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China VC Market Update

iD TechVentures (iDT)
February, 2010
Table of Content

• Macro Economy and Stock Market


• VC Community in China
• ChiNext Board (Shenzhen GEM)
• Local Regulation’s Impact on VC Investment
• RMB Fund Management
• Wrap Up

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Macro Economy and Stock Market
China Economy, 2009

• China GDP growth in 2009 reached 8.7%, with ultimate consumption


contributing 4.6% points and investment 8 points, while net exports
subtracted 3.9% points.
• Amid depressed global economy, China turned around a graceful V-
shaped recovery. Bottomed out from Q1’s 6.1% and grew up
steadily: Q2 7.9%, Q3 8.9% and Q4 10.7%
• Key factors: government’s prompt RMB4 trillion stimulus package,
moderately loose monetary policy (RMB9.5 trillion lending, doubling
of 08’s), a big domestic market to boost local consumption and
relatively healthy financial sector..
• GDP amount reached USD4.9 trillion, could overtake Japan to
become the second largest economy in the world.
• Overtook Germany as the world’s 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 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

- The first 11 months, 2009


VC Investment Dropped

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


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VC Fundraising Declines

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


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VC Investment by Currency

Amount invested: US$2.4B

No. of Deals: 425

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


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VC Fundraising: RMB vs. USD

by Funding Amt: USD5.1B

by Fund Number : 90

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


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VC Investment by Industry

Amount invested: US$2.39B

3No. of Deals: 4251 3 1

2 2
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%

Year Inv $ Broad IT %


05: 1.06B 60%
06: 1.70 62
07: 3.2 43
08: 4.2 36
09: 2.4 30
(2009)
Source: Zero2IPO VC Reports, ’05 till ’09 (first 11 months)
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VC Exits

by Exit Option: 106

by Industry : 106

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


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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 will
continue to be active in 2010.
• Many foreign VC firms also choose to directly raise pure RMB funds in China
instead 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 more
fierce due to many underwriters bring their own direct investment vehicles to invest.
With the strong research and team resource, they are at an advantageous position
to access deal flows. Besides, domestic public companies are aggressively to get
involved in VC business with setting their own VC units, too. The war field
definitely 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 above
0.1%, within 10 years, VC investment in China still have great rooms to grow
(Source: Zero2ipo research center, 2010-01)

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ChiNext 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%

Service 713 3 134.5%


Broad IT 616 9 93.2%
Clean Tech 630 3 85.5%

Biotech / 627 7 84.5%


Healthcare
Total 567 36 91.5%

* 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 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

• 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, Shanghai’s authority announced that GP organized in Shanghai
Pudong would be able to convert foreign currency into RMB for investment
in their own RMB-denominated funds. GP companies established in
Pudong can receive automatic waiver to convert foreign currency into
RMB for investment in their own RMB funds. (iDT’s comment: it seems
that the special measures promulgated in Pudong encountered
“implementation” 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 the
green light to set up RMB funds. Shanghai and other municipalities are
keen 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 with
Blackstone. Blackstone established a management company in the
New 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) was
approved to register a fully-owned subsidiary in Shanghai. This
subsidiary 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 the
new 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 (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.

• So far, Social Security Fund invested 4 PE: CDH, Hony,


China-Belgium Fund, BoHai Industrial Fund and promised to
continue surveying qualified GPs

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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

• Investment focus: 7 strategic emerging sectors supported by


the Chinese government: New energy, energy-saving &
environmental protection, electric vehicles, new material, new
medicine, biotech, and IT.
• Follow the government’s policy: Go West
• VC in China has had more than 10-year history. Many VC
funds have completed their first fund’s life cycle. While GPs
become more mature and professional, it’s time to develop
China’s own LP community.

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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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