Markets Insight

June 4, 2014 4:59 am

Bet on tech pays off in China

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Investors seek way to play a rising consumer class in Asia

For more than a decade, savvy investors have been looking for ways to bet on the rise of a middle class in Asia. The speed with which consumption is growing is now accelerating, especially in China. A recent report from ANZ notes that annual consumption in China is $3.3tn, or the whole Japanese economy in purchasing power parity terms.

Middle class consumption used to mean investing in makers of baby clothes, sportswear, retailers and homebuilders. Now, for private equity groups such as Warburg Pincus, it increasingly means investing less in companies that make or build physical goods and more in virtual companies that connect consumers and merchants in the biggest Asian markets, especially China. Warburg’s shifting investment pattern underscores how dramatically the internet landscape is changing in the region.

In the past, most Asian internet companies were replicas of their western peers. No longer. Moreover, while India had a seemingly huge head start in IT, China has leapfrogged India and even the US in many ways.

Both the scale of the market and the speed with which that scale was built is especially breathtaking in China. That is partly because Chinese tech entrepreneurs have built their companies on mobile technology rather than technology based on personal computers. With money from local or international investors, these home grown companies are today compensating for the lack of physical infrastructure, and are exporting their models elsewhere.

Two Warburg investments, one in a Chinese online classified ad company and one in a comparable Indian company, say much about how mobile technology in the two Asian economies is transforming them, and illustrate how effectively such companies offer a way to play the rise of a consumer class in both.

Start with China, which has more than 600m internet users. “China is on its way to surpass the US and become the largest ecommerce market in the world,” according to data from ANZ bank. “Ecommerce transactions are projected to reach 540m users by 2015 and contribute 10 per cent of total global retail transactions.”

Warburg made its investment in the Chinese online classified ad company in December 2010, well before the group listed on the New York Stock Exchange in the autumn of 2013., with 38 per cent market share, is the largest player in China. The classified advertising market in China, which was worth about $250m in 2012, is expected to be worth 10 times that in 2017, Morgan Stanley calculates.

The company carries ads for jobs, homes and big ticket items such as second hand cars, solicited from an army of sales people. Meanwhile, that last item – used cars – underscores how rapidly China is changing.

New car sales in China now outpace those in the US, which means for the first time there is a used car market on the mainland. And just in case you have drunk too much, there are ads from drivers willing to take the wheel of your car and drive you home. And of the 600m plus internet users in China, every month has 210m visiting its site.

India is far behind China but is even more dramatic in its own way, precisely because of the potential. Illustrating just how limited the physical infrastructure is in India, there are only 29m landline connections in the country and 15m broadband subscribers. But there are 886m mobile users and 40m of them have broadband connections.

And every month the number of smartphone users grows by 5m as the cost of a handset drops. Quikr, the online classified group in which Warburg invested in 2012, gets 30m visitors to its site every month, a small fraction of what China gets. But that is still double the monthly number two years ago.

Like most internet companies, “it is early in the monetisation process”, Warburg’s co-head of TMT, Mark Colodny, notes. That is, of course, the great question mark hanging over internet companies on both sides of the Pacific.

But investors live in a relative, not an absolute world. Goldman Sachs, for example, invested in Alibaba in the late 1990s and in Industrial and Commercial Bank of China a bit later. It sold out of Alibaba in 2004 and only a year ago sold out of its stake in ICBC.

Today, Alibaba’s Alipay unit has 180m users and is increasingly challenging the banks for savings. China Mobile’s texting revenues are being hurt by Tencent’s WeChat application, highlighting how the internet companies are marginalising the business of large state-owned enterprises.

Today, the Forbes billionaires list includes many property magnates and many tech tycoons. Next year, there will undoubtedly be fewer of the former and more of the latter.

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