Veer Holdings Makes a Comeback

Welchip's stock has shown remarkable signs of recovery as it enters 2024, especially after suffering a tumultuous performance in 2022. The steep decline in profits was largely attributed to massive inventory write-downs, with the company acknowledging impairments exceeding several billion yuanThis stunning reversal marked a significant moment in the company's journey, showcasing how business models must adapt in the face of fluctuating market conditions.

In years when the market appeared robust, they aggressively stockpiled raw materials and ramped up production levelsHowever, this investment strategy backfired when the consumer electronics sector encountered a downturn, leading to an overload of stocks in the warehouseThe strategic miscalculation forced the company into a massive write-off, resulting in misaligned expectations and results during this challenging period.

The aftermath of these significant write-downs left Welchip with disappointing profits throughout 2022 and into 2023. Thankfully, after two years of digesting the excess, the company is now expected to emerge with a starkly improved forecast for the next financial year, suggesting a possible rebound without the encumbrance of previous supply chain issues.

An exciting forecast for 2024 estimates net profits attributable to shareholders will range between 3.16 billion to 3.36 billion yuan, translating to an astounding year-on-year growth of around 468% to 504%. Although this impressive percentage increase can be misleading due to a low comparison base from 2023, it still reflects a significant recovery in their profit scale, which is worth noting.

Welchip’s peak profits previously reached almost 4.5 billion yuan, which they have not yet fully regained

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However, 2024's projected figures exceed 2.7 billion yuan from 2020, indicating a gradual recovery processThis situation leads some analysts to believe that the company is on a path to stage a comeback, collecting momentum for growth in this highly competitive market.

The founder, Yu Renrong, established the company as a significant player in the semiconductor industry, having risen to prominence as one of the top individuals in the chip market largely through strategic acquisitionsWelchip's transformational journey towards achieving its current market position has been primarily propelled by successful mergers and acquisitions, a method that has displayed a profound effect on the company’s growth trajectory.

A notable highlight was the acquisition of Beijing OmniVision in 2019, which solidified Welchip's place within the image sensor domainWhile everyone recognizes Samsung and Sony as the leading giants globally, it’s equally significant to note that OmniVision ranks third, a remarkable feat that reinforces Welchip’s capabilities in this sector.

What many might not realize is that Yu Renrong's drive for acquisitions remained unimpeded even during the challenging periods of the previous two years when revenue faltered.

In 2022, they acquired SiSensor Semiconductor, followed by more acquisitions in 2023, including Chipger in Hunan Province and ChipDetect in ZhejiangThrough these strategic moves, Welchip’s non-current assets have surged dramatically — only a few years ago, they were valued at 2 billion yuan, while current estimates soar to approximately 17.5 billion yuan.

The long-term prospects are bolstered significantly, with anticipated revenues of 25.4 billion to 25.8 billion yuan in 2024, showcasing a historic milestone

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This can be attributed to two primary factors: firstly, their growing market share in high-end smartphones and automotive sectors; and secondly, the elevation of their products into the premium pricing segment.

In recent years, the discourse surrounding autonomous driving technologies has intensified, majority focusing on two critical elements: radar detection and camera image captureDue to the trends indicating that vehicles will increasingly utilize cameras—projected at over 12 cameras per vehicle by 2027—it paves the way for opportunities in this burgeoning market.

Additionally, the realm of smart glasses is undergoing a renaissance as well, necessitating numerous cameras for functionalityFor example, VR headsets typically require 2 to 6 cameras, while advanced AR systems may require up to ten, intensifying the demand in this evolving space.

While technologies such as autonomous driving and smart glasses remain in early developmental stages, the forthcoming years represent expansive growth potential for companies like Welchip.

With each passing year, Welchip’s technical prowess continues to impressAn exemplary product is their "OV50K40" image sensor, recognized as the world’s first that employs TheiaCel™ technology, offering dynamic range capabilities comparable to that of the human eye in a single exposureAnother breakthrough is their "OX12A10," touted as the first car-mounted image sensor with 1200 pixels, expected to commence mass production in the latter half of 2025.

Currently, the newly mass-produced product “OX03H10” also exhibits strong characteristics, achieving a dynamic range of 140 dB in a single exposureThese cutting-edge technologies are underpinned by substantial research and development investment.

Despite a decline in R&D expenditure due to market pressures in recent years, the peak in 2022 saw R&D costs soar to 2.5 billion yuan

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With current trends indicating a resurgence of approximately 1.9 billion yuan in 2024, it is clear that their commitment to innovation remains strong.

Typically, when R&D expenditures comprise over 10% of revenue, this signals high investment levels, particularly when contrasted with the profits generated; considering the 2024 net profits of under 2.4 billion yuan, the remarkable financial commitment is more apparent.

Furthermore, any improvement in product pricing and the resultantly enhanced gross margins are underlined by these investments.

Reportedly, the gross margin in 2024 reached 29.6%, while net margins hit 12.5%, highlighting a pronounced recovery from 2023’s statisticsThis gain can be attributed to an uptick in semiconductor sector health as well as an increase in the technical competitiveness of their product offerings.

Two primary aspects account for this improved competitive edge: the unwavering pace of hardware updates and iterations alongside advancements in algorithms.

While many might be oblivious, the photo captured by our smartphones is not a direct reflection of reality, but rather an interpreted outcome produced through algorithmic processingCameras collect data from a defined range, relaying it to the chip, which subsequently reconstructs the photograph we see.

Image processing also necessitates substantial algorithmic involvement; in this framework, algorithms rely heavily on sample sizeThe larger the sample pool, the more formidable the iterative algorithm, establishing a dominantly competitive space.

Welchip has excelled in algorithm development with innovations such as the HALE (HDR and LFM engine) dual combination algorithm, providing exceptional HDR and LFM capabilities

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