Friday, 2022 August 12

Eyeing the future: Identifying China’s innovative direction through Hillhouse Capital Group’s investments

In 2021, a total of 421 Chinese companies that had received venture capital and private equity investments were listed on stock exchanges in China, and VC/PE firms participated in 68.68% of those IPOs. Hillhouse Capital Group bought shares in 33 of those stock offerings, the most among investment firms that were involved in these sales.

Hillhouse Capital Group is an investment firm that focuses on long-term value in healthcare, consumer and retail, advanced manufacturing, and enterprise services. It invests across all stages, with a fund called Hillhouse Ventures that specifically focuses on early-stage companies that are creating innovative products and platforms.

As a firm that writes checks in both US dollars and Chinese renminbi, Hillhouse Capital has more than USD 65 billion in total assets under management, including USD 20 billion that is invested through stock exchanges in Hong Kong and the United States. The firm draws its capital from institutional investors around the world, including university endowments, pension funds, nonprofit foundations, and family offices.

In 2020 and 2021, Hillhouse made more investments in companies providing healthcare services than any other sector. Meanwhile, in 2021, its investments in mobility and manufacturing grew the fastest year-on-year, at 135.29% and 400%, respectively. The firm’s current targets include biopharmaceuticals, autonomous driving, and smart manufacturing.

On Hillhouse Capital Group’s website, the firm says, “We are entrepreneurs who happen to be investors,” and that “we are long-term investors focused on building high-quality businesses that last.” It has built a reputation based on this forward-looking attitude, suggesting that Hillhouse founder and CEO Zhang Lei and his team have identified specific subsectors where they believe that China-based innovators will make breakthroughs.

Advancements in biomedicine

Within the biopharmaceutical sector, Hillhouse showed keen interest in contract development and manufacturing organizations, or CDMOs, in 2021. CDMOs provide custom R&D and production services for drugs, spanning the clinical stage to commercialization. These services include drug compound discovery, drug synthesis, and various types of early-stage research.

Last year, the total sales of the world’s top 10 best-selling drugs grew by more than 20% year-on-year. With a positive market outlook, global pharmaceutical companies are increasing their R&D budgets and outsourcing more work to CDMOs.

In April 2021, Hillhouse invested RMB 110 million (USD 16.5 billion) into Porton Biologics, a CDMO that provides services related to biologics, gene and cell therapy, and CAR-T therapy (chimeric antigen receptor T-cell therapy). The following month, Hillhouse invested RMB 3 billion (USD 451 million) in Legend Biotech, a subsidiary of biopharmaceutical company GenScript. In August 2021, the firm led an RMB 400 million (USD 60 million) investment in biopharmaceutical CDMO Thousand Oaks.

However, there have been headwinds. Healthcare companies have not been performing well in the stock market since 2020. The firm holds shares in 41 companies that are listed in Hong Kong; this includes 28 companies where Hillhouse has floating loss positions as of mid-March. Nearly 77% of its investments in listed healthcare companies have been contracting in value. In particular, the value of Hillhouse’s holdings in Zhaoke Ophthalmology, MicroPort CardioFlow Medtech, and JHBP Holdings (Genor Biopharma) has shrunk by more than 75%. This is a consequence of major developments that have impacted the entire market.

Moreover, on March 10, 2022, the US Securities and Exchange Commission added five healthcare companies to its list of firms that may be delisted in New York—biotech company BeiGene, Yum China, medtech developer Zai Lab, semiconductor technology developer ACM Research Shanghai, and biopharmaceutical developer HutchMed.

This situation has led Hillhouse to develop a new investment thesis. Instead of buying shares of listed companies, the investment firm has been writing checks for these enterprises’ subsidiaries. The firm believes that this is a move that carries less risk because established companies have already defined the rails for emerging subsectors for these younger businesses. Additionally, Hillhouse can pool its resources alongside larger enterprises to build up these smaller firms.

There are already many examples of this course of action. In March 2020, Hillhouse Capital invested in Hualan Vaccine, a subsidiary of Hualan Biologicals, a company listed on the Shenzhen Stock Exchange. The following month, Hualan Biologicals announced that it would spin off Hualan Vaccine for a listing.

Similarly, in January 2021, Hillhouse invested in Asymchem Spectrum, a subsidiary of its portfolio company Dian Diagnostics, another company that is listed on the Shenzhen Stock Exchange. Then, three months later, Hillhouse invested in Porton Biologics, a subsidiary of the Shenzhen-listed Porton Pharma Solutions.

This was followed by a check for GenScript Probio, a subsidiary of Hong Kong-listed Asymchem Biologicals, in May 2021. More recently, in March 2022, Hillhouse took a stake in another Asymchem subsidiary, which aims to seek a ticker code by the end of 2026.

Autonomous driving as the future of mobility

China is the world’s largest market for automobiles. It is building cars that are not merely machines for transportation, but also intelligent, networked, and powered by electricity. Further sector-wide transformation depends on semiconductor processors that enable autonomous driving. Currently, there is a huge demand for chips that can deliver that level of performance and computing power.

At the end of 2021, Beijing released new rules for operating commercialized autonomous driving services within its Intelligent Networked Vehicle Policy Pilot Zone, making it the first city in China to endorse commercial operations for self-driven cars. Last year, there were 94 disclosed investments into autonomous driving solutions developers, totaling more than RMB 43.5 billion (USD 6.47 billion), the highest amount of financing for this sector in a 12-month period.

Hillhouse has been investing in the self-driving sector since 2021. This includes companies that develop semiconductors, simulated test environments, computing platforms, lidar, and other relevant services—spanning the full development chain of autonomous vehicles while remaining diversified within the sector.

Hillhouse Capital’s portfolio companies include TankBlue Semiconductor, Lidar developer Hesai Technology, autonomous driving algorithm designer AutoCore.ai, full-stack self-driving service provider Hirokage Intelligent Driving, and Asensing Electronics, which provides high-precision positioning technology.

Autonomy through smart manufacturing

Hillhouse views AI-driven computer vision as one of the most promising tracks for investments. It has made early investments in companies that operate in this space, including Ten Fong Technology, Current CAD, AllSense Technology, Shuyilink, and DP Technology.

Li Liang, founding partner of Hillhouse Capital, once said that computer vision for the manufacturing sector will create opportunities for rapid growth in China in two ways—Chinese goods will replace foreign-made equipment, and there will be technological development that makes this form of AI augmentation possible.

Cameras used for computer vision will be ubiquitous in smart manufacturing. One important component in these cameras is a specialized sensor that, for now, remains a product made chiefly by foreign entities. This means the sensor carries a premium price, diluting the profits of manufacturers who utilize these cameras.

If this form of technology can be developed and produced domestically in China, then the prices of these sensors (and cameras) will drop, reducing costs for manufacturers not only within the country but potentially around the world. This will be particularly meaningful for industries that are especially sensitive to cost fluctuations, such as food processing and wood processing.

Smart manufacturing will further evolve as researchers build upon computer vision to develop multispectral vision capabilities. At the moment, computer vision systems typically detect the human-visible light spectrum, while multispectral vision technology can yield more accurate imagery for processing. This also transcends human vision and may become the standard for artificial intelligence sensory systems.

Just as Hillhouse has been investing in the subsidiaries of its portfolio companies in the biopharmaceutical space, the investment firm is pursuing the same strategy in the smart manufacturing sector. In February 2022, it invested in Han’s Optoelectronic Equipment, a subsidiary of Han’s Laser, which is listed on the Shenzhen Stock Exchange.

Han’s Laser produces industrial laser systems. Its subsidiary Han’s Optoelectronics Equipment was established in 2007 and produces wire welding machines. In particular, Han’s Optoelectronics became a leader in this segment by formulating domestic manufacturing capabilities for this type of equipment. Hillhouse’s stake in the company may be a precursor to a spinoff that leads to an IPO for the subsidiary.

Hillhouse seeks long-term value creation over short-term gains. As a top VC in China, its current focus on biopharmaceuticals, autonomous driving, and smart manufacturing reveals the firm’s expectations regarding innovation that will take place in China.

This article was adapted based on a research report by 36Kr Global’s research team. KrEurope is authorized to translate, adapt, and publish its contents. 

KrASIA Connection
KrASIA Connection
KrASIA Connection features translated and adapted content published by 36Kr.com, the largest and most influential tech portal in Chinese language.
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