Tian Tu Capital fails to excite with China’s fading consumer story

China’s first venture capital firm to list in Hong Kong got a tepid reaction in its first week as a listed company, as investors worried about its shrinking profits

Key Takeaways:

• One of the most experienced in China’s vast field of 7,000 venture capital investors, Tian Tu Capital has become the first from its class to list in Hong Kong
• A sharp slowdown in Chinese venture capital investment may have dampened enthusiasm for its IPO shares

By Edith Terry

When Shenzhen Tian Tu Capital Co. Ltd. (1973.HK) listed in Hong Kong on Oct. 6, the last day of China’s Golden Week holiday, the consumer-focused venture capital company’s shares priced close to the bottom of their range. The allotment of shares reserved for Hong Kong investors was vastly undersubscribed, and the HK$1.13 billion ($144.5 million) it ultimately raised was well below the $500 million it targeted when it first revealed its intent to list last year.

Things got worse from there, with the stock falling 25% on its trading debut day. And a week later, its shares were trading about 30% below the offer price of HK$6.50.

Not exactly the best performance for a company whose business is helping some of China’s biggest consumer brands to grow and list their shares at the right time to maximize returns on its investments. Then again, these aren’t exactly the headiest times for venture capital and private equity investors in China, where the economy is slowing sharply after three decades of breakneck growth.

Even after all the weakness, the IPO still gives Tian Tu a market cap of HK$3.36 billion and a lofty price to sales (P/S) ratio of 16, possibly indicating investors are still relatively positive on 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 of just 1.8.

The last few years have become a sort of “winter” for asset managers in China, as Tian Tu founder and Chairman Wang Yonghua predicted at a Hong Kong conference in 2018. That year, the country was home to a massive 14,159 private equity and venture capital funds with a similarly impressive 7.89 trillion yuan ($1.08 trillion) in assets, according to the Asset Management Association of China.

But that’s when things began to change.

In April 2018, China’s financial regulators tightened eligibility requirements for venture capital and private equity investors and banned their collaboration with commercial banks, leading to a steep drop in fundraising and the number of funds. By 2022, the number of remaining funds had fallen by half to just 7,000. The industry raised 2.2 trillion yuan in funds that year, up from 1.8 trillion yuan in 2017, according to third-party data in TianTu’s IPO prospectus.

China’s private equity and venture capital market is expected to keep growing, but more slowly, to 2.5 trillion yuan in annual funds raised by 2027 – which doesn’t seem like much compared to the go-go 2010s. But the economy is clearly in a new, slower growth phase, and Tian Tu is among the survivors.

Tian Tu’s survival story isn’t bad. Between 2015 and 2022, its assets under management grew at a compound annual rate of 19.5%, to 25.5 billion yuan, and by March this year it had invested in 222 companies, including early and late-stage investments.

Consumer investor

Tian Tu ranked third in terms of investment projects in China’s consumer industry after Tencent’s venture arm, Tencent Investment, and Hongshan, formerly known as Sequoia China, according to the prospectus. Meanwhile, the average Chinese consumer is expected to spend 32,700 yuan annually by 2027, up from 18,300 yuan in 2017, which should be good for Tian Tu due to its focus on investing in consumer-oriented companies.

Tian Tu’s history goes back to 2002, making it one of China’s most seasoned venture capital and private equity firms. Wang founded Tiantu Chuangye as a fund manager, then changed it to its current name in 2010.

The company’s milestones include listings for portfolio companies like snack seller Zhou Hei Ya (1458.HK) in 2016, dairy products maker Feihe (6186.HK) in 2019, tea seller Nayuki in 2021, and fruit retailer Shenzhen Pagoda (2411.HK) in January. Its other investments have included recycling platform ATRenew (RERE.US) and Xiaohongshu, an Instagram-like social media platform.

Its recent financials, meanwhile, have been somewhat rocky. Revenue from management fees has moved steadily downward from 38.6 million yuan in 2020 to just 12.4 million yuan in 2022, while its investment gains shrunk from 1.1 billion yuan to 377 million yuan over that period. The story is similar for the company’s profit, which shrank from 1.05 billion yuan in 2020 to 532.9 million yuan in 2022. But its net assets have remained steady and even grown over the same period, going from 6 billion yuan in 2020 to 7.3 billion yuan in 2022.

The timing of Tian Tu’s IPO was less-than-ideal, coming into a lukewarm market just as fundraising in Hong Kong hits an 11-year low. Things also don’t look great for the company’s main business in China either. Venture capital deals in the market fell 31.4% in the first half of this year from 2022 levels, with only three U.S. dollar-denominated funds closing in that time, according to Pitchbook.

Despite its questionable timing, the listing brings a certain prestige to Tian Tu by making it the first company from its class to be dually listed in Hong Kong and on the National Equities Exchange and Quotations (NEEQ) board for smaller companies in Beijing, where Tian Tu has been listed since 2015.

Despite the weak performance for its Hong Kong listing, Tian Tu may be hoping sentiment will soon improve after a late-September flurry of Hong Kong IPOs that appeared to be seizing on improving signs in China’s factory output and retail sales in August and September.

Investors have been waiting patiently for a rebound in consumer spending since China ended its “zero Covid” policy that was dampening demand. But after a brief rebound at the start of the year, the gloom has quickly returned amid growing signs of distress from the nation’s property sector. The weeklong National Day holiday last week provided some relief from the gloom, with the average Chinese spending about 10% more per trip this year than during the same period before the pandemic in 2019. The domestic tourism market booked revenue of 753.4 billion yuan during this year’s holiday, more than double 2022 and 1.5% higher than 2019.

For Tian Tu, such good news in consumer spending is good news for its business. The company may feel a bit lonely as the first in its class to market, especially during this wintry period for its industry. But Tian Tu could also reap first-mover advantages if investors are willing to buy into its story as a gateway into the big potential of China’s consumer market.

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