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China VC Market Update

iD TechVentures (iDT)
July 15, 2009
Table of Content

• Macro Economy and Stock Market


• VC Community in China
• Growth Enterprise Market (GEM)
• Local Regulation’s Impact on VC Investment
• RMB Fund Management
• Wrap Up

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Macro Economy and Stock Market
Current Macro Economy
• GDP growth rate in the 1st quarter of 2009: 6.1%. Economic growth in
the second and third quarters of the year is likely to be stronger.
• Chinese government projects its GDP will grow 8.3 percent this year,
according to a report released by the Chinese Academy of Social
Sciences (CASS). This is the government’s official target. Other
research institutions, organizations and economists may have other
forecast.
• Economists in China optimistically believe China’s economy has hit
the bottom and is now on the way gradually bouncing back. Dr. Ma,
the Chief Economist for Greater China of Deutsche Bank, forecasts
that China’s nominal GDP will overtake the US within 10 years.
(source: Jun Ma, April 2009)

Macro Economy & Local Stock Market


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Local Stock Market
• A-share has been bouncing back with a V shape since the inception of
2009. The whole capital market has been very active. The trading
volume from January to May ’09 was twice as much as that in second
half of 2008.
• 9 month since the IPO window closed in last September, finally CSRC
lifted the ban and approve the application from Guilin Sanjin
Pharmaceutical Co., a medium-sized drug firm to list on SME. IPO price
is set RMB19.8 with PE 33.
• Before the IPO window closed, 33 companies had already passed
CSRC’s panel review before IPO but were suspended. After the
financial tsunami, many of these companies’ business dropped. So, it’s
unlikely that 33 companies will go IPO right after the window opens. If a
company’s sales declined more than 50%, definitely it will not be able to
IPO
• CSRC confirmed that they will control the pace of new list and will not
open the gate for all IPO candidates

Macro Economy & Local Stock Market


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VC Community in China
Domestic VC / PE Fund Raising: Q2’08-Q1’09
Domestic VC / PE Fund Raising VC / PE Funds Raised by Foreign
and Domestic VC

By Number By Amount
Domestic (US$) # of Funds Foreign Domestic JV

Source: ChinaVenture Limited


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Partners Summit 2009, by Jay Chen
Limited Partners in China
LP Composition What LP will Do on Investment

Enterprises
2%
2% Bank /
Insurance/Trust
4%
VC / PE 12%
5%
Will Increase
Pension Funds
8% 37%
FoF 18% 41% The Same
8%
Asset
Management Co. Not Sure
9% Sovereign Funds

12% 13% Decrease


Endowment
Funds 29%
Guiding Funds

Family

Source: ChinaVenture Limited


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Partners Summit 2009, by Jay Chen
Growth Enterprise Market (GEM)

Expect to be in October, 2009


Growth Enterprise Market (GEM) –
More Rules Released
• The Provisional Administrative Measures for Initial Public Offerings and Listing
on the GEM (the “Measures”) took effect on May 1.
• CSRC released GEM’s Listing Rules on June 5th, which is to be effective from
July 1st, 2009. The Rules cover more issues, including the independent
directorship’s responsibility, information disclosure, insiders’ obligations…etc.
• The underwriter has 3-year supervise period on the IPO company, 1 more
year than companies on the main board.
• To avoid naive investors speculate in stocks, GEM set “entry permission” for
qualified investors and release Rules on GEM Investor Criteria.
– No minimum capital requirement.
– Only investors capable of taking risks are allowed to trade on GEM: All
individual investors that have no less than two years of experience in stock
trading in China could apply to trade on the GEM with securities
companies.
– Other individual investors are also allowed to apply to trade on GEM but
need to go through stricter training on risks

Growth Enterprise Market (GEM)


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Growth Enterprise Market (GEM) –
More Rules Released
• Regulation about divestment:
– Controlling shareholders, actual controllers cannot
transfer their shares within 3 years after IPO.
– Other shareholders, if they invest within 6 months
before the company files IPO, they are not allowed to
exit within 12 months after IPO. After 12 months, the
investor can exit 50% of its holding within 24 months.
After 24 months, the investor can sell all remaining
shares.
– If an investor invest in 6 month ago before the company
files IPO, the investor can exit in 1 year after IPO.

Growth Enterprise Market (GEM)


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Growth Enterprise Market (GEM) –
More Rules Released
• Criteria of listing on GEM: (source: Xinhua, March 31, 2009)
1. Be profitable for consecutive 2 years with combined profits of at least
RMB10 million.
2. Be profitable of at least RMB 5 millions for the most recent year on
revenues of at least RMB 50 millions and annual revenue growth rate of
at least 30% in recent two years.
(Either 1 or 2 is qualified)
3. Net asset of at least RMB20M
4. Been in operation for more than 3 years
5. Innovative business model with potential of high growth rate
(3,4,5 are necessities)
• With the must of being operation for more than 3 years, very likely a VC will
need at least 6-7 years to completely exit an early-stage investment.
• Besides, the criteria above is also just the lowest bid. In view of the current
candidates waiting in the queue, most of them actually are over-qualified.
• VC definitely will screen deals with higher standard plus the long lock-up
period, it might force VC favor expansion / late stage company.
Growth Enterprise Market (GEM)
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Growth Enterprise Market (GEM)-
Still Have Rooms to be Improved
• Local government is saying that good companies invested by foreign
VC are more than welcome to list on GEM. Is it feasible now?
– Most companies invested by foreign VC are under the structure of
offshore from the inception of investment. This structure means
going IPO offshore is the only way due to China’s stock market
requires the IPO candidates are China-registered companies. If
they want to list on GEM, they will need big effort and time to do the
share restructure.
– Besides, RMB funds set up by foreign funds are non- institutional
funds, which are still NOT allowed to have depository accounts.
Even if GEM is on board, it’s still a question for non-institutional
funds to trade and exit investee companies. We believe this is a
short-term situation and CSRC will solve it in the near future.

Growth Enterprise Market (GEM)


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Growth Enterprise Market (GEM) –
Who is its Competitor?
• GEM is a milestone for China’s onshore investment in the long run.
However, in the short and medium terms, with the aforementioned
problems, and competitions from Hong Kong GEM, London AIM, and
Tokyo Mothers, GEM is still far away from its goal—being China’s
Nasdaq.
• In short term, even Taiwan’s stock market might be a competitor based
on the reasons:
– Appreciate high-tech and innovative companies with reasonable PE
and liquidity.
– Well-developed infrastructures, e.g. electronic clearing system.
– Competitive list cost, low transaction and maintenance cot
– Taiwan has released the restriction of listed companies’ registration
country.

Growth Enterprise Market (GEM)


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Local Regulation’s Impact on VC
Investment
Local Regulation’s Impact on VC Investment
• Tax Bureau’s #87 clearly support VC with company structure. Tax
deduction policy only applies for LP fund registered as a company,
not being applicable to those registered as non-institutional entities.
• Companies invested by non-institutional funds face many
challenges from the underwriters and lawyers when filing IPO. Only
companies invested by VC funds on corporation structure could go
IPO smoothly and enjoy the preferential tax.
• Though in Pudong, Shanghai, the new regulation allows offshore
financial institutions could register under the structure of Ltd with
minimum capital US$2 million, not sure what benefit could be for
such kind of registration. Currently most offshore investment
companies register as a liaise office or representative office.

Local Regulation’s Impact on VC Investment


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RMB Fund Management
LPs in China:
Limited and Not Yet Mature
• Conventional LP practice prevailing in the West is not yet popular in
China:
– Long term view for up to 10+2 years
– Not to involve in GP operation
– Economic interests for GP: Fee and carried
• Local LP community has not yet a mature cluster. Limited LP source,
and funding size is rather small. No retirement, insurance, pension,
endowment, family offices, FoF, … as LPs in China yet.
• Many government agencies (ministries, banks, provinces,
municipalities, hi-tech parks...) set up “leading funds” (引导基金) to
provide LP funding. But, most of them come with “strings attached”.

RMB Fund Management


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Foreign LP’s Role in RMB Fund
Indigenous RMB funds come with certain “Chinese Characteristics”.
USD Offshore Fund RMB Onshore Fund
Fund Life Around 10 years Around 5 years
Fund Size A few hundred US$M Around US$50M
Capital Call Several, for few years 2 or 3 times, for several months
Fund Every 2 to 4 years In less than one year
Raising
LP Basically hands off Try to involve (interfere)
involvement
As a result, with the improving of legal, forex and tax issues,
overseas LPs and FoFs will continue to play a key role in
supplying funding into China’s VC/PE industry.

RMB Fund Management


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The Evolving RMB Fund Management
• Tougher fund raising. China still lacks a sound LP mindset and
practice. Short of diversified and Western style LP sources. And,
foreign LPs are not ready to do direct cross-boarder investment into
a RMB fund.
• Limited onshore divestment routes. Only IPO site in Shenzhen with
higher listing criteria. Almost no M&A market yet.
• Yet-to-improve legal, regulatory and administrative framework to
facilitate RMB fund set up and management.
• Extra red-tapes on operation of RMB funds, which are invested with
foreign funding.
• Need more time to observe a smooth repatriation of foreign LPs’
divestment in local deals.

RMB Fund Management


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RMB Onshore Fund: a Long March
• It might take years for RMB onshore investment to
become the mainstream of VC/PE activities in China. But,
foreign investors need to monitor and proactively react to
the shifting tide. Eventually, doing RMB onshore
investment is not an option, but a survival issue.
• It’s a trend of no return. In the long run, the VC/PE
industry in China will do local RMB fund raising (with local
and foreign LP joining), local fund investment into local
entities, and divested thru local IPO or M&A.
• However, local RMB investment is still come with lots of
challenges. Foreign GPs and LPs should explore the
future trends, but need to control the pace to avoid
mistake.
RMB Fund Management
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Wrap Up
• The whole industry is stable. According to “China Private Equity Industry &
Regulatory Environment” report issued by China Venture Capital
Association: Over 80% of the VC / PE have no plan to cut jobs and 12.8%
even have plans to hire more people.
• According to ChinaVenture’s survey, 50% of LP who are having investment
activities in China expect to reach IRR 10-20% this year . (ChinaVenture
Limited Partners Summit 2009, by Jay Chen)
• With GEM is around the corner, VC community is excited to prepare for the
rally. Even many public companies are keen to jump in by setting in-house
VC arm. VC climate in China is far well comparing with peers in other
countries.
• Eventually, the capability of management and capitalizing return will decide
who are the winners.

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Thank You

Contact Window:

Hanne Chen Hui-


Hui-ju Chen
Investor Relations Investor Relations
email: HanneChen@idtvc.com email: HuiJuChen@idtvc.com
Tel: +886 2 3518 3902 Tel: +886 2 3518 3903

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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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