VC/PE's New 'Blue Ocean': Seizing the New Third Board, with Transfer as the Biggest Risk

　　In the capital market where "money never sleeps," the NEEQ (National Equities Exchange and Quotations) has become a new gold mine for VC/PE firms. Although the "transfer to the main board" channel has not been opened and trading is limited to institutional investors, the enthusiasm of VC/PEs for investing in the NEEQ is increasing day by day.
　　On December 22, 2010, Century Real, formerly listed on the NEEQ, was listed on the ChiNext board, with its closing price reaching 59.4 yuan per share on the first day. This means that Qidi Venture Capital, which invested 2.4 yuan per share four years earlier, has reaped a 25-fold return. It is foreseeable that with the gradual implementation of the "expansion" of the NEEQ, the "capital myth" related to the NEEQ will continue to unfold.
　　Century Real Revelation
　　If it weren't for Century Real, Qidi Venture Capital's "low-key" profile might have continued. Hidden behind NetEase and separated from Tsinghua University by only a wall, the Chuangye Building where Qidi Venture Capital is located is inconspicuous. Even on Sogou Maps, the building's marker is easily lost among various internet giants.
　　However, "low-key" does not mean inaction. While many VC/PE firms were engaged in a "price war" over valuations in the primary market, Qidi Venture Capital quietly completed its layout on the NEEQ.
　　In 2006, Wang Dongxiang, who had just joined Qidi Venture Capital, brought a project he had been observing for a long time—Century Real. This Zhongguancun company, which had already been listed on the NEEQ at the time, seemed to meet all the investment conditions: its main business was railway traffic safety monitoring system products, with few industry competitors; its net profit reached 16 million yuan in 2006. However, the problem was that its trading activity on the NEEQ was almost zero.
　　“At that time, there were too many uncertainties about the NEEQ, which may have also hindered some VC/PE investments,” said Hou Dong, investment director of Qidi Venture Capital. Initially, the NEEQ gave people a feeling of greater uncertainty. Certainly, there were some good companies on the NEEQ, but for VC/PE firms whose primary exit strategy was listing, the inability to determine whether they could "transfer to the main board" was their biggest concern.
　　Qidi Venture Capital was a small player at the time. This subsidiary of Tsinghua Science Park and Tsinghua University Education Foundation was originally a business incubator of Tsinghua University, mainly providing a series of support services for overseas returnees and local entrepreneurs. Established in 2006, Qidi Venture Capital managed a fund of only 500 million yuan, which was only equivalent to the amount Sequoia Capital and IDG Capital spent on a single project. They could only focus on early-stage projects.
　　Century Real came into their sights. Although there were many uncertainties about the NEEQ, this was not a problem for Qidi. Because of its close ties to Tsinghua Science Park, Qidi Venture Capital's understanding of the NEEQ was far superior to that of other VC/PE firms. "Whether it can transfer to the main board is the biggest question, but it's not a problem for us. The establishment of the NEEQ itself is to build a larger and relatively standardized equity trading platform between the secondary market and the equity exchange. High-quality companies on the NEEQ can definitely be listed, and Century Real is a representative of this," Hou Dong frankly stated.
　　In addition to the favorable conditions mentioned earlier, Century Real's equity structure was also quite reasonable. Niu Junjie and Wang Tie, its founders, maintained the same shareholding ratio, and this remained so even after subsequent equity dilution, which is uncommon in the Chinese capital market.
　　It was this advantage that made Qidi determined to bet on Century Real. In 2006, after observing Century Real's net profit and growth, Qidi Venture Capital valued it at 15 times its growth rate of 50%-100% in the past, and then purchased a total of 1.5 million shares of Century Real stock at a price of 4.8 yuan per share on the NEEQ online trading platform. In 2009, Qidi Venture Capital further increased its holdings by 3.5 million shares through capital increase. (There were two dividends and one stock dividend before listing; the cost per share before IPO was 2.4 yuan). This was also the first project invested in by Qidi Venture Capital after its establishment.
　　On December 22, 2010, Century Real was listed on the ChiNext board, with its closing price reaching 59.4 yuan per share on the first day. This means that Qidi Venture Capital, which invested 2.4 yuan per share four years earlier, has reaped a 25-fold return. However, due to the impact of the 2011 high-speed rail accident, Century Real's stock price fell all the way. As of May 4, the closing price was 18.19 yuan, and the total number of shares held by Qidi Venture Capital's two funds decreased to 2.7744 million shares, with a market value of 50.466 million yuan.
　　Risk of Bubble Formation
　　Having tasted the sweetness of Century Real, Qidi Venture Capital accelerated its investment pace on the NEEQ. They successively invested in Norsland, Lianfeixiang, and Haixin Kejin on the NEEQ, and pushed Dexin Wulian onto the NEEQ. In these investments, Qidi Venture Capital's investment price was around 2-3 yuan/share, with Lianfeixiang currently having a three-fold premium on the NEEQ.
　　It is worth mentioning that Dexin Wulian is the only company that was invested in before being listed on the NEEQ. As an investor at the time, Hou Dong introduced that as a major domestic provider of RFID (radio frequency identification, commonly known as electronic tags) equipment, Dexin Wulian ranks second globally, but its market space is small, which has become an obstacle to its rapid development.
　　“The Internet of Things concept has great potential in the future, but a good business model has not yet been found. The current stage is a process of accumulation. Dexin Wulian's current scale does not meet the requirements for listing on the ChiNext board, but we hope to lay the groundwork in advance. Listing on the NEEQ will allow it to familiarize itself with the capital market earlier.”
　　In May 2010, Qidi Venture Capital invested 7 million yuan to obtain about 10% of Dexin Wulian's shares. In October 2010, Dexin Wulian completed its listing on the NEEQ. In Hou Dong's view, the future NEEQ will better solve the problem of financing difficulties for companies like Dexin Wulian.
　　Not only Qidi Venture Capital, but also many VC/PE institutions have begun to lay the groundwork in the current NEEQ market. Among them, Jiu Ding Investment has successively invested in Huayejian, Shanggao Sanitary Ware, and Dr. Glasses; Huashan Capital invested in United Optoelectronics; Zhongju Wealth invested in 7 Days Inn; and Gaotejia invested in Tongcai Automation.
　　The report points out that the cost of VC/PE institutions investing in NEEQ companies is relatively low. Once the invested companies go public through IPO, it will bring substantial returns. In addition, the competition in the current VC/PE market has become extremely fierce, and the competition among institutions for excellent companies is very intense. The emergence of NEEQ companies has opened up a "blue ocean" for the private equity market with abundant funds.
　　However, for the current NEEQ, not all companies are high-quality companies. More companies may become mediocre, or even be eliminated in the cruel capital market, which is an inevitable outcome. Just as the price-to-earnings ratio of companies on the ChiNext board was generally high before, in Hou Dong's view, it is also possible that this situation will occur in the initial stages of the NEEQ expansion.
　　The formation of bubbles is inevitable, and this is also an inherent law of all capital markets. Speculative behavior exists in any capital market; only high-quality companies can survive in such a market, and only true gold is more suitable for completing its own transfer and listing.