* Extracted from Annual Report 2022
1. 2022 REVIEW
2022 was the toughest year for the economy since the reform and opening up due to multiple unexpected factors, including: (i) continued sporadical outbreak of COVID-19 pandemic in some areas and spread regionally to a large scale at the end of the year, causing a serious impact on the entire national economy even after two years of the initial outbreak of the COVID-19 pandemic; (ii) the Russia-Ukraine war also posed severe impact on the global economic landscape as well as the stability of the international financial market and international supply chain, resulting in developed western countries experienced widespread and serious inflation, while the continuously rising interest rates increasingly hampered the economic development; and (iii) rare heatwaves, power supply restrictions and rising raw materials prices over the years further worsened the business environment for enterprises. According to the preliminary calculation by China’s National Bureau of Statistics, the GDP growth in 2022 was approximately 3.0%, with a sharp drop in the GDP growth of only 0.4% year-on-year in the second quarter; the manufacturing PMI index remained below 50 in most months, except for some months when it was around 50.1, indicating that the manufacturing industry was in a long period of contraction. In addition, the non-manufacturing business activity index was below 50 for half of the year and even fell to below 42 in April and December 2022 with a significant contraction. Year-on-year profits of industrial enterprises above designated size decreased by 4.0%, and even profits of enterprises from the equipment industry, which were in a better position, rose by only 1.7%. Such poor indicators were rarely seen in recent decades and some were even lower than those in early 2020 when the pandemic broke out.
The telecommunications industry slightly outperformed the overall economy. According to the statistics of China’s Ministry of Industry and Information Technology, the revenue of the telecommunications industry increased by 8% in 2022, with traditional businesses dominated by mobile data traffic, broadband access, voice and SMS remaining stable, and emerging digital services such as data centers, cloud computing, big data and the Internet of Things (IoT) developing rapidly, achieving a revenue growth of 32.4% as compared to the previous year. The fixed assets investment in the telecommunications industry, which is closely related to the operating environment of the Group, increased by 3.3% in 2022 as compared to the previous year, among which the 5G investments decreased by 2.5%.
Amid the unfavorable macroeconomic conditions both domestically and internationally, all employees of the Group faced various challenges with courage and proactiveness. Taking advantage of their own favourable conditions they managed to seize profitable opportunities successfully, and contributed to the growth of the Group. Throughout the year, the Group realized a revenue of approximately RMB2,039.6 million, representing a year-on-year increase of approximately 25.5%, and a profit for the year of approximately RMB68.1 million, representing an increase of approximately 8.3% over the corresponding period in the previous year, with improved economic indicators reflecting profitability and operational capability.
In 2022, the Group completed its largest investment project since its establishment: the acquisition of each of 51% equity interests in Nanjing Zhangyu Information Technology Co., Ltd* (南京掌御信息科技有限公司) (“Nanjing Zhangyu”) and Shanghai Zhangyu Information Technology Co., Ltd.* (上海掌御信息科技有限公司) (“Shanghai Zhangyu”). Nanjing Zhangyu mainly engages in chips customisation services, semiconductor IP authorisation services and supply chain services as well as research and development (Research and development), production and sales of IoT security chips. Shanghai Zhangyu mainly provides security solutions in the fields of blockchain security applications, digital security audit, data security governance and digital asset trading platforms. After completion of the acquisition of aforementioned two companies in mid-July 2022, both companies forged ahead and made achievements despite the extremely negative impact brought by the recurring pandemic on the Group. In 2022, the two companies reported total revenue of approximately RMB147.95 million, representing an increase of more than 200% as compared to the corresponding period in the previous year, and the net profit of the Group reached over RMB40.0 million, increasing by approximately 100 times compared to the corresponding period in the previous year, thus successfully achieving the Group’s annual profit targets. Upon completion of these acquisitions, the Group has two additional business areas which have growth potentials, marking that the Group has tapped into two new business fields, namely digital technology security and integrated circuit supply chain services, and started to reap the benefits of its dedicated efforts on business transformation over the years.
2. FOR MARKETING
In 2022, Jiangsu Hengxin Technology Co., Ltd. (江蘇亨鑫科技有限公司) (“Jiangsu Hengxin”), a wholly-owned subsidiary of the Group, successfully won bids in various projects, including China Mobile’s 700M antennas centralized procurement project, feeder wire centralized procurement project, base station and high-speed railway antennas centralized procurement project, base station and special scenario antennas centralized procurement project and 2022-2023 indoor distribution system equipment centralized procurement project. It also won bids in China Tower’s centralized procurement project for leaky cables and related accessories products, the Research and development-related technical services procurement project for connector and cable products and the second centralized procurement project for feeder wire products. In particular, it won the first place in the bid for China Mobile’s 444 antennas and single 4 antennas (including 700M) for 2022-2023, with a bid amount of approximately RMB288.06 million, and also won the first place in the bid for China Tower’s leaky cables and accessories products for 2022, with a bid amount of approximately RMB209.06 million. The production facilities of Jiangsu Hengxin have run close to full capacity for a considerable period of time during the Reporting Period owing to the above consecutive bids, which offset the adverse impact of the nearly 50% decline in sales to rail transit customers and decrease in overseas sales, laying a solid foundation for achieving the annual results targets.
Since the outbreak of the Russia-Ukraine war, the US and other western countries have implemented multiple rounds of sanctions against Russia, leading to a rapid deterioration of the trade environment with Russia. In order to avoid risks, Jiangsu Hengxin has proactively slowed down its order placement from such region, resulting in a decrease of nearly US$10 million in export orders and consequently an overall decline of approximately 15% in overseas sales.
Nanjing Zhangyu, a subsidiary of the Company, has kept abreast of the global economic trend digital transformation, so as to firmly seize the opportunities brought by the rapid growth in demand for chips performance and output triggered by the development of application scenarios such as the IoT, new energy vehicles and the “stay-at-home” economy (「宅」經濟). By overcoming difficulties like the uncertain business environment and the lack supply chains caused by the pandemic, continuously breaking through market and technological barriers in key fields such as the IoT, cloud security and industrial control as well as proactively expanding the market, it has successfully acquired a number of influential customers with sound development momentum, including State Grid Corporation, listed companies, national-level research institutes, universities and emerging unicorn enterprises. All these efforts not only made significant contributions to the development of the business for the year, but also provided a strong guarantee for achieving the profit targets for 2023 with unfulfilled orders of approximately RMB76.0 million at the end of the year. In particular, a number of customers who have successfully completed the tape-out process are expected to become the customers who need mass production services, thereby bringing multiple order growth.
3. FOR PRODUCTION AND SUPPLY
According to the main task of “quality improvement, cost reduction, efficiency enhancement” (提質增益、降耗增效), Jiangsu Hengxin made great efforts to strengthen intelligent, information-based and lean development. By “identifying deficiency through data-driven and benchmarking approaches” (數據驅動、對標找差), it made new breakthroughs in cost reduction and captured opportunities to carry out targeted improvement work for inadequate areas. In terms of intellectualisation, it launched a total of 12 projects throughout the year and completed 10 projects, with a revenue of approximately RMB3,228,500; in terms of informatisation, it launched 8 projects and completed 7 projects; and in terms of lean development, the costs decreased by nearly RMB40 million through micro-operation and micro-innovation. In addition, inventory for finished goods decreased by more than RMB40 million through lean inventory control, substantially offsetting negative impact such as limited power supply, rising raw materials prices and supply chain disruptions.
By adopting the Fabless business model, Nanjing Zhangyu has focused on the design, research and development and supply chain services of integrated circuits while entrusting wafer manufacturing, packaging and testing and other processes to professional wafer manufacturers and packaging and testing manufacturers. Therefore, the Company has always attached great importance to supply chain security issues by actively strengthening the management of upstream and downstream industrial chains and maintaining close communication and coordination with wafer manufacturers and packaging and testing manufacturers. During the Reporting Period, the Company established business cooperation relationships with 15 wafer foundry channels, 6 packaging and testing channels and 5 reliability testing channels, fully ensuring that the Company would achieve its production capacity targets for the year while maintaining great development potential.
4. FOR RESEARCH AND DEVELOPMENT
Despite the ravaging pandemic, unfavorable market conditions and fierce competition in 2022, Jiangsu Hengxin still concentrated all efforts on research and development activities. With a total investment of RMB104.3 million in the research and development, it completed a total of 8 projects in the radio frequency fields, including 5 innovative and 3 improved projects. Besides, it completed a total of 26 projects in the antennas field, including the 4G & 5G multi-system fusion antennas series, 5G array antennas series and micro-coverage antennas series, etc., with a sales revenue from new products of approximately RMB472 million as well as 13 invention and PCT patents.
Nanjing Zhangyu and Shanghai Zhangyu are asset-light companies with high dependence on research and development. Since their inception, both companies have always regarded research and development as a top priority. With the two companies joining the Group, the research and development work has reached new heights. During the Reporting Period, the total research and development investments of Nanjing Zhangyu and Shanghai Zhangyu amounted to approximately RMB21.3 million, representing an increase of approximately 86.2% compared to the previous year, which was mainly used in the research and development of blockchain underlying technology and application as well as the research and development of ultra-low power analog data conversion IP cores for IoT scenarios. A breakthrough progress was made in semiconductor IP authorization, resulting in a revenue of approximately RMB27.98 million for the year. The revenue generated from the overseas digital asset platform operation service amounted to approximately RMB8.0 million. In addition, they made applications for a total of 10 invention patents and 25 software copyrights, and were granted 2 software copyrights.
The IoT identity authentication security chips PMSC 1.0 independently developed by Nanjing Zhangyu recently obtained the certification by the Commercial Password Testing Center of the National Cryptography Administration. The function of the chips is to provide unique identity recognition for IoT intelligent devices, protect core data such as sensor data and the transmission process and resist common software vulnerabilities for stealing keys and key side-channel attacks. The chips is pre-set with a globally unique identifier and key, providing root trust and supporting national secret algorithms (SM3/4 algorithms) to provide financial-level security. Leveraging on sophisticated techniques, all IP are domestically controllable without potential production and property rights risks. It supports various MCU chips, with features of full compatibility, ultra-low dynamic power consumption, zero static power consumption and user customization. The successful development of such chips has filled in the national gaps, and its certification will provide an important guarantee for its scale entry into the market, laying a solid foundation for Nanjing Zhangyu’s future development.
5. EXPANSION OF A NEW BUSINESS MODEL
In view of the fact that the Web 3.0 technology is still at an early stage of development and there is a lack of computing service solution providers in the market that specialise in providing hardware leasing and customised software for the Web 3.0 field, the Group has established a cloud computing center with 90 high-performance computing servers in Hong Kong through its wholly-owned subsidiary, Hengxin Metaverse Limited by introducing the unique technical advantages accumulated by Shanghai Zhangyu over the years in the underlying security architecture of the operation system, cloud computing resource scheduling and high-performance distributed storage. It has taken cloud computing and encrypted computing businesses from customers and created its unique business model of “computing power service + hardware certification” (算力服務+硬體認證). The establishment of this cloud computing center is an important move taken by the Group to achieve the strategic goal of “becoming an internationally competitive enterprise in the field of the Web3.0 cloud computing infrastructure”.
6. WORK PLAN FOR 2023
With the adjustment of China’s domestic pandemic prevention and control policies along with the end of the large-scale outbreak of COVID-19, all aspects of social life have begun to return to normal and the demands previously suppressed by the pandemic have been gradually released. According to the Report on the Work of the Government, expanding domestic demand has become a top priority for the economy in 2023, and the government has also launched various policies and specific measures to stimulate economy development, with a rapid increase in the growth of the money supply. Coupled with the change of the government composition this year, the market has high expectation for the new government with a wide forecast of the GDP growth of around 6% in 2023.
Under the backdrop of global economic digitisation transformation, emerging digital services focusing on data centers, cloud computing, big data and the IoT, etc. are expected to maintain rapid development. The “Guideline on the Global Layout for Digital China Construction” (數字中國建設整體佈局規劃) issued by the Central Committee of the Communist Party of China and the State Council has made the work on the construction of Digital China as reference points in the assessment and evaluation of relevant Party and government leaders, which is the most substantial promotion of digital construction under the system with Chinese characteristics. The application of 5G in various industries will continue to move forward, along with increasing new demands arising from the integrated circuit industry and steady progress in domestic alternatives. The Ministry of Industry and Information Technology of the PRC has made it clear that it will fully promote the technological research and development of 6G. These favourable factors promote all business entities of the Group to ride on the momentum of industrial development.
In terms of the telecommunications industry, the Group will secure its strong foundation in the first place in 2023 by consolidating its leading position in the feeder wire and leaky cable industries as well as striving to minimise the costs and win the single championship in leaky cables while maintaining the high-quality development through intelligent, information-based and lean development. Meanwhile, the Group will step up efforts in innovative development by focusing on industry-specific applications for 5G, improving the Research and development efficiency and market competitiveness of the feeder cables products, rapidly promoting broadband and low-loss RF transmission products, vigorously promoting multi-scenario antennas solutions as well as conducting innovative Research and development on the fully automatic connector/component production and testing lines. The Group will also strengthen industry collaboration and cultivate its industrial ecosystem, with an aim to provide all-round product solutions for indoor distribution, rail transit and aerial coverage. In addition, the Group will make continuous efforts to diversify its market footholds by strengthening the expansion into the non-centralized procurement and non-telecommunication markets of the domestic operators as well as overseas markets. Coupled with vigorous steps to accelerate overseas industrial footprints and improve exported product portfolio, the Group is committed to building its international brands to boost the development of overseas businesses.
In terms of integrated circuit design and supply chain services, the Group will step up efforts to secure and develop new customers and strive to provide mass production services for some customers who have successfully completed the tape-out process, thereby achieving a significant increase in order amounts. In addition, the Group will increase its investment in research and development and strive for significant growth in the revenue of semiconductor IP authorization. By developing a generic software driver SDK for the complete adaptation of the PMSC 1.0 intelligent IoT identity authentication security chips and supporting upper-layer applications on encrypted chips, the Group anticipates to complete the software and hardware docking with pilot customers so as to put into practical applications as early as possible. Meanwhile, the Group will carry out research and development on electronics security encryption authentication chips for intelligent consumption and strive to realise mass production and market launch by the end of 2023.
In terms of cloud computing, the Group will make continuous efforts to develop customised software to meet the needs of typical industrial internet and IoT customers, including intelligent IoT data collection systems, remote operation, maintenance and management systems for intelligent IoT devices and industrial equipment, intelligent IoT data edge computing platforms, intelligent IoT data encryption and decryption communication systems, unified identification management systems for IoT devices, and security key management systems for IoT devices, etc. Efforts will also be made to complete the overall cloud computing service hosting for the IoT devices of pilot customers, which will provide backbone for the subsequent expansion into the cloud computing market. The Group is expected to become a new data infrastructure provider that integrates computing power, industry empowerment, self-operated products and data flow trading by continuously launching series of software and hardware solutions and product matrices.
In terms of digital technology security, the Group will proactively cooperate with the digital cultural product (gaming props) trading platform of Shandong Taishan Culture Art Exchange (山東泰山文化藝術品交易所) to ensure stable and normal operations since its inception. It will also assist the Inner Mongolia Culture Assets and Equity Exchange (內蒙古文化產權交易所) in completing the preparation work prior to its opening. In addition, the Group will endeavour to implement the Intelligent IoT Data Privacy Computing Project Plan and develop a recommendation system based on differential privacy. Through analyses on user data with privacy protection, the Group is committed to realising specific information recommendations and thereby achieving models for cooperation in the fields of electricity, energy, medical and industrial IoT.
What matters is that the ice has been broken, the route opened and the toughest time for China’s macro economy is over. Leveraging on the solid foundation laid out by the diligent works in the previous year and the improved macroeconomic and industry background, the Group is expected to make progress in 2023 with the efforts of all our employees.