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South Africa firm hits Chinese jackpot

Updated: 2014-07-18 09:43
By Meng Jing and Cai Xiao ( China Daily Africa)

While developed Western countries are growing slowly, she notes, China's GDP growth is still more than 7 percent a year - even during a lackluster performance by the world economy.

Bertelsmann Asia Investments has backed more than 30 startups in China since 2008 and more than half of them are in the TMT sector, Long says.

Four of those have gone pubic, including US-listed Bitauto Holdings Limited, a leading provider of Internet content and marketing services for China's fast-growing automotive industry.

And there have been others who have been tempted by the dizzying profits and rich rewards of China high-tech investment.

The venture capital firm Draper Fisher Jurvetson, for instance, owned nearly a third of Baidu when the Beijing-based web services company went public in the US in 2005.

JD.com Inc, China's largest online direct sales company by volume, raised $1.78 billion in its US IPO in May.

Its backers include foreign investors such as US investment firm Tiger Global, DST of Russia and Prince Alwaleed bin Talal of Saudi Arabia.

Two decades ago, when the world's most populous country first gained access to the Internet, Chinese dotcom companies, most of which were private, were desperately seeking investors.

Foreign venture capital firms with deep pockets and mature systems of investment were seen as knights in shining armor by many Chinese Internet startups, which worked to make themselves attractive investment prospects.

"Most Chinese TMT companies have business models that originate in the Western developed countries," says William Ng, head global equity sales for Greater China at Deutsche Bank.

"It is easy for foreign investors to understand Chinese Internet companies. For example, JD.com can be sold to Wall Street as the Chinese Amazon. Sina Weibo is known as the Chinese Twitter."

Ng, whose bank has been helping many US-listed Chinese dotcom companies with their American Depositary Receipt business, says that TMT is the Chinese sector that meshes best with the US venture capital system.

"The US market provides Chinese TMT companies with a comparatively friendlier growth environment. Regardless of whether you are listing on the NYSE or NASDAQ, regulations are more flexible." Ng says, adding that stock markets on the Chinese mainland require companies to be profitable, a tough rule for Internet start-ups.

In the case of JD.com, for example, despite being China's largest online sales company by market share and listed in the US in late May, it broke even for the first time only in 2013, a decade after the company was founded in Beijing.

Western venture capital systems, US dollar-based funding and more flexible Western IPO regulations all create an ecosystem suitable for the growth of Chinese TMTs.

By injecting cash into Chinese TMTs and listing their shares in the US, the entire capital market in the West benefits from the Chinese Internet boom, experts say.

Apart from handling American Depositary Receipt business, Western banks also rake in lots of fees by underwriting Chinese companies' IPOs in the US.

The six banks leading Alibaba's IPO reportedly will share $400 million in fees, assuming Alibaba raises its likely target $20 billion, and this year is expected to see a record-breaking number of Chinese companies make their US market debuts.

In 2010, as many as 43 Chinese companies listed their shares in the US, raising nearly $4 billion. That was followed by two slower years for IPOs.

So far this year, 10 Chinese companies have gone public in the US, raising nearly $3.1 billion, and a string of Chinese TMT companies are expected to list their shares in the near future.

While the booming IPO market brings foreign banks and investors lucrative fees and returns, where Western investors benefit most from investing in Chinese TMT companies is in access to the Chinese market.

"In just a few years, China's online retail market has become the second largest in the world, after the US," says Neil Flynn, head equity analyst at Shanghai-based Chineseinvestors.com, a leading financial analysis firm of US-listed Chinese firms.

"Yet China has an online population that is twice the whole US population, and over 300 million active online shoppers. These Chinese companies offer Western investors the biggest and broadest entry into a booming industry.

"For example, if you look at VIPshop, which has a niche role within the online retail industry, they are seeing incredible revenue and profit, and their stock price has risen 2,600 percent in two years," he says.

While the massive returns from the likes of Tencent and Alibaba might not still be in the cards, he adds that plenty of opportunities still remain for investors as the potential of the Internet market in China is huge.

"In terms of Internet penetration, we only have about 50 percent in China, while the developed nations such as the US and Japan have 80 percent Internet penetration, so there is certainly a lot of potential for the market to grow," Flynn says.

During the past 19 years, many people have asked whether TMT companies as a sector would continue to be a good bet, but Chuan Thor, a managing director at Highland Capital Partners, a global venture capital firm with offices in Silicon Valley, Boston and Shanghai, believes it is still the best sector for early-stage venture investments as technologies are evolving every year.