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Tian Tu Capital’s Challenge: Reviving China’s Consumer Story

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Tian Tu Capital’s Challenge: Reviving China’s Consumer Story

When Tian Tu Capital (1973.HK) debuted on the Hong Kong stock exchange on October 6th, it didn’t generate the excitement investors were hoping for. The consumer-focused venture capital company’s shares were priced near the lower end of their range, and the allotment of shares reserved for Hong Kong investors fell short of expectations. Ultimately, Tian Tu raised HK$1.13 billion ($144.5 million), well below its initial target of $500 million when it announced its intention to list last year.

Unfortunately, things went downhill from there. On its trading debut, Tian Tu’s stock dropped 25%, and within a week, its shares were trading about 30% below the offer price. This lackluster performance is not what one would expect from a company that helps major consumer brands in China grow and maximize their returns when listing their shares. However, it reflects the challenging times for venture capital and private equity investors in China, as the economy slows after a three-decade period of rapid growth.

Despite the disappointing start, Tian Tu still boasts a market cap of HK$3.36 billion and a price-to-sales ratio (P/S) of 16. This relatively high valuation indicates that some investors still hold positive sentiments towards the company. By comparison, Hong Kong-listed shares of CICC (3908.HK; 601995.SH), China’s oldest investment bank, trade at a much lower P/S ratio of just 1.8.

The last few years have been a challenging “winter” for asset managers in China, as predicted by Tian Tu’s founder and Chairman Wang Yonghua in 2018. The number of private equity and venture capital funds in the country dropped significantly after China’s financial regulators imposed tighter eligibility requirements and banned collaborations with commercial banks in 2018. By 2022, the number of remaining funds had halved to just 7,000. However, the industry managed to raise 2.2 trillion yuan in funds that year, up from 1.8 trillion yuan in 2017, according to third-party data cited in Tian Tu’s IPO prospectus.

While China’s private equity and venture capital market is expected to continue growing, it will do so at a slower pace, with annual funds raised projected to reach 2.5 trillion yuan by 2027. This growth may seem modest compared to the previous decade, but considering the country’s shift towards a slower growth phase, surviving in this industry is an achievement in itself.

The Journey of Tian Tu Capital

Tian Tu Capital, founded in 2002, is one of China’s most experienced and seasoned venture capital and private equity firms. Over the years, it has achieved significant milestones, including successful listings for portfolio companies like Zhou Hei Ya (1458.HK), Feihe (6186.HK), Nayuki, and Shenzhen Pagoda (2411.HK). Alongside these successes, Tian Tu has also invested in various companies, such as recycling platform ATRenew and Xiaohongshu, an Instagram-like social media platform.

Despite recent financial challenges, Tian Tu has managed to grow its assets under management at a compound annual rate of 19.5% from 2015 to 2022, reaching 25.5 billion yuan. As of March 2022, the company had invested in 222 companies, covering both early and late-stage investments. Tian Tu’s strategic focus on consumer-oriented companies has paid off, with the company ranking third in terms of investment projects in China’s consumer industry, following Tencent’s venture arm and Hongshan (formerly known as Sequoia China).

Certain financial aspects of Tian Tu’s recent performance have been rocky. Revenue from management fees has steadily declined from 38.6 million yuan in 2020 to just 12.4 million yuan in 2022. Similarly, investment gains shrank from 1.1 billion yuan to 377 million yuan over the same period. Nevertheless, the company’s net assets have remained steady and have even grown, reaching 7.3 billion yuan in 2022 compared to 6 billion yuan in 2020.

Weathering the Storm

Despite facing challenging market conditions, Tian Tu Capital remains optimistic about its prospects. China’s economy is currently experiencing a new phase of slower growth, which has had a significant impact on consumer spending. However, as the country gradually recovers from the effects of the “zero Covid” policy, there are signs of improvement. During the National Day holiday in China, domestic tourism revenue increased by 1.5% compared to 2019, demonstrating a rise in consumer spending.

The potential for growth in China’s consumer market is significant. The average Chinese consumer is expected to spend 32,700 yuan annually by 2027, a notable increase from 18,300 yuan in 2017. Tian Tu Capital’s focus on investing in consumer-oriented companies positions it well to benefit from this evolving landscape.

Despite the lukewarm response to its Hong Kong IPO, Tian Tu is hoping for a change in sentiment. The recent flurry of IPOs in Hong Kong, along with improving signs in China’s factory output and retail sales, may reignite investor enthusiasm. As the first company from its class to be dually listed in Hong Kong and on the National Equities Exchange and Quotations (NEEQ) board in Beijing, Tian Tu enjoys a unique position that could provide it with a first-mover advantage in China’s promising consumer market.