BELLWORT TECHNOLOGIES PVT. LTD.
I just returned from a 2 week trip to China where I met with a dozen tech companies. Some were private, some were newly public and some had been public for a few years now.
Before I left for the trip, the number one question my friends asked me was: “Let me know if you see the next Baidu (BIDU)… ok?” It’s sort of like going out to prospect for gold in the Yukon. People think the next gold nugget could be sitting in plain sight at the next stream crossing.
The Chinese market is still bubbly. Despite the problems of fraud afflicting companies like Longtop Financial (LFT) and poor performance of most Chinese tech companies in the last 6 weeks, there is still a long line-up of Chinese companies waiting to do IPOs in the next year or so.
At the start of my trip, the prognosis was still good for new Chinese IPOs. By the end of my trip, the stock market sell-off back in the US and Greek default concerns had hammered Chinese tech stocks. Sina (SINA) is down 30% in the last month. More recent IPOs like RenRen (RENN) and Youku (YOKU) are down 40%.
But, no matter what happens in the stock market, these are all operating companies. It was fascinating for me to sit down with many executives from these companies to see the world through their eyes.
When you talk candidly with Chinese executives or investors, most will speak openly about how they are living in the positive upswing part of the cycle. They also know that this stage won’t last forever. Eventually, this bubble will burst too. They just hope to cash in now before the party ends.
So what about hope for the next Chinese Baidu? In short, I didn’t see many obvious ones.
In China today, there are three big tech gorillas: Baidu, Tencent, and Alibaba Group (which is comprised of of Taobao, Tmall, Alipay, Alibaba.com and some smaller businesses – Yahoo! (YHOO) is a 40% owner of the group). These are all companies that are worth $40 – 50 billion (although Alibaba is still private).
Then, there is a big drop to the next “big” Chinese tech companies. Sina is a $5 billion company again after its recent sell-off. Jaiyuan (DATE) a recent IPO – which bills itself as the Match.com of China — is a $300 million company.
Among these smaller companies, some will make excellent investments in the coming years. But few have the potential to become $40 billion companies.
There are two companies that I see possessing that $40 billion potential: Alibaba Group and 360Buy.
Alibaba Group is obviously in the middle of a long and protracted battle in public with Yahoo! and Softbank. But the company’s operations continue to shine. Tmall, which will soon be set up as a separate entity from Taobao has the potential to be a huge money-maker for the company as they continue to attract merchants and more users. Eventually, the problems with Yahoo! and Softbank will get sorted out. This is still a monster company.
360Buy is much smaller and newer than Alibaba Group but it is going to be a formidable competitor in the e-commerce space. Robin Li of Baidu just made a big investment (personally). DST Ventures is a backer. The most recent financing put 360Buy’s valuation at $10 billion. They are trying to be the Amazon (AMZN) of China – especially in electronics. They are probably going to succeed – although they are spending a lot of money on customer acquisition and logistics to make this happen. They are a well-run company going after a big market with ambitious backers. They will likely IPO by the end of 2011.
But bigger isn’t necessarily better. Many of these niche IPOs could see very strong returns as they execute their business plans. They might go from $300 million to $1 or $2 billion . That’s still a fantastic return. It’s just not going from $300 million to $40 billion.
With the recent downturn, more Americans will throw in the towel on many of these lesser known Chinese names. That’s exactly why you should start paying attention to them and look for some hidden gems in the months ahead.
But do your due diligence. There will definitely be winners and some big losers in the months ahead from the recent IPO crop.
BELLWORT TECHNOLOGIES PVT. LTD.