Joulwatt is one of the few leading analogue chip manufacturers in China to adopt the virtual integrated device manufacturer (IDM) model. The Company has been dedicated to power management chips and is now extending to signal chain products to build an integrated product platform.Capitalizing on the virtual IDM model and the self-developed process platform, Joulwatt has launched a number of analogue chip products with strong competitiveness, and diversified beyond consumer electronics into fields including automotive, energy storage, communications, computers & memory, and industrial production. We forecast its 2023E/24E/25E operating revenue to be Rmb1,609mn/2,142mn/ 2,881mn. Based on a combination of the discounted cashflow (DCF) method and PS valuation, we assign a target market cap of Rmb17.3bn and initiate coverage with a “BUY” rating.

Company profile: Leading domestic analogue chip maker with virtual IDM model.

Founded in 2013, Joulwatt is a scarce leading analogue chip manufacturer adopting virtual IDM model in China. The Company has always adhered to the multi-category analogue integrated circuit (IC) product development strategy during the development process, and sells its products to various mainstream downstream application fields and multiple types of customers. At present, the Company has basically built up a more complete full-category analogue chip product line, which broadly covers various application fields such as automotive electronics, communication electronics, computing and storage, industrial applications, consumer electronics, and so on. As of 2022, its achieved revenue of Rmb1.45bn and attributable net profit (ANP) of Rmb140mn, respectively, making the Company one of the first-tier domestic analogue chip makers. Looking ahead to the future, the Company has launched driver-metal-oxide-semiconductor field-effect transistor (DrMOS), multi-phase controller, battery management system (BMS) analog front-end (AFE) and other medium- and high-end analogue chip products. In the medium-to-long term the Company is likely to usher in a further breakthrough.

Industry analysis: A promising industry, and attention should be paid to import substitution.

Analog chips serve as the link between the virtual and real worlds, covering power management chips, signal chain chips, etc. According to WSTS, the global analog chip industry reached a scale of US$89bn in 2022, up 20.1% YoY. Due to the board downstream demand for analog chips, the market will likely continue to maintain a growth trend in the future. In terms of the competitive landscape, currently, major American and European companies such as TI and ADI dominate the global analog chip industry, but with the trend of import substitution, local analog chip manufacturers like Joulwatt are actively catching up.

Competitive advantage: Self-developed process, full product matrix and rich customer resources.

1) On the technical side, Joulwatt places a high emphasis on research and development (R&D) and innovation. The core technical team has years of experience from overseas analog chip giants, and as of the 1H23 reporting period, the Company has established a well-organized R&D team of 461 talents, ensuring a stable capacity for product design and technological improvement and upgrades. 2) In terms of processes, to break through the industry's inherent process limitations, the Company has utilized existing resources from domestic wafer foundries to establish a process development team. Specific processes are developed based on product requirements to match the manufacturing level with chip development needs, achieving the best cost-effectiveness for the chips. Over the years, it has built three major process platforms in major domestic wafer foundries, including a 0.18-micron 7V to 55V low-voltage bipolar-CMOS-DMOS (BCD) process, a 0.18-micron 10V to 200V high-voltage BCD process, and a 0.35-micron 10V to 700V ultra-high-voltage BCD process, which has significantly enhanced the competitiveness of the Company's products. 3) From the perspective of products, different from typical analog chip design companies that primarily offer single-category chip products, the Company is committed to developing a series of multi-category chips. As of the 1H23 reporting period, the Company has over 1,000 products available for sale and more than 600 products under development. These products cover most mainstream power management chip categories in the industry and are gradually expanding to cover multi-category signal chain products. During the product development process, the Company has launched several innovative product series, demonstrating strong competitiveness in various downstream scenarios. For example, in the multi-phase power supply field, it has become a pioneer in domestic production, leading in product certification, customer adoption, and main chip factory certification. 4) In terms of customers, the Company has become a supplier to major domestic communication and security customers and has entered the supply chain systems of top customers in various fields, including automotive electronics, communication electronics, computing and storage, industrial applications, and consumer electronics. Leveraging these competitive advantages, the Company continues to introduce more highly competitive products and rapidly increase its market share in various downstream areas.

Potential risks: Significant fluctuations in gross profit margin (GPM) of products; R&D risks under the virtual IDM model; a large-amount inventory and sharp price drops; high concentration in both customers and suppliers; product R&D progress not meeting expectations; increasing risks due to intensified market competition; core technology leakage or intellectual property infringement; technical personnel attrition; the implementation of the Company's fundraising projects not up to expectations.

Investment strategy: Joulwatt is a leading domestic analog chip maker that adopts the scarce virtual IDM model. Leveraging its self-developed three major BCD process platforms, the Company has introduced several high-performance analog chip products with strong market competitiveness and is actively expanding into the automotive, energy storage, computer, and storage sectors. In the short term, the semiconductor market is in a downcycle with increased industry competition, putting pressure on the Company’s earnings in 2023. However, the Company is making smooth progress in high-end products such as multi-phase power supplies and BMS AFE, offering the potential for long-term growth. Considering the intensified price competition and relatively inflexible expenses over the past two years, most analog chip companies have faced profit pressures. Therefore, we adopt the PS valuation method for the Company and assign a target market cap of Rmb17.3bn, corresponding to a target price of Rmb39. We initiate coverage with a “BUY” rating.