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iD TechVentures (iDT)
February, 2010
Table of Content
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Macro Economy and Stock Market
China Economy, 2009
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China Economy Outlook, 2010
• GDP growth to be in the range of 9-10%. Growth will not be a big
challenge. Key effort will be on control and adjustment from short-term
expansionary 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 heavy
industries (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
by Fund Number : 90
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Source: VC Data for First 11 Months, 2009, Zero2IPO, Dec., 2009
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Broad IT Investment (%) Dropping
(Data Comparing ‘05 & ‘09)
Healthcare
Unknown
Other 2.5%
1.4%
Hi-tech
9.4%
(2005)
Services
13.3%
IT
Traditional 60.3%
13.0%
by Industry : 106
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ChiNext Board (Shenzhen GEM)
ChiNext Board (Shenzhen GEM)
• ChiNext started trading on October 30, 2009
• ChiNext’s position on listed companies:
– “Two High”: High Tech and High Growth.
– Six “New” : New economy, New services, New agriculture, New
materials, New energy and New business model.
• Total 36 companies on trade: 28 IPO for first batch and second
batch of 8 companies started stock offering on December 8th ‘‘09.
More than 80% of these companies have VC/PE’s 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)
Industry Average Capital Raised No. of Listed Average%
(RMB:M) Company Appreciation after
IPO
Traditional 461 14 85.9%
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Observation of ChiNext
• High PE: Current PE is about 100x, while Shenzhen SME’s PE is about 30x and
main board is 23x. ChiNext’s 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 2H’08 and 1H’09. (quoted Mr. Xiao Bing, Shenzhen Fortune Venture
Capital). Valuation for pre-IPO round is boosted. In some cases, 20x PE still attract
investors.
• 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 and
SME, 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 to
foreign VC used to invest into offshore companies. With ChiNext up and running, we
expect 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 on
ChiNext simply “transferred” their applications from Shenzhen SME or main board
due to the long queue in those two boards.
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Local Regulation’s Impact on VC
Investment
Foreign Currency into RMB for Investment
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More Friendly to Foreign PE / VC
• In November, 2009, CSRC released new regulation (証券登記結算管理辦
法), which paved a way for limited partnership RMB funds to exit their
investees through IPO. Originally, limited partnership RMB funds are NOT
allowed to have depository account, which was an obstacle for funds to
exit investment. Recent cases showed that some limited partnership funds
transferred their stakes to other non-partnership entities before IPO.
• Though foreign-invested limited partnerships now is feasible after the
government released new law in December, 2009, foreign VC under
limited partnership is still not allowed.
• Chinese government is working on improving the regulation system and
make it more friendly to foreigner VC and investors. We are optimistic on
the progress and expect both foreign VC / PE could share ChiNext board’s
fruit in the future.
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RMB Fund Management
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 more
complexity when companies go IPO
– Exchange conversion is a problem
– Every investment requires government approval
• Even though foreign VCs can raise pure RMB funds, however, for
overseas LP, there are issues of conflict of interest. Recent example:
– Bill & Melinda Gates Foundation announced that they will not follow
Hony Capital’s next fund
– Some GPs believe this could be solved by setting clear guideline for
investment 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 to
invest into VC fund. And, foreign LPs are not ready to do direct
cross-boarder investment into a RMB fund. Government’s guidance
funds are the main source of capital for domestic funds.
• Limited onshore divestment routes. Only IPO in Shenzhen with
higher listing criteria and long queuing time. Almost no M&A yet.
• Yet-to-improve legal, regulatory and administrative framework to
facilitate 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 time
to 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 billion
into VC and PE funds and will only play a role of LP, not
involving into the operation and investment. This is a good
news not only for VC / PE industries but also the industry
funds owned by the government.
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Will RMB Strong Funding Sustaining?
• RMB funding’s extraordinary performance in 2009 should be seen only as a one time
surge, 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 supportive
regulatory and tax regimes.
– And, for the past 1.5 years, offshore LP funding were on-hold. But, that’s a
temporary phenomenon. From 2010, they will resume the new commitment, and
China to be the first country to get new investment.
• According to a survey conducted by CVCA, more than 60% of foreign VC / PE have
plan to raise pure RMB funds.
• We expect it will take several years for RMB funds to become mature.
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Warp-Up
China VC Moving Forward
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Thank You
Contact Window:
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Disclaimer:
The content contained in this presentation has been
prepared based on current information available. These
are outcomes dependant on future events, and under no
circumstances can they be treated as commitments by iD
TechVentures.
TechVentures.
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