Are Chinese unicorns on your shopping list?
By Erik Wernberg-Tougaard
In China, start-ups valued at over 1 billion USD – known as unicorns – has seen a sharp increase over the last few years. As surprising as it may sound, the top four unicorns in the world today are Chinese.
businesS executives would be wise to acknowledge and familiarize themselves with this dynamic landscapE. For investors, The pertinent question to ask now is: “SHould Chinese unicorns be on my shopping list?”
In China, things move fast. That goes for buildings and trains but also for investments and start-ups. The Chinese entrepreneurial mindset, which has been reinvigorated by role models like Alibaba’s Jack Ma or Tencent’s Pony Ma and a growing amount of Chinese venture capital, has catapulted Chinese unicorns to the top of the global rankings.
Six of the worlds top 10 unicorns are chinese
In 2019, the US had six of the top 10 unicorns in the world, and China had the remaining four. Today, it is the other way around: In 2020, six of the top 10 unicorns are Chinese, and the US is down to four.
The top four unicorns are all Chinese. At the top of the list we find Ant Group, the financial technology company under Alibaba, which by far outranks its opponents at a valuation of 150 billion USD.
Ranked second is Bytedance (owner of Tiktok, the video-sharing social networking service) and third is Didi Chuxing (the Chinese ride-sharing service).
Only after fourth ranking Lufax (the Chinese online wealth management and peer-to-peer lending platform) do we start to find US companies. The first of these is Elon Musk’s SpaceX, the aerospace company which has just sent two astronauts to the International Space Station. SpaceX is the US’s largest unicorn, at a valuation of 36 billion USD – that is four times smaller than China’s Ant Group.
Ranked 6th and 7th respectively are the US unicorns Stripe (FinTech and SaaS) and Airbnb (online vacation rental marketplace). The remainder of the top 10 is shown in the table above.
WHO IS LEADING? A MATTER OF PERSPECTIVE
Numbers of unicorns vs. value of unicorns
When looking at the numbers of unicorns by country, it is a tight race between the US and China. In 2019 China was ahead with 206 unicorns compared to US’s 203. Today, the US is slightly ahead again, at 233 compared to China’s 227.
However, when we take a closer look at the data, and compare the valuations of the unicorns, a different picture emerges. The aggregate valuation of China’s total unicorns is almost 30% higher than that of the US’s total unicorns.
The same goes for the top 20 unicorns in the world ranked by country. China’s eleven unicorns in top 20 are worth 462 billion USD, while the US’s seven unicorns in the top 20 are worth 171 billion USD. The value of China’s unicorns in the global top 20 is thus more than 2.5 times that of the US, when it comes to aggregate value.
Sectors, cities and regions – who leads?
When we look at the sectors covered, it is clear that the majority of unicorns today are operating within digital and technological fields. The sectors with most unicorns are e-commerce (89), artificial intelligence (63), financial technology (63), software as a service (53), shared economy (33) and health tech (28).
China has nearly double the number of unicorns in e-commerce (39 vs. 21 for US) and the only three robotics unicorns in the ranking are Chinese too. China is also strong when it comes to unicorns within healthcare technology (16 vs. US 10) and educational technology (10 vs. US 8).
On the other hand, the US unicorns are still clearly ahead when it comes to artificial intelligence (34 vs. China’s 21) and big data (11 vs. China’s 7). This is also the case when it comes to sofware as a service (36 vs. China’s 13) and Fintech (21 vs. 18).
Data modified in Excel by author based on Hurun Global Unicorn Index 2020.
Silicon Valley, which is known for innovation and cutting-edge technology is with 122 unicorns, still the region with most unicorns in the world. However, the worlds ‘unicorn capital’ of this year’s Hurun Global Unicorn Index 2020 goes to Beijing, with 93 unicorns headquartered in the capital. San Francisco ranks second with 67 unicorns, and Shanghai takes the third spot with 47. New York comes in fourth with 33, and Shenzhen 5th with 20. Three of the five top unicorn cities are thus Chinese.
As the above analysis shows, unicorns are by no means a field solely dominated by the US, but rather it is a horse-race between the world’s two largest economies.
The Shanghai ‘Star Market’ propel innovation
In June 2019, China launched its Science and Technology Innovation Board, known as the “STAR market”. The STAR market focus on high-tech companies and strategic emerging sectors, such as new generation information technology, (also covered under the ‘Made in China 2025’ plan).
Since its launch, more than 130 Chinese technology companies have listed on the board. This is partly due to the the governance of the board, which differs from other domestic boards such as the Shanghai Stock Exchange or the Shenzhen Stock Exchange. For instance, the board allows stocks to rise or fall by a maximum of 20% in a day, higher than the 10% limit commonly found for stocks on other boards. But also, the boards strong performance has attracted the interest of technology companies.
China Internet Report 2020. Download here.
With the STAR board, entrepreneurs and companies have an easier way of getting support, funding and getting listed locally, and innovative start-ups can thus more easily finance their business venture.
In the first seven months of this year, the Shanghai STAR market has raised 15.26 billion USD, only surpassed by the Hong Kong Stock Exchange at 17 billion USD and Nasdaq at 23.13 billion USD. That makes it the third largest IPO market globally year-to-date, and no coincidence that so many Chinese unicorns are looking to the board for their upcoming IPOs.
However, scrutiny and thorough due diligence is a must when working with unicorns in China. In January 2020, Luckin Coffee – a Chinese coffee company competing against Starbucks, and formerly one of the most promising unicorns – was found to have falsified its financial figures, and manipulated its data. The company had gone from a share price of 17$ in May 2019, to over 51$ a share in January 2020. As the scandal became publicly known, Luckin Coffee’s CEO Jenny Zhiya Qian and COO Jian Liu were relieved from their positions, and today Luckin Coffee is trading at around 2.3$ a share. Luckin Coffee is just one example of why investors should thoroughly understand the management ability of unicorns prior to any investment.
Upcoming IPO’s
China has a number of unicorns that are currently planning to do an IPO. The largest of these is the anticipated IPO of Ant Group, which is estimated to reach more than 200 billion USD – if true, it will be the largest IPO in history. The IPO is set to take place at the Shanghai Stock Exchange (SSE) and the Hong Kong Stock Exchange (HKSE) simultaneously. With the IPO, Ant Group may set an example for other Chinese unicorns, which will increasingly look to stock exchanges in their home region.
Another interesting case is Lufax’s planned IPO in the US this year. The company was founded in 2011 and valuated at 38 billion. The company is planning to list in the US, despite growing tensions, arguing that many of its investors and creditors are based in New York. Lufax is the biggest rival to Ant Group, with 44 million registered users, compared to Ant Group’s 900 million.
Also, JD Digits, the fintech arm of JD.com, which ranks 20th on the 2020 Hurun Unicorn Index is planning to IPO on Shanghai’s Star Market. Four Chinese investment banks have signed pre-listing tutoring agreements with JD Digits, supporting its coming IPO on the Shanghai Star Market. Besides fintech, JD Digits also work with blockchain, artificial intelligence and internet of things.
Finally, Cambricon, China’s fastest growing AI chip unicorn, is also planning to IPO this year. The company develops semiconductor chips especially for the AI industry in China and is thus an important part of China’s ambition to become self-sufficient in semiconductors.
the US-China rivalry Impacts Chinese Unicorns
‘SPLINTERNET’ MAY BE ON THE RISE
In 2018, PWC interviewed 101 CEO’s of Chinese unicorns about their expansion plans, and more than 70% of them told PWC that they had plans to expand internationally. The desire to ‘go overseas’ (出海) makes good sense, considering that some of the most valuable companies today, such as Facebook, Amazon and Apple, all operate at a global level.
But the recent development in US-China relations, may make it difficult. This is evident through cases such as Huawei –the Chinese telecommunication company – which has been sanctioned and blocked by the US, and the more recent case of Tiktok – the video-sharing app – which is currently negotiating a deal with Microsoft as a potential buyer.
Trump has also signed two executive orders that bans Tiktok and WeChat from US markets. Analysts fear that such developments are the first sign of a ”splinternet” era – the splitting of the internet according to regions – with China’s ’Great Firewall’ and the Trump administrations recently announced ”Clean Network” pushing economies further apart from each other.
CHINESE UNICORNS WILL HAVE A HARDER TIME LISTING IN THE US
The tense situation and the worsening of the political climate makes Chinese IPO’s overseas more and more difficult. For instance, Nasdaq is planning to tighten listing rules which will make it harder for Chinese companies to raise funds. The escalating tensions between China and US, will increasingly lead Chinese tech-unicorns to look for listing opportunities at stock markets in their home region.
Numerous Chinese companies are now turning to the Hong Kong Stock Exchange or the Shanghai Stock Exchange. Semiconductor Manufacturing International Corp. ended its stay on the New York Stock Exchange after 15 years. But others are eyeing opportunities. For instance, Lufax’s planned IPO (described above) may turn into a merger with the financial conglomerate Ping An Insurance Group, if the fintech unicorn is not allowed onto the US stock exchanges.
Why You should follow Chinese unicorns
The total value of global unicorns today is estimated to be 1.9 trillion USD, more than five times the GDP of Denmark, and Chinese unicorns account for almost half of that value (869 billion USD).
Chinese unicorns have grown significantly over the last years and are expected to keep growing in the years to come.
Chinese unicorns are strong indicators of future growth opportunities and innovation and are a good place to look for new trends and tendencies in your industry. Even if Chinese unicorns are not on your shopping list, they should be on your watchlist!
Chinese unicorns are born disrupters, and with a large number of Chinese unicorns planning to IPO and internationalize, Chinese companies may soon become your competitor!
Following and understanding the unicorn market will make you less likely to invest in companies like Luckin Coffee. Not investing the time to understand the unicorn market is also a risk.
China and US together account for 79% of the world’s total unicorns. Europe for less than 10%. It is time for Europe to act, to not fall further behind.
Meet the unicorns
INSIDE DIGITAL CHINA – THE FUTURE OF BUSINESS
At Inside Digital China, you will have the opportunity to engage with some of China’s most succesfull organisations – among others the Chinese unicorn Bytedance (owner of Tiktok – the most profitable APP in the world in May 2020). You can see the impressive program content here and registrer for our 2-day event here.