Interview of Material Investment Team of JD Capital: Grasp Opportunities to Forge New Material Leade
Source: Materials Science and Engineering
Statistics show that, from 1990 to 2015, the compound annual growth rate of the gross output of Chinese construction industry had exceeded 20%. The enormous and consistent construction demands propelled the development of such basic materials as concrete and cables. Meanwhile, a number of excellent basic material manufacturers emerged, generating enormous opportunities for investment.
“Previously, in material investment, we mainly focused on those common basic materials of a large consumption, including metal, construction materials, electrical materials, glass, ceramics, and plastics,” said the investment team of JD Capital. The wide array of materials indicates an enormous market. The annual gross output of the listed metal material companies alone amounts to over 1 trillion yuan.
Over the years, JD Capital has made massive deployment in the material industry. So far, among its investees, four industrial bellwethers have gone public, which are Gold Cup Electric (002533.SZ), Hainan Ruize New Building Material (002596.SZ), Star Cable (603333.SH), and Fengxing Limited (002760.SZ), and one (Shenfu Explosive Material) has been merged by a listed company. In addition, other eight investees including Anda Technologies (830809.OC) and BTR (835185.OC) have been listed on the National Equities Exchange and Quotation (NEEQ).
Investment-fueled economic prosperity brings about a booming basic material industry
From the end of the 1990s to the beginning of the 21st century, Chinese economy had witnessed a rapid development. The prosperity of the construction industry and manufacturing industry brought along lots of investment opportunities in the basic material industry. PE investment in this phase was mainly based on the pre-IPO investment model, during which time JD Capital received satisfactory returns.
In the concrete sector, for example, JD Capital became a shareholder of Hainan Ruize (002596.SZ) in 2009. “Located in Sanya, Hainan, Hainan Ruize is endowed with geographical advantages. As Hainan becomes a domestic tourist center, the demand for basic materials from large-scale infrastructure and real estate construction projects soars. And since it is costly to transport cement from inland factories, Hainan Ruize stands out,” so explained the responsible person of the investment team. In 2011, Hainan Ruize went listed.
As for the electrical materials, Gold Cup (002533.SZ), also an investee of JD Capital, mainly deals in household cables at the consumer end. “We decided to invest in Gold Cup not only because of its quality materials, but also for its outstanding brand effects in South China,” introduced the responsible person. According to public information, Gold Cup and Hainan Ruize, both invested by the funds managed by JD Capital, have already realized an annualized return of 50%, which is truly remarkable.
As far as JD Capital is concerned, the material industry is the upstream of the construction and manufacturing industries, and also a fundamental sector for the national economy. The above-mentioned successful investments with remarkable returns wouldn’t have been possible without a fast growing economy fueled by investments.
Cut overcapacity of traditional enterprises, and propel business transformation with new materials
“As China’s economy enters the new normal, traditional material enterprises are generally faced with the problem of overcapacity in their development. Since the development of the material industry is still in its infancy, there is tremendous room for quality enhancement and high-end portfolio expansion,” the investment team pointed out, “And as a result, massive investment opportunities can be found in the new material sector.”
In 2016, the Ministry of Science and Technology of China revealed 36 national key R&D projects, seven of which were directly related to materials. While in the past, basic materials were the mainstream, in the new phase of economic development, new materials indicating transformative influences on the future industrial pattern become the hotspot issue of China, enterprises, and capital.
“Looking back on the development of household televisions these years, we can have a glimpse of the transformative impact of new materials on traditional ones.” According to the investment team, in 2008, the core material of most household color televisions was still cathode ray tubes (CRT), and the market share of such televisions was twice that of liquid crystal display (LCD) televisions. As the LCD application technologies matured, however, the market pattern totally changed. Nowadays, CRT televisions, hardly found in the market, is only a memory of the elder generations.
“So to speak, if there emerges a bottleneck to the development of original businesses, or new material technologies start to be industrialized, traditional material enterprises may as well shift their focus to new materials, so as to explore more development opportunities.”
In addition to LCD materials, the advancement of lithium battery driven the development of new-energy automobiles is also exemplary.
In 2016, as the industrialization of lithium battery became foreseeable, the capital market witnessed a mania for the concept of lithium battery, which gave rise to almost quintupled stocks in the A share market. The same case continued in the National Equities Exchange and Quotation (NEEQ), with Anda Technology, a lithium material company, rising against the downward trend. After its official market making transfer was completed in January 2016, the share value of Anda Technology has grown by 200%. As a domestic bellwether, the company has been the major supplier of the anode material LiFePO4 for BYD, a leading new-energy automobile manufacturer in China, for six consecutive years.
JD Capital has invested in Anda Technology years ago.
Before JD Capital’s involvement, Anda Technology was a traditional chemical company engaged in phosphorus chemical production and technology accumulation for over a decade. “When we first talked with Anda Technology, new-energy automobiles were still in a conceptual stage. The major fallback restricting the application of the concept was that the anode material of batteries was unable to be charged in cycles or to achieve a high power density,” introduced the responsible person.
The automobile industry in China has long been subjected to foreign companies in terms of internal combustion materials and equipment. However, when it comes to new-energy cars powered by electrical engines, companies across the world are generally on a level playing field. As a result, the field of new-energy automobiles promises a significant chance for Chinese automobile industry to catch up with leaders in automobile technologies by undertaking the international industrial transfer. Therefore, battery anode materials are not only the investment focus worldwide, but an investment priority for the new-energy industry of China.
Globally speaking, the development of battery anode materials focuses on the upgrading of two kinds of materials: one is ternary material with a high power density but performing unsatisfactorily in safety and cycle charging theoretically; the other is the LiFePO4 material performing satisfactorily in safety and cycle charging but with a relatively lower power density in theory.
“After an in-depth research on the technical background and R&D progress of manufacturers home and abroad, we consider that ternary materials, despite of its high power density, will not show obvious advantages over LiFePO4 in the short run due to technical difficulties. At the same time, considering the safety of passengers and the capacity of being charged in cycles, LiFePO4 will be a breakthrough point for the development of new-energy automobiles in China,” the team pointed out, “Anda Technology, as an experienced phosphorus chemical producer in China, boasts advanced LiFePO4 production techniques and the potential to become an industrial bellwether in the future.”
After Anda Technology developed the anode material LiFePO4 and its precursor, JD Capital and the company set up cooperation between capital and high-quality technologies, which allowed consistent input in R&D and production lines and ensured product quality as well as stable and massive production.
Nowadays, new materials are no longer limited to liquid crystal and lithium battery materials. The category keeps expanding along with technical breakthroughs. For instance, some latest display materials, represented by OLED, have been developed. With such properties as high contrast, low power dissipation, fast response, and flexibility, they will be distinguished enough to impact the dominant position of LCD materials when relevant technologies mature. Meanwhile, fuel cells theoretically able to hold denser power also gradually come into our view, and are expected to be industrialized once the technologies get prepared.
With these knowledge, the material investment team of JD Capital are now engaged with multiple domestic and international new material enterprises in such fields as composite materials, 3D printing materials, OLED, lithium battery materials, and graphene, so as to prepare for the next industrial boom.
Amidst industrial cycles, promote industrial bellwethers to emerge with M&A
“The material industry is the upstream of the industrial economy. To dig the investment value of the industry, we should not only take its iteration and cycle as the two key indicators for the analysis of industry development tendency, but also fully understand the basis of the industrial investment logic,” so considered the investment team of JD Capital.
To put it specifically, in terms of internal development, the material industry is in essence motivated by technologies and innovation. A new material verified to be applicable can change our society to a large extent. From wood, steel to plastics, for example, all of them have made profound changes to society and people’s lifestyles. Foreign material and chemical giants such as 3M, Toray, and Asahi Glass secure their dominancy in the industry by constantly upgrading product lines.
With regard to external development, the total volume of materials as the basis of all production activities demonstrates significant cyclical fluctuation as downstream demands vary. In the long term, in the material industry with diversified categories, as new materials start to be applied and promoted, the life-cycle characteristics of traditional materials become more obvious.
“From a special perspective of the industry cycle, the new normal of economy, though brought the material industry to its cyclical low, also generated sufficient opportunities for industrial consolidation, for M&As are the trend for their development at its low point.”
On the basis of its understanding of such periodic characteristics, JD Capital launched the “Bellwether Plan” targeted at the material industry, in a way to make in-depth deployment for potential leading companies in the sectors at the cyclical low. JD Capital aims to help the companies embark on the path of industry consolidation with its capital strength and thus pull ahead of their competitors, and meanwhile, benefit the companies with industrial recovery and a higher industry concentration. As for the existing bellwethers in the industry, JD Capital, while consolidating their leading position with its capital power, assist them to make industry synergy-oriented expansion.
“At the current stage, we continuously follow the industrial reform momentum given by new materials, and the cyclical oversold and bounces of some industrial segments, both of which promise tremendous market opportunities,” so considered the responsible person if the investment team of JD Capital, “Our tasks are not only to identify potential market bellwethers, but to keep enhancing their core competitiveness and thus achieving sustainable growth through M&A and expansion.”
Since its establishment, JD Capital has invested over 30 material enterprises. The material investment team has engaged with over 1,000 companies in this sector, and set up a worldwide project system, all of which provided excellent operational platforms and resources for JD Capital’s “Bellwether Plan” in the material industry. JD Capital will take the implementation of its “Bellwether Plan” as the main tool, and “industry + capital” as the methodology, in a way to comprehensively propel leading companies in the material industry to make leap-forward development.
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