Will New Tax Incentives Really Benefit China’s Semiconductor Industry?
The policies recently launched by the State Council of The People's Republic of China raised intense discussions, but the stock market did not react as many anticipated.
► A limited number of companies will considerably benefit from the new tax policies.
► The local stock market took this news with a grain of salt.
► The measures will aggravate the Matthew effect in the Chinese semiconductor market.
On August 4, 2020, the government launched tax policies to support semiconductor companies in China, and large amounts of private investors speculated that the stock price of IC firms would rise significantly. However, the price of the benchmark semiconductor ETF (512480:SH) increased only by 1.34% on the next trading day.
Why didn't they buy into it?
First, judging from P/E (TTM) ratios, the valuation of China-listed semiconductor companies is currently very high. For instance, according to the closing price on August 6, 2020, microfabrication equipment maker AMEC (688012:SH) was trading at 585.57 times earnings, while its European counterpart ASML (ASML:NASDAQ) had a 'humble' 45.2 P/E; the mainland's top foundry SMIC (688981:SH) closed at a 313.32 P/E – way higher than Taiwanese TSMC's (TSM:NYSE) 27.37.
Second, money flows into other industries. As the relationship between the United States and China is becoming more and more fraught, military-industrial and vaccine A-shares perform strongly, becoming the investment focus of the public in recent days.
Third, the new tax policy will not make a big difference to some companies. On February 9, 2011, the state published a similar tax incentive policy. Therefore, for leaders in each sub-sector, current tax expenses are low. For example, in 2019, SMIC's tax expenditure was CNY 158.49 million while its revenues were CNY 21.39 billion.
Who will benefit?
The policy will benefit almost all companies in the IC and software industries, but the number of companies meeting demands, including operation period, technology level and break-even, is very limited. To figure out which level different IC manufacturers are at, we collected the information of their most advanced tech and respective operation periods.
Apart from IC manufacturing companies, firms in other parts of the industry chain can enjoy policy bonuses, but according to rules 2 and 5 in the newest policy, the list of those companies will be decided by The National Development and Reform Commission, the Ministry of Industry and Information Technology, in conjunction with relevant departments.
With favorable policies, companies with advanced technologies will experience better development opportunities, but some of them need to reach the break-even point first.