At some point within the next year or so, three Chinese consumer tech giants could go public. One is Ant Financial, the payments arm of Alibaba, which was last valued at about $150bn. Shares in ByteDance are trading in the grey market at a level that implies a valuation of about $100bn, $25bn higher than the last private fundraising for the owner of TikTok and other platforms. And then there is WeBank, a digital bank backed by Tencent, its own management, and a group of government-approved Shenzhen firms.
“The superpowers are becoming more dominant. Anything new and interesting will be gobbled up by one of the superpowers,” says a Hong Kong-based private market investor. “There are still opportunities; they just aren’t as great as before.”
But these expected stock-market debuts could mark the end of an era. Beyond that trio, say some analysts, there is a real lack of would-be champions. The head of Asia for one Silicon Valley-based venture-capital firm says his firm “has not been as active recently” as in the past. “We can no longer make as much as seven times our money from investment to exit in just a few years. Today, the valuations are super high and there is so much capital . . . from early to late stage.”
A decade ago, this investor was making billions of dollars on Chinese tech giants such as Alibaba, JD.com and Tencent, whose shares now trade in New York and Hong Kong at a combined valuation of $1.1tn. Now he is considering investments in education providers, real estate platforms and used car firms, all peddling their wares online. “We don’t see a lot of interesting opportunities emerging,” he says.
There are several reasons for the change in outlook. One, perversely, is the size of these titans of the consumer internet: they have become so powerful that they can make it more difficult for start-ups to succeed. If they see something promising, they either copy it or swallow it.
There will, of course, be more initial public offerings from the consumer internet space. The dominant players in online auto (Guazi) and property sales (Lianjia) remain private. But investors will probably require more patience now than before, for a smaller return.
As a result, some are now reviewing their previous strategies. Either they are turning their backs on the consumer internet area and looking for opportunities in the offline world — or they are abandoning private markets to focus instead on public markets.
“Offline is totally undervalued,” says the Hong Kong investor, pointing out that Alibaba and Tencent are now investing in retail: Alibaba owns and operates the Hema supermarket chain, while Tencent has a big stake in Yonghui Superstores. “There is no dominant chain in China, no Walmart,” he points out.
Another investor thinking differently is Richard Ji, formerly Morgan Stanley’s Asia tech analyst, and then founder of Hong Kong-based investment firm All-Stars. Mr Ji, who has been living in a remote part of Jinan in China with his in-laws since the pandemic spread across the mainland in January, has been reflecting that the internet giants will soon reach the point where their traffic will plateau.
As a result, Mr Ji says he would rather have a position in Full Truck Alliance, a B2B leader in long-haul logistics, than in Didi Chuxing, the B2C ride-sharing platform. At the same time, he has a flexible mandate, so he can invest in public markets as well as private.
“These days, valuations in the private market are higher,” he says, adding that he is investing in “category champions” that are undervalued by public markets, such as ZTO Express, a courier that sold shares in New York in 2016. “The market is overshooting on the downside,” he says, noting that investors were spooked last year by the trade war and now, by the direct and indirect effects of coronavirus.
Meanwhile, Hillhouse Capital, an Asia-focused firm, is taking positions in old-economy consumer electronics firms such as Gree Electric Appliances, an air-con specialist.
It is always possible that the consumer tech giants will stumble. Given their size, they will inevitably become less flexible. And before the virus struck, venture capitalists had tried to court some of their rising stars in the hope they would find success after striking out on their own, particularly in areas such as artificial intelligence or enterprise software.
But today, the next ByteDance is not obvious. And until that changes, the excitement is unlikely to return.
Reference: Financial Times
