafer slot cleaning techniqueNot only do these advancements improve cleaning efficiency, but they also significantly reduce the use of harsh chemicals like concentrated sulfuric acid, which helps cut production costs for their clients

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Notably, SAPS technology was already in use on the mass production lines of the internationally recognized DRAM manufacturer SK Hynix.

As of 2023, cleaning equipment constituted 67% of Shengmei’s total business, reflecting significant growth in this segmentRevenue figures tell a compelling story: in the first three quarters of 2024, the company reported revenue of 3.977 billion yuan, up 44.6% from the previous year, with a net profit of 760 million yuan—a 12.7% year-on-year increase.

However, it is worth noting that despite these impressive revenue growth figures, the increase in net profit was less robust than anticipated, with an overall decline in both gross and net profit margins—down 4.7% and 5.4%, respectivelyThis discrepancy is attributed to several factors impacting the company’s profitability.

Firstly, increasing expenses have significantly affected profit marginsDuring the first three quarters of 2024, Shengmei's research and development costs rose to 540 million yuan, marking a 35.8% year-on-year increaseThis investment places it second only to Northern Huachuang, Zhongwei Company, and Changchuan Technology in terms of R&D expenditure within the semiconductor equipment realm, ultimately compressing profit margins.

Moreover, the year saw the company incur substantial equity incentive costs, leading to a 77.8% year-on-year increase in management expenses, totaling 230 million yuanThis escalation further impacted profit growth.

Another key factor is the decreased share of high-margin products in their overall portfolioWhile cleaning equipment is pivotal, complementary semiconductor tools like plating and vertical furnace pipes, which yield a gross margin of 59.5%, have historically been profit centersDelays in confirmation of revenue from certain orders hampered the realization of profits from these high-margin items, subsequently affecting overall profitability ratios.

Lastly, increasing depreciation and amortization expenses due to the establishment of a new 1.2 billion yuan research and manufacturing center impacted profitability

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As these assets transition from construction to fixed assets, the resultant depreciation expenses have risenBy mid-2024, fixed asset depreciation hit 33.76 million yuan, marking a 25.6% year-on-year increase.

Despite the current pressures, the investment in this new facility is expected to unlock over 10 billion yuan in future value, allowing for scale efficiencies that are likely to bring down production costs and enhance margins in the years ahead.

This analysis indicates that while Shengmei Shanghai faces short-term challenges regarding lower profit margins, the long-term outlook remains incredibly promisingBy the third quarter of 2024, they reported an order backlog of 6.77 billion yuanAs these orders are fulfilled, the company is positioned for sustained growth in the coming years.

Diving deeper into market dynamics, we can evaluate Shengmei’s performance through two dimensions: sales regions and product offeringsWith the rapid increase in industry investments expected to plateau around 2025-2026, capital spending by foreign wafer manufacturers will likely slow, marking the peak of a cycleIn contrast, domestic markets are anticipated to see a significant shift towards domestic substitution, fueling vibrancy in China’s semiconductor equipment landscapeIndeed, Shengmei Shanghai's focus on solidifying its domestic market presence is evident, as evidenced by their impressive 63.3% growth in revenue, reaching 2.4 billion yuan in the first half of 2024.

Additionally, on the product front, Shengmei has begun diversifying beyond cleaning equipment, with plans to expand into thin-film deposition, coating, and advanced packaging equipmentThese segments are expected to become new growth driversThe thin-film deposition and coating technologies are currently in development, with commercial certification anticipated by the second half of 2025. In comparison, advanced packaging equipment is progressing swiftly, with the company recently securing four orders for wafer-level packaging tools in North America, demonstrating substantial advancements in their technology capabilities.

Ultimately, as the semiconductor industry warms up across the board, Shengmei Shanghai stands out as a leading player in the cleaning equipment arena

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