The year 2021 marks the beginning of the 14th Five-Year Plan. Digital economy has become a fresh momentum and new driver of effectively boosting the high-quality development of Chinese economy. A new round of technological revolution is emerging across the globe at an accelerated speed, in which China has gradually changed its role from a follower to a leader. In the 15 years to come, intelligence revolution and domestic & foreign circulation will be keywords central to industrial development.
Over 300 technological innovators have so far successfully got listed on the ChiNext Board and the Sci-Tech Board for financing. The market capitalization of the Sci-Tech Board has increased fast from RMB550 billion in the very beginning to close to RMR5 trillion. A growing number of technology enterprises in their start-up and growth phases have been able to become unicorns and small giants through incubation.
RC Family Office differentiates the foundation of investment plan for each client based on our prospective industry analysis and strategic planning. In this monthly update, RC Family Office will introduce in detail how to capture the industrial transformation opportunities in the new round of technological revolution and seize the investment opportunities.
China’s technological advances in the midst
of major changes unseen in a century provide
a firm foundation for its economic take-off
1.中国正勇登本轮科技革命浪潮之巅。China is leading the current wave of technological revolution
China has doubled its economic volume and growth speed in the four decades since reform and opening-up. Riding the wave of IT application and globalization, the quick advancement of the Internet and the mobile Internet has brought about wealth and opportunities for China, and the country has walked onto the road of seizing opportunities and acting in the Internet era.
Currently, China ranks first in the world in terms of the number of 5G base stations, the citation rate of artificial intelligence (AI) papers and the number of AI patent applications (Figures 1 and 2), the number of high-speed rail patents and mileage, and the penetration rate of new energy vehicles. China landed a spacecraft on Mars in the Tianwen-1 mission, becoming the first in the world to orbit, land and operate a rover on the Red Planet at one time. In the future, relying on the gradually improved science and tcountry echnology system and industrial foundation, China will further strengthen its scientific and technological competitiveness and gradually foster the foundation and conditions for leapfrog development, so as to catch up in the wave of global technological advances.
Figure 1: Top 10 Countries by the Number of High-level AI Papers Published in the Past Decade
Source：Institute for Artificial Intelligence, Tsinghua University
Figure 2: The Number of Global AI Patent Applications in the Past Decade
Source：Institute for Artificial Intelligence, Tsinghua University
2.中国科技产业将迎来广阔的投资机遇。China’s technology industry will embrace wide-ranging investment opportunities
High-quality investees are increasingly seen in China’s technology industry. With the across-the-board debut of the Sci-Tech Board in 2019, high-quality technology companies have continuously entered the A-share market (Figure 3), and institutional investors have collectively increased investment in technology stocks. Active equity funds, including Wanjia Technological Innovation A, Lion Growth Fund, and E Fund Information Technology Fund, hold a larger portfolio of technology stocks.
Figure 3: Overall Performance of the Sci-Tech Board since Debut
In recent years, China’s digital economy has been booming, with new industries and new models emerging in a continuum, giving a push to economic transformation and upgrade. In this context, relevant enterprises on the chip, new energy and network security industry chains acquire high growth space and investment potential. China’s technology development potential attracts foreign investors to buy more Chinese assets against the headwinds. By the end of 2020, northbound capital had undergone a restructuring of their allocations from traditional blue chips to growth stocks in the technology industry, by significantly increasing their holdings in new energy, pharmaceuticals and TMT while reducing exposure to the financial, real estate and some consumer staples sectors in which they usually heavily overweighted. The technology sector, represented by power equipment, new energy, pharmaceuticals, computer and electronics, reported an increment of investment capital at RMB110.9 billion in 2020.
Investing in the technology industry is just
in time as China steps into the incremental era
1.多重利好助力中国科技企业腾飞。Multiple positive factors to help Chinese technology enterprises take off
According to the report delivered at the 19th National Congress of the Communist Party of China,” we need to accelerate the building of an industrial system that promotes coordinated development of the real economy with technological innovation, modern finance, and human resources.” The Chinese government will gradually solve the difficulties faced by investing in high-tech enterprises, such as new business models, difficult valuation, large capital requirement, long profit cycle and uncertainty of investment returns, and build a sound technology financial system.
In recent years, banks in all provinces and municipalities in China have provided favorable policies for strategic emerging industries and launched credit products for technological innovation. For instance, Shanghai has gradually explored and formed the “1+4+1” technology finance mechanism, and provided financial services for more than 8,000 micro, small and medium-sized technology enterprises accumulatively through an innovative technology credit system, involving a credit amount of RMB216.2 billion. At the same time, the debut of the Sci-Tech Board has further opened the channel for the capital market to support technological innovation, and more high-quality companies have chosen to list in the mainland and Hong Kong markets. By the end of July 2021, 313 companies had gone public on the Sci-Tech Board, with a total market capitalization of RMB5.38 trillion.
Apart from the support from policy factors, China’s digital economy is developing at a gallop (Figure 4) and has already at the forefront of the world. The COVID-19 pandemic has even accelerated the further growth of the digital economy. The development momentum of new models and new business formats such as telecommuting and online diagnosis & treatment has been fully tapped in China, becoming a fresh growth driver to back the stable development of Chinese economy and ensuring that related enterprises can develop new business or pick up speed in transformation.
Figure 4: Volume of China’s Digital Economy (trillions of RMB yuan)
Source：RC Family Office
2.具有高成长潜力的科技投资主线已浮上水面。The focus of technology investment with high growth potential has surfaced
The popularity of 5G technology has created larger-scale emerging industries, among which the development opportunities of intelligent vehicles are the most eye-catching. Since 2017, the State Council, the National Development and Reform Commission and other departments have successively released a number of intelligent vehicle-related policy documents, including the Innovation-driven Development Strategy for Intelligent Vehicles. By the estimate of Credit Suisse, the penetration rate of high-level intelligent networked vehicles (including L3-conditional driving automation, L4-high driving automation; and L5-full driving automation) will reach 63% and 23%, respectively, in the next decade (Figure 5), and the intelligent network-based development momentum in the auto industry is gaining steam. Traditional auto makers such as SAIC, BAIC, Changan and GAC, as well as technology firms such as Huawei, Alibaba, Xiaomi and 360 have thrown themselves into developing intelligent networked vehicles.
RC Family Office believes that intelligent networked vehicles not only boast a broad market space, but also have overwhelming advantages over traditional vehicles because of their big differences in product structure and function realization, among other aspects. Meanwhile, problems, including data insecurity and random failures of auto-driving systems, are urging technology companies to improve the basic features related to vehicle safety and continuously better the technologies, thus increasing investment opportunities in the industry chain. Intelligent vehicles imply a fledgling and promising industry that will see significant growth.
Figure 5: Forecasts on L2-L5 Autonomous Driving Penetration in China
Security controllability of chip technology is a top priority for China, the world’s largest chip consumer. After 15 years of development, China has made certain technical breakthroughs in both the 01 special programme (core electronic devices, high-end general chips and basic software products) and the 02 special programme (manufacturing technology and complete sets of technology for very large scale integrated circuits). At present, Chinese companies are still self-sufficient with the support of large funds in the four fields of technology central to lithography manufacturing: design and overall integration, light source and optical systems, dual workpiece, and immersion systems. In the opinion of RC Family Office, although China’s chip industry is not at the world’s top level yet, it will continue to unleash its development potential with the support of national policies and given the demand for homegrown products.
To help technologically innovative enterprises enhance international competitiveness, the Ministry of Industry and Information Technology unveiled the Implementation Plan for the Special Campaign to Foster and Improve Single Champion Enterprises in the Manufacturing Industry in 2016, rolling out the initiative aimed at fostering single champion manufacturers. These applicants all have strong innovation capabilities. 97% of them have R&D institutions, while the number of researchers and developers accounts for 20.4% of the headcount, more than twice of the standard for identification of high-tech enterprises; they have 609.6 valid patents on average, including 254.7 invention patents, and 66.4% of them have invention patents accounting for more than 20% of all kinds of patents, far exceeding the level of general manufacturers. RC Family Office believes that given an accurate view on the development prospect of the industry and the technological innovation potential of the champion enterprises, the champion enterprises in different segments of manufacturing will be good investment targets.
China will strive to peak its CO2 emissions before 2030 and achieve carbon neutrality before 2060. In this context, the new energy and green technology industry, which is closely related to the above goals, will embrace huge growth opportunities. For one, China’s energy structure is undergoing profound readjustment, with gradually less reliance on fossil energy on a whole. However, such reliance can be still largely reduced in the future (Figure 6), providing a greater development space for enterprises that master advanced new energy and energy storage technologies.
For two, green energy-saving and environmental protection technology is also an important choice for China to reduce energy consumption and pollution. In order to accelerate the substitution of foreign green technology by domestic one, win the critical battle of pollution prevention and control, and become the world’s largest “green technology” market, China is increasing the support for related technologies and enterprises, which is expected to gradually release the huge investment opportunities in the green technology industry.
Figure 6: Structure of China’s Installed Power Generation Capacity
Source：China Power Media Group Research
Invest prudently in the
pace-setting technological innovation sector
1.投资科技产业更需专业技术鉴别能力。Investing in the technology industry calls for expertise to discern the right targets
Compared with the investment in traditional industries in the real economy, it is all the more necessary for investment decision makers to have a deep understanding of the technology industry’s development prospect, technology and industrial barrier. Only in this way can they make a correct judgment on the invested enterprises. This raises an even higher requirement on investors. Only a more professional and focused strategy for investment in the technology industry can help investors discern leading and high-quality enterprises in a segment and conduct reasonable allocations.
Whether the core technology of the invested enterprises has sufficiently important technological barriers, the technology application scenarios can support future development, and these enterprises own core R&D strengths determine whether they can become the long-term leaders in their respective fields. For this reason, investors need to consider carefully when selecting a target.
2.在较长期的投资过程中需面对更大的不确定性。Investors have to face greater uncertainty in the longer investment process
Investors have swarmed into technology investment, and many projects have high valuations, leading to reduced investment returns or even the risk of inverted valuations. Investing in long-term projects requires investors to be patient and resilient enough to accompany enterprises from growth to maturity, and help them go from technology development to commercialization and industrialization of R&D results.
In such longer investment process, investors have to not only weather through the ups and downs of industry development and face changes in market sentiment, but also deal with policy and regulatory uncertainties. Many giant companies have seen their value shrink rapidly under the tightened supervision at home and abroad, and investors’ returns have been thus dealt a heavy blow. How to address regulatory uncertainties is also a major challenge for investors in the technology industry.
The changes in 5G, IoT, AI and other next-generation underlying technologies have made possible the advancement of various industries, while the changes in target users have engendered new pain points in demand to the industries. However, the technology industry requires investors to have the very expertise to discern the right targets and sufficient investment resilience, and investors also have to tackle more demanding challenges in face of opportunities. So, what will RC Family Office do for our clients in respect of technology investment?
1.搭建细分科技领域专家智库网络。Develop a network of expert think tanks across different technology fields
Leveraging the expert resources in various scientific research institutions, real economy and different investment fields, RC Family Office will develop a think tank platform composed of experts across different technology fields, so as to gain an in-depth understanding of the technology frontier and keep abreast of the industry dynamics.
2.开展主题闭门研讨会议。Carry out thematic closed-door symposiums
RC Family Office will hold closed-door symposiums between experts in different fields and our investment team concerning varied themes such as new energy, carbon neutrality, new materials, and high-end equipment, to be well informed of the latest information about technology frontier in multiple dimensions and thereby design more scientific and reasonable strategic investment decisions.
3.针对性为境内外客户构建定制化投资方案。Customize investment solutions for Chinese and foreign clients
RC Family Office will customize a full package of investment solutions for our clients based on their differentiated needs, including but not limited to transaction structure design, risk control structure design, and evaluation of the invested enterprises. For overseas clients, RC Family Office will take advantage of local and information advantages to fully access internal and external information sources, provide strong information-backed early warning and analysis of policy risks and an industry’s systematic risks during investment, and conduct continuous post-investment tracking and risk prevention.