Sino-U.S. tech race turbo-charges China chip investment, triggering bubble fear By Reuters

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By Josh Horwitz and Samuel Shen

SHANGHAI (Reuters) – The U.S. restrictions on Chinese technology companies in the intensifying struggle between China and the United States for technical supremacy lead to an investment boom in the Chinese semiconductor industry and drive up prices from both listed and venture-backed companies the bubble.

Investors have raised the country's 45 listed chip manufacturers' share prices to 100 times corporate earnings, making semiconductors the most expensive sector on the stock exchange.

There is also a mystery surrounding pre-listing deals, as venture capitalists who once focused on internet consumer businesses are turning their attention to chips. According to Zero2IPO, this investment in this sector has almost doubled to 22 billion yuan (£ 2.50 billion) in two years by 2019.

"It's not just the government, it's the private sector too – everyone in China is trying to invest in something semiconductor-related," said Jin-biao Huang, co-founder of six-year-old Nuvolta, a wireless chip chip maker .

Many startups still have to market products or demonstrate long-term business value, which prompts investors and analysts to warn of an asset price bubble. But with the government doubling its efforts to support a domestic chip industry and with no end to the tensions between Sino and the US, there is enthusiasm.

"Ten years ago, all Chinese semiconductor investors could be accommodated at two tables," said Alan Peng, founder of the chip startup NextVPU. "Nowadays, hundreds of people crowd around the same two tables."


Until recently, China's semiconductor sector was heavily dependent on the government. The National Integrated Circuit Industry Investment Fund, popularly known as "the big fund", allocated 139 billion yuan for chip projects in 2014. 204 billion yuan was added last year.

Private investors previously avoided the capital-intensive sector in favor of burgeoning Internet companies such as the leading provider of games and social media Tencent Holdings Ltd (HK 🙂 and the delivery service for food Meituan Dianping (HK :).

A slowdown in the internet sector has prompted investors to look for alternatives. US import tariffs and national security restrictions for China's Huawei Technologies Co Ltd (HWT.UL) and others buying US technology open up options.

"You won't get the growth you have achieved in China in the past 20 years if you are looking for the next Tencent or Meituan," said Wayne Shiong, partner at China Growth Capital. "But if you look at chips, there is a huge market opportunity."

Chinese chip companies, the least known in the global industry, have seen ratings rise accordingly.

When the start-up company for optical chips North Ocean Photonics received angel financing from New Vision Capital in Shanghai in 2017, the company was worth several tens of millions of yuan. In March, when the last round of donations ended, the valuation was over 1 billion yuan.

"Suddenly money is flowing into this sector," said Kay Li, partner at New Vision Capital.

Listed companies, many of which are trading in the new technology-driven STAR market, also have peaks in valuations.

At Advanced Micro-Fabrication Equipment Inc (SS :), a manufacturer of etchers for chip manufacture, the share price has risen by 150% since January. The price-performance ratio is stratospheric 540.


Industry participants divide China's chip makers into two groups. One focuses on chip replacement, as well as parts and equipment for manufacturing chips that are currently imported by domestic technology companies.

Bob Zhao, investment director at New Access Capital, said his venture capital firm has committed to investing in Shenzhen-based battery management specialist One-micro Semiconductor because the sector is dominated by U.S. and Japanese companies and therefore has great potential in China Has.

Manufacturers like Huawei "are looking for replacement tires and replacement schemes," said Zhao.

The second group concerns artificial intelligence (AI). AI chip makers such as Enflame, supported by Tencent, and Horizon Robotics, supported by a South Korean chip maker SK Hynix Inc. (KS :), have enjoyed increasing ratings.

Nevertheless, both sectors are associated with a high risk.

"If you only invest in a chip that is cheaper than something that is made overseas, anyone can do it and nobody will make margins," said Jerry Bai, a partner at Glory Ventures.

Many such companies still have to prove themselves.

Cambricon, an AI chip company to be listed on the STAR market this year, stated in its prospectus that it had 444 million yuan in sales and 1.18 billion yuan in net loss in 2019.

After losing business with Huawei, Cambricon now earns almost half of its revenue from a single city office.

"They have no real customers and a big loss, but they can still survive the listing process because the government wants to support AI and semiconductors," said a former chip investor.

Cambricon did not respond to a request for comment.

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