Analysis: SoftBank’s China strategy wobbles as key bets disappoint

Ping An Healthcare and Technology Co

13/12/2019 19:12

By Kane Wu, Julie Zhu and Yingzhi Yang
    HONG KONG/BEIJING, Dec 13 (Reuters) - For SoftBank Group Inc
 9984.T , financial technology firm OneConnect's IPO should have
been a vindication of an aggressive China investing strategy.
    Instead, embarrassed bankers had to slash the offering size
and cut its price as investors baulked at a business model seen
too reliant on majority owner Ping An Insurance  601318.SS . The
IPO valued OneConnect at $3.7 billion  urn:newsml:reuters.com:*:nL1N28N00M, about half
its worth last year when SoftBank's Vision Fund invested $100
million, and its stock was down slightly in its debut on Friday.
    OneConnect Financial Technology  OCFT.N  is just one of many
China bets placed by the Japanese investment giant or its
massive Vision fund which have run into trouble. That's added to
global woes for SoftBank CEO Masayoshi Son, under fire for bad
judgement and insufficient due diligence, exemplified by U.S.
office-space startup WeWork's disastrous IPO attempt and
subsequent bailout.
    In ZhongAn Online P&C Insurance Co Ltd's  6060.HK  2017 IPO,
for example, SoftBank ploughed in $550 million as a cornerstone
investor. But the deal was seen by some investors as way
overvalued and now trades at about half its IPO price.  
    Its unlisted portfolio has also had problems. The Vision
Fund in February invested $1.5 billion in Guazi.com, valuing the
second-hand car dealing platform at more than $9 billion.
    But a $500 million funding round for Guazi.com in the first
half of the year failed to get off the ground, people with
knowledge of the fundraising said.
    The people, who were not authorised to speak to media and
declined to be identified, said potential investors thought it
was too pricey and were put off by its lack of profits in a
sector where sales have been declining.
    Guazi.com said in a statement that talks for new funds were
advanced, investors included the Vision Fund and other top
international investment institutions and that it expected to be
profitable in the fourth quarter.
    In fairness to SoftBank, many China IPOs have stumbled, hurt
by a sharp slowdown in economic growth and trade tensions with
the United States. 
    But investors and some bankers looking at China-related
deals say SoftBank's involvement, once a sign of promising
prospects, was now viewed as a red flag that a company was
likely overvalued.
    "SoftBank has become a signal that the market has peaked,"
said one person involved in the OneConnect IPO.
    SoftBank declined to comment on its investments in Chinese
companies for this article. 
    
    OTHER PROBLEMS
    Other big bets like TikTok owner ByteDance and artificial
intelligence firm Sensetime are threatened by the fallout from
the U.S.-China trade conflict. The Vision Fund has invested
roughly $1 billion in both, sources have said.      
    ByteDance is entangled in a U.S. national security review
over how it handles U.S. customer data. 
    Sensetime in October was added to the U.S. "entity list"
which bars it from buying U.S. components without U.S.
government approval, over its alleged involvement in human
rights abuses in China's Xinjiang.
    Sensetime has countered it abides by all relevant laws of 
jurisdictions in which its operates and that it has been
actively developing an AI code of ethics.
    Ride-hailing company Didi Chuxing, one of SoftBank’s biggest
China bets with $11.8 billion invested, appeared to have a
bright future after U.S. rival Uber  UBER.N  traded its China
business for a stake in Didi.
    But the rape and a murder of a Didi passenger by her driver
has dented the company's image, and its IPO timetable remains
unclear after Uber valuations slid.
    The Vision Fund opened a China office this year led by
former Silver Lake managing director Eric Chen. Two sources
familiar with the operation told Reuters that the pace of hiring
for the China team has been slow, though SoftBank says the team
has grown a lot since March to include about 20 investment
professionals.
    One source said Chen had scaled back the size of the deals
he was looking at, now focusing on investments of around $50
million compared to those of $200 million-$300 million.
    SoftBank declined to comment.
    It's all a far cry from just two years ago, when SoftBank
and the Vision Fund were ramping up. Son had made a killing with
an early investment in Alibaba  BABA.N  - a stake now worth $140
billion - and the China tech business was booming.
    Then, Son's penchant for splashy checks to help startups
grow fast and quickly vanquish rivals was in full force - as
evidenced by a meeting with Chinese online medical platform Ping
An Good Doctor  1833.HK  in late 2017 to discuss pre-IPO
fundraising.
    "How much do you want to raise in the pre-IPO round and via
IPO? " Son asked Good Doctor's CEO Wang Tao, according to
sources.  
    Wang told him it would be $300 million and $1 billion
respectively.
    "How about I give you $1 billion and you drop the listing
plans?" Son said.
    Wang later decided not to take him up on the $1 billion,
receiving instead $400 million from the Vision Fund in a pre-IPO
round before listing in Hong Kong last year.
    In contrast to some of SoftBank's other China investments,
its stock has made progress after a rocky start, however,
climbing and mostly staying above its IPO price since October.
    

 (Reporting by Kane Wu and Julie Zhu in Hong Kong and Yang
Yingzhi in Beijing; Additional reporting by Sam Nussey in Tokyo
and Clare Jim in Hong Kong; Writing by Kane Wu; Editing by
Jonathan Weber and Edwina Gibbs)
 ((kane.wu@thomsonreuters.com; +85228436590; Reuters Messaging:
kane.wu.thomsonreuters.com@reuters.net))