Source: CITIC Securities Research
The third phase of the National Integrated Circuit Industry Investment Fund (Big Fund) was formally established. Judging from the current investment situation, it focuses on financial support entities and the direction of growing patient capital. There may be some adjustments and optimizations compared to the first phase and the second phase in terms of entrustment management models and investment periods. We believe that adopting a long-term goal orientation will help avoid shortsightedness and help long-term industrial development. We expect semiconductor manufacturing to remain the largest in the third phase, and we expect to further increase support for critical areas such as equipment, materials, components, EDA, and IP. We recommend continuing to focus on leading companies in related fields.
▍ According to the enterprise investigation, the National Integrated Circuit Industry Investment Fund Phase III Co., Ltd. (hereinafter referred to as Big Fund Phase III) was established on May 24, 2024, with a registered capital of 344 billion yuan. The legal representative is Zhang Xin. The first and second phases of the Big Fund were established in 2014 and 2019, respectively, with a scale of 138.7 billion yuan and 204.1 billion yuan respectively. The scale of the current three phases is equivalent to the sum of the previous two rounds, showing stronger support.
▍ We compared and analyzed the shareholder structure of the first, second, and third phases of large funds, focusing on the investment ratio.
Judging from the three-phase shareholder structure of Big Fund, state-owned commercial banks (six major banks) account for 33.14%, local state-owned enterprises (Beijing, Shanghai, Shenzhen, Guangzhou and Guangdong) account for 27.62%, central finance 17.44%, state-owned enterprises (China Tobacco, Chengtong Group, China Resources Group, China Mobile) 11.34%, and CDB 10.47%. The first phase of the Big Fund was funded by the central government (36.47%), showing strong support from the central government in the early days; the second phase of the Big Fund accounted for the majority of local state-owned assets (64.17%), reflecting the enthusiasm of all regions to support the integrated circuit industry and attract investment around 2019; the third phase of the Big Fund had state-owned commercial banks accounting for the majority (33.14%), reflecting the direction of financial support entities and growing patient capital.
▍ The third phase of entrustment management model may change.
It is worth noting that Huaxin Investment Management Co., Ltd., the sole trustee manager of Big Fund Phase I and Phase II, did not appear in the third phase of the shareholder list. We expect this may mean that Big Fund Phase III may change the single entrustment management model since Phase I and Phase II, such as changing to a model of direct investment+entrusting multiple managers. The new shareholders of central enterprises, Chengtong Group and SDIC Group, all have positions in the field of industrial fund investment: for example, the Chengtong Group manages the National Survey Fund, mixed reform funds, etc., and the SDIC Group manages the Science and Technology Achievement Transformation Fund. Further official announcements are yet to be made.
▍ The three-phase investment period may be extended to 10 years, reflecting long-term goal orientation and helping to avoid shortsightedness.
According to the collective announcement of six major banks including the Bank of China on May 27, 2024, each bank is expected to pay for the third phase of the investment in the Big Fund within 10 years from the date the fund is registered and established. Both the first and second phases of the Big Fund have an investment period of 5 years and a payback period of 5 years. We speculate that the payment of the third phase of the fund announced by the bank within 10 years may mean that the investment period of the Phase 3 fund has been extended to 10 years. We believe that long-term, sustainable capital is beneficial to incubating and supporting some long-term industrial projects, pursuing long-term commercialization goals and long-term assessments, rather than focusing on short-term investment profits. It is more conducive to supporting technological innovation and breakthroughs in industrial upgrading, and is in line with the current trend of growing “patient capital.”
▍ We expect semiconductor manufacturing to remain the largest investment direction in the third phase of the Big Fund, and it is expected to further support critical areas such as equipment, materials, components, EDA, and IP.
According to our statistics, the first phase of the Big Fund's investment is mainly focused on IC manufacturing (63%), IC design (20%), packaging testing (10%), and equipment materials (7%). According to data from the Financial Federation Venture Capital Connect - Central Finance, the share of the wafer manufacturing sector reached 70%. It can be seen that the manufacturing process accounts for the heaviest share of the investment amount due to high factory construction expenses; investment in equipment and materials has increased, reaching about 10%; investment in IC design projects has also reached about 10%; and the investment ratio in the sealing and testing industry has declined.
Considering the current “stuck neck” problems in advanced manufacturing and supporting equipment, materials, components, EDA, IP, etc., we expect that support for leading companies in related fields will continue to increase. At the same time, since about 80% of a fab's capital expenditure is used to purchase semiconductor equipment, the investment in wafer factory construction will also significantly benefit semiconductor equipment, component and material manufacturers.
▍ Risk Factors:
Subsequent semiconductor technology restrictions on China exceeded expectations; advanced domestic technological innovation fell short of expectations; changes in the international industrial environment and intensified trade frictions; advanced process technology changed; and downstream demand fluctuated greatly.
▍ Investment Strategy:
It is recommended to continue to pay attention to the new product layout of domestic equipment companies in the “stuck neck” field and the room for order growth brought about by domestic fabs expanding production and procurement, and it is recommended to focus on leading domestic equipment companies.
Furthermore, considering the trend of localization of equipment supporting parts, it is also recommended to focus on semiconductor equipment parts companies.
From the perspective of financial support for continued domestic production expansion, it is recommended to focus on leading manufacturing companies.
editor/tolk