Marketing semiconductors for use on ink and toner cartridges and other consumables, MEGAIN Holding (Cayman) Co. has emerged as a leading chip supplier to China’s third-party supplies industry. While over 85 percent of the firm’s revenue came from sales in China last year, the company has embarked on a global effort in 2024 to grow overseas sales in the various countries in which it operates.

When it reported its full-year results for fiscal 2023 in March (see “Mysteries Abound in Megain’s FY 2023 Results”), the company said that in the current fiscal year, “opportunities and challenges coexist in an undulating operating environment full of uncertainties.” With revenue and profits experiencing double-digit declines in the first half of fiscal 2024, it appears the firm’s previous assessment was a bit too rosy (see “Megain Reports Downbeat H1 2024 Results”). Nevertheless, in its H1 2024 financial report, Megain said it remains “optimistic” about 2024. To better understand this optimism, we discussed the firm’s growth strategy with Patrick Wang, Megain’s CEO.

Megain Overview

Megain was established in 2010 in Zhuhai, China, as Zhuhai Megain Technology Co., Ltd. Megain set up a holding company in the Cayman Islands in June 2016 to act as the firm’s parent company. With shares traded on Hong Kong Stock Exchange (HKSE) under the stock code 6939, MEGAIN Holding went public in 2021 (see “Chipmaker Megain Holds IPO, Ranks of Public Firms in China’s Supplies Industry Swell”).

According to the firm’s post-hearing information pack (PHIP), which was filed with the HKSE prior to Megain’s initial public offering, in 2019 the company was the second-largest chip supplier to the third-party cartridge industry in China in terms of domestic market share (see “Megain Reveals Lots about Chip Business in IPO Filings”). The firm presented data indicating that it held just over 11 percent of the Chinese market. Although it did not name its rivals, our read of Megain’s PHIP was that Apex Microelectronics, Ninestar’s chip subsidiary, held the number-one slot with roughly 41 percent of the market. In the number-three position was Hubei Dinglong’s Chipjet Technology chip subsidiary with a 9 percent share.

Totaling CNY 246.1 million (about $37.8 million), Megain’s revenue reached its zenith in FY 2018 before plunging over 36 percent in 2019. The firm has managed to shore up its sagging top line somewhat in the past couple of years. During the first half of FY 2023, sales were up almost 15 percent (see “Megain Sees Revenue Rise and Profits Fall in H1 2023”), but the gain was erased in the second half. For the full year, Megain’s revenue was CNY 172.4 million (about $24.3 million), about 0.6 percent lower than in FY 2022 and down about 30 percent from the 2018 figure. Compatible cartridge chip sales last year were up a modest 0.4 percent year-over-year to CNY 142.8 million ($20.1 million) and represented 82.8 percent of Megain’s total FY 2023 revenue.

While Megain’s revenue was essentially flat year-over-year in 2023, its profits contracted significantly. The firm’s gross profit shrank 26.1 percent last year to CNY 67.0 million ($9.4 million), pushing its gross profit margin down to 38.9 percent from 52.3 percent the year prior. Megain’s net profit tumbled 48.3 percent last year to CNY 23.2 million ($3.3 million).

While Megain’s financial performance may have been lackluster in 2023, the growth in its unit shipments of compatible chips was phenomenal. Total sales volumes rose 53.3 percent year-over-year to 14,639,000 units fueled by shipments of chips for inkjet printer cartridges, which soared an astounding 251.7 percent to 4,013,000 units. At 10,344,000 units, shipments of chips for laser printer cartridges also saw healthy growth of 26.3 percent. Likewise, shipments of chips for commercial printer cartridges rose a robust 27.6 percent to 282,000.

In its report on FY 2023, Megain said it released an eye-watering 955 new models of chips last year, including 756 chips for inkjet cartridges and 199 chips for laser printer cartridges. That is by far the most new product introductions in a single year that we’ve ever witnessed from the firm. In a typical year, we estimate that Megain releases around 150 new cartridge chips. In FY 2022, Megain introduced a mere 35 new chips: 15 for inkjet cartridges and 20 for laser printer cartridges.

Releasing 393 new chips in H1 2024 compared to 106 during H1 2023, Megain has managed to accelerate the incredible rate of product introductions it achieved in 2023. Its sales volume also jumped to over 7.1 million cartridge chips in H1 2024 compared to 5.6 million the year prior. Moreover, the sales volume of chips for other applications mushroomed from just over 250,000 in H1 2023 to nearly 5.4 million this year. Regardless of this remarkable growth, Megain’s financial performance this year has been lousy. The firm’s revenue contracted nearly 25 percent and it gross profits tumbled 40 percent. Megain came very close to slipping into the red this year, with net profits plunging 97.3 percent to a skimpy CNY 405,000 ($55,700).

Megain’s poor financial performance while new products flew out of the door indicates to us a willingness by the company to “buy” market share. As if to make the point, Megain reported that in H1 2024 the average sales price (ASP) on its laser cartridge chips dropped over 25 percent year-on-year. The impact on the firm’s overall business was significant because chips for laser cartridges accounted for over two-thirds of the firm’s total revenue during the first six months of 2024. We also noted that Megain sold its ink cartridge chips at a loss. The ASP for ink cartridge chips dropped from CNY 9.0 ($1.24) to CNY 5.3 ($0.73). The firm reported a gross loss of nearly CNY 1.5 million ($204,000) in H1 2024 on desktop inkjet chips sales despite the fact that volume of desktop inkjet chips skyrocketed 67.8 percent.

If the firm’s aim is in fact to sell chips at a loss to gain market share, it may be working. Megain reported that during the first six months of 2024, overseas revenue rose 102.0 percent to reach CNY 13.4 million ($1.8 million) and the ratio of domestic to foreign sales shifted from 92.4 percent domestic and 7.6 percent overseas in H1 2023 to 79.6 percent domestic and 20.4 percent overseas in H1 2024.

Talking About Growth

Mr. Wang, Megain’s CEO, discussed the firm’s potential for growth with us. He said to grow, Megain is leveraging many of the relationships it has formed over the years. According to Mr. Wang, Megain has built alliances with both its customers and channel partners as well as others. The company works closely with non-OEM cartridge producers, for example, to overcome barriers to market caused by patents. He said, “By providing unique chip and component solutions, Megain has helped these partners launch compliant and secure products, such as the Brother TN229 series.”  Mr. Wang maintained that in addition to providing legal protections, Megain allows its customers to develop innovative solutions that allow them to “to stand out in fierce market competition and explore new opportunities.”

Mr. Wang said his firm has never been sued by an OEM or a competitor for violating intellectual property. This gives Megain a competitive advantage over its chief rival Geehy/Apex, the chip-producing subsidiaries of Ninestar Corporation, which have sometimes landed in hot water for violating OEM intellectual property related to chips ( see “Over 500 Toner Cartridge Listings Removed from Amazon Because of Infringing Chips”). “Also, no cartridges equipped with Megain chips have been removed from Amazon due to the chips infringing intellectual property rights,” he added.

Mr. Wang said that Megain routinely develops customized solutions to meet its customers’ needs. As an example, he cited the recent development of “a custom-capacity W1110 chip for an e-commerce company.” Mr. Wang explained, “While original and standard compatible cartridges could only print 1,500 pages, the Megain customized compatible cartridge could print 10,000 pages, far exceeding the competition.” He added that the “superior performance and differentiated advantages” of the Megain chip “attracted numerous consumers, driving substantial traffic to the e-commerce store.”

Megain also collaborates with its channel partners to hasten the launch of certain key new products. Mr. Wang said Megain has been working with a Korean distributor for over a decade. “The two companies have maintained a high degree of synergy in areas like product development, quality assurance, and delivery,” he said. As a result, the partners are often first to market with the latest cartridges. “For example,” said Mr. Wang, “when Samsung launched its new C1410 color laser printer series in June 2024, Megain was able to deliver compatible chips within just one month.”

Beyond its customers, Megain partners with companies manufacturing components like drums and blades to bring to market new products. Mr. Wang explained that these relationships “drive synergistic business development” in areas like product design and process optimization. He said, “Through this collaboration, we can stay on top of industry trends and jointly develop customized product solutions.” As a result, Megain has been able to expand its product portfolio.

Expanding in New Regions

As noted, China represents the largest market for Megain’s chips and is home to hundreds of its full-time employees. Its two largest markets outside of China are in Europe and North America. In addition, the firm does business in Asian countries, including Korea as mentioned earlier, as well as in South America. Megain’s world headquarters and production facility are in Zhuhai, where it can produce up to 6 million chips each month. The company also maintains R&D capabilities in other regions

Megain currently does business in some 50 countries. As part of what Mr. Wang called the firm’s “internationalization strategy,” it is actively looking to spark new growth by taking share in markets outside of China. While its chip production is centralized in Zhuhai, Mr. Wang said its products can be “promptly dispatched” to destinations around the world via air freight. Most regions receive shipments within 3 to 7 business days.

In an effort to grow its North American business, Megain launched a subsidiary in the United States last month. Megain US was incorporated on July 8 in Los Angeles. “This move is a significant step in deepening our presence in the North American market,” said Mr. Wang. “It will soon enable us to provide the local customers with more timely technical support and after-sale service.”

Other Growth Opportunities

Like its competitors, Megain is looking to expand its chip portfolio beyond semiconductors for use on ink and toner cartridges. “We are closely monitoring the emerging opportunities in the IoT [Internet of Things] sector,” Mr. Wang explained, “and have already developed a range of innovative IoT chip products, including power management chips, battery charging management ICs, and various MOSFET models.” Last year, the company released roughly 20 chips for IoT applications. “While our IoT chip business is currently in the early stages of production and market development, we believe that through continuous R&D and market penetration efforts, Megain will achieve significant successes in this domain.”

Mr. Wang explained that the development of IoT chips and chips for other applications is part of the firm’s “dual-track” growth strategy. The strategy, he said, calls for the company to consolidate and grow its consumables chip business, while it “aggressively” expands into the IoT market. He said that the company plans to take share from other chip producers in China, including from its largest competitors—Apex (also known as Geehy) and Chipjet. As noted, Megain has greatly increased the number of new cartridge chips it is introducing, and more are expected. Next year, Mr. Wang said the firm will release a series of compatible chips for HP toner and inkjet cartridges. He opines that bringing these products to market will solidify and expand Megain’s “leading position in the printing consumables chip market.”

In the past, Megain has expressed an interest in growing through acquisition. Mr. Wang confirmed that the firm “maintains an active acquisition strategy, but we are being more cautious and selective in terms of timing and target selection.” He said the company has yet to identify any “suitable acquisition targets.” Mr. Wang stated, “We will continue to monitor industry dynamics and seek appropriate M&A opportunities to support the diversification of our business.”

It will be interesting to see if Megain can continue to shy away from acquisition if it expects to grow. For the past couple of years, its revenue has struggled to grow, suggesting that organic growth has been elusive. With a huge catalog of new chips and a new U.S.-based subsidiary, the firm seems poised to grab market share in the region. We’ll be watching eagerly to see how the company does during the rest of fiscal 2024 after its lackluster start.