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Credit Suisse presents report on prospects for China's unicorns at 9th annual China Investment Conference

Credit Suisse today presented a special report that takes an in-depth look at the trends and characteristics among China's fast growing community of unicorns, privately-owned companies valued at over USD 1 billion that are the driving forces of the country's technological advances. The report was launched at this year’s Credit Suisse China Investment Conference (CIC), which provides a unique opportunity for public and private companies to connect with investors and gain insights into the important themes driving China's markets and the country' s state of health.

Now in its ninth year, the three-day conference welcomes close to 1,000 attendees, including representatives from over 150 companies, representing over USD 2,000 billion in total market capitalization, and more than 700 investors from around the world. The 2018 CIC brings together a strong line-up of experts and thought leaders, focusing on topics including policy reforms, macro risks, healthcare, biotechnology, artificial intelligence, and consumer trends.

China – a breeding ground for unicorns

China has been at the forefront of technological innovation and has achieved impressive progress in strengthening its entrepreneur community and helping people to live better and healthier lives. As a result, China is now the second-largest source of unicorns. The special report, entitled "China Unicorns: Where are their breeding grounds?", compares how China's unicorn scene differs from that of the US, the world's largest breeding ground for unicorns. As of September 18, 2018, globally, there were 272 private start-ups with valuations exceeding USD 1 billion; together, their value amounted to USD 864 billion. Of these companies, 79, or 29%, originated from China/Hong Kong, making up 33% of the total valuation. In the US there are 127 unicorns and they are worth a total of USD 439 billion (51% of the world's total).

Ample venture capital funding

Vincent Chan, Head of China Equity Strategy Research at Credit Suisse and one of the authors of the China Unicorns report, explains that the availability of venture capital funding helped to fuel the fast-growing unicorn scene in China. Between 4Q16 and 4Q17, of the 36 largest global venture capital (VC) transactions, 17 of them or 47% originated from China.

"The rise of China as a key source of new unicorns in the past few years has also been reflected in the sharp rise in VC funding in Asia. In 2012, VC funding in Asia was only around USD 5 billion, similar to that of Europe and around 15% of North America. By 2017, VC funding in Asia, largely driven by China, was similar to that of North America and way ahead of Europe."

Driven by business model innovation, rather than technology

A key finding of the report is that Chinese unicorns are driven by business model innovation, which takes advantage of the large, fast-growing but fragmented consumer market in China, rather than high technology, as evidenced by the fact that 46 or 58% of China's 79 unicorns are in the internet, e-commerce, O2O and games spaces. In contrast, in the US, 45% of the unicorns are in sectors requiring more advanced scientific research capability, such as AI, big data, robotics, software, healthcare and biotech.

Catching up with global innovation

The reason for this divergence between China and the US is due to China's level of scientific research still lagging behind; China needs to spend more on basic research to catch up with global innovation. Although Research & Development (R&D) spending in China has increased rapidly in the past few years, reaching 2.1% of GDP by 2016, it is still slightly lower than the OECD level of 2.3% and much lower than many other smaller economies that have invested heavily in technology, such as Japan, Korea, Sweden, Germany, Israel and Finland, according to the report.

Credit Suisse believes the increased R&D spending in recent years will lead to an emergence of unicorns that are much more technology-focused rather than business model focused, most notably in the biotech/healthcare and AI/big data space, which are also the focus topics for this year's CIC.

Five key sectors to spot unicorns in China

The Credit Suisse China Unicorns report has identified five major sectors where most of the current and future China unicorns will likely come from. These sectors comprise:

Automotive – Three megatrends in the smart electrical vehicle (EV) industry are electrification, autonomous driving and smart features. Credit Suisse expects China's new energy vehicle (NEV) sales to enjoy a 28% compound annual growth rate (CAGR) for the 13-year period from 2017-30E. By 2020, NEVs will likely achieve a penetration rate of 45% (NEV volume as a percentage of overall) in China. The China NEV market was driven by strong government support; notable unserved demand due to car plate restrictions; rapidly growing charging infrastructure and the Chinese "NEV credits" regime, and declining battery price and NEV ownership cost.

FinTech – The FinTech industry has been growing rapidly, driven by the internet boom and technology advancements, as well as the under-served demand for financial services of mass market individuals and small- and micro-enterprises. The China Unicorns report states that these two factors support structural growth in the industry over the long term: the volume of China's third-party payments market is expected to grow at 32% CAGR in 2017-21E and reach RMB 470 trillion in 2021E, according to Frost & Sullivan, Oliver Wyman.

Healthcare – China's "Big Health" market has reached RMB 4.9 trillion per government in 2017. China's pharmaceutical sector has delivered strong sales growth since 2010, which could be regarded as a strong indicator of the whole healthcare sector. Growth remains strong and sector overall pharmaceutical sales growth in 1H18 has outperformed the past a few years with the new drugs included in the national drug reimbursement list (NDRL). Strong growth in the past 10 years drives a lot of attention as well as capital in this market.

Internet – China had the largest number of active internet users at 802 million as of the end of 1H18, or 57.7% of the population, according to data published by the China Internet Network Information Centre (CNNIC). By comparison, the US has an estimated 300 million internet users. Some 98% of China's Internet users are mobile netizens, which is attributed to higher smartphone ownership in China. Credit Suisse expects that in the next few years, the internet sector will continue to be the dominant sector among Chinese unicorns, given that China had the second largest consumer market in the world in 2017 and is growing fast. Many unicorns were born in the mobile age and have flourished, driven by people's increased spending for better quality content and services. The new unicorns born in the mobile age are riding the latest technology tide of big data, AI and a sharing economy.

Technology hardware – Artificial intelligence (AI) is one of the fastest-growing technology trends in the 21st century. It is having a profound impact on most areas of people's life, work and production. According to estimates by online statistics, market research and business intelligence firm Statista, the AI market is expected to grow from USD 7.3 billion in 2018 to USD 89 billion in 2025, with a 45% CAGR. China's AI market accounts for roughly 12% of the global market, Statista found. Credit Suisse expects China to become a leader by 2030 driven by three factors, namely strong VC investment totaling USD 2.6 billion annually; the largest smartphone user base of 730 million, and lastly a strong domestic talent pool (including some returning from overseas).