Size won’t pro­tect busi­nesses that don’t ef­fec­tively fol­low the trends of China’s devel­op­ment

The China Post - - BUSINESS -

Story con­tin­ued from page 5

The com­pany ranked 854th in the Greater China Top 1000 sur­vey, New Ori­en­tal Ed­u­ca­tion & Tech­nol­ogy Group Inc., is China’s lead­ing pri­vately run ed­u­ca­tion com­pany and posted dou­ble digit rev­enue and had a profit mar­gin of 19 per­cent last year. But even a com­pany with such strong fun­da­men­tals can still be out­done by a new tech up­start.

Over­tak­ing New Ori­en­tal was an “In­ter­net Plus” new-econ­omy com­pany called Guang­dong Qtone Ed­u­ca­tion Co., which was listed on the Shen­zhen stock ex­change last year. The com­pany’s main prod­uct is its com­mu­ni­ca­tion plat­form for K-12 schools that en­ables par­ents to fol­low their chil­dren’s progress at school on their smartphones. The prod­uct, which ex­em­pli­fies the con­cept of fus­ing the In­ter­net with ed­u­ca­tion, has been so suc­cess­ful that the com­pany’s shares have sky­rock­eted since it went public, push­ing its mar­ket value to 50 bil­lion ren­minbi (about NT$250 bil­lion).

As a re­sult, the 10-year-old com­pany with an­nual rev­enues of less than NT$1 bil­lion and quar­terly prof­its of only NT$25 mil­lion now has a higher mar­ket value than the 22-year-old New Ori­en­tal, which has an­nual rev­enues of more than NT$30 bil­lion and quar­terly prof­its of NT$1.6 bil­lion.

Qtone Ed­u­ca­tion’s as­cent re­flected far more than the rise of the new econ­omy. On one level, the mar­ket value of China-listed Qtone Ed­u­ca­tion sur­passed that of its ed­u­ca­tion ri­val listed on the New York stock ex­change, cre­at­ing the nar­ra­tive of an un­der­dog Chi­nese “A” stock beat­ing wellestab­lished Wall Street.

On an­other level, it sig­ni­fied that prop­erly po­si­tion­ing one’s busi­ness in the new econ­omy age may be more im­por­tant than how the en­ter­prise is man­aged, with ef­fec­tive fundrais­ing or go­ing public the best way to cre­ate high “price-to-dream” ra­tios.

“Even a pig can fly if it can find a place in the eye of a storm,” is how Lei Jun, the chair­man of smart­phone ven­dor Xiaomi Inc., put it. Af­ter Qtone Ed­u­ca­tion’s shares took off, the share prices of sev­eral other new econ­o­my­con­cept stocks soared.

What Tai­wan can­not ig­nore are the mar­ket op­por­tu­ni­ties and po­ten­tial rep­re­sented by China’s new econ­omy.

Ed­mond de Roth­schild’s Li ex­plains that many eco­nomic sec­tors in China have tra­di­tion­ally been mo­nop­o­lized or dom­i­nated by state- run en­ter­prises, with lit­tle hope of be­ing re­formed from within. China’s health care sec­tor, for ex­am­ple, des­per­ately needs re­forms, but hos­pi­tals are highly un­likely to over­haul their prac­tices on their own. They will need In­ter­net in­no­va­tion to force re­form and use the new econ­omy model to shat­ter the old estab­lish­ment.

The op­por­tu­ni­ties cre­ated by this process are po­ten­tially huge, Li says, es­pe­cially in terms of re­mote (or long-dis­tance) health care and re­mote ed­u­ca­tion to solve treat­ment and en­roll­ment bot­tle­necks.

New Econ­omy For­mula No. 3: Rais­ing Funds to Cre­ate

Chi­nese Sil­i­con Val­leys

The third new econ­omy for­mula is the Chi­nese ver­sion of the “Wall Street + Sil­i­con Val­ley model.”

Some of the re­sults of the Greater China Top 1000 sur­vey were at odds with those of past years be­cause of the Chi­nese gov­ern­ment’s de­lib­er­ate cam­paign to lift up “A” shares. ITRI’s Chang ob­serves that China’s se­cu­ri­ties in­dus­try is the most clearly rep­re­sented sec­tor in the sur­vey’s list of fast­ing grow­ing com­pa­nies, pre­cisely be­cause China’s gov­ern­ment has propped up its do­mes­tic stock mar­kets since the sec­ond half of last year. In­dexes have soared and turnover has set new records, and ex­pec­ta­tions are that Chi­nese se­cu­ri­ties firms will con­tinue to see ma­jor rev­enue growth in 2016.

As the class of mid­dle-aged Chi­nese women known as the “dama” ( ) rushed to open ac­counts to trade on the Shang­hai and Shen­zhen mar­kets, Chi­nese se­cu­ri­ties firms struck it rich. But in terms of the new econ­omy, the trend also brought new funds and en­ergy to the in­no­va­tion-driven econ­omy, us­ing the strength of cap­i­tal mar­kets to sup­port in­nova- tion and en­trepreneur­ship. The ex­pan­sion and growth of the cap­i­tal mar­kets turned Zhong­guan­cun (a tech­nol­ogy hub in Bei­jing) into Sil­i­con Val­ley and “A” shares into the New York Stock Ex­change on Wall Street, forg­ing a new model merg­ing in­no­va­tion and cap­i­tal.

New Econ­omy For­mula No. 4In­fras­truc­ture + Ser­vices =

Op­por­tu­nity

The fourth new econ­omy for­mula is cre­at­ing eco­nomic op­por­tu­nity through in­fra­struc­ture ini­tia­tives (such as One Belt, One Road) and the devel­op­ment of the ser­vice sec­tor. The Greater China Top 1000 sur­vey found that listed prop­erty com­pa­nies not only did not see their share prices suf­fer from Bei­jing’s mea­sures to keep soar­ing hous­ing prices in check, they ac­tu­ally posted sales and profit growth, with the rev­enue growth rates of some of the com­pa­nies land­ing in the top 50 in the sur­vey.

That’s be­cause many prop­erty op­er­a­tors now have in­ter­na­tional reaches and in­te­grated ser­vices ca­pa­bil­i­ties, in­clud­ing build­ing ports and ba­sic in­fra­struc­ture and pro­vid­ing sea and air cargo lo­gis­ti­cal ser­vices. Among th­ese new econ­omy op­er­a­tors are three com­pa­nies whose profit mar­gins ranked in the sur­vey’s top 50: CK Hutchi­son Hold­ings Limited ( ranked 319th over­all), The Wharf (Hold­ings) Limited (ranked 261st over­all), and Guang­dong In­vest­ment Limited ( ranked 918th over­all).

In the past, China’s in­fra­struc­ture devel­op­ment op­por­tu­ni­ties were of­ten seized by Hong Kong and Sin­ga­pore con­glom­er­ates, but that may now be chang­ing.

The Chi­nese prop­erty com­pa­nies’ high growth and high prof­its in­di­cate that while China may have suspended con­struc­tion of no­to­ri­ous “ghost cities” and big prop­erty de­vel­op­ments, it con­tin­ues to in­vest in in­fra­struc­ture projects re­lated to peo­ple’s liveli­hoods that im­prove ef­fi­ciency, such as ports, wharfs, air­ports, and wa­ter and elec­tric­ity fa­cil­i­ties.

TIER’s Sun says Tai­wan had hoped to en­ter this mar­ket in China the past but never took con­crete ac­tion. In the fu­ture, as China be­gins its One Belt, One Road in­vest­ments, th­ese Tai­wanese com­pa­nies will have to fol­low Chi­nese cap­i­tal in in­vest­ing abroad. It’s a po­ten­tially lu­cra­tive sec­tor, Sun says, and Tai­wan should fig­ure out a way to par­tic­i­pate.

An­other find­ing of this year’s sur­vey was the re­cov­ery of a so­lar en­ergy sec­tor shaken by the bankrupt­cies of the world’s big­gest so­lar panel ven­dor, Sun­tech Power Hold­ings Co., Ltd., and so­lar wafer sup­plier, LDK So­lar, in early 2014.

Chang says the new en­ergy sec­tor per­formed very well over­all last year, in­di­cat­ing that China con­tin­ues to sup­port the new en­ergy sec­tor amid its se­ri­ous pol­lu­tion and emis­sion prob­lems. Among the win­ners in the sec­tor last year were top 50 EPS com­pa­nies Canadian So­lar Inc. (ranked 405th over­all), Jinko So­lar (ranked 651st), and JA So­lar Hold­ings Co., Ltd. (ranked 582nd), and top 50 growth com­pany Hanen­ergy Thin Film Power Group Ltd. (ranked 806th). Though th­ese new en­ergy com­pa­nies in China may be re­ceiv­ing de­lib­er­ate sup­port from lo­cal gov­ern­ments, Tai­wan, which has po­si­tioned it­self as a so­lar power devel­op­ment hub, can­not ig­nore the new en­ergy econ­omy within China’s broader new econ­omy con­cept.

Tak­ing a closer look at how Tai­wan fared in the Greater China Top 1000, as the thresh­old to make the top 1000 in the 2015 sur­vey (based on 2014 re­sults) rose to NT$29.00 bil­lion from NT$26.00 bil­lion a year ear­lier, only 151 Tai­wanese com­pa­nies made the cut, down from 158 last year and 189 in the past.

Though the num­ber of Tai­wanese com­pa­nies on the list con­tin­ued to decline, Tai­wan Semi­con­duc­tor Man­u­fac­tur­ing Co. ( TSMC) rose from 17th in the top 50 most prof­itable com­pa­nies to 11th this year, and Hon Hai Pre­ci­sion In­dus­try moved up a notch from 27th to 26th. Tai­wanese com­pa­nies also were present in the top 50 for rev­enue growth, profit mar­gin and EPS.

TIER’s Sun be­lieves that how many Tai­wanese com­pa­nies made the list is not nearly as im­por­tant as the qual­ity of those com­pa­nies that made it, es­pe­cially be­cause Tai­wan will be even less able to com­pete on size in the fu­ture as China pushes merg­ers among state-run gi­ants to form even big­ger be­he­moths.

Chang says that Lar­gan Pre­ci­sion, TSMC and Hon Hai per­formed well in the sur­vey mainly be­cause they made the en­tire world their mar­ket, an in­di­ca­tion that if Tai­wanese en­ter­prises hope to grow in the fu­ture, they need to use the Chi­nese mar­ket and re­sources and have to ex­pand in­ter­na­tion­ally.

An­other phe­nom­e­non ob­served by Chang was how quickly China’s mar­ket changes, cit­ing the decline in rev­enues last year of Tingyi (Cay­man Is­lands) Hold­ing Cor­po­ra­tion (ranked 132nd), which op­er­ates the Mas­ter Kong brand. In­stant noodles were once the food of choice of farm work­ers in China, Chang says, but with the rise of per capita in­come and a mid­dle class, con­sumers have put more em­pha­sis on healthy eat­ing and food safety and are eat­ing fewer in­stant noodles.

Com­pa­nies that do not stay on top of trends in China’s eco­nomic devel­op­ment and adapt to mar­ket changes are des­tined to suf­fer, no mat­ter how mas­sive they are. Trans­lated from the Chi­nese by Luke Sa­batier Ad­di­tional read­ing se­lec­tions can be found at http:// english.cw.com.tw

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