*NEWS*ASIA’S HOT GROWTH COMPANIES

[Anonymous]

Asia’s Hot Growth Companies
Backed by a flood of capital, the region’s smartest startups are expanding their scope
Just
a few years ago, Asia was a tough place for small companies. Venture
capitalists worldwide were licking their wounds from the dot-com bust
and had little appetite for prospecting in Asia. The region itself was
still digging out from the Asian financial crisis, so banks busy
clearing the bad loans from their books didn’t have much time to take
on new risk. And exchanges around Asia were focused on large
enterprises, leaving startups out in the cold.
Today, that has all
changed. New money is flooding in, the crisis feels so last century,
and relaxed rules make it easier for startups to get airborne.
Furthermore, consumers in Asia have new spending power, and
technologies such as the Internet and cellular telephony are creating
opportunities for entrepreneurs from Seoul to Singapore. In China, the
3.5 million private companies — the vast majority of them small or
midsize — are the real engines of the economy, generating $241 billion
in sales last year and accounting for 15% of gross domestic product.
“The environment for entrepreneurs is getting so much better,” says
27-year-old Ninie Yan Wang, founder of Pine Tree Institute, which
operates vocational centers for senior citizens in Beijing. “At the
moment young people would rather be their own bosses.”
Plenty of
Asia’s scrappy upstarts are making a name for themselves. Air Asia of
Malaysia and India’s Air Deccan have taken advantage of airline
deregulation and are now among the fastest-growing carriers in the
region. In South Korea, one of the hottest new brands is TheFaceShop.
The two-year-old brainchild of entrepreneur Jung Woon Ho serves up
cosmetics to the young and trendy, and its sales are expected to grow
by 176% this year. India’s Balkrishna Tyres is making handsome profits
in a niche — tires for tractors and construction vehicles — abandoned
by the industry’s giants. And just about every urban Chinese teenager
knows QQ, the toy penguin mascot of Tencent Inc., which controls 60% of
the mainland’s Internet instant-messaging market. Tencent’s sales? Up
55% in 2004.
One big reason these companies have been able to grow
is the amount of cash sloshing around Asia. TheFaceShop, for instance,
just got funding from Hong Kong-based Affinity Equity Partners, which
took a 70% stake in the retailer. Last year, private-equity funds
targeting the region raised some $10.6 billion, up from $3.3 billion in
2004, according to Asian Venture Capital Journal in Hong Kong. The
journal, the most comprehensive source on VCs in Asia, predicts that
new money raised this year could top $12 billion.
The money is
coming from some of the biggest names in international finance. CVC
Capital Partners, an arm of Citigroup, in May put together a $1.95
billion fund to invest in the region. JPMorgan Partners Asia raised
$1.58 billion in September. International Data Group, which has poured
$200 million into China since 1993, last year launched a $100 million
fund to invest in Vietnam’s fledgling tech sector. And Kohlberg Kravis
Roberts & Co. in September said it’s planning its first foray into
Asia with new offices in Hong Kong and Tokyo.
The reason for the
influx is the big payouts that some players have already enjoyed in the
region. IDG paid $10 million for a stake in Chinese online auction
company EachNet that it sold to eBay four years later for $180 million.
And private-equity partnership Carlyle Group made back 15 times its
initial investment of $8 million in Chinese online travel company
Ctrip.com International Ltd. when it listed on NASDAQ in 2003.
All Aboard
It’s
not just foreigners who are sniffing around for deals. Kuala
Lumpur-based Navis Capital Partners Ltd. — which has made investments
in everything from disposable diaper manufacturing in Malaysia to
airline catering in India — raised $315 million in July to back more
startups in the region. And Korea has some 102 local venture-capital
companies with $3.5 billion to invest. Startups in Korea “won’t face
funding problems as long as they have good products or technologies,”
says Kim Hyung Soo, director at the Korean Venture Capital Assn.
Some
of the most eager backers of startups are Asian entrepreneurs who made
fortunes with their own successful initial public offerings. Neil Shen,
the 37-year-old Chinese returnee who helped found Ctrip is leaving the
company to start his own private-equity firm in China. And Muneaki
Masuda, who shepherded his Culture Convenience Club Co. — Japan’s
largest chain of DVD rental outlets — to an initial public offering
five years ago is now funding smaller startups. “The guys who have made
money in an IPO know there are people just like them,” says C.J.
Wilson, founder of Global Alliance Ltd., a mergers-and-acquisitions
advisory firm. “They know it’s the best money they’ve ever made.”
Stock
markets these days offer more opportunities for startups, too. Until
recently, a big obstacle to raising funds in Asia was the difficulty
investors had in cashing out. But in the past several years local
bourses have set up secondary exchanges designed specifically for
startups, which in turn has made it easier for those companies to
attract money from venture capitalists early in their growth. Japan’s
Mothers board (short for Market of the High-growth and Emerging
Stocks), has attracted 137 companies. Shares in the top mover on the
exchange, V Technology Co. — a maker of inspection gear for
semiconductors — have nearly quintupled this year. Hong Kong’s Growth
Enterprises Market (GEM) has 205 companies. Korea’s KOSDAQ now has 582
and is actively courting profitable startups. KOSDAQ-listed NHN Corp.,
which runs Korea’s biggest Internet portal and search engine, has seen
its share price more than double this year, as its profits are expected
to climb 70%. Exchanges in the West are also trying to get in on the
action. In the past year, London’s AIM market and the New York Stock
Exchange have set up offices in Hong Kong and Beijing to woo local
companies to their bourses.
A few hit stocks, of course, help sell
Wall Street on an idea. And many small companies from Asia have done
pretty well lately. In Shanghai, Focus Media Holding Ltd. has built a
successful business placing TV screens near elevator banks and serving
up ads to waiting office workers. In just two years the company went
from zero to a NASDAQ IPO and is one of the hottest Chinese companies
to list this year. Not quite as hot, though, as mainland Internet
search engine Baidu.com Inc. Its shares now trade at double their
offering price, though they’ve come off the 355% gain they saw on their
first day of trading in New York in August.
The flood of money
coming into the region carries some dangers. Expectations for Asia’s
startups may already be outstripping their real potential, and many
investors appear to be ignoring the risks of investing in any untested
company, let alone one in a developing market such as China or India.
So U.S. venture-capital funds looking around China are finding that
valuations, especially in the Internet and mobile telecommunications,
are getting out of hand. “There is an awful lot of money chasing
relatively few deals,” says Michael Thorneman, the head of Bain &
Co.’s private-equity practice in China. “Some private-equity companies
have money burning in their pocket, and it’s going to get pretty
competitive.”
You don’t need to look far for highfliers that fell to
earth, either. Chinese property and orchid magnate Yang Bin was one of
the country’s richest businessmen before the authorities nailed him for
tax evasion in 2002. Xinjiang Delong Group, a red-hot Chinese
conglomerate that sold everything from tomato sauce to cement to
stocks, last year collapsed under a mountain of debt. Japanese
semiconductor technology developer North Corp. is due to delist from
the Tokyo Stock Exchange this fall because it was found to have
falsified its financial statements. And Carlyle Group invested in New
Delhi educational software company Educomp Solutions Ltd. back in 2000,
hoping to cash in on the outsourcing boom in India. But earlier this
year Carlyle sold its stake back to the company at a loss.
Such
failures serve as a sober warning to investors on the lookout for the
Next Big Thing. In the West, despite the risks of investing in young
and inexperienced companies, financial backers can at least be fairly
confident they’re getting the real story from management. In China and
India, it’s not uncommon for companies to keep two or even three
separate sets of accounts. That means it takes a lot of extra sleuthing
before deals come together, and investors often appoint a foreign chief
financial officer, while leaving the day-to-day running of the business
to the local founder. Baring Private Equity Partners, for instance,
hired a CFO from one of its other portfolio companies for Ningbo-based
auto parts maker Minth Group.
Ready to Buy
Still, there are lots
of real opportunities in Asia as developing economies take off and
others undergo demographic changes. China’s booming cities are
sprouting new apartment buildings daily, and virtually every new flat
is home to a middle-class family ready to buy everything from quality
toys for Junior to better health care for grandpa. That creates
opportunities for the likes of BabyCare, a Beijing-based startup that
is seeking to cash in on the 23 million children born in China every
year by dispensing advice on parenting — and by selling vitamins,
formula, and toys. And in Japan, many of the fastest-growing companies
are those that serve the elderly — which makes sense given the
country’s rapidly aging population. Message Co. runs more than 100
nursing homes and last year saw its sales jump 66%, to $92.6 million.
Startups
are also taking advantage of new technologies that the region’s giants
have been slow to exploit. In China, already the world’s largest
mobile-phone market, there’s an explosion in demand for everything from
the latest pop music ringtone downloads to the hottest new online
games. Taiwanese photovoltaic battery cell maker Motech Industries Inc.
is cashing in on growing demand for green technologies and has built a
robust business selling cells to solar panel makers. And Korean
consumers continue to eat up anything digital, fueling the growth of
companies such as Nexon Corp., which gives away online games but this
year expects to more than double its sales — to $250 million — of
virtual accessories such as cars and goggles that players buy to gain
an advantage over other competitors.
Launching a startup anywhere
isn’t easy. And Asia will see plenty of failures as entrepreneurs take
the kind of risks required to create a big success. But for those ready
to seize the growing opportunities it offers, Asia is looking better
all the time.

[Author]

November 9, 2005 at 10:41 AM