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[Original] study of new materials industry investment value and difficulty Author:

Date: 2019-04-05
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Zhou Min (Paradise Valley partner, focusing on new energy, new materials, new investment in the automotive sector for many years)

Shao Zhongqi (Paradise Valley Senior Investment Manager)

Zhang Cheng (Paradise Valley Financial Research Institute Senior Fellow)

Material is the material basis of human society, but also the specific carrier of civilization. Neolithic civilization, human opener marks the first of its kind to use; bronze civilization, represents the level of human productivity a qualitative leap; emergence of pottery civilization, represents the first human to start the beginning of chemically self-made history of new materials; the launch of the last century plastic, then further opened up a new frontier of human use of organic materials. Evolution, evolution history of a combination of materials development and progress of human beings, can be said to be the cornerstone of the history of human development (Figure 1).

Source: Network Data, Paradise Valley

Looking back at history, we find that every revolutionary invention of new materials, the application always lead to human time and time again technological innovation, promote industrial restructuring and upgrading from generation to generation, but also spawned a lot of new industries to develop in depth. As in recent years, polycrystalline silicon, lithium ion, carbon fiber and other infrastructure has become more sophisticated in technology and new materials, and promote and support the booming emerging photovoltaic industry, new energy vehicles, wind power, LED, chips. Therefore, as one of the countries of the seven strategic emerging industries, new materials industry has been a double hit of hot areas.

Global status of new materials

From a global perspective, countries in the world for the development of new materials have a very high value, the overall size of the industry is also expanding. Data show that in 2010 the global market size of approximately $ 400 billion of new material, 2016 has been about $ 2.16 trillion. Because the new materials industry in many areas of capital strength, core technology, research and development capabilities, etc. all have a very high demand, the development of new materials industry global stage showing a pattern of technology developed areas in the United States, Japan and Europe as the leading trend. Specifically, the US capital, technology and other advantages make the overall leader in the new materials industry, while Japan has an advantage in the field of nano-technology, carbon fiber, mainly in Europe has the leading technology in terms of structural materials. China and South Korea, Russia belong to the second echelon.

China's current status of new materials

The new material is an important support for the real economy of China, but also solve many of the current 'strangle hold project' basis source of work. In recent years, the country continued to increase investment and research in the field of new materials and the development path planning initially established a relatively comprehensive technical support programs and research into the system.

According to the 'Made in China 2025 key areas of technology roadmap,' we have new materials into advanced base materials, key strategic materials and cutting-edge new technology into three categories, respectively, based on resources, needs and technology development (Figure 2).

Source: chain plastic net

Advanced wherein the base material refers to the amount of large, involving a wide range of new surface material, mostly high-end portion of a conventional material, having 'a multi-sheet' feature. The key strategic material is a key material for the protection of major strategic needs of the country, it has 'a need more than material' feature. Cutting-edge new materials refers to the basic research-based, future broad market prospects, future-oriented material.

Therefore, the state has invested a huge amount of research funding to support research and development of new materials. 2013 for the first time the total amount (R & D) funding of research and experimental development ranked second in the world (40% for the same period the total amount of US & R D expenditure), has been six years. While in 2018 the total amount of investment in R & D expenditure over 1.97 trillion yuan, up 11.6 percent over the previous year, further narrowed the gap from first place in the US (forecast for the same period in the United States R & 70% of the total expenditure D) (Figure 3).

Source: China Government Network

Thanks to sustained economic development superposition state funds support, the scale of China's new materials industry in the New Year the past 10 years of rapid growth, forecast 2020 GDP of 60,000 yuan, 10 times in 2010 (Figure 4).

Source: Institute for Industrial Economics Preview

However, the rapid expansion of the scale does not mean that China has become the industrial powerhouse of new materials. In the process of industrial development, we also have to face the reality:

A phenomenon: some of the core material is still facing can not be self-sufficient, and even some strategic material risk of outages.

In 2018 the Ministry of Industry to China more than 30 large enterprise to launch a new material research needs. The results show that 130 kinds of key materials required, only about 14% can be self-sufficient, while 32% is absolutely necessary to rely on imports. Information technology industry, for example, in 2018 China's IC imports amounted to 

Source: Wind

Phenomenon II: weak core manufacturing base of high-end equipment, restricted the realization of downstream applications, it is difficult to seize the strategic high ground.

There has not been a company specializing in the integration of our equipment manufacturing business of listed companies. On the one hand is due to the industry's business model a lot of income payable to confirm more difficult; on the other hand is the installation of this type of company, in terms of the overall negotiating position in the industrial chain in the long term in a weak position. According to wind data, the total assets of 17.3 billion yuan as the leading chemical engineering equipment installation - China Construction Installation Company, 2018 quarterly profit of 128 million yuan. Net profit margin of only 1.28% in 1536 similar projects companies (including real estate, infrastructure and other engineering companies) ranks only column 1275. So the industry leader, for other small and medium private institutions, in order to get the opportunity to develop upward challenged will be more severe. This is a direct result of our high-end, core equipment of production engineering enterprises, whether profit or capital accumulation of high-end engineering experience are grossly inadequate.

Our integrated equipment manufacturing their own strength is relatively weak, a direct result of manufacturing, research and development and operations, and a number of craft techniques and equipment integration of our country, many aspects such as the number of patents owned with foreign advanced level there are still significant differences, and and It did not form a significant momentum to catch up. Often in the laboratory developed the new material, even after entering the pilot production stage, due to the immaturity of domestic equipment, sophisticated technology, laboratory prototype can not reach the requirements on product quality, or can not achieve similar foreign quality requirements. If you encounter some foreign restrictions on the export of equipment devices, the direct impact on the production of finished products. This ultimately formed the basis of our country although industry is already quite well developed, but some downstream areas of production and advanced applications also rely heavily on foreign harsh reality.

Three phenomena: low resource development and utilization of capacity, seriously restricting sustainable development.

Not only for our country heavily dependent on imports of oil and other resources, and even some resources for application development resources endowment itself has also not ideal. A large number of low-cost phenomenon export of raw materials, high-priced imports of finished, semi-finished products are common. This seriously reduces the value in use of resources, and also restricting the process of sustainable development. Titanium, for example, China's titanium reserves at the forefront of the world. However, in several applications of titanium, faced with low resource utilization capacity situation.

The titanium dioxide for whitening coatings, there are two technologies path sulfate and chlorination internationally. Low-cost method of sulfuric acid product, but the product contamination, lower product stability, mainly used in some basic applications; chlorination of more environmentally friendly products, the quality is more stable, and therefore also higher added value, mainly used in high-end applications. Currently in addition to China, the world's production capacity of titanium dioxide concentration is very high, the top five suppliers control 52% of the global total capacity, of which 85 percent is used in the chloride process. The 2018 production of titanium dioxide in China accounted for only 7.5% chloride. This leads though titanium is the advantage of our resources, but still low technical threshold processing methods mainly in China, the deep processing techniques are still controlled by others, high-end products still expensive imports.

In another field of application of titanium superalloy, which phenomenon is also present. High-temperature alloys, also known as super alloy, because of its ultra-high temperature-resistant properties of the material of choice in aerospace engine materials. U.S. F22 internal combustion engine with its temperature reaches 1070 ℃, purity required in order to withstand such a working environment requires special 99.99% of titanium in the titanium powder in a special process. However, the current mainstream manufacturers of titanium powder purification technology is still at 95-99.4% range. Due to the high content of impurities, can not meet the demand for superalloys, titanium alloys and even a significant portion of high-purity titanium powder remains high price of imported.

In addition to titanium, the use of rare earth in the country have the same dilemma. These systemic challenges of the new materials industry development encountered in the process, and restricts direct impact on the development of new materials and mature entrepreneurial innovation projects, but also ultimately affect the success of new materials investments. How to make up the short board, to shorten the gap to become whole scientific community and industry in a sought-after topics. It is also seen the importance and difficulty of the development of new materials industry in China, the state has issued a series of policies to support industry development (Table 1), but still need to catch a long process, powers of new materials Road Ren The long road.

Source: Public information

The new material equity investments difficulty

The new material behind its huge market demand, high economic value-added, highly explosive profit growth trajectory, it has been one of the key driving forces of human wealth creation. From the perspective of an equity market point of view, the new material investment is not open around the field, are also investors have been contested. In 2012, with the capital market dividends, China VC / PE market new materials industry is also a large number of opportunistic investment case.

However, after several rounds of investment peak in recent years, the market for investment enthusiasm, the relative electronic information industry, new materials and other popular terms, the growth rate was declined. On the surface, this is the market matures, the role of joint industrial investment gradually return to the essence of value investing and other reasons. However, further inquiry, we will find that there are some practical industry problems found behind this, lie in the industrial side and the capital side; who among researchers and application, severely restricted the organic combination of industry and capital. These industry-specific issues focused on the following five areas:

1, 'industrial MSG' effect

MSG industry mainly refers effect throughout the large industrial systems, certain types of new materials, although the effect is better, but the actual demand is not large, can notscale, so the ceiling of aggregate demand significantly, bad economics in the short term. The main cause of this effect comes from three reasons:

First, the current mainstream material due attention and more development has been the use of increasingly perfect, it has been a major breakthrough points or less difficult. For example, the existing steel, cement, paints, and some other categories of semiconductor material has been able to meet most needs; from the material itself and say, want to dramatically improve the performance has been very difficult. This makes the material research breakthroughs in recent years tend to focus on some of the previous concerns relatively small field of modified material.

The second is currently quite a number of studies, the main applications used in some special equipment, military, aerospace and other niche. Relatively limited application scenarios, such as manned space flight, lunar exploration, polar exploration and other special scene.

The third is the cost. Research on the early launch of new material, due to the lack of supporting the integration of equipment, the high cost of early industrialization conversion. The high price is bound to contain the outbreak needs. Therefore, some scenarios presented are added in small doses to achieve the original material modified material.

2, large-scale industrial production difficult

New materials science and proprietary products, often need to go through five stages to formally achieve industrial use: (1) the laboratory stage; (2) pilot plant stage; (3) production line model (pilot); (4) demonstration factory; (5) the factory. Each stage is necessary, and not overnight. To achieve from the laboratory to the pilot, and then across the industrial production is not easy, a part of any deviation may lead to the final product can not scale production. This one is the most difficult to cross, there is the magnitude of differences in large-scale industrial requirements required manufacturing equipment and laboratories and pilot plants, resulting in greatly increased probability of deviation from the laboratory to the final production of the long time-consuming often than it expected.

Graphene development in recent years reflected the difficult process of production of new materials. In 2004 graphene was isolated from graphite, it opened a revolutionary chapter in this area. In a few years later, the global industrialization of graphene enthusiasm continues to climb, many countries have increased R & D in the field of graphene materials. But the reality is that so far only a few still graphene powder as raw material base products out of the lab available. And for high-end applications of graphene films, graphene batteries and other key technologies, including preparation, dispersion, application and environmental protection, has as yet not achieve a substantial breakthrough. This is in sharp contrast with the high market expectations early. The reason is that large-scale, low-cost, high-quality graphene preparation technology is not yet a breakthrough, can not meet the needs of industrialization, a direct result of the application of graphene materials widely the investment community, the research community, the business community concerned has been unable to break out as scheduled .

3, protection of intellectual property is difficult, leading to structural imbalances in production capacity

Materials science discipline has its particularity. Empirical trial and error type, discrete material is still the mainstream of development. This also led to the entire development cycle across the production of long, big investment, high uncertainty period. From another perspective, one of the key barriers to research material accumulation and experience. As long as adequate funding and under the necessary supporting hardware and software support, research breakthroughs in the laboratory is only a matter of time. Also caused a lot of domestic project experience, often herd in investment-driven, resulting in the introduction of a common base material early, even if the quality is not high but the capacity has rapidly soared. This phenomenon in the domestic alternative process some new material particularly evident. On the other hand, in the country of some of the preparation process is relatively difficult to take patent protection, plus some local disregard for patent protection. These two reasons resonance, resulting in a lot of new material that is the initial product launch encounter technical imitation, copying, and leading to low excess capacity, profit margins are compressed.

In recent years, the development of domestic carbon fiber industry went through such a roller coaster. Carbon fiber is known as 'black gold', is aviation, aerospace, military and other aspects of irreplaceable needs, so a number of domestic research institutions and listed companies have research and development around the carbon fibers. At present, China's carbon fiber industry has been fully broken through the T700 and T800 grade carbon fiber production technology to achieve a domestic alternative. Country have a number of similar products lines, production capacity reached the level of the third (6) in just three to five years. However, most applications are still low-end products, which also led companies can not achieve profitability, managed to support the embarrassing situation.

Source: Institute for Industrial Economics Preview

4, investment and financing difficult to grasp node

'Used to love take the eye, and now can not afford to climb,' it is a metaphor for the kind of image the investment characteristics of new materials equity. When the product from research and development to final production process between the plant, the enterprise as a whole has been in the investment period, and therefore strong corporate party financing needs. But because there is a strong market and technology are uncertain, investment institutions can eventually achieve the outcome difficult to predict in advance and carried out verification great.

As the most cutting-edge research, for 'liquid metal', 'carbon nanotubes', 'fullerenes', 'airgel' and other highly conceptual new materials research, due to technical maturity longer period, market demand flashpoint more difficult to grasp, so a lot of attention in the field of new materials and investment institutions are often a lingering sense at the door, not easily shot.

And once the product to achieve a breakthrough and get the scale downstream applications, from production to production is often in short supply in the twinkling of an eye. At this company for a strong bargaining power downstream, often require payment and delivery and even advance. This means that the company has an excellent cash flow and strong profits, the urgency of party financing companies greatly weakened, while the status of the negotiations between the companies and venture capital institutions will be ectopic. For investors, this time they often easy to invest in high, reducing the fault rate, little twists and turns in the event of future industrial development will tend to fall into a passive, or even a loss. As Apple had hoped to try using a panel of sapphire material IPHONE6, set off the investment boom in the market for sapphire industry. However, when the absorption of the supporting vendors heavily invested have commissioned a new sapphire production line, Apple because of cost reasons eventually abandoned the continued use of sapphire panel on the new generation of mobile phones, led directly to the sapphire supplier to the US very special advanced technology company liquidation, domestic exposed laugh Technology sapphire business losses year after year. After the 2014 high of follow up considerable industrial investment eventually had to face the harsh reality of a loss out.

5, hear their expert opinion

Since the new materials are often in the forefront of technology, to demonstrate its technology and product knowledge is beyond the scope of the vast majority of investment managers and investment companies, the new material equity investments generally will listen to the views and analysis of relevant industry experts. But these expert opinions appear great fallacy and assume probability practice, in general there are two aspects of the causes. One reason is that the kind of new materials involved more and more and more current research stage and more interdisciplinary cooperation. Experts in the field is difficult to give a single comprehensive, accurate recommendations. Partly because to solve a problem may generate a lot of different paths program. The meter mobile computer storage technology. The scientific community has evolved out of several sets of solutions, from U disk, memory VCD-SVCD-DVD now more widely used, and even the network cloud disk. This involves a lot of technical evolution, also taking into account what kind of technology will lead into maturity. Even exposure to which researchers often difficult to predict the eventual development of process technology.

This leads to investment institutions investing in the field of new materials, often face extremely difficult to verify and professional peer deep expertise subjective component greatly even opposing views of the situation. This led directly to investment institutions in tune with the industry to make investment difficult to find objective and rational investigation of third-party experts give valuable advice and evaluation.

Our team of investment logic

Based on the properties of the new materials industry understanding and investment in the history of endowments, investment investment industry encountered difficulties Inresponse to these new materials, we have our own unique way of thinking of the investment logic of new materials. The common exchange to share with you.

A concern for high maturity, large market capacity of the new material project

We prefer to invest in the technology path rather than follow the strategy is based on the original strategy, namely choice of technology maturity is relatively high, supporting a more complete technology roadmap. Development of new materials to the time of the application of the general longer, in order to match the investment horizon. We will actively seek already proven technology in the world, focusing on investment in the project is about to be commercialized mass production. Compared to the same time truly new materials enterprises prefer to invest in enterprise application of new materials, in order to enjoy greater market capacity.

2, the main entry point to the domestic alternatives

Domestic alternative is the most promising area of new materials can be successful in the short-term direction. At present, the level of scientific research is developing very fast, hardware facilities and personnel have been close to the level of foreign reserves, only less time to accumulate. Once the hatch has security funds, the chance of success than the original development of the probability of success starting from basic research will increase the number.

3, the investment has a double technical and resource barriers to business

In order to reduce plagiarism brought by the late homogenization of competition, we rely on is based on the unique technology along with two special resource endowments and corporate resources to build a more lasting stability moat. Especially some resources unique to China, but also conducive to the formation of the core competitiveness worldwide.

4, M & A investment exit strategy as a priority

New materials research and development project cycle is long, technically demanding, big investment. From R & D to product molding requires at least five years, and to promote the application period may be longer, if the IPO as the main means of exit, you can not exactly match the current market deposit renewal of major investment funds. Therefore, we will mergers and acquisitions tend to be the main exit strategy. Based on this we invest in the beginning, we will tend to the introduction of the industry upstream and downstream enterprises as a strategic partner to jointly bid for the proposed strategic investment.

to sum up

New materials is an important factor in promoting social progress, so countries in the world make great efforts in the field of materials science. With the continuous development of China's economy, the material, especially the development of new materials with a sophisticated property is the focus of our attention. China in recent years to catch up in the field of new materials, and to achieve a localization replace a portion of the material, but only a few. In the 130 kinds of key materials, achieve self-sufficiency ratio of only about 14%, while 32% rely entirely on imports, stability and other domestic products are also not guaranteed.

However, we believe that the opportunities of China's new materials industry will stabilize in it. Although there will be difficulties in terms of investment, but in the long run, the development of new materials industry will have huge profit margins can be released.

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