When a Dragon Births Unicorns – 5 In 2018

March 15, 2019

MONTHLY ANALYSIS

China has always had a solid reputation for high-speed manufacturing, but when it comes to highly-valued ventures, the country may just have outdone itself last year. Consider this: in 2018, in spite of an extended trade war with the US and in the face of an economic slowdown, 25 private Chinese companies were valued at a total of $58.05 billion.

In 2018’s H1, China’s FinTech companies raised ~$35 billion (over 80% of the global total) and three giants took more than half of the amount fundraised in China. Which giants? Ant Financial, Du Xiaoman Financial, and the new one on the block, JD Finance, raised ~$17.8 billion, accounting for more than half the total amount of funding in China for the year.

A lot has been said about China’s growing tech unicorn culture. Some contend that such growth is inevitable, considering the overwhelmingly massive number of mobile and internet users in the country. Others make the argument that this could be a bubble in the making. It’s way too early to take a definitive call on this, but it’s impossible to deny – the ongoing Chinese FinTech growth story is an immensely fascinating one.

A (Far) East-Side Story

For a country that has been historically considered mystical, China’s approach to the development of its FinTech landscape is actually rooted in sheer practicality.

Back in the early years of the new millennium, China’s financial sector was not very technologically advanced, to say the least. Bad loans had all but bankrupted state-owned and controlled banks whose attention was, for the most part, focused on its institutional customers. This left the common individual with few choices but to endure the ordeal of long waiting-times, queues, and bureaucracy. Here’s the worst part: compared to 65% of American citizens using internet services in 2004, Chinese users accounted for fewer than 8%.

When the mobile movement finally took place in China, there was little to stop the wave of innovation by FinTech firms putting in place their own systems and processes that made customers’ lives a whole lot easier. With Chinese FinTech innovation often leveraging existing technologies such as the now commonly-used QR code and the government being far more relaxed in terms of regulation or legislation when it came to its indigenous FinTech giants, the FinTech revolution had come into its own.

Cut to the present and major players such as Alipay and Tenpay loom over all others in the Chinese FinTech landscape. Looking at the numbers, one can find that together they account for ~84% of the third-party payment market in the country.

China’s FinTech Unicorns in 2018

While China has had major players such as Alibaba, Tencent, and others that have helped cement its place in the hallowed FinTech unicorn club, 2018 saw two new entrants in pure play FinTech, with three others focused on blockchain.\ \ Du Xiaoman

when-dragon-births-unicorns-5-in-2018-1.png\ \ **Founded: **2015\ Founder(s): N/A (subsidiary of Baidu)\ **Lead Investors: **Bank of Tianjin, TPG\ Current Valuation: USD $3.5 billion\ \ Formerly known as Financial Services Group, the company changed its name to Du Xiaoman Financial in April 2018. It is based in Beijing, China, and was formerly a subsidiary of Baidu, Inc. \ \ The company provides personal consumer credit, wealth management, and other financial services to a largely underserved population, also offering a mobile-wallet service. It seeks to focus on AI and to develop new FinTech platforms, expanding the unit’s presence in China’s financial ecosystem. Its competitors include Ant Financial Services Group and WeChat Pay, as it seeks to rival them in the lucrative mobile payments space.\ \ Its short-term loan service offering is chiefly what’s made it popular with people, helping build investor confidence and rocketing it to unicorn status.\ \ Tiger Brokers

when-dragon-births-unicorns-5-in-2018-2.pngFounded: 2014\ **Founder(s): **Wu Tianhua \ **Lead Investors: **China Growth Capital, Xiaomi, Huagai Capital, GoldStone Investment\ Current Valuation: USD $1.06 billion\ \ Beijing-based Tiger Brokers is a FinTech service provider, offering traditional services such as stock brokerage and banking with technical elements including an aspect of distribution over the internet. The firm is backed by Interactive Brokers Group Inc., Xiaomi Inc., ZhenFund, and Wall Street investment guru Jim Rogers. \ \ Tiger Brokers, as an online brokerage firm, lets Chinese investors invest in overseas securities, in particular, stocks listed on the US and Hong Kong exchanges. Its app ‘Tiger for US Stocks’ launched in 2014, has a Chinese interface and supports multiple features like one-click short selling, personal profit & loss analysis, stock options trading, real-time quotes, and iOS, Android, Windows & Mac OS coverage, making it popular among Chinese investors using it. Its simple interface coupled with its array of features makes it easy to invest, which has served to build investor confidence, helping it gain unicorn status in the country.

These two companies are the latest in a growing pool of FinTech giants that have already started to dominate the financial services and ancillary landscapes in China. They tend to follow the tried and tested formula of their prestigious predecessors, such as Alipay and WePay, and it’s clear that inspiration can come from anywhere – even those one seeks to compete against!\ \ You’ll recall that at the beginning of this narrative, we mentioned blockchain unicorns in China as part of the growing FinTech landscape. Were you aware that over 3,000 Chinese companies registered blockchain-related names in H1 2018? \ \ And that’s not all: the number of companies that have registered names including the word ‘blockchain’ between January and July of 2018 increased by 500% compared to the whole of 2017. In July 2018, 3,078 Chinese companies had registered names with the term ‘qukualian’ (Chinese for ‘blockchain),’ bringing the total of firms adopting DLT-themed names in China to 4,000+. This is really interesting when you take into consideration the ban on ICOs in China; it’s evident that the Chinese state is open to promoting blockchain-related ventures despite its tough stance on cryptocurrencies.\ \ This seems to have worked well enough for some companies. Look at the Q2 Unicorn Index published by the Hurun Research Institute and you’ll find it lists companies in the cryptocurrency space – something that hasn’t previously been done. Three cryptocurrency mining companies in China have made it to the 2018 unicorn list: Bitmain has the highest valuation, standing at ~$10.3 billion, while Canaan Creative has a valuation of ~$3 billion. The third cryptocurrency mining company, Ebang, is valued at ~ $1.5 billion. Furthermore, the companies recently indicated their desire to conduct initial public offerings on the Hong Kong Stock Exchange in the coming months.

China’s Blockchain Unicorns in 2018

Bitmain

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Founded: 2013\ **Founder(s): **Jihan Wu, Micree Zhan\ **Lead Investors: **IDG Capital, Sequoia Capital China, Sinovation Ventures, Crimson Ventures\ **Current Valuation: **USD $ 10.3 billion\ \ Bitmain is a Chinese firm that designs and manufactures high-performance computing chips and software. Bitmain is a manufacturer of Bitcoin mining hardware and other related services.

Bitmain was founded by several of the digital currency industry’s earliest players, and its team has experienced engineers, financial experts, and Bitcoin enthusiasts.\ \ With offices in both, China and the US, Bitmain has been well-placed to attract investors’ attention, and their focus on making high-quality equipment for cryptocurrency mining by leveraging tech like Antminer is undoubtedly one of the reasons it has been able to join the prestigious unicorn community in China.

Canaan Creative

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Founded: 2013\ **Founder(s): **Andreas Romero, N.G. Zhang\ **Lead Investors: **Tunlan Investment, Jinjiang International, Baopu Asset Management\ **Current Valuation: **USD $3 billion\ \ A Chinese cryptocurrency-mining firm, Canaan Creative produces blockchain servers and provides solutions for repetition ASIC chips. Its products are sold not just within China, but globally as well.\ \ The firm leverages the latest technology to ensure it provides top-notch products to its customers and claims that it makes USD $4 million in revenue, annually.\ \ Its commitment to high-quality design and manufacturing combined with a focus on customer service have clearly impressed investors and is one of the reasons for its entry into the group of Chinese unicorns in 2018.\ \ Ebang

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Founded: 2010\ Current Valuation: USD $1.5 billion\ \ Ebang is a Chinese enterprise integrating R&D, production, sales, and service. Data communication equipment and blockchain computing devices are among its leading products. The company specializes in data communication and chip design, and its primary business is divided into two categories: telecommunication services (including data communication equipment and optical fiber transmission equipment) and the blockchain business based on integrated circuit design and independent research & development of chips, providing high-quality blockchain computing equipment. \ \ Going forward, the company claims it will continue to develop and provide top BPUs, and develop blockchain applications, artificial intelligence data processors, blockchain applications and solutions for non-cryptocurrency, and 5G technologies. \ \ Its focus on high-quality hardware along with a forward-looking attitude is what’s helped the firm leapfrog into the unicorn category in China.

What’s Working for Chinese FinTech?

What makes it easy for companies such as Du Xiaoman and Tiger Brokers – and even cryptocurrency-mining businesses – to make it into the unicorn leagues in China? Three factors, in particular: a huge, underserved population inclined towards tech-adoption, a banking industry that remained underdeveloped, and relatively-relaxed regulation and oversight (at least towards the beginning). Adding fast urbanization to the mix, what China experienced was the rapid growth of a huge middle-class. Consider the following numbers:

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Astounding, to say the least, China’s 772 million internet users amount to more than all of Europe’s population in that year. Take into account the proliferation of cheap smartphones in the country and you’ll find that this means, 95% of China’s internet users surf the internet on their mobile devices.\ \ It’s also important to consider China’s internet disruptors, primarily, the BAT giants: Baidu, Alibaba, and Tencent – their services are used by millions upon millions of Chinese users for third-party mobile payments. In Q1 2018, China’s third-party payments’ transaction volume reached a stunning ~$5.87 trillion. China’s BAT giants have evolved a whole ecosystem around their users, collecting immense quantities of data that lets them better anticipate consumer behavior to offer extremely innovative and highly personalized services.\ \ Consider how China’s mobile payments business has grown at a three-digit annual rate over the last five years:

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Source:https://www.brookings.edu/blog/order-from-chaos/2018/02/08/whats-happening-with-chinas-fintech-industry/

It’s clear, so far, that 2018 was a great year for investments in the region; China’s Ant Financial (an affiliate of the Alibaba Group) is looking to aggressively expand its reach in Southeast Asia. It alone made investments worth $14 billion – accounting for a whopping 35% of 2018’s total investment and making the conditions ideal for the birth and growth of more FinTech unicorns.\ \ What also sets such startups apart is the fact that unicorns in China tend to have shorter growth cycles as compared to that of their counterparts from other regions. Additionally, their capacity for innovation is stronger too. Furthermore, being ‘hard technology-driven’ has become a typical feature of Chinese unicorns. What also helps is that investors seem to have shifted their preferences from traditional to high-tech companies.

Chinese FinTech Unicorns: Bubble or Bubbling Over?

The question on everyone’s minds and the veritable elephant in the room: is the explosion of FinTech unicorns across China being similar to the infamous dot-com bubble? A disturbing thought.\ \ The chief bone of contention is that unicorns are often overvalued – sometimes up to 50%. During IPOs, many unicorns end up becoming a lot cheaper. What this means is, the evaluation of investors and the assessment of the market do not match. To add to this, startup owners are almost always under pressure. Several technology unicorns that still have not achieved large-scale profitability will be pressed to explore new routes for funding, which may require going public.\ \ Furthermore, Alibaba Group’s Vice Chairman, Joseph Tsai, has cautioned that valuations are distorted and could decline over the next six to nine months, especially in over-saturated spaces like bike-sharing – fair enough, seeing as how even giants such as Xiaomi Corp. and Meituan Dianping ended up trading much below their initial value.\ \ That said, one should keep in mind that China’s massive population comprises of mind-bogglingly large numbers of mobile internet users, and as the cost of internet-enabled mobile devices falls while internet speeds rise, demand will grow to meet what might seem like an excess of supply at the moment.

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Source: https://www.speedtest.net/insights/blog/2018-internet-speeds-global/

FinTech startups in China are fast replacing the old – arguably ancient and almost redundant – financial services industry’s offerings. They are also, quite smartly, leveraging regulatory norms in a place where navigating the maze of frameworks is a complicated task. If anything, 2018’s investment numbers suggest that FinTech in China will continue its upward rise. Given the pattern of FinTech disruption the country has witnessed recently, it seems more likely than ever that 2019 will go down, in FinTech history as the Chinese Year of the Unicorn.

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