Shenzhen turns pig parts into gold?

Hepalink – whose main product is unappealingly sourced from pig intestines – sold 10% of its total shares at 73x 2009 earnings, in the best result ever for a PRC A-share listing, valuing the whole business at around $8 billion. And Goldman’s 12.5% stake, bought for $4.9 million in 2007, is now worth slightly north of $981 million – a 200x profit.

This terrific result could lead investors to all kinds of conclusions, many of them quite wrong. For one thing, this is no guide to future performance on ChiNext. China’s public markets are notoriously laws unto themselves, prone to huge swings in valuation. And Hepalink’s IPO price is already being singled out as a glaring example of this. Pre-listing warnings from PRC securities analysts that the price was irrationally high made no visible difference to the outcome, and if any trigger event is likely to drive regulators to rein in over-exuberant investors, the Hepalink listing is probably it.

The result for Goldman is no real vindication for international investors’ capabilities in China healthcare VC. As argued in AVCJ before, Western VCs do have a lot to bring to the China healthcare story. Their domain knowledge is probably far ahead of China VC competitors, giving them arguably far more of a differentiating advantage in healthcare than in IT or Internet businesses. But Goldman only came into Hepalink after the company had already secured its FDA Approval Letter in 2005, so the key US-related value-enhancing event had already taken place. Additionally, Hepalink listed in Shenzhen, instead of targeting US healthcare investors via the NYSE or NASDAQ.

Furthermore, there are no signs yet that Goldman has exited its stake. Hepalink may plunge as far as it soared, as Shenzhen continues its proverbial volatility, so the 200x paper result may translate into considerably less in practice. And the unwelcome attention attracted by the listing result may mean that the husband-and-wife founders, Li Li and Li Tan, end up as the next targets of official PRC moves to rein in overly successful businesspeople, rather than richly reward their successful entrepreneurs.

But all the cautionary notes will not avail against some very big conclusions. First, China healthcare is now officially on the VC map. Interest has been building, as the China healthcare VCs recently covered by AVCJ can attest. Expect it now to rise to fever pitch.

Second, the Hepalink result vindicates ChiNext as a growth listing board. International VCs in particular had been cautious around the new IPO venue, as ChiNext saw wild swings typified by its opening in November 2009, with its inaugural stocks hitting trading limits buffers in both directions in its first few days, both for price rises and price falls. But such fears are unlikely to quell those in search of returns of 200x. The average p/e multiple on ChiNext is now almost 85x. This is the stuff of VC dreams.

Third, the result helps vindicate the whole RMB VC ecosystem of end-to-end fundraising, investing, and exiting within China. Any outside investor who can play in this game will now likely pursue it perhaps to the exclusion of USD-denominated investing. Certainly few remotely ambitious or greedy entrepreneurs would want to go to NASDAQ after this.

As often in China, this dazzling news is likely to leave many outsiders chasing phantoms. ChiNext may not deliver such astronomical returns again. Healthcare may prove a very tough proposition. RMB convertibility issues and other constraints may choke off Western access. None of this will stop the investors. Watch this space – and be ready for more parts.

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• Topics
• Greater China
• Exits
• Healthcare
• Early-stage
• Goldman Sachs