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