China Heating Up: Venture Capital, Halter Index Soar

Includes: CMEDQ, MR, PGJ, SVA, TBV
by: Centient Biotech Investor

According to an article in the Wall Street Journal, the amount of venture capital that went into China last year showed a 55% increase from the year before.

In 2006, $1.9 billion of venture capital was invested in China, up from $1.2 billion in the year earlier. There were 214 deals in 2006, for an average of $8.8 million each. In 2005, there were 156 investments at an average $7.8 million apiece. The statistics were gathered by the Dow-Jones VentureOne service and Ernst & Young.

Much of the money went to early-stage and seed money enterprises, which has traditionally been the case in China. But the biggest growth, year-over-year, was in later-stage investments.

Of the total $1.9 billion, $314 million was invested in third rounds (or above). That was only 17% of the total, but it was a huge 124% increase from the year before. Second rounds comprised $591 million of the total, or 31%. This number also more than doubled from the year before, with a jump of 156% over the 2005 number. Average deal size was $10 million. That was larger than the average second round for a U.S. company, which came in at $8.5 million.

The increase in seed and first-round raises was rather tame by comparison. It jumped by only 27% to $881 million. Investors spread the money across 106 deals for an average of $8.3 million each. These early rounds comprised 46% of all the dollars, but 62% of the total number of deals. Last year, the seed/first round group captured 68% of the deal flow.
The article cited two potential problems that might affect the future of this positive performance. First, the run-up for high tech investment in China has been on-going for 10 years, making observers wonder how long it can continue. Second, the mechanism for allowing investors to cash out of their investments has become more difficult. China has strict restrictions on the exportation of capital, so investors have favored the founding of an international holding company, which holds title to the Chinese assets. The international company subsequently seeks a listing on an international stock exchange, affording VCs a method to repatriate their capital. But China has recently clamped down on forming the international holding companies, currently leaving investors without a viable exit plan.

To people on the scene, this is no more than a bothersome detail. They argue that China needs the capital, it believes in the need for technology, it supports the system. Thus, China will have to allow VCs a way to cash out or the whole arrangement collapses.

Also showing the vitality of the Chinese economy and stocks, the Halter Index (NASDAQ:PGJ) registered a 51% increase in 2006, which included a 30% increase in the fourth quarter. The Halter Index is an index of companies, currently numbering 58, that do the majority of their business in China, but are listed on U.S. exchanges. The companies must maintain a market capitalization of at least $50 million.

Membership is not limited to any particular industry or sector. As a result, only 4 companies are biomedical. These include Chinese Medical Technologies (CMED), Mindray Medical International, (NYSE:MR), Sinovec Biotech (NASDAQ:SVA), Tiens Biotech Group (NYSEMKT:TBV). Chinese Medical makes medical devices that treat cancer. Mindray Medical, also a device maker, has 40 products in three divisions: patient monitoring devices, laboratory instruments, and ultrasound imaging systems. Sinovec is a vaccine company, and Tiens makes nutritional supplements and personal care products.

The PowerShares Golden Dragon Halter USX China Portfolio [PGJ] is an ETF that reflects the Halter Index.

Disclosure: none.

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