China’s semiconductor industry has undergone rapid growth, bringing its investment to a surge. But under the surface of prosperity, industry investors are becoming worried about overheating and pondering what to do next.
Statistics in China show that there are over 20,000 registered companies related to semiconductors and relevant industries. Chen Qi, The semiconductor investment manager for pin Li fund, pointed out that many projects have artificially high valuations with companies behind them utilizing their investment reputation. "This indicates ove rheating in our industry. Though no bubble is impossible, overheating is harmful." He said.
Statistics show there are 413 equity investment cases in 2020, with more than RMB140 billion ($21.644 billion) investment, four times volume compared with RMB30 billion ($4.638 billion) in 2019. This year semiconductor investment increase continues: the total invested cases went up to 27, exceeded RMB 20 billion ($3.092 billion), in the first half of the year, including for Horizon, Enflame, Biren Technology. A string of design, equipment, EDA, simulation and AI companies was listed in STAR Market under Shanghai Stock Exchange.
Chen Datong, a well-known investor in China’s semiconductor industry and the Chairman for Oriza Holdings (Yuanhe Puhua) investment committee, looked into the background of this boom. He described that China’s semiconductor investment went through four stages – the closed development period f rom 1958 to 1979, the difficult transition period from 1979 to 2000, the wild growth period from 2000 to 2014, and the rapid development period jointly promoted by the Chinese government and market since 2014.
The Chinese semiconductor business brisked up around 2005 when a lot of overseas Chinese veterans returned home, thanks to the rise of the US-dollar-led VC in China’s market.
The industry was facilitated again in 2009 by RMB funding after ChiNext was initiated under the Shenzhen Stock Exchange.
But overall, few Chinese VCs were invested in the semiconductor industry between 2008 and 2014 because investment firms regard their ROI low, Chen recalled.
In 2014 when the Chinese government established the Big Funds I of close to RMB138.7 billion ($21.5 billion), it prompted the investment wave. In 2019, the Chinese government launched the Big Funds II of close to RMB200billion ($30.8 billion).
Though VC investment for semiconductors increased from 2014 to 2019, the mainstream investment institutions still favored more profitable financial and internet markets. When STAR Market was launched in 2019, it swept away the obstacles for capital withdrawal, boosting the ongoing boom.
Chen analyzed the underlying reasons. The 1st is more IC companies got listed, numbering 50-60 in the STAR Market; They are also more valuated, with ten companies at over RMB100 billion ($15.4 billion). "This was unimaginable a couple of years ago," he said.
The second is the business model for Internet companies has been exhausted, for now, calling for innovated areas. There are many potentialities for innovation in China’s AI, automatic driving, 5G, and semiconductor industry; the 3rd is that fronting the U.S. sanctions, China’s self-reliant and controllable supply chain with home substitutes of semiconductors became unstoppable trends.
While China’s semiconductor investment is surging now, investment organizations and startups must find suitable fields and directions.
For investors, Chen Datong suggested looking into the semiconductor product chain, such as packaging, testing, and material, if they had studied the industry long and well. "If not, just not invest in them. Because these are short-term opportunities, maybe just for a couple of years," he said.
Chen himself favors investing in semiconductor design. "The product chain for semiconductors is narrow, but its application and design have great potential, especially in RF, high-power，high voltage, high-computing chips. The U.S. semiconductor giants all succeed because of tracking application markets and constantly upgrading. Chinese domestic gia nts that can match the American peers would emerge as well, he added.
Chen Qi of Pinli Fund spoke directly to the point that the design houses belong to light assets. If a company is competent and can seize market opport unities, investment in semiconductor design can yield returns in several years. The consequent increase in scale, gross profit, and profit can be expected. So most investors prefer design businesses and search for the next unicorns for investment.
Additionally, due to the intertwining of various influence factors, investors should follow markets more closely. For example, the Chinese government pushes for the domestication of semiconductor manufacturing equipment, which involves importing more critical components, parts, and special materials. This need leads to new markets and more divided tracks for investors.
For entrepreneurs, though there are multiple opportunities in the semiconductor industry chain, lasting only three to five years. More chances are in application scenarios and directions.
Investment insiders say there are two categories of such applications and directions: homemade product substitution and technology innovation. The form er is a rare opportunity window for a few years. The subsequent company development involves various factors for corporate management in product upgra ding, execution power, strategy, founders’ values, outlook, and cultural convergence.
The direction for technical innovation is in communication, consumer electronics, automobile electronics, data center, safety and protection, EDA/IP, GPU, devices, and materials. Though they look beautiful in valuation and prospect, they can be kicked out of the game if no guarantee for a cash flow.
Optoelectronic semiconductor IC, new type sensors, AI, IoT, 3G/4G semiconductors, and new type packaging also deserve investors’ attention.
Wang Tianlin, Intel Capital’s Managing Director and its China General Manager, shared his idea on investment: find top players to invest, but don’t ignore common players with great potential, and do not get too much into the company’s operation after investing.
Chen Qi warned against overheating. "Investors exposed to over valuated companies have to think about how and when to divest at what price. The current risk is high. The risk and profit ratio is not balanced, " he said.
Meanwhile, Chen Qi added that the semiconductor industry is full of involution and fierce competition. Companies tend to choose either merger or spinoff. Merger and acquisition can be a good way for many investment firms.
Chen Qi believed that mergers and acquisitions might be the primary approach in the semiconductors industry, not only by design companies but also in the equipment and materials sectors.
He asserted that this will happen in China because though this industry is big in scale, the capital market may not evaluate as high as now. It occurred in the semiconductor industry history, and it will happen in China as well.
In Chen Datong’s description, when China’s internet industry entered the M&A stage, there emerged Alibaba, Tencent, and other giants after massive mergers and acquisitions. Big platform companies will come into being in the semiconductor industry surrounded by numer ous small firms. So we need proactively cooperate with platform companies.