As the COVID-19 pandemic continues to spread rapidly around the world at a different pace, increasing concerns have been placed on the future recovery scenarios for both businesses – crisis management, business continuation, sustainable growth – and investors – increasing importance of digital infrastructure, new business normal, and change in fundraising.
In this context, China holds a unique position of being the first country that has shown a sign of recovery. It is crucial to learn how the new normal would be like. Given its size, China’s economy is an important reference point for global leaders to revitalize the global economy in the unpredictable future.
Please see below keynote presented by Patrick Cheung, our managing and founding partner in the panel discussion.
Investment business is about meeting people and making good judgement call. Under the COVID-19 outbreak, meet in-person is limited due to travel restrictions, ZWC find ways to deal with existing market situation. For an instance, we share common interest as our portfolio companies. I come from entrepreneur background with good operational know-how. During the first quarter, our team spent lots of time talking to portfolio companies to understand their situation and provide advices. As investor, we need to know about the market landscape and development stage of the company. Some companies are in good position, i.e. with sufficient cash and resources to expand business. Some are early stage companies that still in the process of product development and testing the market. For the latter, it is suggested to focus on key product and cost reduction. We look at the fundamental of the company, good companies are still good companies after the crisis. Due to the pandemic, although we face challenge of due diligence and people judgement, our team are familiar with remote working. ZWC has office in six location with good experiences in team coordination. Our investment strategy is to focus on sector and companies that we followed for a long time, founder and management that we met for at least one year. By this, we reduce the necessity of people judgement call. Apart from that, we do follow-on investment of good portfolio companies. We care about our portfolio companies. During the outbreak, ZWC sourced and distributed masks and other medical supplies to portfolio companies. We invited our co-founding partner who had plenty experiences in dealing with SARS to hold online seminar with all portfolio companies. We also invited founder of 4th Paradigm to share insights on how AI help with organization. Professional Yeung as our special partner also shared expertise on organizational structure.
COVID-19 created ‘New Normal’ and investment opportunities. The US-China tension made China government to accelerate development of deep technologies. China has great supply chain in many fields, however deep tech is lag behind that of the US. We expect to see more and more top Chinese talents coming back to China from overseas, which will enhance China’s talent pool. This is a good focus for our fund. In addition, China government will strongly promote multi-tier stock markets. We see mid to small cap companies listed on STAR market with high liquidity. As you may know, STAR market is open to loss-making high-tech companies which is a major breakthrough. China are more open and welcome to foreign capital. We expect to see listing using VIE structure in the coming year. This is especially benefiting US dollar fund like ZWC. For Hong Kong Stock market, successful listing of Meituan and Xiaomi took advantage of new listing regime allowing weighted voting rights share. China’s huge market is still here, especially consumer market which still experiences a high growth by our research. Digitalization of traditional companies and IIoT are what we call the main focus of ‘second half of internet world’. Coronavirus has brought about opportunities for enterprise service industry. We see huge gap in market cap of big enterprise software companies between US and China. China is still at very early stage in the field of enterprise software. Unlike consumer sector, enterprise companies unlikely to deliver substantial growth in short period of time. As financial investors, we can still enjoy 15-20x return especially given the opening of China STAR market. ZWC invested in RootCloud and EV power under the “new Infrastructure’ framework. We see good things and bad things emerged from the coronavirus pandemic.
On the economic front, long period of loose monetary policy creates low interest rate. Equity is still very attractive assets in the ‘new normal’, especially company with sustainable growth and good barrier. During the crisis, we follow our investment philosophy of ‘innovation value investment’ and strengthen our methodology. We found that companies with technology capability and good business model can change industry pattern and improve efficiency. This is critical for our tech investment. In long term, good companies go through cycles, strengthen leadership position and capture market share from traditional players. True innovation creates true blue sea opportunities.