Shenzhen Huiding Technology Co., Ltd (“Huiding”) issued a prospectus for raising funds of CNY1.353 billion for eight projects including the technological upgrading project of small-sized touch-screen controller chips.

Huiding specializes in the R&D of intelligent human-computer interaction technology and supplies capacitive touch-screen chips and fingerprint identification chips to intelligent terminals such as mobile phones and tablet PCs to the market.

Journalists of Securities Market Weekly found out that the unit price of capacitive touch-screen chips, a flagship product of Huiding, had suffered a fall for ages. Actually, the company has increased sales yet made no profits.

From 2013 to 2015, the turnover from capacitive touch chips accounted for 98.75%, 98.29% and 76.31% of the total respectively, and apparently this company faced the risk of over-reliance on one single product.

In the face of internal troubles, Huiding also need to address external issues at the same time. In April 2015, the world's leading touch-screen chip manufacturer Synaptics sued Huiding for patent right infringement at the Northern District Court of California in the United States and initiated the "337 investigation" against Huiding with the US International Trade Commission (ITC).

Synaptics alleged that Huiding's GT915 Touch Chips had infringed on its four patents in the United States. Apart from an application filed with ITC for investigation, Synaptics also petitioned for an order for banning the import of related products of Huiding to the United States.

Shortly thereafter, Huiding also initiated lawsuit. In August 2015, Huiding instituted administrative proceedings against IPR at the United States Patent and Trademark Office and respectfully requested the US Patent Office to declare relevant patents invalid.

However, vice senior president, chief counsel and secretary general John McFarland of Synaptics expressed: "Petition for administrative proceedings against IPR is an old trick of defendant and the United States Patent and Trademark Office has not yet decided whether to review the patents of Synaptics, nor such litigation will affect the trial commencing from February 22, 2016. Even if the patents of Synaptics are reviewed, we are about to win the arbitration."

Wang Feiya, a patent agent in Shenzhen ScienBiziP Intellectual Property (IP) Agent Group, deemed that not only related products of the defendant would be banned from exporting into the United States, but similar products of other companies might also be prohibited from export if the "337 investigation", a kind of timely investigation with severe penalties reveals that there exists patent infringement..

If the above-mentioned litigation has an adverse influence on the overseas markets of Huiding, its revenues will go down. From 2013 to 2015, the overseas sales of Huiding was CNY 279 million, CNY 349 million and CNY 365 million, accounting for 40.72%, 40.93% and 32.67% of the total respectively.

In its Particular Risk Factors Prompt, Huiding announces that it is up against fierce competition with numerous IC design rivals. In the international market, there is a huge gap in comprehensive strength and brand popularity between Huiding and giants Synaptics, Cypress and Atmel noted for huge capitals, cut-edging technology, well-known brand and high market shares. In the domestic market, there is an increase in the number of rivals with increasingly mature technology and chip products will show a tendency towards homogenization in the future, which may result in a fall in Huiding's market prices and industrial profits. In the meanwhile, as sales grow slowly, there is a decline in gross margin in some downstream IC design companies and this may lead to a fall in profits of the design companies in this industry.

In fact, there has been a decline in the average price of Huiding's capacitive touch-screen chips for ages, standing at CNY 4.95 / unit, CNY 4.04 / unit and CNY 3.60 / unit from 2013 to 2015, respectively. Huiding expressed, "As prices show a decline tendency, Huiding will suffer a decline in major product prices and this will incur the risks of declining profitability and shrinkage of profit margins in the face of intensified market competition and declining gross margins of downstream companies in the future.

In 2014, Huiding's total revenue and net profit were CNY 854 million and CNY 384 million respectively, an almost equivalent increase of 24.51% and 27.88% over the previous year. However, in 2015, there was an increase in the revenues of Huiding yet a decrease in profits. Specifically, its total operating income and net profit were CNY 1.12 billion and CNY 378 million respectively, an increase of 31.15% and -1.43% over the previous year.

In addition, the amount of receivables of Huiding far exceeded that of its revenues. At the close of financial years of 2014 and 2015, the receivables were CNY 104 million and CNY 22 million with the growth rates of 87.36% and 93.56% respectively, which far exceeded the growth rates of 24.51% and 31.15% over the same period last year.

In 2014 and 2015, the investment in real estate in its balance sheet was CNY 64.5316 million and CNY 64.3959 million, yet there was no incomes derived from tenancy in its main business incomes in 2014.

(Source from: Securities Market Weekly • Red Week)

【Comments】

Yuan Li: We might say that Huiding instituted the administrative proceedings to counter patent infringement allegation made by Synaptics in a prompt and effective manner. Nevertheless, we are surprised by the fact that Huiding, a company specializing in the R&D in intelligent machine-human interaction technology, has applied for approximately 200 patents in China. From the number of patents hold by Huiding, we can infer that Huiding lack an awareness of intellectual property rights though the number of patents cannot be used as a yardstick of evaluating innovative technology and patent level.

There are two underlying causes for technical company's lack of awareness of intellectual property rights. 1.Imbalance of payments. Generally speaking, it costs a lot to apply for patent yet patents for use is exiguous. In other words, the majority of patents are of no use to Huiding's protecting intellectual property rights and carrying on business. 2.Time-consuming application: It takes a long time to apply for patent and it may not obtain patent when applying patent. To some extent, it is useless to obtain patent and sometimes the patent might be invalidated by rivals. Even more, some companies have no idea of patent at all...

In reality, it costs huge to apply for patent and we need to employ tactics to file an application. Instead of applying for patent for common ideas or innovation, we should issue an early warning and work out tactics for applying for patent. Specifically, the patent solutions are the key to obtaining patent and it is vital to work out patent solutions and prepare patent applications as required to ensure the validity of patent and avoid the invalidation by rivals in the future. All in a word, we shall make a decision on whether to apply for patent depending on innovation and prepare applications in a rigorous and responsible manner to reduce the number of useless patent.

Here, we just intend to remind our technology companies of applying for patent while coming up with innovations so that they can achieve win-win.

Limin Zhang: In recent years, the chip industry has been stimulated by the popularity of mobile phones, tablets and other smart devices, and the development of intelligent robots has increased the supply of chips to smart devices. As a result, the chip industry will supply more chips to such smart devices in the chip industry. In the meanwhile, the increasing demand for chips used in smart devices and the rising number of domestic manufacturers resulting from elimination of reliance on overseas chip suppliers would exert competitive pressure on chip manufacturers and even lead to a fall in their profits. To cope with such tricky situation, it is imperative for Huiding to come up with innovations to maintain dominance.

In the global chip market, the expansion of domestic chip manufacturers will also change the market shares of foreign manufacturers. Nevertheless, since foreign manufacturers have heightened awareness of intellectual property rights and set up the patent application system earlier than domestic manufacturers, it is inevitable that European and American chip manufacturers have a competitive edge over domestic rivals. In the face of such tricky situation, Huiding has no way of getting out of this awful predicament by the "337 investigation".

At this time, the "337 investigation" may merely target at Huiding. Nevertheless, if Huiding is imposed severe penalties after the "337 investigation", domestic peer manufacturers shall be bound to suffer a huge blow. To cope with the tricky situation, the chip industry shall unite to take countermeasures against the patent infringement litigation and the "337 investigation" initiated by Synaptics. At the same time, it also reminds us that precautions outweigh remedies and we should use patent as a powerful tool for protecting right by improving patent quality and invalidating patent.