'Golden age' for China brands bolstered by tech crackdown

CHINA'S intensifying crackdown on technology companies is proving to be a cautionary tale for investors in the nation's startups, with one notable exception: consumer brands.

From cosmetics to bubble tea, Chinese ventures making waves among a new generation of shoppers are becoming a magnet for funds hunting for their next big hit. Investors may see such companies as a viable alternative to tech startups because the government, rather than clamping down, is pushing to foster domestic champions that can fuel spending and compete with the likes of Coca-Cola and Nike.

Beijing's tightening regulation is increasing barriers to invest in traditionally popular areas such as tech, said Mark Tanner, managing director of Shanghai-based marketing and branding firm China Skinny. "In contrast, consumer sectors from food, fashion to fitness and leisure are seeing increased interest from investors with more policy support," he said.

Chinese brands are grabbing market share from global rivals in the world's largest consumer market. Even before the tech crackdown, consumer-sector startups including healthy beverage maker Genki Forest and KKR & Co-backed dairy producer Adopt A Cow were drawing more funding - about US$62 billion since 2018, said data provider Preqin. While that's dwarfed by the US$112 billion put into tech, the number is expected to increase in coming years.

"The next decade will be the golden age for the rise of Chinese brands," said Frank Wei, co-head of Warburg Pincus China, which invested in Genki Forest, valued at US$6 billion. "The rise of Generation Z reshapes the industry."

China's decision to curb the business of ride-hailing giant Didi Global days after its US listing is the latest bombshell for tech investors, who have seen a months-long clampdown hurt shares of companies from Alibaba Group Holding to Tencent Holdings.

That's denting fundraising plans of tech startups. Authorities in Beijing are worried that tech firms listing in the US pose a security risk because of the vast troves of data they hold.

The consumer sector is a good option for capital to shift to because it faces much lower policy risks than tech and education - which has also faced a crackdown - a source said. On the downside, consumer companies face fierce competition and uncertain growth prospects, he said.

One Chinese venture capital business is considering shifting its focus to categories that are most likely to get government support and favourable policies, including local consumer brands and environment-friendly enterprises, a source said.

Once regarded as cheap and inferior, Chinese brands saw transactions grow 6 per cent more than that of foreign counterparts in 2020, according to a research report by e-commerce platform JD.com. Investors have backed more than 3,500 deals in the nation's consumer discretionary sector since 2018, Preqin figures show.

Yatsen Holding, owner of cosmetics house Perfect Diary, has become a growing threat to the likes of L'Oreal and Estee Lauder and stands as the second-largest brand, with 6.7 per cent of the crowded market for colour make-up such as lipstick and mascara, Euromonitor estimates. It attracted investors including Warburg Pincus and Hillhouse before listing in the US last November.

Pop Mart International Group, a Chinese toy maker, attracted more than US$100 million from firms including Sequoia China before garnering HK$5 billion (S$872 million) in its Hong Kong IPO last December.

Heytea, a Shenzhen-based teahouse chain, is favoured by the likes of IDG, Sequoia China and Hillhouse and is now valued at more than 60 billion yuan (S$12.5 billion) after its latest round of fundraising, said a source.

Local rival Nayuki Holdings raised US$656 million in a Hong Kong IPO last month.

One reason for the rapid rise of local brands is their ability to reach customers through social media and livestreaming shopping platforms. Online goods sold via livestreaming could grow 25 per cent to 1.2 trillion yuan this year, according to consultant iiMedia Research.

"Social media enables new brands to be recognised much faster than via traditional marketing channels," said Helen Wong of Qiming Venture Partners. "Therefore, the consumer startups are more attractive to us than before as our investment is expected to pay back sooner."

Companies like Hangzhou-based Adopt A Cow devote most of their marketing budgets to livestreaming. The direct-to-consumer firm allows people to track a cow online and works with influencers including Qianxun (Hangzhou), co-founded by China's millionaire livestreaming queen Viya.

Livestreaming platforms "are giving birth to a plethora of new Chinese brands", said Zhao Ran, president of Qianxun (Hangzhou), which works with more than 20,000 of them. They are devoting more of their budgets to such marketing than their foreign counterparts, which are trying to catch up on the trend, he added.

Nationalism has also played a role in the shift towards domestic names. Global titans like Nike and Adidas are facing pressure in China after shoppers boycotted them for taking a stand against the treatment of Muslim Uyghurs in Xinjiang.

Still, valuations are reaching frothy territory, with multiple funds chasing the same companies to convince founders that they can bring in resources beyond cash.

The investments can be risky. A slew of Chinese brands have gone under just as fast as they emerged. Eye-shadow seller Apinkbaby, which had more than 180,000 online followers, went bankrupt earlier this year. BLOOMBERG