As the EU “Grexit” scenario reaches a firm deadline on Sunday, the financial world is starting to wake up to a much larger headache in the shape of the Chinese Stock Market. While the bubble is across the board, the tech space has seen some incredible funding in the past 12 months, something that had this analyst a little worried as much as 3 years ago. Let’s take a look at one example in the location-based services market that illustrates some of the problems here.
As far back as 2012, investment in location-based technologies companies appeared excessive, with Dianping, the Chinese Yelp, raising $100 million on a $1 billion valuation. It has since raised a further $850 million on a valuation of $4.05 million. Let’s be clear here, this is still a start-up (albeit one backed by internet giant Tencent) that is looking to bring the Yelp model to China; a model that has been questioned and criticized at every turn and now has a “sell” rating with many analysts because its revenues are starting to slip due to excessive ad pricing.
But wait there is more. This month alone, Meitan.com, a new online group buying start-up looking to compete with Dianping, is looking to raise $1 Billion on a valuation of $7 Billion. Again, the company is backed by a big internet player in Alibaba, but these valuations are coming even now, when the overall market is under significant threat. This also follows an $700 million investment in March 2014 into Meitan.com’s parent company, in response to the aforementioned $850 million Dianping investment.
One of the major problems here is the illusion of the scale that these companies operate at. Despite its relative newness, Meituan is claiming 200 million active users and operations in over 1,000 cities. This is incredible when you think that Yelp is a global service that has been in existence for 10 years, is the clear leader in this field and yet still only has 142 million unique monthly users. Investors eyes light up at the numbers mentioned, but all active users are not equal, and while the group buying/O2O market has been a huge success thus far in China and South-East Asia, such consumer spending is completely dependent on a strong growing economy. Furthermore, there is no doubt that Meituan will continue to use the money to basically buy market share by offering heavily discounted deals. This is a dangerous technique at the best of times, often resulting in a lot of casualties as only the strongest survive. Add a stock market crash into the mix and it becomes completely dead investment money.
This level of investment, at such a critical time for the Chinese Stock Market, into a market that in all honesty has failed to live up to revenue expectations in the US and Europe is incredible. From a technical point of view, this business model is starting to look dated particularly when we consider how a much more established player like WeChat, with over 680 million users is now engaging in BLE Beacon advertising with Sensoro. This is essentially an evolution of the O2O market, using adverts that are far more targeted and relevant, lower cost, and with a far greater opportunity for instant gratification.
At the time of writing, a host of measures by the Chinese market regulator were taking effect and the market is bouncing back, but there is a strong sense of kicking the can down the road here. One of the major levers at the regulators disposal is margin buying of shares, something synonymous with the great depression in the US in the 1930s. There are far more informed financial analysts out there to discuss this topic, but this one example (and I could have picked from many just in the LBS sphere) illustrates how with the technology world we could be looking at a lot of big companies facing some very tough times.
I believed that in 2016 we could start to see a complete reversal in the flow of western technology companies into emerging markets. Companies like WeChat, Baidu, Tencent, Alibaba and others are now looking towards global expansion and certainly have the means to do so. In many ways these companies thirst to invest in local start-ups is helping to create this bubble, forcing up prices. However, a major Chinese stock crash could have big implications even for these major technology companies. Without the safety net of its own growing indigenous market, We may find that there is a severe contraction in both global expansion plans and internal start-up investment in 2016.