China Vc Market Update (090714)

China VC Market Update

iD TechVentures (iDT) July 15, 2009

Table of Content • Macro Economy and Stock Market • VC Community in China • Growth Enterprise Market (GEM) • Local Regulation’s Impact on VC Investment • RMB Fund Management • Wrap Up

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Macro Economy and Stock Market

Current Macro Economy • GDP growth rate in the 1st quarter of 2009: 6.1%. Economic growth in the second and third quarters of the year is likely to be stronger. • Chinese government projects its GDP will grow 8.3 percent this year, according to a report released by the Chinese Academy of Social Sciences (CASS). This is the government’s official target. Other research institutions, organizations and economists may have other forecast. • Economists in China optimistically believe China’s economy has hit the bottom and is now on the way gradually bouncing back. Dr. Ma, the Chief Economist for Greater China of Deutsche Bank, forecasts that China’s nominal GDP will overtake the US within 10 years. (source: Jun Ma, April 2009)

Macro Economy & Local Stock Market 3

Local Stock Market •

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A-share has been bouncing back with a V shape since the inception of 2009. The whole capital market has been very active. The trading volume from January to May ’09 was twice as much as that in second half of 2008. 9 month since the IPO window closed in last September, finally CSRC lifted the ban and approve the application from Guilin Sanjin Pharmaceutical Co., a medium-sized drug firm to list on SME. IPO price is set RMB19.8 with PE 33. Before the IPO window closed, 33 companies had already passed CSRC’s panel review before IPO but were suspended. After the financial tsunami, many of these companies’ business dropped. So, it’s unlikely that 33 companies will go IPO right after the window opens. If a company’s sales declined more than 50%, definitely it will not be able to IPO CSRC confirmed that they will control the pace of new list and will not open the gate for all IPO candidates Macro Economy & Local Stock Market 4

VC Community in China

Domestic VC / PE Fund Raising: Q2’08-Q1’09 Domestic VC / PE Fund Raising

VC / PE Funds Raised by Foreign and Domestic VC

By Number Domestic (US$)

# of Funds

Source: ChinaVenture Limited Partners Summit 2009, by Jay Chen

Foreign

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Domestic

By Amount JV

Limited Partners in China LP Composition

What LP will Do on Investment Enterprises

2%

Bank / Insurance/Trust VC / PE

2% 4%

12%

5%

Will Increase

Pension Funds

8%

37%

41%

18%

FoF

8% Asset Management Co. Sovereign Funds

9% 12%

13%

Not Sure Decrease

Endowment Funds Guiding Funds

29%

Family

Source: ChinaVenture Limited Partners Summit 2009, by Jay Chen

The Same

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Growth Enterprise Market (GEM) Expect to be in October, 2009

Growth Enterprise Market (GEM) – More Rules Released • •

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The Provisional Administrative Measures for Initial Public Offerings and Listing on the GEM (the “Measures”) took effect on May 1. CSRC released GEM’s Listing Rules on June 5th, which is to be effective from July 1st, 2009. The Rules cover more issues, including the independent directorship’s responsibility, information disclosure, insiders’ obligations…etc. The underwriter has 3-year supervise period on the IPO company, 1 more year than companies on the main board. To avoid naive investors speculate in stocks, GEM set “entry permission” for qualified investors and release Rules on GEM Investor Criteria. – No minimum capital requirement. – Only investors capable of taking risks are allowed to trade on GEM: All individual investors that have no less than two years of experience in stock trading in China could apply to trade on the GEM with securities companies. – Other individual investors are also allowed to apply to trade on GEM but need to go through stricter training on risks Growth Enterprise Market (GEM)

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Growth Enterprise Market (GEM) – More Rules Released • Regulation about divestment: – Controlling shareholders, actual controllers cannot transfer their shares within 3 years after IPO. – Other shareholders, if they invest within 6 months before the company files IPO, they are not allowed to exit within 12 months after IPO. After 12 months, the investor can exit 50% of its holding within 24 months. After 24 months, the investor can sell all remaining shares. – If an investor invest in 6 month ago before the company files IPO, the investor can exit in 1 year after IPO. Growth Enterprise Market (GEM)

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Growth Enterprise Market (GEM) – More Rules Released •

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Criteria of listing on GEM: (source: Xinhua, March 31, 2009) 1. Be profitable for consecutive 2 years with combined profits of at least RMB10 million. 2. Be profitable of at least RMB 5 millions for the most recent year on revenues of at least RMB 50 millions and annual revenue growth rate of at least 30% in recent two years. (Either 1 or 2 is qualified) 3. Net asset of at least RMB20M 4. Been in operation for more than 3 years 5. Innovative business model with potential of high growth rate (3,4,5 are necessities) With the must of being operation for more than 3 years, very likely a VC will need at least 6-7 years to completely exit an early-stage investment. Besides, the criteria above is also just the lowest bid. In view of the current candidates waiting in the queue, most of them actually are over-qualified. VC definitely will screen deals with higher standard plus the long lock-up period, it might force VC favor expansion / late stage company. Growth Enterprise Market (GEM)

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Growth Enterprise Market (GEM)Still Have Rooms to be Improved •

Local government is saying that good companies invested by foreign VC are more than welcome to list on GEM. Is it feasible now? – Most companies invested by foreign VC are under the structure of offshore from the inception of investment. This structure means going IPO offshore is the only way due to China’s stock market requires the IPO candidates are China-registered companies. If they want to list on GEM, they will need big effort and time to do the share restructure. – Besides, RMB funds set up by foreign funds are non- institutional funds, which are still NOT allowed to have depository accounts. Even if GEM is on board, it’s still a question for non-institutional funds to trade and exit investee companies. We believe this is a short-term situation and CSRC will solve it in the near future.

Growth Enterprise Market (GEM) 12

Growth Enterprise Market (GEM) – Who is its Competitor? • GEM is a milestone for China’s onshore investment in the long run. However, in the short and medium terms, with the aforementioned problems, and competitions from Hong Kong GEM, London AIM, and Tokyo Mothers, GEM is still far away from its goal—being China’s Nasdaq. • In short term, even Taiwan’s stock market might be a competitor based on the reasons: – Appreciate high-tech and innovative companies with reasonable PE and liquidity. – Well-developed infrastructures, e.g. electronic clearing system. – Competitive list cost, low transaction and maintenance cot – Taiwan has released the restriction of listed companies’ registration country.

Growth Enterprise Market (GEM)

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Local Regulation’s Impact on VC Investment

Local Regulation’s Impact on VC Investment • Tax Bureau’s #87 clearly support VC with company structure. Tax deduction policy only applies for LP fund registered as a company, not being applicable to those registered as non-institutional entities. • Companies invested by non-institutional funds face many challenges from the underwriters and lawyers when filing IPO. Only companies invested by VC funds on corporation structure could go IPO smoothly and enjoy the preferential tax. • Though in Pudong, Shanghai, the new regulation allows offshore financial institutions could register under the structure of Ltd with minimum capital US$2 million, not sure what benefit could be for such kind of registration. Currently most offshore investment companies register as a liaise office or representative office.

Local Regulation’s Impact on VC Investment

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RMB Fund Management

LPs in China: Limited and Not Yet Mature • Conventional LP practice prevailing in the West is not yet popular in China: – Long term view for up to 10+2 years – Not to involve in GP operation – Economic interests for GP: Fee and carried • Local LP community has not yet a mature cluster. Limited LP source, and funding size is rather small. No retirement, insurance, pension, endowment, family offices, FoF, … as LPs in China yet. • Many government agencies (ministries, banks, provinces, municipalities, hi-tech parks...) set up “leading funds” (引导基金) to provide LP funding. But, most of them come with “strings attached”.

RMB Fund Management 17

Foreign LP’s Role in RMB Fund Indigenous RMB funds come with certain “Chinese Characteristics”. USD Offshore Fund

RMB Onshore Fund

Fund Life

Around 10 years

Around 5 years

Fund Size

A few hundred US$M

Around US$50M

Capital Call

Several, for few years

2 or 3 times, for several months

Fund Raising

Every 2 to 4 years

In less than one year

LP involvement

Basically hands off

Try to involve (interfere)

As a result, with the improving of legal, forex and tax issues, overseas LPs and FoFs will continue to play a key role in supplying funding into China’s VC/PE industry. RMB Fund Management 18

The Evolving RMB Fund Management • Tougher fund raising. China still lacks a sound LP mindset and practice. Short of diversified and Western style LP sources. And, foreign LPs are not ready to do direct cross-boarder investment into a RMB fund. • Limited onshore divestment routes. Only IPO site in Shenzhen with higher listing criteria. Almost no M&A market yet. • Yet-to-improve legal, regulatory and administrative framework to facilitate RMB fund set up and management. • Extra red-tapes on operation of RMB funds, which are invested with foreign funding. • Need more time to observe a smooth repatriation of foreign LPs’ divestment in local deals.

RMB Fund Management 19

RMB Onshore Fund: a Long March • It might take years for RMB onshore investment to become the mainstream of VC/PE activities in China. But, foreign investors need to monitor and proactively react to the shifting tide. Eventually, doing RMB onshore investment is not an option, but a survival issue. • It’s a trend of no return. In the long run, the VC/PE industry in China will do local RMB fund raising (with local and foreign LP joining), local fund investment into local entities, and divested thru local IPO or M&A. • However, local RMB investment is still come with lots of challenges. Foreign GPs and LPs should explore the future trends, but need to control the pace to avoid mistake. RMB Fund Management 20

Wrap Up •

The whole industry is stable. According to “China Private Equity Industry & Regulatory Environment” report issued by China Venture Capital Association: Over 80% of the VC / PE have no plan to cut jobs and 12.8% even have plans to hire more people.

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According to ChinaVenture’s survey, 50% of LP who are having investment activities in China expect to reach IRR 10-20% this year . (ChinaVenture Limited Partners Summit 2009, by Jay Chen)

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With GEM is around the corner, VC community is excited to prepare for the rally. Even many public companies are keen to jump in by setting in-house VC arm. VC climate in China is far well comparing with peers in other countries.

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Eventually, the capability of management and capitalizing return will decide who are the winners.

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Thank You

Contact Window: Hanne Chen Investor Relations email: [email protected] Tel: +886 2 3518 3902

HuiHui-ju Chen Investor Relations email: [email protected] Tel: +886 2 3518 3903 22

Disclaimer: The content contained in this presentation has been prepared based on current information available. These are outcomes dependant on future events, and under no circumstances can they be treated as commitments by iD TechVentures. TechVentures.

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