【China】Is China the next incubator of tech bubble?

Investors interested in China have to be cautious in the coming year about the risk of over-valuation of certain technology start-ups, which is driven by continuous injection of venture capital into the sector.


The aggregate input of venture capital into the Chinese technology sector reached around US$3.27 billion during the first half of 2014, 74.3% of the total amount for the previous year, and 1.3 times the annual total for 2012, according to data tracker Dealogic.


Not limited to venture capital, the sector also raised US$12.2 billion in the first nine months of this year via 54 stock-related deals in the domestic market: including initial public offerings and share placements. That was nearly four times the trading value of the same period in 2013, with US$3.1 billion via 19 deals.


“There is a lot of capital that has been raised by venture funds but not yet invested. They need to find companies to invest in, so the market will continue to see more deals,” says Nina Xiang, the producer of China Money Network, a media company serving global institutional investors


“However, it only takes a few seconds for the market to shift from today’s crazy environment where people are too busy pursuing higher future profit to tackle the higher risk to the opposite side”, says David Zhang, co-founder of the venture capital firm Matrix Partners, in an open letter.


Chinese TechCom for US IPO

The technology blockbuster of this year - Alibaba Group Holding Ltd., raised a record US$25 billion through an initial public offering on the New York Stock Exchange.


China’s second largest online shopping platform,  JD.com, raised US$1.8 billion in an IPO on Nasdaq this May, while Weibo Corporation, operator of the Chinese version of Twitter, also raised about US$285.6 million on Nasdaq during the same month.


Debates abounded about whether China’s current situation suggests a bubble similar to the global one seen15 years ago, when many dot com companies also listed at astronomical valuations and the Nasdaq index reached as high as 5,132.52 points in March 2000. In the subsequent slide from that peak, there were a swath of bankruptcies of such big names as WorldCom, America’s second largest long distance telephone company at that time.

But the key sign of determining a bubble lies more in retail investors, according to Xiang, and now it is still at a nascent stage compared to the dot com bubble, as retail investors are not yet hot-headed into buying the dot com stocks.



Among the broad range of categories in the technology sector, mobile app is a favorite of venture investors. Quite a number of independent mobile app start-ups established within the last five years now have a valuation above US$100 million, most of which have burgeoning active monthly users, which is a sign of a prosperous market.


“It's very hard to value technology start-ups, as most of them don't have earnings, or even revenue, so there is no P/E ratio or EBITDA to speak of. The valuation is more by common sense or reasonable expectations, and in some cases they are over-valued,” Xiang said in reply to Young Financial Post’s questions in an email.


Momo Inc., the Beijing-based social networking platform established in 2011, just filed for a US$300 million NASDAQ initial public offering this November. Keen interest in the listing has reportedly driven up its valuation to almost US$3 billion. Its monthly active users reached 60.2 million in September 2014, representing growth of 112.8% over a year earlier.


However, despite the high valuation and user figure, Momo has not yet generated any profit. It suffered net losses of US$3.8 million, US$9.3 million and US$8.3 million in 2012, 2013 and the first half of 2014, respectively, according to the company’s IPO filing.


Momo cannot be reached for comments now according to the security regulation.

Investors have given tens of millions of dollars to mobile apps, which beefs up their valuations. Customized news app Toutiao, launched in December 2012, now has a valuation of US$500 million after raising US$100 million in its third round of financing this June.


Still, no one is sure when the market will peak, and investors should not be carried away nowadays by over-optimism of technology start-ups with popular concepts, as there are certainly some companies that have been valued higher than their worth/potential, says Xiang.

by Su Xin

《The Young Financial Post 新報人財經》



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