Chen Zhibin of Yuanhe Puhua: Discovering valuable semiconductor investments in a bubble market

On the afternoon of August 27, 2020, at the Global Semiconductor Industry and Finance Summit and Semiconductor Investment and Financing Sub-Forum, Yuanhe Puhua partner Chen Zhibin delivered a speech entitled "Semiconductor Investment Opportunities in the Bubble Market".

Chen Zhibin pointed out that the word "bubble" may be seen as a derogatory term from the perspective of stockholders, but in his opinion, it can also be viewed with a neutral mindset. It more describes the current society's perception of the semiconductor industry and reflects everyone's enthusiasm for the industry. In fact, the industry can develop in a bubble, and investment institutions can also explore investment opportunities and create value in a bubble market.

There is a necessity to develop the direct financing market

At the forum, Chen Zhibin reviewed the macroeconomic background for the development of the direct financing market. It is not difficult to see from a report this year by Yi Gang, governor of the People's Bank of China, that between 1991 and 2007, the proportion of direct financing increased, but after 2008, contrary to expectations, the proportion of direct financing in my country decreased instead of increasing.

Specifically, from 1991 to 2007, the proportion of direct financing in China showed an overall upward trend, with the development of the stock market playing a key role. After 2008, affected by a variety of internal and external factors, the proportion of stock financing declined, and the decline was very large. At the end of 2018, the ratio of securities assets, including stocks and bonds, to GDP was 135.5%, a decrease of 31.4 percentage points from the end of 2007. At the end of 2018, the ratio of stock market value to GDP was 44.6%, a decrease of 75.5 percentage points from the end of 2007.

From the perspective of the source of funds, loans are still the main source of funds for enterprises, showing a rapid growth overall. With the development of the bond market, bond financing in the corporate sector has grown rapidly, with the proportion of bond financing increasing by 9.4 percentage points between 2008 and 2018. From the data, the growth of stock financing in the corporate sector has slowed down, with the proportion of stock market value at the end of 2018 falling by 28 percentage points compared with the end of 2007, which also highlights the necessity of developing the direct financing market.

Competition accelerates companies to go public

Chen Zhibin mentioned that when the Science and Technology Innovation Board was first proposed, practitioners viewed it more as a green channel for the listing of science and technology innovation industries. From the actual operation of the Science and Technology Innovation Board, including the subsequent reform of the registration system of the Growth Enterprise Market and the change of the listing approval authority, it actually created a competition among exchanges for high-quality listed companies. This competition greatly accelerated the listing of companies. With some supporting institutional reforms, including the improvement of the delisting system, the establishment of a dividend system, and a strict information disclosure system, it has a great impact on the supply of listed companies as a whole.

When talking about the ten-year development history of China's PE/VC industry, Chen Zhibin pointed out that from 2010 to 2014, the number of newly established funds and the scale of funds in China's VC/PE market developed steadily; from 2015 to 2017, there was explosive growth, and the number of newly established funds exceeded 10,000; since 2018, due to stricter supervision, new asset management regulations, financial deleveraging and other factors, China's PE/VC market has experienced an overall correction; in the first half of 2020, coupled with the impact of the sudden epidemic, the PE/VC market was hit hard again in the context of a capital winter.

From niche to craze: Discovering value investment in a bubble market

At the forum, Chen Zhibin also reviewed the history of China's semiconductor equity investment. He said that this needs to be divided into three investment nodes: overseas US dollar funds, Chinese US dollar funds, and Chinese RMB funds.

From the perspective of overseas dollar funds, semiconductor venture capital and exits in the United States have been at a long-term low since 2000, while Chinese dollar funds partially drove domestic semiconductor investment after the peak of listing in the United States from 2005 to 2007. However, due to the influence of industry and policies, the overall return was not ideal, which also led to the fact that many dollar funds/mainstream dollar investment institutions have not resumed semiconductor investment to date.

China's RMB funds started in the early days of the ChiNext, but due to the small number of semiconductor projects, the "national PE" craze did not reach semiconductors. It was not until 2014 that the State Council issued the "National Integrated Circuit Industry Development Promotion Outline" and the establishment of a large fund, which led to the first wave of chip investment fever. The launch of the Science and Technology Innovation Board in 2019 detonated investment in the semiconductor industry.

Chen Zhibin pointed out that currently, semiconductor investment enthusiasm leads the entire market. Specifically, from H2 2019 to H2 2020, it can be said that the valuation of the entire semiconductor market, whether in the primary market or the secondary market, is at a high level, and new funds are entering the market at an accelerated pace. In addition, from the perspective of the entire industry and the market segments, the semiconductor industry leads the entire market in terms of valuation, financing amount and quantity.

Generally speaking, the stages of a bubble market include: investment recovery, increased financing amounts, and shortened financing time; valuation increases, and increased industrial fund raising; valuation peaks, and performance continues to expand; performance improves and returns to normal, valuations fall rapidly, and resources are concentrated in leading companies; and the financing time of leading companies lengthens as they wait for the next round of recovery.

As for the question of what stage of the semiconductor bubble is currently in, Chen Zhibin believes that different people have different answers, which deserves our attention and consideration.

Finally, Chen Zhibin also shared several views on how to find valuable investments in a bubble market, including: focus on value creation, focus on relative value positioning in the industrial chain; focus on cash flow, focus on the company's sustainable operating ability; focus on business expansion capabilities, focus on the diversity of core customers; focus on entrepreneurial spirit, focus on the team's continuous learning ability; focus on market capabilities, focus on market-oriented innovation capabilities and business implementation capabilities.