FEBRUARY 7, 2017 by: Henny Sender
When Wang Jun, co-founder of BGI, left the Chinese genomics group to establish a new Shenzhen medical technology company called iCarbonX in 2015, several big venture capitalists of China courted him, hoping that he would take their money. Neil Shen of Sequoia Capital China, who had backed Mr Wang at BGI, thought he would have an inside track. Zhang Lei of Hillhouse Capital offered to write a cheque for as much as Mr Wang wanted. But eventually Mr Wang turned to Tencent founder Ma Huateng, who gave him almost $200m, valuing his young start-up at $1bn.
One reason for these investors’ enthusiasm for Mr Wang was his history at BGI, which is now a leading genome sequencing organisation that works closely with the Bill and Melinda Gates Foundation. When it goes public in Shanghai as soon as next month, its listing is expected to generate big returns for Sequoia and other early investors.
Not long ago, Chinese tech largely meant Alibaba’s ecommerce business and Tencent’s social media empire built around its WeChat app. That is no longer the case. The sector is becoming broader, more value-added and more lucrative. While most investors are increasingly bearish about China’s macro prospects, many are relatively optimistic about the country when it comes to technology. In areas ranging from robotics and artificial intelligence to medical devices and fintech, China is making the transition from imitator to innovator. That raises the prospect of huge gains for investors fortunate enough to get in early. One recent list of the top technology groups that are still private worldwide from CB Insights shows that four out of the top 10 are based in China, compared with five from the US and one from India.
A glimpse at the offer memo for private equity firm Warburg Pincus’s newly raised, specialised China fund shows just how profitable investing in Chinese tech can be.
Before last year Warburg, which rarely sponsors highly specialised funds, invested in Chinese transactions through its global fund. It invested $1.5bn in mainland Chinese groups in 2015 alone and made 2.2 times its money on average over the past decade. A $92m investment in 58.com, a Chinese online classified company, turned into $700m or a return on investment of almost 8 times, on a gross basis, while the $29m Warburg put in Koudai.com, an advertising platform that focuses on mobile ecommerce, is now worth $650m. The two are among Warburg’s most valuable China investments as measured by return on money invested.
“Last year was the year the Chinese dragon roared,” noted a recent report from Citigroup on fintech investing. “Asia has overtaken North America as the number one fintech investment destination driven by the Chinese dragons.” The bank estimated that venture capital investment into China doubled in 2016, while it fell 38 per cent in the US. Chinese companies accounted for 46 per cent of all global VC investment in the sector.
Chinese tech companies have also played a role in shifting the character of the big emerging market indices. “The MSCI EM index is now an IT-heavy index,” notes Morgan Stanley. Not only have information technology companies outperformed their local peers, but the sector’s role was further enhanced by the addition of the huge Chinese internet companies to the index. The IT sector now accounts for 23 per cent of the index, “making it the most IT heavy of the major indices”, Morgan Stanley adds.
Silicon Valley entrepreneurs have long looked down on tech start-ups across the Pacific and highlighted the constraints on Chinese innovation. Many local universities still embrace Confucian rote learning, and loyalty to the Communist party plays a role in the selection of top administrators and research grant recipients.
Chinese tech groups aim to change those attitudes. Mr Wang’s iCarbonX is seeking to create a “digital” or virtual health profile of clients, to identify their risks for a wide range of diseases and then come up with a plan to reduce those risks. Last month he revealed a series of eight strategic investments worth $350m that he has made in US medtech companies. Such developments make it harder to analyse companies as just Chinese or just American. But iCarbonX and its peers argue that US-China deals should increasingly be seen as mergers of equals.