Wei Shi, managing partner of JD Capital: There is great potential for domestic substitution of Chinese companies, and only when self-sufficient is achieved first will there be a chance to “overtake” the market

2022-08-15

Summary: Commercialization ability is the key

Recently, “Investment Variations: The 16th Annual China Investment Conference-Annual Summit ” was held in Hangzhou, China, hosted by China Venture.

Wei Shi, the managing partner of JD Capital, was invited to participate in the forum and show his opinions on the structural investment opportunities of domestic substitution.

The following is compiled from his statement:

There is excellent potential for domestic substitution. Commercialization ability is the key.

JD Capital was founded in 2007, an investment institution listed on the main board of China. We have approximately RMB 36 billion of assets under management, with dual currency funds in RMB and USD. We focus on those principal investment directions: consumer, advanced manufacturing, and healthcare.

There is a great investment opportunity in domestic substitution. JD Capital focuses on growth and maturity-stage investments. Over the past decade, many companies we have invested in have achieved great returns because of the general trend of domestic substitution.

Domestic substitution is a grand narrative. We are concerned about the technology and also about the commercial ability of the company. We emphasize that the products and services created by companies should be recognized by the market and create value for customers and consumers, not just provide a specific technology that solves a stuck problem.

In this regard, we also have some lessons. Once invested in a new material enterprise, the technology threshold is high so that the global market can do it few. Still, the product market space is narrower. The commercialization ability could be better. We conclude that all companies that do well have high enough technical barriers and strong commercialization capabilities.

Specific to each sub-sector, from our historical experience, equipment, and materials have many domestic alternative investment opportunities. In the past, JD Capital has laid out many domestic substitution projects in these two areas. Take semiconductors, for example; there are many opportunities for domestic substitution, especially in the semiconductor equipment segment. A while ago, we just exited from a semiconductor chip test equipment company, which is a typical case of domestic substitution. By breaking the monopoly of international leaders, the company was the first in China to mass produce and sell digital and SoC (system-on-chip) testers.

In addition, in the field of materials, essential innovation is a tricky thing. But through learning or imitation, once done, the speed of the enterprise running out may be relatively faster. Among them, we have seen a relatively large possibility of accelerating the trend of domestic substitution in some terminal materials, such as functional protection materials applied to panel photoresists and 3C display devices. So, there are many excellent investment opportunities here. We are very bullish on this track overall.

Alternative and innovation: Only by first achieving self-sufficient can we have the opportunity to “overtake” the market

Domestic substitution and independent innovation are not contradictory. As an investor, for example, which may not correspond exactly, I think “substitution” is more likely to create fund DPI, and “innovation” is more likely to create fund IRR. Under the general trend of domestic substitution, there is still opportunity in many fields. The key is to be patient in researching.

New materials areas mentioned above, innovation is essential. It is the driving force but costly and time-consuming. Change or great innovation is a tricky thing in this field. It may be more than nine deaths. Most companies in the market will die on this challenging road. Eventually, a few will be able to survive and run out.

However, if the enterprise can go in the direction of “alternative” first, through the cost advantage to survive, through the market advantage of strong up, to obtain the ability to create blood and cash flow, perhaps it will have more and better opportunities for independent innovation. When companies have the capital to support innovation and make more disruptive and revolutionary innovations, we believe it is a chance for sustainable “overtaking.”