UBS: The Chinese A-Share Semiconductor Sector: Improved R&D and Fixed Asset Efficiency Support CFROI Enhancement

Main Points

The investment growth in China’s A-share semiconductor industry is strong, with R&D investment growth outpacing fixed assets.

Since the establishment of the National Integrated Circuit Industry Investment Fund in 2014 and the inclusion of semiconductors as a strategic emerging industry in the “14th Five-Year Plan,” investment in this sector has significantly increased. According to the report, the total investment of the 50 largest A-share semiconductor companies in China has grown at an average annual rate of over 19% year-on-year over the past five years. Although fixed asset investments, such as factory equipment, remain the largest component, the growth rate of capitalized R&D has surpassed that of fixed assets, reflecting a shift in the industry’s capital allocation priorities.
Both R&D-intensive and capital expenditure-intensive semiconductor companies are expected to see improvements in CFROI, but the fundamentals of the former are stronger.

The report categorizes Chinese semiconductor companies into two groups: “R&D-intensive” (such as North Huachuang, Zhongwei Company, etc.) and “capital expenditure-intensive” (such as SMIC, Huahong, etc.). The cash flow return on investment (CFROI) for both groups is expected to improve between 2025 and 2026. Historically, R&D-intensive companies have had higher CFROI levels, which are expected to reach a five-year high of 12.9% in 2026; meanwhile, the CFROI of capital expenditure-intensive companies is expected to recover moderately after hitting a low in 2024. From a profit expectation perspective, the market is more optimistic about R&D-intensive companies, which have had positive CFROI adjustments for six consecutive months, while capital expenditure-intensive companies have continued to show weakness.
The valuation premium between the two types of companies is converging, and current valuation levels are not aggressive.

In terms of valuation, measured by the HOLT Market Implied Yield (MIY), R&D-intensive companies have historically enjoyed a valuation premium (lower MIY). However, over the past three months, the MIY levels of both groups have converged, narrowing the valuation gap. Currently, while the MIY of R&D-intensive companies has rebounded from a January low, it remains 50 basis points below its five-year average; the MIY of capital expenditure-intensive companies has returned to its five-year average level. The report suggests that relative to their historical levels, the current implied valuations of both groups are not aggressive.
Improvements in R&D efficiency and asset efficiency are key drivers for future return growth in both types of companies.

For R&D-intensive companies, although initial increased investment has led to a decline in R&D efficiency (total sales/capitalized R&D investment), this metric is expected to rebound and reach a ten-year high in 2026, supported by strong sales growth expectations. Similarly, for capital expenditure-intensive companies, their fixed asset efficiency (total sales/inflation-adjusted fixed assets) is also expected to recover after a decline following accelerated investment, as investment growth slows and strong sales expectations materialize. The improvement in efficiency is the core driver supporting the future CFROI increase for both types of companies.
The report highlights Bestechnic among R&D-intensive companies and JCET among capital expenditure-intensive companies.

Among R&D-intensive companies, Bestechnic Shanghai is noted for its high R&D efficiency, ample cash flow to support R&D activities, and positive CFROI adjustments. In the capital expenditure-intensive category, JCET stands out due to its superior fixed asset turnover, strong debt repayment capability, continuously improving CFROI forecasts, and relatively discounted valuation compared to its peers and historical levels.

Factual Basis

The total investment of the top 50 A-share semiconductor companies in China has grown at an average annual rate of over 19% year-on-year over the past five years.
The report categorizes companies into two types: R&D-intensive (the top 20 companies with the highest proportion of capitalized R&D in total investment) and capital expenditure-intensive (the top 20 companies with the highest proportion of fixed assets in total investment).
The median CFROI of R&D-intensive companies is expected to reach a five-year high of 12.9% in 2026, while capital expenditure-intensive companies are expected to recover moderately after hitting a low in 2024.
The three-month CFROI adjustment for R&D-intensive companies has been positive for six consecutive months, while capital expenditure-intensive companies have continued to show weakness, recording a maximum monthly decline of 26 basis points in May.
The current MIY of R&D-intensive companies is 50 basis points lower than their five-year average, while the MIY of capital expenditure-intensive companies is at their five-year average level.
Benefiting from strong sales growth forecasts (expected to grow by 15% in 2025 and 2026), the fixed asset turnover of capital expenditure-intensive companies is expected to rebound.
Bestechnic Shanghai and Rockchip Electronics have both performed excellently in R&D efficiency and funding support for R&D, with positive CFROI adjustments over the past three months.
JCET ranks high in fixed asset turnover and fixed cost coverage, and its valuation is discounted relative to peers and its historical levels.

Statement Summary

This report aims to analyze the background of the surge in investment in China’s A-share semiconductor industry driven by policy, and its impact on corporate profitability and valuation. The report creatively employs the HOLT analytical framework to categorize companies in the industry into“R&D-intensive” and “capital expenditure-intensive” groups, thereby revealing the performance differences of companies under different capital allocation strategies more clearly.

The core point of the report is that although the profitability (CFROI) of both groups is expected to experience a cyclical recovery,R&D-intensive companies exhibit stronger fundamentals and growth momentum, with profit expectations and historical return levels superior to those of capital expenditure-intensive companies. At the same time, the report notes that the current valuation levels of both types of companies do not overly reflect future expectations, and the convergence of valuation gaps may provide investors with a new perspective. Ultimately, the report emphasizes that whether in R&D or capital expenditure,improving the efficiency of capital utilization (i.e., R&D efficiency and fixed asset efficiency) will be the fundamental driving force for sustained corporate value growth, and based on this, attractive individual stock cases have been selected.

Key Data

19% YoY Growth: The average annual compound growth rate of total investment by the top 50 A-share semiconductor companies in China over the past five years, indicating rapid industry expansion.
12.9% CFROI Forecast: The expected median CFROI for R&D-intensive companies in 2026, marking the highest point in five years, indicating that their profitability will reach new heights.
MIY Convergence: Figure 5 shows that the gap in market implied yield (MIY) between R&D-intensive and capital expenditure-intensive companies has significantly narrowed in the past three months, indicating a reassessment of the valuation differences between the two.
Figure 1: Total Investment Composition: This figure visually demonstrates the increasing proportion of capitalized R&D expenditure in total investment from 2015 to 2026 (forecast), while the proportion of fixed assets remains relatively stable, highlighting the industry’s trend towards R&D.
Figures 7 & 13: Company Screening Matrix: These two scatter plots are the core tools for screening quality companies in the report. Figure 7 locates quality R&D companies like Bestechnic based on “R&D efficiency” and “cash/R&D expenses”; Figure 13 locates quality capital companies like JCET based on “fixed asset turnover” and “CFROI changes”.
6.2% and 7.5% Implied Growth: The report uses the HOLT model to reverse-calculate that the current stock prices imply that Bestechnic and JCET need to achieve average annual sales growth of 6.2% and 7.5% respectively in 2028-2029, providing quantitative references for investors to assess their valuation rationality.

Recommended Asset Targets

Bestechnic (Bestechnic Shanghai): Viewed favorably among R&D-intensive companies due to itshigh R&D efficiency, sufficient cash reserves to continuously support R&D activities, and continuously improving CFROI since 2022, with positive profit expectations.
JCET Group: Viewed favorably among capital expenditure-intensive companies due to itsoutstanding fixed asset turnover, strong debt repayment capability, continuously improving CFROI forecasts, and current valuation being discounted relative to peers and its historical levels.
Rockchip Electronics: Listed alongside Bestechnic as a company with high R&D efficiency, strong financial strength, and positive profit expectations.
Jiangxi Lian Chuang and Suzhou Novosense: Noted among capital expenditure-intensive companies for their high fixed asset turnover and strong year-on-year CFROI growth.

Professional Terms and Important Events

CFROI (Cash Flow Return on Investment): A core metric of the HOLT methodology used to measure a company’s economic profitability. It calculates the ratio of cash flow generated by the company to its total capital invested (adjusted for inflation). This metric is used throughout the report to assess and compare the operational performance and return levels of companies.
HOLT MIY (Market Implied Yield): A forward-looking indicator in the HOLT valuation model that reflects the future investment return rate or discount rate implied by the current stock price. A lower MIY indicates higher market expectations for a company’s future growth and a more expensive valuation; conversely, a higher MIY indicates a lower valuation or a higher risk premium required by the market.
China Integrated Circuit Industry Investment Fund: Established in 2014, commonly referred to as the “Big Fund.” This is a national-level investment fund set up by China to promote the development of the domestic semiconductor industry. The report views it as a key policy catalyst for triggering the investment boom in the industry and driving industrial upgrades.