I visited Shannon Semiconductor today and took a look at it. It is a major distributor in the storage chip market, deeply engaged in the enterprise-level storage sector. They operate through a dual model of distribution and self-research, and they hold exclusive agency rights and technical barriers for HBM.
The products of Shannon are mainly used for data centers and cloud computing storage. For example, who are their clients? Their clients include companies like Alibaba, Tencent, and ByteDance. In recent years, the demand for HBM and HDD driven by AI computing power has surged, and prices have continued to rise.
Therefore, the overall attention on Shannon Semiconductor has significantly increased compared to before. However, I looked at their revenue, and in the first three quarters, it was 26.4 billion, a year-on-year increase of 59.9%, which is still a high growth rate.
The revenue corresponds to the explosive growth of AI, but the net profit is 360 million, a year-on-year decrease of 1.36%. This increase in revenue without a corresponding increase in profit is somewhat concerning. Why is this the case? Why does revenue continue to grow while the net profit decreases?
The answer is simple; just look at their business structure. Their distribution business accounts for 97%, while their own manufacturing business only accounts for 1.93%. Additionally, their accelerator business only accounts for 0.93%, with the distribution business being the main component at 97%.
The distribution business means they are acting as agents for other companies’ products, essentially serving as intermediaries. Therefore, the profit margins are very low. Since they lack bargaining power, their net profit level is only 1.3%, with a year-on-year decrease of 38%, and the gross profit margin is 3.13%, with a year-on-year decrease of 39.6%. Their net profit level of 1% is almost at the survival level, just enough to keep them afloat.
However, there isn’t much profit to be made; others are eating the meat while they are left with the soup, and even that is minimal. Their overseas business accounts for 84%, while domestic accounts for 16%. They mainly operate overseas, but this overseas business is not simple.
They state that their overseas revenue mainly comes from internet giants like Alibaba, Tencent, and ByteDance, as well as from their overseas procurement centers and overseas subsidiaries of domestic ODM factories. The reason for adopting this model, I suspect, is to avoid the relevant suppression measures from the U.S.
Thus, these large companies, such as Alibaba, Tencent, and ByteDance, actually provide them with relatively low profit margins. Additionally, Shannon has 576 employees, with an average salary of 250,000. The number of employees is not very large; with over 500 people, it is not considered a particularly large enterprise. The average salary is not low, as they are located in Shenzhen, where the salary levels might be higher.
Accounts receivable, which is the money owed to them by their major clients, amounts to 3.76 billion, accounting for over one-third of their total revenue, which is quite significant. Because in terms of both revenue and profit levels, their bargaining power within the entire industry chain is very limited.
They only invest 12 million in R&D, which accounts for less than 0.1% of their revenue in the first three quarters. This proportion is quite small. Although they claim to engage in R&D, they are primarily acting as agents with only a minimal amount of actual R&D, which is very limited. This is the situation with Shannon.
Is their role significant in the storage chip data center or AI sector? At least there is a strong correlation, but in terms of bargaining power within the entire industry chain, compared to those large companies like NVIDIA, TSMC, Alibaba, Tencent, ByteDance, and Huawei, they do not have much pricing power.