* Extracted from Annual Report 2023
CUI WEI
Chairman
1. 2023 REVIEW
Following a major adjustment in the domestic policy on prevention and control of COVID-19 pandemic since the beginning of 2023 as well as the end of the pandemic, normalization has taken place at all levels of society and economy after three years of the initial outbreak of COVID-19 pandemic. Despite the complexity of the international situation and a series of risks and challenges in Chinese economy, the Chinese economy continued to rebound and improve in 2023, with high quality development and solid progress. The transformation and upgrading of the economic structure continued to accelerate and the economy became more resilient, presenting many bright spots. By implementing a series of proactive macroeconomic policies, including moderately expansionary fiscal policy and prudent monetary policy, the Chinese government has created an accommodating environment to promote stable and positive economic development. In terms of fiscal policy, governments at all levels have increased tax incentives for small and medium-sized enterprises (SMEs) and high-tech enterprises, and comprehensively maintained the stability of the supply chain and the industrial chain, so as to build a solid foundation for economic development. Through continuously increasing investment in technological transformation and innovation in the manufacturing industry, it has promoted the transformation and upgrading of traditional industries, while at the same time giving rise to emerging industries and new technologies, actively promoting the development of cutting-edge fields such as the digital economy, artificial intelligence, biotechnology, aviation and aerospace, which accelerates the construction of a modern industrial system.
According to the preliminary calculation by China’s National Bureau of Statistics, the year-on-year GDP growth in 2023 was approximately 5.2%. On a quarterly basis, the GDP growth in the first quarter of 2023 was 4.5%, in the second quarter of 2023 was 6.3%, in the third quarter of 2023 was 4.9%, and in the fourth quarter of 2023 was 5.2%. On a period to period basis, GDP in the fourth quarter of 2023 grew by 1.0%. The added value of industrial enterprises above designated size increased by 4.6% year-on-year in 2023, representing an increase of one percentage point over the 3.6% year-on-year increase in 2022; fixed-asset investment increased by 3.0% year-on-year in 2023, of which investment in computer, communication and other electronic equipment manufacturing industries increased by 9.3% year-on-year. By the end of 2023, a cumulative total of 3.377 million 5G base stations had been constructed and put into operation, representing an increase of 46.1% from 2.312 million at the end of 2022. The continuation of the Russian-Ukrainian war and the austerity policies triggered by the generally high inflation in developed countries have brought the economies of various countries back into a slump.
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 6.2% in 2023 as compared with that of the previous year, of which the revenue from fixed Internet broadband access business grew steadily and the revenue from mobile data traffic business dropped slightly; however, with the rapid development of data centers, cloud computing, big data, Internet of Things (IoT) and other emerging businesses, business revenue in 2023 increased by 19.1% as compared with that of the previous year, and its share in the revenue of the telecommunication industry increased from 19.4% in the previous year to 21.2%, driving the revenue of the telecommunications industry to increase by 3.6 percentage points. Among them, revenue from cloud computing and big data business both increased by 37.5% over the previous year, and revenue from IoT business increased by 20.3% over the previous year. The fixed assets investment in the three basic telecommunication enterprises in the telecommunications industry and China Tower Corporation Limited, which is closely related to the operating environment of the Group, increased by 0.3% in 2023 as compared to the previous year, among which the 5G investments increased by 5.7% year-on-year.
In 2023, under the unfavorable international situation, development opportunities for China always outweighed the challenges, while the favorable conditions outweighed the unfavorable factors, and the basic trend of the long-term improvement of China’s economy remained unchanged, which supported the high-quality development of China’s economy. 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 RMB2,255.9 million, representing a year-on-year increase of approximately 10.6%, and a profit for the year of approximately RMB104.2 million, representing an increase of approximately 53.0% over the corresponding period in the previous year, and reflecting the continued improvement of the Group’s economic indicators of profitability and operational capacity under its business diversification development strategy in 2022 and 2023.
In 2022, the Group acquired 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, 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, the two companies contributed total revenue of RMB202.7 million in 2023, representing an increase of approximately 115.1% over the total revenue generated after the completion of the acquisition in the previous year, and the segment profit before taxation of the the two companies (representing the digital technology and digital security business segment of the Company) reached approximately RMB78.7 million, representing an increase of approximately 73.7% over the segment profit before taxation generated after the completion of the acquisition in the previous year, and has successfully achieved the guaranteed profit targets for the acquisition of the two companies. This marks that the new digital technology security and integrated circuit supply chain services under the Group’s business diversification strategy have entered the harvest period, and started to reap the benefits of its dedicated efforts on business transformation over the years.
In addition, with the completion of the acquisition of 51% equity interest in Zhejiang Zhongguang New Energy Technology Co., Ltd.* (浙江中光新能源科技有限公司) and its subsidiaries (collectively hereinafter referred as the “Zhongguang New Energy”) on 21 July 2023 by Hangzhou Longkong Zhongguang Enterprise Holding Enterprise Partnership (LimitedPartnership)* (杭州龍控中光企業控股合夥企業(有限合夥)), which was established by the Group in 2023 and in which the Group holds an 87.67% equity interest, marking the further completion of the Group’s development strategy to explore new businesses. As a newly developed new energy and services business segment of the Group, Zhongguang New Energy possesses two core technologies, including (i) the solar thermal power generation technology which uses heliostat to gather sunlight and heat up molten salt to produce high temperature and high pressure steam to drive the turbine generator to generate electricity; and (ii) the molten salt energy storage technology which is widely used in the concentrated solar power industry and is considered as one of the most mature and safest technologies for high temperature heat storage. Zhongguang New Energy owns and operates two solar thermal molten salt energy storage power stations in the city of Delingha of Qinghai Province, PRC, with operational scales of 10MW and 50MW, respectively. Since the completion of the acquisition of Zhongguang New Energy on 21 July 2023, Zhongguang New Energy (representing the new energy and services business segment of the Company) has contributed revenue of RMB77.1 million and segment profit before taxation of approximately RMB27.2 million for the Group in 2023. Solar thermal power generation, as a new energy power generation technology with stable and reliable output, has the dual functions of peaking power sources and energy storage, which can realize the use of new energy to support new energy, and is an indispensable technology in building a new type of electric power system and realizing the goal of energy transformation in China, with a broad market space in the future. With the commencement of the large-scale development of solar thermal power generation in China, it will bring stable and continuous growth to the Group in the future.
2. FOR MARKETING
Nanjing Zhangyu, a subsidiary of the Company, has kept abreast of the global economic trend on 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 of 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 military industry, State Grid Corporation, listed companies, national-level research institutes, universities and emerging unicorn enterprises. All these efforts made significant contributions to the development of the business for 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.
In 2023, Jiangsu Hengxin Technology Co., Ltd. (“Jiangsu Hengxin”), a wholly-owned subsidiary of the Group, successfully won bids in various projects, including China Mobile’s 2023 feeder wire, feeder connectors and cluster jumper centralized procurement project, China Mobile’s 2023 high-speed railway and special scenario antennas products centralized procurement project, China Mobile’s 2023-2024 urban and rural base station antennas products centralized procurement project, China Mobile’s 2023-2024 700M aesthetic antennas products centralized procurement project, China Tower’s 2023 shot-light aesthetic antennas products centralized bidding project, China Tower’s 2023 leaky cables and accessories products centralized procurement project. In particular, it won the first place in the bid for China Mobile’s 2023 feeder wire centralized procurement project, with a bid amount of approximately RMB612.08 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, laying a solid foundation for achieving the annual results targets.
In overseas markets, the business of the Company’s subsidiary in India declined significantly due to India’s attempts to support its own market and industry by raising tariffs, restricting imports, and implementing anti-dumping measures, which made it difficult for our subsidiaries in India to carry out their business, and caused delays of varying degrees in the construction of our subsidiaries’ factories and the installation of equipment in India. Despite new projects in other overseas markets, overall overseas sales declined by approximately 20%.
3. FOR PRODUCTION AND SUPPLY
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 foundries, featured by international mainstream and specialty process, as well as their service providers, and 13 packaging and testing service and reliability testing service providers, fully ensuring that the Company would achieve its production capacity targets for the year while at the same time laying the foundation for sustainable and reliable development in the future.
The 50 MW solar thermal molten salt energy storage power plant project of Zhongguang New Energy under new energy and services business segment operated steadily, with monthly power generation exceeding 17.00 million kWh and 18.18 million kWh in October and November 2023, respectively, setting new records for single-month power generation since its commencement of operation. In 2023, the cumulative power generation was 152.4 million kWh, representing a year-on-year increase of 4.1%. The amount of on-grid power generation exceeded 150.0 million kWh, the highest ever recorded. In terms of operation and maintenance services, Zhongguang New Energy completed the compilation of a publicity brochure on the operation and maintenance of solar thermal power plants in 2023, and at the same time established the calculation of operation and maintenance costs for solar thermal power plants of various scales, as well as the corresponding service content, scope and service standards to lay the foundation for the orderly promotion of the operation and maintenance service project.
In 2023, Jiangsu Hengxin accelerated the improvement of internal operation efficiency under the guidance of “Strengthening the foundation and innovating for development” (固本強 基、創新發展). In terms of intellectualization (智慧化), it launched a total of 15 projects throughout the year and completed 13 projects, with a revenue of approximately RMB1,872,000; in terms of informatization (資訊化), it launched 6 projects and completed 6 projects; and in terms of lean development (精益化), the costs decreased by nearly RMB73.00 million through micro-operation and micro-innovation. In addition, the cost project revenue of RMB47.00 million was realized through breakthrough in cost management innovation. These efforts were carried out and implemented to further realize the Company’s internal operation to explore potential and improve efficiency.
4. FOR RESEARCH AND DEVELOPMENT
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 in 2022, 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 RMB13.6 million, 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. In 2023, they made applications for a total of 9 software copyrights; obtained 18 authorized patents, including 3 invention patents, 15 software copyrights and 2 authorized software copyrights; and obtained 1 commercial cryptographic products certification.
The IoT identity authentication security chips PMSC 1.0 independently developed by Nanjing Zhangyu obtained the certification by the Commercial Password Testing Center of the National Cryptography Administration (國家密碼管理局商用密碼檢測中心). 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 chip 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.
In 2023, Zhongguang New Energy invested RMB4.8 million in R&D, internally approved 1 research project, completed the inspection of 1 major technology special project in Qinghai Province, and obtained 1 scientific and technological achievement in Qinghai Province; applied for 3 patents, including 1 invention patent and 2 utility model patents; obtained 4 authorized patents, including 2 invention patents and 2 utility model patents; and obtained 4 approved projects with local standards. Since its establishment in 2012, Zhongguang New Energy has undertaken 1 national industrialization project, 1 national 863 science and technology plan project, 5 provincial science and technology plans and major technology special projects, 2 enterprise technology innovation projects in Qinghai Province and 6 municipal level scientific research projects. It has obtained a total of 21 authorized patents, including 12 invention patents and 9 utility model patents, participated in the completion of 1 local standard, 1 group standard and 1 National Energy Administration quality supervision and inspection outline, all of which have been released and implemented, and obtained 6 scientific and technological achievements, of which 5 were leading in China. Zhongguang New Energy currently has 3 scientific research platforms above the provincial level, namely “National Local Joint Engineering Research Center for Solar Thermal Power Generation Technology (approved by the NDRC)”, “Qinghai Solar Tower Thermal Power Generation Engineering and Technology Research Center (approved by the Science and Technology Department of Qinghai Province)”, “Tower Solar Thermal Power Generation Engineering and Technology Research Center (approved by the Development and Reform Commission of Qinghai Province)”, with all constructions completed and platform-related work carried out in a normal and orderly manner.
In 2023, through Jiangsu Hengxin, the Company continued to invest in research and development (“R&D”) of new products and technologies in light of the market demand and the future development direction of the industry, and achieved 28 invention patent authorizations and 1 international patent for the whole year, and was awarded the Jiangsu Intellectual Property Model Enterprise, and 1 Wuxi City Patent Invention Gold Award. In the field of wireless access product, 33 R&D projects were completed, and the annual sales revenue of new products amounted to approximately RMB795 million; a relatively large performance growth was achieved in the 5G smart antennas series, special scenario antennas, 5G leaky cables products, and new-generation device components products.
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”.
In respect of the new energy and services business segment, the Qinghai Zhongkong Delingha Industrial Tourism Experience Project launched since May 2023 onwards under the premise of ensuring production safety in the Qinghai Zhongkong Project has significantly increased the Company’s exposure, and further expand the Company’s industry influence. In addition, substantial breakthroughs were achieved in the operation and maintenance of solar thermal power plant, with a 100MW solar thermal power generation project of general contracting operation and maintenance in Xinjiang Province entering the preliminary investigation and plan formulation stage.
6. WORK PLAN FOR 2024
The Central Economic Work Conference pointed out the spirit of“persisting in stable yet progressive growth, promoting stability through progress, creating a new model before abandoning the old one, implementing more policies conducive to stabilizing expectations, growth and employment” and “focusing on supporting scientific and technological innovation” for 2024. As a result, it is expected that the Group’s new digital technology and digital security and new energy and services business segments will be able to gain favorable development opportunities from the national policies.
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 2024, the Group will continue to improve the quality and efficiency of traditional products and consolidate its leading position in the industry under the guidance of “seizing market opportunities to strive for industry leadership, enhancing R&D and innovation to promote high-quality development”. At the same time, we will further promote research and development changes, PLM implementation, and accelerate the introduction and promotion of new products as well as breakthrough in new technologies and new material applications, to stabilize the continuous growth of RF series products. We will focus on the research and development of key wireless products such as 5G antennas, special scenario application antennas, green antennas, and repeater stations, start the pre-study of millimeter wave phased array and satellite communications antenna project for technology reserve and market development of the next generation of mobile communication technology 5G-A and 6G; promote market diversification, strengthen the development of domestic operators’ non-collection and non-communications operators market; strengthen the development of overseas markets, accelerate the improvement of overseas industrial layout and export product structure, build international brands, and boost overseas business development.
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. 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 completing the software and hardware docking with pilot customers so as to put into practical applications as early as possible. Meanwhile, it has developed a business system to provide support for the integrated circuit supply chain, which is currently under internal testing, with a view to opening up the service to external customers by the end of 2024.
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 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.
In terms of the new energy and services business, Zhongguang New Energy will continue to ensure that the continuous and stable operation of the 50 MW solar thermal molten salt energy storage power plant project, and the 10 MW solar thermal molten salt energy storage power plant project reached production early after technical transformation. Meanwhile, the Company will expand its market influence by combining the industrial tourism experience project and carry out new technical reforms to increase new revenue sources, explore opportunities for project development of large energy bases in Qinghai and Gansu, and actively create opportunities for capital acquisition and cooperation for the first batch of solar thermal demonstration projects. The operation and maintenance service business and energy storage business will be steadily promoted. At the same time, the Company will try to improve customers’ differentiated demand response capabilities by jointly developing single-tank molten salt related products, and explore new business revenue engines.
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 2024 with the efforts of all our employees.
* for identification purposes only
