SuperReturn Asia, a global leading private capital conference, took place at the Marina Bay Sands, Singapore, on 19-23 September 2022. The event brought together 800+ Asia-focused institutional investors, fund managers and service providers from across the globe to network, do business and discuss latest market trends. Leo Zheng, the founder and CEO of Lighthouse Capital, was invited to share his observations on the current investment environment and opportunities in China. Below are some of his insights about the investment timing in China, and latest environment confronted by China’s investment banks.
China is still a very attractive market with strong fundamentals
Currently, the logic behind China’s economic development is changing, and China’s economy has entered a “new normal” era. The economic and industrial structure in China has seen significant transformation. “On the one hand, China’s dependence on foreign trade has decreased since 2008. Specifically in 2020, China adopted a ‘dual circulation’ development pattern whereby domestic and foreign markets can boost each other, and the economy has changed from export-oriented to a combination of domestic and foreign demand-oriented market.” Leo elaborated, “On the other hand, China’s GDP has shown an upward trend thanks to the technology-intensive industries, which means China’s industrial structure continues to upgrade in the direction of higher added value.”
The transformation of economic and industrial structure also gives birth to new opportunities in China, and according to Leo, there is reason to believe that China is ready to make good use of them.
Firstly, China has a number of upgraded production factors in place that will become the growth engines of China’s Economy: a high quality talent pool, diversified and internationalized financing methods, and rapid development of core technologies.
A high-quality talent pool, as Leo mentioned, including well-educated engineers, bring new development and investment opportunities. China’s demographic dividend is shifting from low-cost to high-quality labor, and the large talent pool of well-educated engineers will become a continuous driving force for the upgrading of China’s industrial structure.
As for the diversified and internationalized financing methods, some favorable events that happened in China’s capital market include the establishment of Sci-Tech innovation board and the Beijing Stock Exchange, and the new listing reform of Hong Kong Stock Exchange. Besides, the development of venture capital has been continuously supported, providing effective financing channels and exit methods for Chinese start-ups.
Core technology R & D has always been paid great attention in China. According to the World Intellectual Property Organization, China’s international patent applications reached 69,500 in 2021, ranking first in the world for three consecutive years.
Secondly, from the perspective of industrial development, Leo underlined that China is one of the few countries with both a huge market and a complete supply chain ecosystem. He referred to some valuable statistics, “China has a population of 1.4 billion, a middle-income population of over 400 million, with a per capital GDP of more than 10,000 US Dollar.” Such a huge market volume has brought a diversified and active business ecosystem.
Moreover, he also anticipated that with multiple providers along the supply chain, excellent cooperation capability, and a complete infrastructure and logistics system, China’s overall supply efficiency is among the world’s leading players.
Thirdly, Chinese government has been making continuous efforts to promote long-term sustainable development. Leo gave some examples of favorable policies:
“In the Internet industry, despite anti-trust and data security policies having a negative impact on Chinese concept stocks in the short term, the underlying goal of regulators is to effectively regulate the market, standardize the industry, and break monopoly to create an environment that encourages innovation. It is also the policy direction that developed markets such as Europe and the US have been promoting. It’s important to mention that China has always been very supportive for privately owned enterprises.”
From the above analysis, Leo concluded that thanks to upgraded production factors, favorable environment for industrial development and supportive policies, China is shifting from quantity-driven to quality-driven development, and that future growth is expected.
The shifting capacity structure of investors and financial advisors
From Leo’s perspective, China has always been a market worth investing in, but China is now in a new investment era. In this new era, investors need to evolve to have deep connections with the industry as well as have a good understanding of how technology drives the industry.
He foresaw investment opportunities in the integration of technology and industries are getting earlier. He mentioned a project of transforming mining areas with robotics in Ordos. Now such application of robotics in local specialty industries in remote areas is receiving more attention. It is the technologies capable of accelerating and deepening the transformation of industries that truly drive the primary market.
Leo further pointed out that, the valuation foundation is also changing. In the past, investments can only focused on single variables such as user growth or technology innovation, while investment in the industry needs to introduce more factors that affect the development of the company. “It is not only how great the technology itself is, but also whether the technology has good industrial prospects.”
He also reminded investors that the entry threshold of industry business is higher than that of the Internet. Enterprises increasingly make demands on the shareholders’ industry resources.
With the above themes, Leo highlighted two requirements of investors in the long run. For one thing, they need to identify opportunities and seize projects earlier through in-depth research, with many industrial projects hidden behind the curtains. For another, they should be patient to form the industry chain linkage and better help enterprises find a balance between industrialization and business growth.
“In the future, China will lean towards proactive investors who take root in the industry and hold the key to successful industry investment.”
Managed by Leo and his partners, Lighthouse Growth Fund is a proactive fund dedicated to taking root in the industry. The Fund, equipped with the diverse capability systems and resources of Lighthouse Capital’s market-leading financial advisory business, can make full use of the financial advisor’s high-quality deal flow, and through in-depth research and service, it is an effective tool to realize long-term value with all partners.
Lighthouse Capital, with a global perspective, is exactly what a leading boutique investment bank in China should be like.
“With investment bank as our core business, we can continue to help companies raise capital, and we established Value-Added-Service to help entrepreneurs recruit people; Set up an Industrial- Development-Advisory team to assist entrepreneurs to promote industrialization; Set up M&A team to help enterprises have more diversified capital market choice. To date, we have helped more than 200 companies finance an accumulation of over 32 billion US Dollars. Having a good leading position in China enables us to see good opportunities earlier and seize good assets. And the eco-system built by Lighthouse can deeply empower enterprises after investment.” Leo concluded.