1973.HK
Tian Tu Capital tumbles into the red

The venture capital company posted 814 million yuan in investment losses last year, reversing 337 million yuan in gains for 2022

Key Takeaways:

  • Tian Tu Capital posted an 873 million yuan net loss last year, reversing a 559 million yuan profit in 2022
  • The venture capital firm is getting hit by weakness in the Hong Kong IPO market, one of its primary venues for disposing of its consumer-related investments

  

By Doug Young

What do you do when one of your primary revenue sources runs dry?

That question was front-and-center in the maiden earnings report from Tian Tu Capital Co. Ltd. (1973.HK), which made minor history when it became China’s first venture capital to list in Hong Kong last year. Unfortunately for Tian Tu, other new listings in Hong Kong were a relative rarity last year, falling to a 20-year low on weak sentiment towards the Chinese economy.

That’s a crucial factor for companies like Tian Tu, which rely heavily on IPOs to recoup investments in their portfolio companies. As such an “exit” strategy becomes increasingly difficult, Tian Tu said it is shifting to “investment strategies that do not rely on IPO exits,” such as selling its holdings to other buyers.

The bottom line was that Tian Tu sank deeply into the red last year, reversing a profit in 2022, as its revenue from asset disposals sagged and its existing assets also fell in value. Its latest results, released on Thursday just before the Easter holiday, show it lost 873 million yuan ($121 million) last year, compared with a 559 million yuan profit in 2022.

Most of the loss stemmed from 814 million yuan in investment losses for the year, reversing 337 million yuan in gains for 2022. The company also generates some other revenue, mostly from management fees. But even that amount was down by 3% last year to 44.6 million yuan from 46 million yuan a year earlier.

Tian Tu’s shares rose 2.3% on Tuesday after a long weekend for the Easter holiday. But they are down about 23% since the company first flagged its big loss for 2023 via a profit warning in early March. At its latest price of about HK$3.10, the stock has also lost more than half of its value since it sold IPO shares for HK$6.50 last October.

The company is in a difficult position for several reasons. Its main focus is consumer companies, with a list of earlier investments in well-known brands like dairy products maker Feihe (6186.HK), tea seller Nayuki (2150.HK), and fruit retailer Shenzhen Pagoda (2411.HK), which are all now listed in Hong Kong.

It’s no accident that Tian Tu’s investments often find their way to the Hong Kong Stock Exchange, rather than seeking IPOs on China’s domestic A-shares market or in the U.S., which are two other popular destinations for Chinese companies. Hong Kong-based investors have a strong appetite for such consumer stocks, which are often slower growth and pay dividends to entice investors.

By comparison, U.S. investors have traditionally favored companies from higher-growth areas like tech, drugs and emerging industries like new energy. China is different due to the regulator’s role as gatekeeper for what companies are allowed to list in Shanghai and Shenzhen. In such an environment, companies in areas prioritized for development by Beijing, such as new energy and microchips, often get priority among new listing applicants.

Slumping Hong Kong

All that brings us back to Hong Kong, Tian Tu’s favorite listing ground for its portfolio companies, which is suffering from some of its worst sentiment in decades. Tian Tu noted the benchmark Hang Seng Index fell 14% last year and said another index that tracks Chinese consumer stocks is down 12% so far this year.

Amid such weak sentiment, only 73 companies were able to make new listings in Hong Kong last year, raising HK$46.3 billion, according to PwC. The fundraising total was especially weak, down 56% from 2022, and represented a 20-year low. Of the companies that managed to list, consumer goods and services represented the largest group, or 29% of all new listings.

The weak IPO market has also hit overall venture capital and private equity investment in Chinese companies, which fell 27% last year to $42.6 billion, according to GlobalData.

As the market sagged, Tian Tu reported the value of its assets under management fell to 24.4 billion yuan at the end of last year from 25.5 billion yuan nine months earlier at the end of last March. The company said it generated 433 million yuan in capital from asset disposals last year. It didn’t provide any comparable figures for 2022.

But in its IPO listing documents last year, it said it generated 4 billion yuan from asset disposals in the three-plus years from January 2020 to March 2023, which averages 1.23 billion yuan per year. That means the company’s proceeds from asset disposals were likely down by two-thirds or more last year from previous years.

As part of its shift to IPO alternatives, Tian Tu said it will seek investments that are more aligned with government priorities. That decision looks shrewd in the current environment, since many of China’s large state-owned investment companies like to buy such assets to show their support for the government. Unfortunately, the kinds of basic consumption-related companies that Tian Tu typically targets are not high on Beijing’s list of priorities.

Tian Tu is trying to shift that focus, however. While four of the five new funds it launched last year targeted consumer products and services, the fifth was focused on biotech. And one of the company’s latest investments last year was in a company called Shanghai Yuekun, which operates intelligent recycling systems. Both biotech and recycling are higher-tech areas that would be more likely to attract big state-run investors or get approved for IPOs in Shanghai or Shenzhen.

Tian Tu’s shares currently trade at a huge discount compared with its global peers as it changes its strategy. Its stock commands a price-to-book (P/B) ratio of just 0.28, or a fraction of the 3.3 for U.S. private equity giant Carlyle (CG.US) and 3.9 for KKR (KKR.US).

The company won’t need to worry about cash as it makes its transition, as it had 1.11 billion yuan in its coffers at the end of last year, nearly double the 614 million yuan a year earlier, thanks to the influx of funds from its IPO. And, of course, there’s always the chance that the Hong Kong stock market could finally start to improve, which seems likely in the next few years as China’s economy stabilizes.

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