China VC Market Update (100212)

8/14/2019 China VC Market Update (100212)

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China VC Market Update

iD TechVentures (iDT)February, 2010


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Table of Content

Macro Economy and Stock Market

VC Community in China

ChiNext Board (Shenzhen GEM)

Local Regulations Impact on VC Investment

RMB Fund Management

Wrap Up


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Macro Economy and Stock Market


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China Economy, 2009

China GDP growth in 2009 reached 8.7%, with ultimate consumptioncontributing 4.6% points and investment 8 points, while net exportssubtracted 3.9% points.

Amid depressed global economy, China turned around a graceful V-shaped recovery. Bottomed out from Q1s 6.1% and grew upsteadily: Q2 7.9%, Q3 8.9% and Q4 10.7%

Key factors: governments prompt RMB4 trillion stimulus package,moderately loose monetary policy (RMB9.5 trillion lending, doublingof 08s), a big domestic market to boost local consumption andrelatively healthy financial sector..

GDP amount reached USD4.9 trillion, could overtake Japan tobecome the second largest economy in the world.

Overtook Germany as the worlds largest exporter in 2009.


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China Economy Outlook, 2010

GDP growth to be in the range of 9-10%. Growth will not be a bigchallenge. Key effort will be on control and adjustment from short-termexpansionary urgent measures in 2009 to a healthy and stable

development system. Concerns going forward:

Excessive credit growth leading to inflation

Danger of real estate bubble bursting

Production over-capacity due to massive investment in heavyindustries (such as those addressed by NDRC earlier in steel, cement,plate glass, coal-chemical, polycrystalline silicon and wind power

equipment).

A weak global outlook


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VC Community in China

- The first 11 months, 2009


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VC Investment Dropped

Source: VC Data for First 11 Months, 2009, Zero2IPO, Dec., 2009


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VC Fundraising Declines



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VC Investment by Currency

No. of Deals: 425

Amount invested: US$2.4B



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VC Fundraising: RMB vs. USD

by Fund Number : 90

by Funding Amt: USD5.1B



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VC Investment by Industry

3 1

2

1

2

3

Amount invested: US$2.39B

No. of Deals: 425



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Broad IT Investment (%) Dropping(Data Comparing 05 & 09)

Healthcare

2.5%Other

Hi-tech

9.4%

Traditional

13.0%

Services

13.3%

Unknown

1.4%

IT

60.3%

Year Inv $ Broad IT % 05: 1.06B 60%

06: 1.70 6207: 3.2 4308: 4.2 3609: 2.4 30

Source: Zero2IPO VC Reports, 05 till 09 (first 11 months)

(2005)

(2009)


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VC Exits

by Industry : 106

by Exit Option: 106



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Summary of VC Community in China: 2009

Generally speaking: Stable, recovering, but cautious. RMB funds prevailed, in terms of fund raising and investment. RMB fund raising

surpassed that of USD in 2009 for the first time. RMB onshore fund raising willcontinue to be active in 2010.

Many foreign VC firms also choose to directly raise pure RMB funds in Chinainstead of JV due to the legal environment is not friendly.

After ChiNext (Shenzhen GEM) was formally launched, domestic IPO is becoming

companies new preference. For VCs, the competition of pre-IPO round is morefierce due to many underwriters bring their own direct investment vehicles to invest.

With the strong research and team resource, they are at an advantageous positionto access deal flows. Besides, domestic public companies are aggressively to getinvolved in VC business with setting their own VC units, too. The war fielddefinitely become more competitive.

In 2009, VC penetration rate (VC annual investment / GDP) in China was 0.05%.

Comparing with mature VC market such like the U.S. and Europe which are above0.1%, within 10 years, VC investment in China still have great rooms to grow(Source: Zero2ipo research center, 2010-01)


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ChiNext started trading on October 30, 2009

ChiNexts position on listed companies:

Two High: High Tech and High Growth.

Six New : New economy, New services, New agriculture, Newmaterials, New energy and New business model.

Total 36 companies on trade: 28 IPO for first batch and secondbatch of 8 companies started stock offering on December 8th 09.More than 80% of these companies have VC/PEs investment.

(China Private Equity Matters, 2009-10-10). Most of the companies are

more than 5 years old. (VC Newsletter, #46, 09, CVCRI)


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Summary of ChiNext

(as of Dec. 31, 2009)

91.5%36567Total

84.5%7627Biotech /Healthcare

85.5%3630Clean Tech

93.2%9616Broad IT

134.5%3713Service

85.9%14461Traditional

Average%Appreciation after

IPO

No. of ListedCompany

Average Capital Raised(RMB:M)

Industry

* Average PE: 105.38X as of December 31, 2009* Expect to have 120 companies list on ChiNext in 2010(source: www.Cyzone.CN, 2010-01-12)


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Observation of ChiNext

High PE: Current PE is about 100x, while Shenzhen SMEs PE is about 30x andmain board is 23x. ChiNexts PE now is far higher than those markets.

The above situation also caused the overall valuation on VC market to rise for 20%-30% comparing with 2H08 and 1H09. (quoted Mr. Xiao Bing, Shenzhen Fortune Venture

Capital). Valuation for pre-IPO round is boosted. In some cases, 20x PE still attractinvestors.

Averagely, the investment return for IPO on ChiNext board and Shenzhen SME are

higher than IPO on other overseas markets: 6.23X with IRR114.2% for ChiNext andSME, comparing with 4.36X with 92.3% on other markets. (Zero2ipo research center,

2010, 01)

So far very few foreign VC have investments got listed on ChiNext. This is due toforeign VC used to invest into offshore companies. With ChiNext up and running, weexpect more foreign VC, including iDT, will be involving into onshore investment.

Not really a market for Two High and Six New: Many companies filing IPO onChiNext simply transferred their applications from Shenzhen SME or main boarddue to the long queue in those two boards.


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Local Regulations Impact on VCInvestment


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Foreign Currency into RMB for Investment In the past, under the restriction of Circular 142, without case-specific

approvals, foreign investors, including GPs, cannot convert foreign

currencies into RMB for the purpose of investing in RMB funds. Last year, Shanghais authority announced that GP organized in Shanghai

Pudong would be able to convert foreign currency into RMB for investmentin their own RMB-denominated funds. GP companies established inPudong can receive automatic waiver to convert foreign currency intoRMB for investment in their own RMB funds. (iDTs comment: it seemsthat the special measures promulgated in Pudong encounteredimplementation difficulties as SAFE is not agreeing with the conversion)

LPs attempt to convert foreign currency into RMB for investment purpose

will continue to be subject to the Circular 142 restrictions

Debevoise & Plimpton LLP, Client Update, Nov 2, 2009


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More Friendly to Foreign PE / VC

In August, 2009, foreign PE institutions have been officially given thegreen light to set up RMB funds. Shanghai and other municipalities arekeen to introduce incentives to attract foreign PE to relocate (source:Zero2IPO eWeekly, 2009-08-21, No 0400)

Shanghai Pudong New Area Government formally signed an MOU withBlackstone. Blackstone established a management company in theNew Area and will raise its first RMB fund.(http://news.chinaventure.com.cn/2/20091030/27885.shtml)

First Eastern Financial Investment Group (Hong Kong based) wasapproved to register a fully-owned subsidiary in Shanghai. Thissubsidiary will act as a GP and do RMB fund raising in China

CLSA, Macquarie Group, and Prax Capital are also following.

In Jan. 10, Beijing followed Shanghai movement to announce new policy

which favored foreign PEs staging in Beijing. The most alluring part of thenew policy is that Beijing will provide funding support to qualified GP.


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More Friendly to Foreign PE / VC

In November, 2009, CSRC released new regulation (), which paved a way for limited partnership RMB funds to exit theirinvestees through IPO. Originally, limited partnership RMB funds are NOTallowed to have depository account, which was an obstacle for funds toexit investment. Recent cases showed that some limited partnership fundstransferred their stakes to other non-partnership entities before IPO.

Though foreign-invested limited partnerships now is feasible after thegovernment released new law in December, 2009, foreign VC under

limited partnership is still not allowed.

Chinese government is working on improving the regulation system andmake it more friendly to foreigner VC and investors. We are optimistic onthe progress and expect both foreign VC / PE could share ChiNext boards

fruit in the future.


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RMB Fund Management


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Short-mid Term Challenges

for RMB Onshore Investment JV-type RMB funds could not work efficiently:

Not welcome by investee companies because it will create morecomplexity when companies go IPO

Exchange conversion is a problem

Every investment requires government approval

Even though foreign VCs can raise pure RMB funds, however, foroverseas LP, there are issues of conflict of interest. Recent example:

Bill & Melinda Gates Foundation announced that they will not followHony Capitals next fund

Some GPs believe this could be solved by setting clear guideline forinvestment by either USD or RMB

Mutual trust between foreign funds and domestic LP RMB funds managed by foreign VCs are prohibited from investing into

some restricted industries, e.g. on-line game


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Short-mid Term Challenges

for RMB Onshore Investment Tougher fund raising. China still lacks a sound LP mindset and

practice. Short of diversified and Western style LP sources.

Financial institutions like commercial banks are still not allowed toinvest into VC fund. And, foreign LPs are not ready to do directcross-boarder investment into a RMB fund. Governments guidancefunds are the main source of capital for domestic funds.

Limited onshore divestment routes. Only IPO in Shenzhen withhigher listing criteria and long queuing time. Almost no M&A yet.

Yet-to-improve legal, regulatory and administrative framework tofacilitate RMB fund set up and management. Foreign GPs legal

status (national treatment) and tax are complicated.

Extra red-tapes for foreign invested JV funds. It will need more timeto observe a smooth repatriation for divestment to foreign LPs.


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Social Security Fund will Allocate More to

PE / VC Funds

Social Security Fund has promised to invest RMB100 billioninto VC and PE funds and will only play a role of LP, notinvolving into the operation and investment. This is a goodnews not only for VC / PE industries but also the industry

funds owned by the government.

So far, Social Security Fund invested 4 PE: CDH, Hony,China-Belgium Fund, BoHai Industrial Fund and promised tocontinue surveying qualified GPs


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Will RMB Strong Funding Sustaining?

RMB fundings extraordinary performance in 2009 should be seen only as a one timesurge, and might not be sustainable. Key considerations:

Most domestic funding are from first time players lured mainly by ChiNext board

hype. The equity fund gold rush needs to be validated with good return. Onshore LP funding supply needs a few years to be improved in views of right

LP mindset, diversified LP sources, bigger funding, and more supportiveregulatory and tax regimes.

And, for the past 1.5 years, offshore LP funding were on-hold. But, thats atemporary phenomenon. From 2010, they will resume the new commitment, andChina to be the first country to get new investment.

According to a survey conducted by CVCA, more than 60% of foreign VC / PE haveplan to raise pure RMB funds.

We expect it will take several years for RMB funds to become mature.


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Warp-Up


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China VC Moving Forward

Investment focus: 7 strategic emerging sectors supported bythe Chinese government: New energy, energy-saving &environmental protection, electric vehicles, new material, newmedicine, biotech, and IT.

Follow the governments policy: Go West

VC in China has had more than 10-year history. Many VCfunds have completed their first funds life cycle. While GPsbecome more mature and professional, its time to develop

Chinas own LP community.


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Thank You

Contact Window:Contact Window:Contact Window:Contact Window:

Hanne ChenHanne ChenHanne ChenHanne Chen

Investor RelationsInvestor RelationsInvestor RelationsInvestor Relationsemail:email:email:email: [email protected]@[email protected]@idtvc.com

Tel: +886 2 3518 3902Tel: +886 2 3518 3902Tel: +886 2 3518 3902Tel: +886 2 3518 3902

HuiHuiHuiHui----jujujuju ChenChenChenChen

Investor RelationsInvestor RelationsInvestor RelationsInvestor Relationsemail:email:email:email: [email protected]@[email protected]@idtvc.com

Tel: +886 2 3518 3903Tel: +886 2 3518 3903Tel: +886 2 3518 3903Tel: +886 2 3518 3903


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Disclaimer:Disclaimer:Disclaimer:Disclaimer:

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