Sino-US tech race turbocharges China chip investment, triggering bubble fear
- A slowdown in China’s consumer internet sector has prompted investors to focus on semiconductor-related companies
- Investors have pushed the share prices of the country’s 45 listed chip makers to more than 100 times the companies’ earnings
US curbs on Chinese technology companies amid the intensifying battle for tech supremacy between the two countries are feeding an investment boom across China’s semiconductor industry, driving prices of both publicly traded and venture-backed firms into bubble territory.
Investors have pushed the share prices of the country’s 45 listed chip makers to more than 100 times the companies’ earnings, making semiconductors the priciest sector in the stock market.
There is also a scramble for pre-listing deals, as venture capitalists once focused on consumer internet companies turn their attention to chips. Such investment in the sector almost doubled to 22 billion yuan (US$3.1 billion) in two years through 2019, showed data from Zero2IPO.
“It’s not just the government, it’s the private sector too – everyone in China is trying to invest in something related to semiconductors,” said Huang Jin-biao, co-founder of six-year-old Nuvolta, a maker of chips for wireless charging.
Many start-ups have yet to market products or prove long-term business value, prompting investors and analysts to warn of an asset-price bubble. But with Beijing redoubling efforts to support a home-grown chip industry and no end in sight to US-China tension, enthusiasm reigns.
“10 years ago, you could fit all of China’s semiconductor investors around two tables,” said Alan Peng, founder of chip start-up NextVPU. “Nowadays there are hundreds of people crowding around those same two tables.”
“You won’t get the growth that you got in the last 20 years in China looking for the next Tencent or Meituan,” said Wayne Shiong, partner at China Growth Capital. “But if you look at chips, there’s a huge kind of market opportunity.”
Valuations for Chinese chip-related companies – most little-known in the global industry – have soared accordingly.
When optical chip start-up North Ocean Photonics raised angel funding from Shanghai-based New Vision Capital in 2017, the firm was worth tens of millions of yuan. In March, when its latest fundraising round closed, its valuation exceeded 1 billion yuan.
“Suddenly, money is gushing into this sector,” said Kay Li, a partner at New Vision Capital.
Publicly listed firms, many trading on Shanghai’s tech-focused Star market, are seeing valuation spikes as well.
Advanced Micro-Fabrication Equipment, which makes etching equipment for chip manufacturing, has seen its share price jump 150 per cent since January. Its price-to-earnings ratio sits at a stratospheric 540.
Industry participants divide China’s semiconductor companies into two groups. One is focused on replacing chips as well as chip-making parts and equipment that domestic technology firms currently import.
Bob Zhao, investment director at New Access Capital, said his venture capital firm committed to invest in Shenzhen-based battery management specialist One-micro Semiconductor because the sector is dominated by US and Japanese companies, so it has huge potential in China.
Manufacturers such as Huawei are “looking for spare tyre and replacement schemes”, Zhao said.
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Still, both sectors carry plenty of risk.
“If all you’re doing is investing in a chip that’s cheaper than something made overseas, then anyone can do it, and no one will make any margins,” said Jerry Bai, partner at Glory Ventures.
Also, many such companies have yet to prove themselves.
Cambricon, an AI chip company set to list on the STAR market this year, in its prospectus said it booked revenue of 444 million yuan in 2019 and a net loss of 1.18 billion yuan.
After losing business with Huawei, Cambricon now earns almost half of its revenue from a single municipal government branch.
“They have no real customers and a huge loss, but they can still pass the listing process because the government wants to support AI and semiconductors,” said one former chip investor.
Cambricon did not respond to a request for comment.