• China’s regulatory crackdown has intensified in recent months, with major crackdowns hitting the edtech, online music streaming, and food delivery industries.
• The semiconductor industry is unlikely to see any regulatory tightening as the government has declared its development as a national priority.
• Those who are uncomfortable with the growing regulatory risk in China’s tech sector may look towards the semiconductor industry for investment ideas.
• For exposure to the industry, investors can consider adding a position in SMIC (HKEX:981), or the Global X China Semiconductor ETF (HKEX:3191).
China’s regulatory crackdown has intensified in recent months
If we had to pick a word that best describes China’s tech sector for 2021, it would be ‘crackdown’.
Since the suspension of Ant Group’s mega IPO last year, China has embarked on an unprecedented regulatory crackdown on its tech sector, a campaign that has only intensified in recent months. In the past two weeks alone, the tech sector was hit with three major crackdowns across the edtech, online music streaming, and food delivery industries. Needless to say, the scope of the latest regulations only led to more fear in the market, where sentiment was already fragile.
As of 11 August 2021, the Hang Seng TECH Index is down by nearly -35% since its peak in February, making it one of the worst performing sectors in 2021 so far (Figure 1).
Figure 1: The Hang Seng TECH index is down by close to 35% since its February peak
China’s semiconductor industry may benefit from Big Tech crackdown
Despite the growing regulatory crackdown and the ensuing sell off, it is not all doom and gloom for China’s tech sector, as there are certain segments of the market which are not only resilient, but may even benefit from the crackdown on Big Tech.
One of these segments is the semiconductor industry, which has been identified as a key area of importance in China’s 14th Five-Year Plan, a roadmap that sets the country’s national priorities over the next five years.
In the wake of rising US-China tensions, developing its domestic semiconductor capabilities has become one of China’s top priorities. This comes as the US government implemented a series of sanctions on Chinese companies, such as Huawei and SMIC (HKEX:981), restricting their access to US-made semiconductors and semiconductor manufacturing equipment.
These sanctions have caused considerable damage to the affected companies and the country as a whole, as China relies heavily on imports to feed its massive electronics manufacturing industry. The sanctions on SMIC further exacerbates this problem as without the latest manufacturing equipment, the company is unable to produce cutting edge chips to meet the growing demands of its domestic customers.
Given how crucial semiconductors are to a nation’s development and China’s ambition of becoming a technological superpower, we believe that the chipmaking industry is one segment that is unlikely to see any regulatory tightening for the time being. As a matter of fact, the Chinese government may even do the opposite, implementing supportive policies which are beneficial to the growth of the industry, as it has over the past few years.
Chipmaking industry a long-term investment opportunity
In light of the worsening tensions between China and the US, we are confident that chipmakers will not be affected by the regulatory tightening as the government looks to direct capital towards areas that could improve the competitiveness of China’s economy, such as its semiconductor industry.
While US sanctions may delay China’s dream of becoming self-sufficient, we believe that China will eventually overcome these challenges as the future of the nation depends on the success of this endeavour. With a renewed focus on building up its semiconductor capabilities, China’s semiconductor industry could enter a high growth phase soon.
Investors who are concerned about the growing regulatory risk among China’s Big Tech firms and are keen to invest in the semiconductor industry may want to consider adding exposure to SMIC (HKEX:981).
SMIC is the largest and most advanced foundry in mainland China, and it is widely regarded as the country’s national champion in the semiconductor industry. With rising domestic demand and extensive state support, SMIC is well positioned to benefit from the rapid development of China’s semiconductor industry.
Related Article: Investors betting on the growth of China’s semiconductor industry should not overlook this company
Alternatively, those who prefer a more diversified approach can consider the Global X China Semiconductor ETF (HKEX:3191), our recommended ETF for exposure to the Chinese semiconductor industry.
Related Article: China’s semiconductor industry: A sleeping giant that has been awakened
Declaration:
For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a NIL position in the abovementioned securities. The analyst who produced this report holds a position in SMIC and the Global X China Semiconductor ETF.
All materials and contents found in this site are strictly for general circulation and informational purposes only and should not be considered as an offer, or solicitation, to deal in any of the funds or products found/identified in this site. While iFAST Financial Pte Ltd ("IFPL") has tried to provide accurate and timely information, there may be inadvertent delays, omissions, technical or factual inaccuracies and typographical errors. Any opinion or estimate contained in this report is made on a general basis and neither IFPL nor any of its servants or agents have given any consideration to nor have they or any of them made any investigation of the investment objective, financial situation or particular need of any user or reader, any specific person or group of persons. You should consider carefully if the products you are going to purchase are suitable for your investment objective, investment experience, risk tolerance and other personal circumstances. If you are uncertain about the suitability of the investment product, please seek advice from a financial adviser, before making a decision to purchase the investment product. Past performance is not indicative of future performance. The value of the investment products and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. In respect of any matters arising from, or in connection with the said research analyses or research reports, recipients of the report are to contact IFPL at 10 Collyer Quay, #26-01 Ocean Financial Centre Building, Singapore 049315, or by telephone at +65 6557 2853. Where the report contains research analyses or research reports from a foreign research house and if the recipient of such research analyses or research reports is not an accredited investor, expert investor, institutional investor or an ex-accredited investor, IFPL accepts legal responsibility for the contents of such analyses or reports to such persons only to the extent as required by law. Please note that only certain security(ies) herein are available to all investors, while the rest are only available for certain persons to invest in, such as Accredited Investors (as defined in the Securities and Futures Act) or one who invests at least S$200,000 (or its equivalent currency) per transaction. To qualify as an Accredited Investor, one needs to submit a declaration form and certain relevant supporting documents, according to iFAST’s prevailing policies and procedures.
Please read our full disclaimers on the website at ( https://secure.fundsupermart.com/fsmone/policies/328125/investment-account-terms-&-conditions).
iFAST Financial Pte Ltd (IFPL) (registered address: 10 Collyer Quay #26-01 Ocean Financial Centre Singapore 049315, Telephone: 6557 2000) holds the Financial Advisers Licence issued by the Monetary Authority of Singapore ('MAS') to conduct regulated activities of advising on securities, marketing of collective investment schemes and arranging of any contract of insurance in respect of life policies, other than a contract of reinsurance and the Capital Markets Services Licence issued by the MAS to conduct regulated activities of dealing in securities and providing custodial services for securities. While IFPL has made every effort to ensure the independence of the report's contents, IFPL's nature of business is such that IFPL and its connected and associated entities together with their respective directors, officers and staff may be involved in providing dealing or investment-related services in the abovementioned securities, and have taken or may take positions in the securities mentioned in this report, and may also act as the principal for any buy or sell trades.