China TH Capital’s Vice President Renchuan Chen
China TH Capital is a boutique investment bank, which focuses on primary markets growth-stage TMT (tech, media and telecom). It does primary market fund-raising for a cheque size of US$50-100 million in China, starting from Series B and to pre-IPO.
With China in relative saturation, TH Capital expanded to India and Southeast Asia in 2018-2019, where it is looking for more opportunities and trying to expand further in emerging markets.
In this interview, China TH Capital’s Vice President Renchuan Chen talks about its activities and plans in Southeast Asia and India.
Excerpts:
While India and Southeast Asia are fast-emerging markets, China is still the fastest-growing and presents massive investment potential. What are the reasons for your gradual shift to Southeast Asia and India?
China market will still be the fundamental market for us. We’re leveraging the resources/experiences in the local market. But emerging markets such as Southeast Asia, India, Africa, South America, East Europe as a whole are parallel strategic markets for us to focus on. The new strategy is to become a world-class financial advisor/ investment bank for the entrepreneurs in the TMT industry, globally.
You are primarily an investment bank. Do you also double up as an investor as well?
The core business and significant revenue still come from financial advisory/investment banking. We do participate in investment if the companies that we’re helping are quite good assets and are early-stage with great potential. But still, those are the subset business for TH capital. The financial advisory is the main focus.
Chinese companies have a presence in India and Southeast Asia since the turn of the current decade. Don’t you think you are late to the party and why so?
There are two actual push and pull reasons for that. The push reason is that the whole Chinese economy, especially on the consumer internet segment, is sort of slowing down. The mobile penetration rate in China is relatively high level; the recent mobile penetration rate in China is dropping a little bit as compared to the fast growth in the emerging markets. The birth rate and the population dividend are the other push reasons. We can hardly find many great opportunities in the consumer internet segment in China.
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In Southeast Asia and India markets, too, similar things are happening, but their TMT infrastructure is still in the early stages of development. If you look at Indonesia and Vietnam, these two countries have registered dramatic improvement in the past three to four years. The overall underlying GDP or economic development in those countries are growing fast, but there is still room for improvement.
If you look at China, the overall PE/VC investments in 2018 were US$200 billion. But this year it is less than US$100 billion, which is still huge but has dropped significantly.
As for PE/VC volume or frequency in emerging markets, the overall size of these five to six regions (Southeast Asia, India, South America, East Europe, the Middle East and Africa) are relatively small. In 2018, the total volume of the emerging market was only one-seventh to one-fifth of China. However, as China has dropped to half, these markets are growing. What is happening is that the overall volume for emerging markets becomes around one-third of China.
The whole TMT industry in the emerging markets is growing fast. We are indeed early comers for the financial advisory business. If you look at the Chinese market, I don’t see any other financial advisors that have put in such dedication and resources into a new market. We are the first dedicated to those emerging markets and consider them strategic paralegal market to China in the past six to seven years.
We are relatively late compared to other Chinese traditional business or early tech companies going abroad. Still, we are early comers compared to a lot of our peers in the similar market financial advisory industry.
The Southeast Asian markets are fundamentally different from that of China in terms of languages, culture, and customer behaviour, etc. How do you tackle these challenges in these markets?
It’s an exciting topic. There are quite a few cultural differences. We have quite a good foundation in India, which is that we have leading clients in the different segments in the TMT industry in the market. We are the long-term partners with those entrepreneurs, leading companies in their segments.
So we know what happened in their early stages, in what they did well, what mistake they committed, or what they are doing in their Series B and Series C rounds. We also know what strategy they should have taken, but didn’t.
Southeast Asia is a group of developing countries with high-density population and social structure like China. We’re talking to the entrepreneurs in Southeast Asia who can benchmark with Chinese companies. We are more similar compared to local companies. That’s our entry point to overcome cultural and language issues.
The world economy is in the doldrums, especially in India, where private consumption has come down. Don’t you think you got the timing of your entry into the region wrong?
If we look at India and the emerging markets as a whole, the overall capital market is heating up, instead of cooling down. This is the fundamental reason for our entry into the country. Plus, as I pointed out earlier, the TMT infrastructure is improving quite fast. This will bring quite a good dividend for new technology companies.
Sure, the window period will be shorter when compared to China. But still, there’s quite a difference between how global investors, global institutions and investors look at India currently.
If we draw a parallel, ten years ago, global players and investors were hesitant to invest in China because it was a different market then, and they didn’t understand its culture. They were not familiar with the regulations. Some of them, however, held on to while some others left. People who chose to hold became successful.
India and Southeast Asia are also going through this phase. The India market hasn’t been developed much, but people who chose to invest are making good returns. For investors looking at India, the only choice is to invest because this is the prominent single largest market with a vast population and huge potential. This market is relatively early stage, from the underlying economy side or the TMT segment side.
The Chinese market is stagnated because it is already tapped into its potential. What does the future hold for Chinese startups and investors?
The biggest trend we see in the startup investments space in China is that there is a big shift from consumer internet to industrial internet segment. Not many investors are looking at consumer startups anymore. A lot of them have shifted to enterprise technologies (B2B).
The overall industrial internet segment currently in China is under development; it is only 5-10 per cent v/s 50 per cent in the US.
We are the most developed or one of the most developed consumer internet economies in terms of e-commerce penetration, third-party mobile pay penetration and online population penetration. Still, we’re one of the least developed industrial internet economies in the world in terms of those metrics.
My understanding is that Chinese entrepreneurs have a higher risk appetite than their counterparts in emerging markets. What other qualities do Chinese entrepreneurs have that entrepreneurs in emerging markets can learn from?
There are two differences, I would say. One of them is the background of entrepreneurs. If you look at the kind of entrepreneurs who are doing well in China, you will come to know they are those who come from a less-privileged background or even from the bottom of the pyramid/grass-root level.
These entrepreneurs built multi-billion dollar companies from scratch and broke through a lot of social class during their startup journey. That’s the major characteristics have been seeing over the past seven to eight years. But that is changing and has changed. A lot of today’s entrepreneurs are from the upper class. They are from a more diversified background.
Look at the Southeast Asian and Indian market. Most entrepreneurs are from a pretty good and diverse background. A lot of them come from the Ivy League in the US or an investment banking background. They have a much better education background and a much broader global perspective which is quite important because that’s another difference between the entrepreneurs in China and Southeast Asia.
China is relatively protected or is a closed economy; it is sort of independent from the rest of the world. You don’t see much competition coming from the global giants, but in India and Southeast Asia, giants such as Amazon Facebook and Netflix are posing a big challenge to local players. So, entrepreneurs with much more diversified, global background have a competitive advantage in a more open economy compared to China.
At a time of the global economic slowdown, what core competencies should startups acquire to come out of this?
I think the core competencies that you are talking about should be different for different markets. In China, until recently the so-called core competencies used to be technology compatibility, management etc. Right now, it is about a relationship with the government, understanding government policies.
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Given the current underlying TMT infrastructure development, we find that companies who can cut into the market with a very localised method will advance.
New-age technologies such as AI and robotics are arising VC’s interest recently and have become hot in Southeast Asia. How do you look at these sectors?
We served leading companies in China such as Geek+. The business logic and momentum should be similar.
The demand for robotics, “the muscle”, starts with demographic change. When we look at countries like the US and Japan where robotic workers are widely adopted, the install base tends to be positively correlated to the peak of the percentage of the working-age population.
We believe China is on the verge of this growth cycle of robotics-driven automation, as China’s working population peaked in 2010 and average annual salary doubled in the past seven years. The demand for higher productivity across all sectors has led to a boom in entrepreneurship in the technology sector in the past few years. India and many SEA countries are still enjoying demographic dividends and mobile penetration growth, so business model innovations are likely to precede technology ones, just like what happened in China.
Besides the demand to “replace” human workers, corporates in China are also gradually realising the advantages of AI, “the brain”, in human-driven workplaces. In many circumstances, technology like AI is more accurate, more efficient, more stable, thus a good assistant to human. That enlarges the addressable market for technology startups, as enterprises are more willing to allocate budgets to software, compared to a long-lasting favourite of physical assets.
Technology helps in improving productivity. We see the challenge of new technology startups lies in how to commercialise and commoditise the products and their value.
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Image Credit: TH Capital
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