Recently, a reporter from China Securities News learned from multiple independent sources that the fundraising work of the National Integrated Circuit Industry Investment Fund (Phase II) (referred to as the "Big Fund Phase II") has been completed, with a scale of around 200 billion yuan. Some companies are in talks with the National Fund to discuss the second phase investment method.

Last March, China Securities News exclusively reported that the Phase II plan of the large fund had been submitted to the State Council and approved.

There are three representative views on the investment direction of the second phase of the large fund: firstly, it is believed that there will be some differences compared to the first phase, but generally not much change. One manifestation of the differences is that the second phase of the large fund will invest in downstream terminal application enterprises of semiconductors; Secondly, it is believed that the focus of investment may be more inclined towards designing materials and equipment, while increasing downstream applications; Thirdly, it is believed that investment will be focused on applications, which will drive the entire industry chain.

It can be seen that regardless of the viewpoint, the application side of the large fund's Phase II investment is a consensus.

Why is the application side so important? Several industry insiders have told China Securities Journal reporters that the application side represents the most authentic and cutting-edge market demand, and can effectively guide the development direction of upstream supply capacity in cultivating and guiding industries. For example, as an application terminal, Apple has improved the level of the entire mobile phone supply chain. Similarly, Huawei will strengthen cooperation with upstream chip companies and guide the development of chip production capacity in ensuring the security of its own supply system and promoting the spare tire plan process.

Chen Datong, Chairman of the Investment Committee of Beijing Qingxin Huachuang Investment Company, suggested in a 2018 interview with China Securities News that large funds should appropriately relax their investment targets, and downstream application terminal platform enterprises of integrated circuits should receive support, which is conducive to cultivating the industrial environment and driving market demand; Secondly, the investment amount of sub funds in the first phase of the large fund is too small, only 10 billion yuan, about 7%; It should be increased to 15% in order to form a fleet with large funds as aircraft carriers and distinctive sub funds as frigates and destroyers, fully leveraging the leading role of large funds.

Huaxin Investment, the manager of the first phase of the National Large Fund, stated in October last year that in accordance with the requirements of the second phase fund approval plan and the overall deployment of the National Integrated Circuit Industry Development Leading Group, it will actively participate in the preparation work of the second phase fund, strive to achieve seamless connection between the two funds, ensure the steady progress of major projects, the stable development of key enterprises, and the continuous improvement of industrial competitiveness.

Trillion scale
A source close to the National Big Fund once revealed to reporters that the second phase of the fund raised more than the first phase, with a fundraising scale of around 150-200 billion yuan. The actual fundraising reached around 200 billion yuan, and according to a 1:3 leverage ratio, the scale of social funds leveraged was around 600 billion yuan.

However, according to information disclosed by Huaxin Investment in October last year, from the perspective of invested enterprises, the first phase of the large fund (including sub funds) has driven new social financing (including equity financing, corporate bonds, bank, trust and other financial institution loans) of about 500 billion yuan, with an amplification ratio of 1:5 based on the actual investment amount of the fund.

If the leverage ratio is 1:5, the total amount of funds for the second phase of the large fund will exceed trillions of yuan.

Huaxin Investment stated that large fund investments have played an important role in leveraging social capital investment and enhancing industry investment confidence. The amplification ratio calculated based on the proportion of central government funds in actual fund contributions is 1:19. From the perspective of sub funds, the total scale of the 11 sub funds invested by the fund is 66 billion yuan, with a total investment and financing amount of about 170 billion yuan, and the amplification ratio of the fund's investment is close to 1:12. From the perspective of Xinxin Leasing led by the fund, it has invested nearly 40 billion yuan in integrated circuit and semiconductor enterprises, achieving a 1:11 amplification effect in investment promotion and financing.
Huaxin Investment also stated that under the guidance and drive of the fund, the investment and financing environment in the domestic integrated circuit industry has significantly improved. Taking the manufacturing industry with the most capital intensive characteristics in the integrated circuit industry as an example, the total capital expenditure of Chinese Mainland's integrated circuit manufacturing industry in 2014-2017 doubled compared with the previous four years. From the perspective of leading company SMIC, after obtaining fund investment in January 2015, SMIC's total capital expenditure from 2015 to 2017 was approximately the sum of the previous 10 years (2005-2014). The establishment and investment of funds have a significant effect on alleviating financing bottlenecks in the integrated circuit industry and backbone enterprises.

At the end of 2012, the Shanghai Municipal Government, together with four industry enterprises including China Microelectronics, wrote a joint letter to national leaders. Later in 2014, the country launched the National Integrated Circuit Industry Development Plan, which outlined the development of China's integrated circuit industry.

This has a clear guiding symbolic significance. A state-owned investor who has participated in overseas mergers and acquisitions of integrated circuit projects told reporters that in 2014, the development momentum of domestic integrated circuits rebounded, attracting many overseas talents to return to China. Spreadtrum, Howei, Lanqi, and others all decided to return to China around that time.

The investor also said, "Integrated circuits, especially in the manufacturing sector, require investments of billions of yuan or billions of dollars to drive a little bit of investment. Generally, investors have too high a threshold for participation, and from the perspective of investment returns, they have no confidence in their hearts. More importantly, they still need the government to take the lead. National large funds, implementing national strategies, and adopting market measures have played a great role in the development of China's integrated circuit industry, promoting the formation of an effective coordinated development trend of technology, industry, and finance in China's integrated circuits."

An industry insider told reporters that in fact, an important purpose of setting up "large funds" is to leverage local government and social funds. In addition to direct equity investment, they can also invest together with local and social funds to form a linkage. There are three main ways of cooperation: participating in local funds (such as Beijing Integrated Circuit Manufacturing and Equipment Sub Fund, Shanghai Integrated Circuit Manufacturing Sub Fund, Wu Yuefeng Fund, etc.); Participating in social capital (such as establishing Hongtai Fund); Collaborate with leading enterprises to establish investment funds (such as Xinke Energy Fund, SMIC Juyuan Fund, and Anxin Fund).

Marketization operation

The National Integrated Circuit Industry Investment Fund Co., Ltd., also known as the National Integrated Circuit Industry Investment Fund, was established in September 2014 with a registered capital of 98.72 billion yuan and no actual controller. As of the end of 2018, the total assets of the National Fund were 115.936 billion yuan, the total liabilities were 47.9387 million yuan, and the net assets were 115.888 billion yuan.

Since its establishment, the National Fund has always adhered to the principles of "market-oriented operation and professional management" in its operation and investment, while adhering to the policy of integrating national strategy and market mechanisms to guide fund investment. Mainly utilizing various forms of investment in enterprises within the integrated circuit industry, fully leveraging the guidance and support role of the state in the development of the integrated circuit industry.

The national fund adopts a corporate management model, which is fundamentally different from the previous subsidy model.

The aforementioned state-owned investors also said that, unlike the past "Mayor the final say", the operation of large funds is "market the final say". The specific project is not judged, which reduces the gray area of power rent-seeking, and the market efficiency is greatly improved. At the same time, it is not an industrial company, but a propellant for industrial development, and will not do anything to damage the industrial chain.

In terms of equity, the shareholders holding more than 5% of the first phase of the National Fund include the Ministry of Finance of China (36.47%), China National Development Corporation (22.29%), China National Tobacco Corporation (11.14%), Yizhuang Guotou (10.13%), China Mobile (5.06%), Shanghai Guosheng (Group) Co., Ltd. (5.06%), and Wuhan Financial Holdings (Group) Co., Ltd. (5.06%).

Guangfa Securities stated that the investment methods of national funds include private equity, fund investment, mezzanine investment, and other primary and secondary market investments, but do not include venture capital and angel investment. The exit methods include repurchase, merger and acquisition, and public listing.

Public data shows that as of September 12, 2018, the effective commitment amount of the National Large Fund exceeded 120 billion yuan, and the actual investment amount reached 100 billion yuan. The investment progress and effect were better than expected. By the end of 2018, the effective commitment for the first phase of the scale should be basically completed, and the overall investment progress should be advanced by 9 months.

Ding Wenwu, President of the National Fund of China, recently attended an event and stated that industrial development relies on entrepreneurs with a spirit of hard work, capitalists with wise investment, and the combination of industry and finance is a very good way. "Previously, people thought we didn't have the funds to develop industries. Now, there is a lot of funds to develop industries, but whether these funds should be invested in this industry is crucial."