South Africa firm hits Chinese jackpot

A big screen at NASDAQ displays congratulatory messages for JD.com Inc, which was listed on the exchange on May 22. JD.com is China's largest online direct sales company by volume. Wang Lei / Xinhua

In one of its richest hauls, nasper's investment in a high-tech start-up grew some 1,500 fold

Naspers, the Cape Town-based multinational, made an audacious bet on a loss-making Chinese Internet company more than a decade ago.

In 2001, the South African company's iconic founder Koos Bekker took what many people viewed at the time as a reckless high-tech gamble when he invested $32 million for a 46.5 percent stake in a then little-known Chinese start-up.

That target, Tencent Holdings, is today one of China's technology miracles - the country's largest Internet company, with a market value of nearly $140 billion, best-known at home for its market-dominating mobile messaging apps WeChat and QQ.

The Hong Kong-listed company has just posted first-quarter profits that beat analyst estimates, with net income rising 60 percent to 6.46 billion yuan ($1.04 billion) in the three months ended March 2014, from 4 billion yuan a year earlier.

Based in Nanshan Hi-Tech Industrial Park in the southern Chinese city of Shenzhen, Tencent was recently crowned as China's most valuable Chinese brand, according to the Hurun Report, a leading measurer of China's wealthy.

Naspers still owns nearly a third of Tencent, and its stake is said by some analysts to be worth around 1,500 times what Bekker initially injected.

Founded in 1915 as Nasionale Pers, or National Press, Naspers first began its overseas push following the end of apartheid in South Africa in 1994.

Today it operates a highly lucrative pay-television business across South Africa and much of Africa, and has stakes in newspapers and magazines in South Africa and other emerging markets.

As a consequence of Tencent's listing in Hong Kong in 2004, its shareholding was diluted to 35 percent, but Bekker still remains on the Tencent board, just as Pony Ma, Tencent's iconic chairman and CEO, also retains his seat on the Naspers board.

Some analysts estimate Naspers' 35 percent accounts for as much as 80 percent of its revenues.

Bekker's 2001 bet on the fledging Tencent might well qualify as one of the smartest $32 million ever spent - but it is far from isolated in the annals of foreign investment in Chinese e-commerce.

Some current and former employees of China's other e-commerce leviathan, Alibaba Group, for instance, are expected to become millionaires as the conglomerate heads into what is expected to be one of the largest initial public offerings in global history.

According to Alibaba's draft prospectus, employees hold 26.7 percent of existing shares, which could translate into roughly $44.8 billion worth of unlocked shares, according to estimates from a Bloomberg survey of analysts.

As the largest e-commerce company in the world and owner of the massive Taobao shopping site, Alibaba Group is valued at $200 billion.

But its employees, who built the company from scratch over some 15 years, are not the biggest winners of the Hangzhou-based company's upcoming IPO in the United States. Its foreign investors who are likely to grab the biggest slice.

Also, Masayoshi Son, the chairman of Japan's SoftBank, a top telecommunications and Internet investor, is likely to regain his position among the world's richest people due to the well-timed bet he made on Alibaba Group back in 2000. With the $80 million he invested, SoftBank is Alibaba's largest shareholder with a 34 percent stake now believed to be worth more than $57 billion.

Yahoo! Inc, the US-based multinational Internet giant, which invested $1 billion and holds 23 percent of Alibaba, could also reap billions from Alibaba's potential $20 billion listing.

"It is difficult to find TMT (technology, media and telecom) companies which have an annual growth of 50 percent in developed markets," says Annabelle Long, managing partner with Bertelsmann Asia Investments, a venture capital firm owned by the German multinational mass media corporation Bertelsmann.

"Growth rates even as low as 20 percent in Europe or the United States are difficult to find. But companies with such strong growth momentum can be found everywhere in China," she says.

"TMT is a high-growth sector in China compared with traditional industries," Long adds.

She rather nicely describes the country's TMTs as having potential as deep as "a blue ocean".

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.

Highland invested $17.5 million in Chinese Internet security company Qihoo 360 at the end of 2006, and its 15.94 percent stake had a total value of more than $630 million when it went public on the New York Stock Exchange in 2011. It has also invested in leading Chinese TMT companies such as Tuniu 6.CN, GameWave, NetentSec, Viva and UUSee.

He says many Chinese equity investment firms used to seek pre-IPO deals when the companies were very mature and profitable, but such opportunities have become rare.

He adds that while TMT giants are often strong, small companies can still provide good opportunities and may become new giants.

Thor cites Lycos, which used to be a popular search engine in the late 1990s. Yahoo overshadowed Lycos, and then Google rose up and became the giant, though Facebook, Twitter or something else might dethrone it someday.

"If a start-up team works hard and is willing to innovate and reverse the traditional business pattern, it may create a great company," says Thor, adding that his firm invests in companies that are one or two years old, because that's when they need money the most.

Many experts, however, do caution that the large number of cash-thirsty start-ups in China's rosy Internet market does not guarantee profits for foreign investors.

Some cite concerns that the Chinese government might try to tighten regulations to limit foreign investment in the TMT sector, which has increasingly grown into the most dynamic part of China's economy, or launch policies to give the growing number of local venture capital firms an edge in the sector.

A total of 189 new yuan-based funds emerged in China's venture capital market in 2013, raising a total of $6.38 billion in that year, while only 10 new foreign currency funds emerged in China in 2013, raising $541 million, according to a recent report from Zero2IPO Research, a leading research institution in China's private equity industry.

China's increasing wealth has provided a new flow of venture capital funds for investment in Chinese businesses, analysts say.

Foreign-based venture capitalists can also find it hard to fully understand the market, adds Flynn.

"It's very easy for Western investors to see the likes of VIPshop and JD, and read the hype about Alibaba, and get a rosy view about China's e-commerce market.

"However, investors have to understand the nature of consumers in China, the contrast between the tier-one cities and the tier-four cities, and understand that you can't just view Alibaba as the 'Chinese Amazon'.

"Once Western investors understand these points, they can understand China's e-commerce market."

However, Annabelle Long thinks many foreign venture capital firms, which have now set up offices in China and hired Chinese people to run them, have a better chance to land deals.

"The main difference between Chinese and Western venture capital firms is the money they raise, RMB or US dollars," she says. At the same time, she says there is "no direct competition" between Chinese and Western venture capital firms because different companies focus on different sectors of the market.

However, what she does see as the major threat for Western firms like hers is the increasing power of China's big three Internet companies - Baidu, Alibaba and Tencent.

Citi Research has forecast that the three will drive Internet-related deals in China to a record this year.

"As a Western VC, how to compete with leading Chinese Internet firms in making deals with start-ups is our biggest problem," Long says, adding that her firms invest $100 million every year.

She says writing a $5 billion check would be a big decision for any Global 100 Index company, but it is not a difficult choice for rising Internet giants such as Alibaba, which just spent cash and shares worth more than $3 billion to buy UCWeb, a Chinese mobile browser company.

Heading to its highly anticipated IPO in the US, Alibaba has stepped up its buying spree by investing in various companies from media and shopping malls to online video platforms and football clubs.

Alibaba alone has spent more than $5 billion this year in buying controlling stakes of smaller firms or making strategic investments in promising startups.

Late last month, Naspers posted a surprise 2 percent drop in full-year earnings after ratcheting up expansion spending, sending its shares lower - but analysts still said its stake in Tencent is worth nearly as much as Naspers' entire market value.

Alibaba and Tencent have announced 61 acquisitions and investments with a value of $24.5 billion since 2012, according to data compiled by Bloomberg.

Music to the ears, no doubt, of those early-stage foreign investors.

Contact the writers at mengjing@chinadaily.com.cn.