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Wolfspeed: Tesla's Secret "Hard Currency" that is on Fire

When Tesla announced that the Model 3 would be equipped with silicon carbide, the market began to pay attention to this once niche field. The appearance of silicon carbide can somewhat alleviate the balance between weight and range, which has been a long-standing problem for electric vehicles.

If an electric vehicle has a long cruising range, it needs a larger battery, which inevitably increases the weight of the vehicle. The main function of silicon carbide is to improve energy conversion efficiency, allowing new energy vehicles to achieve longer range experiences with the same size battery.

Tesla's supplier of silicon carbide is STMicroelectronics, and the silicon carbide giant behind STMicroelectronics is Wolfspeed. Since 2020, STMicroelectronics has been the company's largest customer, and the company has also occupied more than half of the global market share in the silicon carbide market for power electronics.

Earlier this year, Dolphin Analyst conducted an overall analysis of the silicon carbide market. This time, we have specifically chosen to focus on the industry leader Wolfspeed. The main considerations are:

  1. In the context of the economic slowdown, areas with high-speed growth have larger space. The continuous growth of more than 30% in the field of silicon carbide is expected to resist the risk of macroeconomic slowdown.

  2. Wolfspeed's performance exceeded expectations in the last quarter and the company has raised its future prospects, indicating that the company has sufficient confidence in future growth.

In this article, Dolphin Analyst mainly summarizes our thoughts on Wolfspeed from three aspects:

  1. Why we focus on Wolfspeed in the context of the continuous decline of the new energy vehicle market;

  2. How is Wolfspeed running as a company;

  3. How should we expect the future of Wolfspeed.

Through our analysis, we believe that driven by the demand in the mid-to-high end car market, silicon carbide will maintain a high-growth trend. Wolfspeed, as the leader in the field of silicon carbide substrates, has obvious advantages in technology and production capacity, and is expected to maintain its leading position in the future, extending downstream to components and bringing further growth potential to the company.

Dolphin specifically analyzes our thoughts on Wolfspeed below:

First, in the context of the continuous decline of the new energy vehicle market, why do we focus on Wolfspeed?

As the growth rate of new energy vehicle sales begins to slow down, leading companies such as CATL and BYD have also experienced over 20% decline in the recent period. In the current situation where the new energy sector is sluggish, Dolphin has re-focused on Wolfspeed, mainly considering the demand of the industry, conductive materials, and the market position in the subdivision field.

1.1 Demand of the industry

Silicon carbide first came to the public's attention mainly because Tesla's Model 3 was equipped with silicon carbide MOSFET devices in 2018. Since then, leading new energy vehicle manufacturers such as BYD, XPeng Motors, and NIO have successively begun to equip silicon carbide devices. Many carmakers gradually began to use silicon carbide devices, mainly because: (1) they can improve performance; (2) they also help models enter the mid-to-high-end market.

Silicon carbide devices are mainly used in power control units and charging units in new energy vehicles: in power control units, using silicon carbide devices can make the battery lighter, have a longer range, and have better performance. In the charging unit, silicon carbide devices can shorten the charging time.

Although the overall sales growth rate will gradually slow down as the penetration rate of new energy vehicles increases, the competition among manufacturers for mid-to-high-end models will continue. Referring to the development of the mobile phone market, because mid-to-high-end markets can earn the vast majority of profits, domestic mobile phone manufacturers have always been pursuing such markets.

Similar to the pursuit of higher-performance processors in mid-to-high-end mobile phones, silicon carbide not only improves the energy conversion efficiency of new energy vehicles, but also increases the overall cost of vehicles, but the higher pricing will cover this part of the cost. Various manufacturers' mid-to-high-end cars will also gradually be equipped with silicon carbide devices in order to obtain more industry profits.

1.2 Silicon Carbide Material-Conductive Materials

The main thing used in new energy vehicles is the final product (devices or modules), and Dolphin Analyst has previously mentioned in "The Battle for the SiC Track Behind New Energy Vehicles, Who Will be the Next King?" that the biggest value end in the industry chain is substrate materials. Wolfspeed is at the top of the silicon carbide supply chain and is also the most core substrate link.

Although there is continuous demand for silicon carbide in the new energy field, not all silicon carbide materials can be used in this field. Silicon carbide substrates are divided into two types: semi-insulating and conductive. Due to their different characteristics, semi-insulating silicon carbide is mainly used in information and communication, and radio detection fields, while the new energy field is most concerned with conductive materials that can be used in new energy vehicles, rail transit, and high-power transmission.

Wolfspeed, mentioned in this article, mainly produces conductive silicon carbide substrate materials.

Source: Tianyue Advanced, Dolphin Research and Analysis

1.3 Industry Status

Since conductive materials are the main beneficiaries of the development of the new energy field, let's look at the market pattern of the entire conductive silicon carbide substrate. According to Yole statistics, Wolfspeed (formerly Cree) has an absolute leading advantage in the entire conductive market, occupying more than 50% of the market share. In other words, no matter whether new energy vehicles use products from ST, Infineon and other manufacturers, most of them still purchase substrate materials from Wolfspeed. Due to Wolfspeed's absolute dominance and position in the silicon carbide market, this is Dolphin Analyst's reason for picking it up again in the context of the new energy callback.

Source: Yole, Dolphin Research and Analysis

2. Looking closely at the company, how is Wolfspeed doing?

Wolfspeed is currently the world's largest manufacturer of silicon carbide substrates. The company was previously named Cree, and Wolfspeed was originally just a department within the company. Cree's original main business was LED and lighting, but as market competition intensified, the profitability of the two businesses continued to decline.

After Tesla chose to use silicon carbide devices, silicon carbide began to shift from military/commercial to civilian applications. Cree (now Wolfspeed) saw the growth potential of silicon carbide substrates in the field of new energy, so it chose to transform. The company sold its lighting and LED businesses in May 2019 and March 2021, respectively.

After divesting its lighting and LED businesses, Wolfspeed's main products are (1) material products: silicon carbide wafers, epitaxial wafers, epitaxial layers on silicon carbide wafers; (2) power products: silicon carbide Schottky diodes, isolated MOSFET devices, power modules, gate drive boards; (3) RF products: GaN HEMT devices, GaN on SiC solutions.

Source: Company website, Dolphin Research and Analysis

From the perspective of product classification, Wolfspeed has laid out the entire silicon carbide industry chain of "substrate materials-epitaxy-terminal products." The company's core competitiveness lies in the highest value substrate materials.

1) In terms of revenue: it can be seen from Wolfspeed's past revenue situation that the LED business has lost its growth potential, while the semiconductor business (Wolfspeed department) has shown good growth potential with the development of new energy. In the second quarter of 2022, the company's semiconductor business revenue reached $228 million, nearly twice that of the LED business when it was divested.

2) In terms of gross profit: since the LED market is fully marketized, the overall industry has obvious cyclical characteristics. Profitability is good when LED production capacity is scarce, but when it is over capacity, profits are basically nonexistent. After divesting its LED business, the company's overall gross margin has become more stable, remaining above 30%.

Regarding net profit, Wolfspeed has realized profitability this quarter mainly because, before the disposal of the LED business, the company signed an agreement to perform profitable business. The profit loss from the termination of the business this quarter was $9.4 million. Excluding this impact, the company is still in a loss-making state this quarter. The main reason for the company's loss is the depreciation caused by a large investment in fixed assets and high research and development costs. To turn losses into gains, the company needs to wait for the release of production capacity and the completion of depreciation.

Considering that the entire industry is still in the early stages of development, Wolfspeed is currently in a period of production capacity expansion. Large investments in fixed assets resulting in increased depreciation and amortization expenses are eroding company profits. The positive net profit from the previous quarter was mainly influenced by the settlement of past LED businesses and is not sustainable.

From the perspective of the company's operating profit, it is still a ways off from turning losses into gains. Dolphin Analyst believes that, for a company in the early stages of industry development, the most important thing at this stage is to see continuous release of production capacity and continuous growth in revenue, and then observe the situation of turning losses into gains.

III. What is the outlook for Wolfspeed's future?

3.1 The technology is still leading

Currently, 6-inch wafers are the mainstream substrate material for the silicon carbide market. Taking 6-inch substrate materials as an example, comparing the parameters announced by various manufacturers, other manufacturers are approaching Wolfspeed from various indicators. This indicates that domestic manufacturers actually have some ability to produce corresponding products, but domestic manufacturers still have problems with product consistency, yield, and cost in mass production.

Looking at the timing of the 6-inch wafer production, domestic manufacturers and Wolfspeed are more than 8 years apart. The company has been producing 6-inch substrates since 2011, while domestic manufacturers only achieved mass production around 2019. Although the indicators are close, the actual difference is still more than 5 years.

Today, Wolfspeed has begun mass production of 8-inch substrates, while other foreign manufacturers are expected to be in mass production after 2024, and domestic manufacturers are still in the research and development stage.

Source: Company financial reports, official website, Dolphin Research and Investment 3.2 Capacity Leads by a Wide Margin

Currently, Wolfspeed's capacity for silicon carbide substrates exceeds 850,000 pieces (equivalent to 6-inch wafers), with conductive substrates being the main type. Meanwhile, in the first half of 2021, Shandong Tianyue's capacity was only 28,000 pieces, and even when the new Shanghai factory reaches full production, it will only have 300,000 pieces by 2026, far behind Wolfspeed.

As for conductive substrates, the company's capacity has already exceeded 500,000 pieces. Combining with the company's plans, it is expected that the company's capacity for conductive substrates will increase to over 1 million pieces by 2026. Although both II-VI and ROHM also have plans to expand production capacity, they are still less than Wolfspeed. It is particularly noteworthy that Wolfspeed's 8-inch wafers, which are already in mass production, may not be produced by its followers until after 2024.

With the release of production capacity in North Carolina and New York factories, Wolfspeed is expected to continue to maintain its production capacity advantage in the industry.

3.3 Extending to Devices, Greater Room for Growth

When introducing the company's products, Dolphin Analyst also mentioned power products and RF products, indicating that the company has begun to penetrate downstream products from substrate materials.

From the perspective of the industrial chain, although the substrate is the highest value part of the silicon carbide industrial chain, the company is not satisfied with just the substrate area. As the company extends from substrates to devices, this will help the company to have a higher industrial chain discourse power, and also provide greater room for growth.

Dolphin Analyst estimates that although the gross margin of power devices is currently lower than that of substrate materials, with its advantages in substrate materials, the gross margin of device business is expected to increase in the future. In addition, with the release of 8-inch production capacity, it is also expected to increase wafer utilization and thereby reduce device manufacturing costs.

Dolphin Analyst mainly introduced the situation of Wolfspeed in this section. It can be seen that Wolfspeed is expected to continue to lead the industry with its advantages in technology and production capacity. The extension of the company's business to downstream devices is also expected to bring more growth to the company. In the next section, Dolphin Analyst will focus on the performance estimation and valuation pricing of Wolfspeed.

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