DDN Business Insider | The war of chips: China aims at breaking barriers by ICF Phase III

Editor's note: The third phase of the China Integrated Circuit Industry Investment Fund (CICF) was founded on May 24th. Affected by the news, Integrated Circuits (IC) and other related sectors saw significant gains last week. What other impacts will the third phase of the Big Fund bring to the market? Regarding this topic, we have invited Yang Delong, Chief Economist of First Seafront Fund Management Co., Ltd., Dong Shaopeng, China Stock Market Policy Expert and Senior Researcher from the Chongyang Institute for Financial Studies at Renmin University of China, and Fu Yifu, Senior Researcher of Star Atlas Institute of Finance, to bring their comments and analysis.

【Anchor】Hello everyone, welcome to DDN Business Insider. I am Yunfei Zhang. The third phase of the China Integrated Circuit Industry Investment Fund (CICF) was founded on May 24th. Affected by the news, Integrated Circuits (IC) and other related sectors saw significant gains last week. What other impacts will the third phase of the Big Fund bring to the market? Regarding this topic, we have invited Yang Delong, Chief Economist of First Seafront Fund Management Co., Ltd., Dong Shaopeng, China Stock Market Policy Expert and Senior Researcher from the Chongyang Institute for Financial Studies at Renmin University of China, and Fu Yifu, Senior Researcher of Star Atlas Institute of Finance, to bring their comments and analysis.

Hello! First of all, Mr. Yang, compared to the first two phases of the Big Funds in 2014 and 2019, what do you think are the characteristics of the third phase?

【Yang】If we look at the previous two phases of investment, the first phase invested mainly in chip manufacturing companies, and the proportion amounted to 60%. The proportion of investment in chip manufacturing companies in the second phase was 80%, as the chip manufacturing sector is an asset-heavy sector that requires a large amount of heavy investment. At the same time, the investment direction of the second phase has begun to focus on some areas of weakness, such as equipment and materials. I think this trend will continue, including addressing weak points, in an effort to achieve the healthy development of the semiconductor industry chain in China.

Therefore, the third phase of investment may gradually shift to some key equipment and key materials. This is because China mainly holds advantages in the mid-to-low-end chip semiconductor manufacturing sector, while in high-end chips we still face relatively large technical difficulties, especially in chips below 14nm. And most of the upstream equipment needs to be imported, so the investment in scientific research to break through technological barriers, promote private investment, and achieve breakthroughs in equipment and materials, will be a key point in the third phase.

【Anchor】The funding efforts of the third phase appear to be the largest in history. In terms of shareholder structure, state-owned banks were introduced for the first time. Mr. Fu, what signals do you think these messages send?

【Fu】Big Fund III is the largest in its history in terms of capital scale. This reflects that the government attaches greater importance to overcome bottleneck technologies, including the early realization of breakthroughs in key areas and the realization of autonomy and control in various aspects. From the current international situation and domestic industrial development, high-end manufacturing, including breakthroughs in core technologies, and independent control are still the most important things. Moreover, the changes in the AI industry in the past two years have had a series of far-reaching impacts on various industries. The foundation of AI is actually in the chip, in the IC. So this also shows our determination to achieve breakthroughs in core technologies. The establishment of the third phase with such a large-scale fund also reflects the high importance attached by the government. In terms of the shareholder structure, the introduction of state-owned banks for the first time is different from the past.

The fact that all the major banks have stated their positions and injected funds this time fully demonstrates the commitment of the major banks to their responsibilities. At the same time, since the IC and semiconductor industry investment is a long-term investment, and often requires significant amounts of capital, the direct participation of large banks and financial institutions in the investment is helpful for the entire IC and semiconductor industry innovation and development.

【Anchor】It is expected that the relevant funds will be available in the next ten years. Mr. Fu, how do you anticipate the overall impact of this funding on the development of China's chip industry?

【Fu】Looking at the entire chip industry, it is a high-tech industry, and this industry has the characteristics of high investments and high risk, and the investment cycle is relatively long. The participation of large-scale and powerful state-owned banks in the chip industry is helpful for the future supply of funds. They can provide a more stable, long-term and larger scale of capital so that these technology-based industries can have more confidence in realizing technological research, development and breakthroughs. This will provide sustained benefits for the upstream and downstream of the chip industry chain.

【Anchor】Alright. What is the expected impact of this funding on the semiconductor industry, Mr. Yang?

【Yang】The semiconductor industry is not only a technology-intensive industry, but also a capital-intensive industry. So it requires a large amount of capital investment in the research and development process. There are six major state-owned banks to participate in and contribute to the Big Fund III, with a total amount of 114 billion yuan, accounting for about one-third of the total. This indicates that the bank credit support for R & D will be intensified in the future. It is also worth noting that the first and second phases of the Big Fund indirectly led to more than one trillion dollars of social capital investment in the semiconductor industry. I believe that the third phase of the fund will play a greater role in the development of the semiconductor industry.

【Anchor】The three main competitors in the global chip war are the US, the European Union and China. Each of the three parties is making its own efforts in chip development, while countries around the world are stepping up their investment in chip research and development. Mr. Dong, what do you think is the key to the breakthrough of China's chip industry compared to other countries in Europe and the US?

【Dong】In today's world of intensified competition in technology, AI, and chips, the US and a few other countries are relying on their technological superiority to impose all kinds of blockades on China. But at the same time, the US is trying to gain profits from the Chinese market. It's such a complicated situation. In this situation, only when China increases its own industrial investment, led by state funds, with the participation of private funds and various mutual funds, can we strengthen the gradual breakthrough of China's IC-related materials, designs and cutting-edge products.

Especially in the field of chips, there is still a big gap between us and the U.S. in terms of high-end chips. A long-term U.S. embargo is impossible regarding patent and technology cycles. While the public thinks there is a huge gap between China's scientific research capabilities and those of the US, technological advancement and leapfrogging for China are not entirely impossible.

【Anchor】Alright. Mr, Fu, what do you think?

【Fu】First, we need vigorous support from the national strategic level. Relevant government departments should strengthen guidance, planning and top-level design. On one hand, it is to determine the long-term roadmap for the development of the semiconductor chip industry, and take corresponding investment in tax revenue and finance in different stages of development according to local conditions, as well as to provide relevant supporting measures for intellectual property rights. On the other hand, macro-regulation should be used as a means to allocate national resources across various stages of the chip semiconductor industry chain, and then establish a perfect, complete industry-academia-research innovation system. This will provide a good environment for local technology innovation and enterprise development. In addition, we should also increase the effort to attract and cultivate talent. Competition in the chip and semiconductor industry is the competition for top technological talent. Every country is facing a shortage of such talent, even developed countries and China is no exception. Therefore, it is worthwhile for us to pay attention to how to attract high-end talents globally and at the same time strengthen the cultivation of domestic professionals.

【Anchor】Yes. In the face of the US and other developed countries, if China's chip industry wants to develop, in addition to increasing investment, Mr. Dong, what else can be done?

【Dong】China is a large country, the accumulated manufacturing foundation is at the forefront of the world, and the relevant manufacturing industry is also the most complete in the world.

Our main weakness lies in the chips, including storage chips and artificial intelligence chips. There is also a significant gap in our computational chips. So our main focus is on computational chips and storage chips.

【Anchor】Alright. Stimulated by the news, the Hong Kong chip sector performed strongly. Meanwhile, US chip-related stocks, represented by Nvidia, are also catching attention. Mr. Fu, how do you assess the current valuation of the relevant sectors and is there any overheating?

【Fu】As for Nvidia, it has been the most active company in the global capital market over the past two years, and its stock price has been going up overall and exceeding expectations. Its valuation is also rising, so the market generally believes that there is a valuation bubble. But Nvidia has responded to the market with results constantly beating expectations, forming a kind of Davis double-killing effect. That is, when the company's results continue to exceed expectations, the market is willing to give it a higher valuation and continue to promote the sustainability of the upward movement of Nvidia's share price.

In fact, the chip and semiconductor industry itself is a typical cyclical industry. Therefore, we can not only look at how the PE changes to see its entire valuation but also whether its profitability can improve. At present, the entire industry profitability of the A-share chip industry has improved in the first quarter of this year, and we can also see that the storage chip price has also increased recently. This will have a positive effect on the recovery of the performance of the relevant companies. For A-share, semiconductor industry index, including related stocks, the overall position is actually not too high.

【Anchor】For investors, Mr. Dong, do you think it is the right time to enter the relevant sectors? What are the risks that investors need to watch out for?

【Dong】From the stock market, it is certainly feasible to invest in related concept stocks and related enterprises, but the key is whether the average investor can recognize the technological progress, technical level, and patent of the related companies. This is a big problem. So investors need to learn professional knowledge and have a professional understanding of the progress of the relevant technology.

Under these circumstances, it is important to take into account the performance level of the company to make a relatively sound investment. An easier way is to follow the movements of large research and investment firms.

【Anchor】Yes. Mr. Fu, are there any areas that you think investors should pay special attention to?

【Fu】Investors should avoid companies with no core competitiveness. In fact, we should focus on companies that have strong fundamentals, high industry positions and are expected to have better-than-expected performance. I think such companies will be a good choice. Besides that, I think allocating some index ETFs is also an option.

【Anchor】Mr. Yang, do you have any advice for ordinary investors?

【Yang】For ordinary investors, on the one hand, investors should note that it takes a long time to realize the benefits of investment in this industry, so we have to be patient. Short-term capital is not suitable for investment in this industry, and it's better not to speculate on the theme or concepts. After the launch of the third phase of the Big Fund, the emerging semiconductor sector has seen some unusual and large increases. However, it is recommended that investors do not follow the trend of speculation, but focus on the medium and long term, to see if this will bring some technological breakthrough companies or good enterprises. In that case, the risk of investing is relatively manageable. The government's support for the IC industry will increase until we achieve breakthroughs in technology and gradually realize the application, thus narrowing the gap with the international advanced level, and building a state-owned industrial chain.

【Anchor】All right, thank you to you all. That's all for this episode. Remember to follow us on YouTube or download our APP. I'm Yunfei Zhang, thanks for watching, and see you next time