Why China Internet companies make money in the Chinese market

Many people say why China Internet companies make money in the Chinese market, the last money was taken away by foreign consortia? However, in those days without them, there is no Internet in China, they are not contributed. "

- Beijing Zhong search Network Technology Co., Ltd. founder and chairman of Chen Pei

China Economic Weekly reporter Li Yong intern Chen Chen | Beijing reports

July 11, Alibaba Group updated IPO prospectus submitted to the Securities and Exchange Commission. According to prospectus, the company's self-valuation has risen from the original 117 billion US dollars to about 130 billion US dollars, of which Japan Softbank Group holds 34.4%, as the largest shareholder. Prior to May 22, Jingdong, which is listed on Nasdaq in the United States, is the second largest shareholder of Tiger Global Fund with a stake of 18.1%, second only to Liu Qiangdong, whose shareholding ratio is 18.8%. Both Japan's Softbank Group and Tiger Global Fund, are foreign-invested institutions.

Many domestic investors lamented that Ali and Jingdong earn domestic money, while the biggest beneficiaries are foreign investors. In fact, Ali and Jingdong are not isolated cases. The well-known domestic Internet companies Baidu and Tencent are all listed in the United States. With the rising share price and dividend after the listing, the foreign shareholders of the company have all made great profits. Outstanding Internet companies are growing in China, but why they left China's capital market?

Recently, Chen Pei, founder and chairman of Beijing Zhongshang Network Technology Co., Ltd. (CZSE), the Internet company that had ever halted overseas capital markets and eventually listed the third board, accepted the invitation of China Economic Weekly "Interview, tells the search network landing capital market history. It may be possible to glimpse the hardships Internet companies are trying to embrace China's capital markets.

Used to be Baidu, Google's competitors, but missed the capital opportunity

Chen Pei still remembers the glory days of 10 years ago. At that time, search network in China's direct competitors are the two search giant Baidu and Google, and now, the latter two have exceeded the market value of 100 billion yuan.

The original gene in the search network is HC (08292.HK) search business. In 2004, Zhongsou Network came out independently from HC Network to become an Internet company that focused on the search field.

Chen Pei said that from 2003 to 2005, CTS is the largest search engine technology provider in China, providing search engines for portals. At that time, Sina, Sohu, Netease and TOM all used search engines provided by Census Network. "So, behind us and Baidu, Google is a direct competitor, but also Google's real competitors in the country." Chen Pei said.

However, even with such a brilliant experience, search network or lost the chance to stand out. Chen Pei analysis, search network until 2004 from the HC network split out before, has been a part of HC network search business, not an independent individual, is not known to the outside world. It was already too late when we split it out in 2004, and only competitors knew what the CSN was and many new users did not know who CSN was.

"After the split in the search network has actually missed the opportunity and Baidu competition in the market, which makes the entire search engine search network road go very difficult. 2004 Baidu has been very strong, and if you do something similar to Baidu , Who is willing to give it a try? "Chen Pei said regretfully. August 2005, Baidu listed on the NASDAQ IPO, financing more than 100 million US dollars, its influence and ability to expand further strengthened.

In this context, the search network to explore new search format. This is referred to as the third generation search technology by Chen Pei. Compared with the second generation search results listed by other search engine companies in China, after the user input the keywords, the search on the third generation search platform The result is a disaggregated piece of information that makes it easier and faster for users to navigate through the information and knowledge they need, giving a complete knowledge of any one of those keywords.

Obviously, however, this requires a substantial capital cost. Search network began to seek domestic and foreign capital markets.

Foreign listing or domestic listing, this is a problem

Chen Pei admitted frankly that at that time, there was no domestic capital willing to invest in emerging Internet companies, especially start-ups that were not yet profitable. Before and after 2005, many domestic investment institutions lacked sound valuation techniques when looking at a high-tech company. They were good at looking at a mature enterprise such as manufacturing and using PE to measure a firm. However, this valuation method often underestimates the growth of high-tech enterprises such as the Internet.

"So in the search network in 2005 the first round of financing is mainly overseas capital, such as Fidelity Fund." Pei told reporters that only foreign capital think their mode of operation is very reasonable, are willing to give it a try to support.

In fact, not only is CZSE facing such a situation, but also other Chinese Internet companies that have already landed capital markets abroad. For example, Tencent's largest shareholder is South Africa's media tycoon Cosbek, Alibaba's largest shareholder is Japan's Softbank Group.

"Many people say why Chinese Internet companies make money in the Chinese market, but in the end they have been taken away by foreign consortia. However, they did not have the Internet in China without them," said Chen Pei.

After the introduction of foreign capital, search network started to list on NASDAQ. At that time, the method was to construct the commonly used red-chip structure of overseas listing of enterprises: Chen Pei and others set up special search company China Search Inc. ("CSI") in the Cayman Islands to hold the operating entity , In order to achieve the purpose of overseas listing.

The so-called red-chip architecture, in simple terms is the main business, the source of profits for the domestic, but through the structural design of the final ownership of profits for foreign companies to facilitate the listing abroad.

After building a red-chip architecture, CSN began its full sprint to the NASDAQ, but this dream has not been realized until 2009.

Chen Pei told reporters that in 2009, the search engine network search engine concept is still in the process of gradually improving, not yet fully demonstrated, at this time also reached the level of the market.

In addition, the domestic capital market has undergone tremendous changes. In October 2009, the GEM was established. By the end of the month, the first 28 companies were successfully listed. Chen Pei recalls that his friend's company is one of the first 28 listed companies. At the same time, Chen Pei saw the original intention set by the GEM is to support high-tech companies, which also meet the search network positioning. At this time, the idea of ​​return to A shares emerged in Chen Pei mind.

"Since China provides the GEM and is likely to become the NASDAQ in the future, I can also consider trying out the capital markets in China, because China's Internet companies are actually a few international companies with the vast majority of Internet users , Customers from China, the entire market and brand are in China, they are completely forced to go overseas, since there is a domestic GEM, then I can take the lead back. "Chen Pei said.

However, the return to A-shares means that the red-chip architecture previously built by the search network should be repeated. Chen Pei frankly, this is a very difficult thing, many people daunting.

He said that returning from overseas means removing all the capital abroad and replacing it with the domestic capital. This time, we must deal with many historical issues. In dealing with the original shareholders at the same time, but also new strategic investors and shareholders can be brought in.

To properly handle all the original shareholders' relations, we must compensate all kinds of capital so that it can withdraw rationally. At this time only the legal relationship, economic interests and the spirit of the contract balance, CTS network may be realized in the domestic market.

Chen Pei admitted that in 2009 when dismantling the red-chip architecture, the entire concept of search network and the business model is not mature, in which case to convince domestic investors is very difficult. At this moment, he must handle the domestic financing while borrowing money to handle the compensation of the original shareholders.

Switch to the new board, looking forward to landing GEM

Wait until the search network completely removed from the red-chip architecture is the end of 2010. In August 2011, Zhongsou Network formally restructured into a stock company, and the rudiment of its return to A-share market emerged.

According to the domestic IPO rules, in order to be listed, the survival of a joint-stock company should last for three years and meet the conditions of continuous profitability. This is very hard for Internet companies.

In search of network-related person in charge, in order to access the capital market, search network in 2011 to 2013 did indeed make a three-year profit. Is preparing to submit its listing application, the domestic IPO suspension, a large number of companies to be listed in line to form a "dammed lake." If the normal route through the market, in search of the network's listing of the road is still in the foreseeable future. For the much-needed network of search software, the time cost is almost unbearable.

In mid-2013, CITIC Securities Co., Ltd., a sponsor who was responsible for listing Zhongshang Online, proposed to change the listing from the GEM to the new three-listed bank. Based on the domestic capital market situation and the actual demand for funds, Chen Pei accepted this suggestion.

In November 2013, CTS Network was listed on the new three board. On June 18, 2014, SZSE completed the first targeted financing (ie issuance of shares to specific investors to raise funds) with a financing amount of not more than RMB100 million.

"Now search network in the new three board valuation of only one billion yuan, but many Internet companies listed on the Nasdaq, almost all the valuation reached billions of dollars. The gap between the two so large market value, after all Is caused by the gap between Cnc.com and other Internet companies, or is it caused by different capital markets? "Pei Pei asked.

According to regulators ideas, as the new board listed companies more risky, so investors implement the access system, the investment threshold for individual investors securities market value of the previous day more than 5 million yuan.

Chen Pei believes that such a threshold has left many people without a chance to participate in the new Third Board's liquidity can not be fundamentally resolved. Even if the market maker system is introduced to enhance the liquidity of the market transactions, domestic investors are still not able to attract the Internet companies to come up with new three-board listed companies due to their lack of valuation capability for Internet-based enterprises.

Today, Chen Pei more hope that the system will be established as soon as possible, the search network from the new three board to the GEM.

On May 30 this year, Zhang Xiaojun, a press spokesman of the CSRC, said that the SFC is actively studying the establishment of a separate layer on the GEM to support the listing of Internet and technology-innovation enterprises that are not yet profitable. Zhang Xiaojun said that taking into account the unprofitable Internet and science and technology innovation business risk is large, it is proposed to be listed in the new three board companies, to accept market and social supervision, improve the standard operation level, and then apply for a separate level GEM issue.