With the gradual opening of the country's capital market, an ever-increasing amount of foreign capital is pouring into China. Many outstanding domestic companies are also looking outside and proactively seeking the help of overseas investment capital. But what types of business is international capital ultimately attracted to? And how can these businesses best utilize venture capital?
Overseas capital, in general, seems to favor China. What do you think it is, specifically, about China that attracts overseas capital?
Andrew Qian: Currently, there is about $15 billion in overseas capital hovering over China, watching over the country's top businesses and attempting through various means to place itself. On the other hand, the amount of overseas capital officially authorized by the Chinese Government through QFIIs (Qualified Foreign Institutional Investors) is only around $5 billion. Private equity and venture capital firms are the main providers of this capital, and the amount and the scale continue to grow each year at an incredible pace.
We need not even look back to the former glory of NetEase and Shanda. With the recent IPO of Home Inn, for example, the IPO issue price was $13.80, but it opened on NASDAQ at $22.00, 59 percent up on the IPO price. Its price/earnings ratio rose into the hundreds on its first day in the secondary market, while that of Choice Hotels International Inc., an American company, remained at a modest ratio of 28. The amount of attention overseas capital paid to the "China story" is clearly no mere passing glance.
By "China story," I mean China's growth-the whole of China's aggressively expanding economy, including high-quality domestic businesses that have found various ways to list outside China. In recent years, the "China story" has involved one fairy tale after another of wealth and prosperity being created on the overseas capital markets. This is the main reason that international investors have looked upon China with such favor.
Domestic businesses have a great need for financing. What are the main types of businesses that seek venture capital or private equity funding?
The strong entrepreneurial passion can be the theme song to the "China story" and also the main reason for the current peak in financing. This has proved especially true in the IT field. From the initial Web 1.0 to Web 2.0 to the future Web 3.0, each advancement in technology has brought with it new opportunities whereupon an entire batch of leading edge companies has grown along with these very opportunities. Take domestic video blogging companies for example. A year ago, these types of companies numbered zero. At the beginning of September 2006, the number had already exceeded 150 and by the middle of October, around 200 such companies had been set up.
When new businesses reach a certain stage of development, it is imperative that they begin to seek the financial support of venture capital firms.
Also, in recent years, with the launching of the government's macroeconomic control measures, private enterprises that have found themselves facing a tighter macroeconomic environment are looking increasingly toward overseas capital to feed their need for development. Companies like Meng Niu have taken on venture capital from firms such as Morgan Stanley, CDH Investments and Actis. And although additional funds allow for the sustenance of the all-important cash flow, the most important aspect of having overseas capital lies in the broadened horizon of Meng Niu. Through a series of capital
management operations, the company has been successfully listed overseas, and in a few short years has effectively become one of the frontrunners of the industry.
Similar private enterprises include Li Ning, Gome and Suning, all of which have taken on overseas funding and were able to quickly complete their initial stages of development and expansion. Overseas capital has assisted them in breaking through bottlenecks in terms of funding, management and technological development, and has allowed them to stand in the industry's leading positions.