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Insights | What Hillhouse Capital’s Investments Tell Us About Chinese Tech Stocks
June 6, 2022
Note: This article was originally published by TechNode China (in Chinese).
Hillhouse Capital is a leading investment institution whose investment moves are often seen as trend-setting when it comes to Chinese companies listed in the United States. Its latest investment filing this year revealed a new positioning: actively selling shares in the Chinese EV trio Nio, Xpeng and Li Auto, reshuffling several e-commerce bets, and maintaining its biotechnology investments with some adjustments.
Detailed investment data is available in the filing submitted by HHLR Advisors, Hillhouse’s fund management arm. HHLR Advisors filed its first-quarter Form 13F on May 16 — a quarterly report required from institutional investment managers with at least $100 million in assets under management. It discloses their holdings and transactions and serves as something of a reference sheet for investors evaluating their own positions.
In the first quarter, HHLR held 64 stocks in the U.S. equity market, 13 fewer than in the previous quarter. Hillhouse exited positions in 17 well-known companies, including Airbnb, Amazon and Coinbase, while adding four Chinese companies. Its total assets stood at $4.8 billion, down 26% from the previous month.
Five of Hillhouse Capital’s 10 largest holdings were U.S.-listed Chinese companies: BeiGene, JD.com, Legend Biotech, Vipshop and iQiyi. Of the 64 stocks held by Hillhouse Capital in the first quarter of the year, 24 were Chinese companies, accounting for approximately 38% of the total.
Since the first quarter, Hillhouse Capital reduced its holdings in Legend Biotech, ZTO Express, Li Auto, Mogu and Huazhu Hotels Group, while fully exiting Boss Zhipin, Nio, Pinduoduo and Xpeng.
The firm increased its positions in Vipshop, JD.com, KE Holdings and ACM Research. Didi, Full Truck Alliance, Futu Holdings and several EV companies were added to Hillhouse Capital’s portfolio in the first quarter. Its positions in Sohu, Uxin, Yatsen Holding and 11 other Chinese companies remained unchanged.
Hillhouse had invested in Didi, Full Truck Alliance and KE Holdings before their IPOs, so its previously private investments in these companies were converted into American Depositary Shares (ADS). According to enterprise database Qichacha, Hillhouse Capital participated in Didi’s Series D+, two strategic funding rounds of Full Truck Alliance, and KE Holdings’ Series D.
Hillhouse Capital is a leading investment institution whose investment moves are often seen as trend-setting when it comes to Chinese companies listed in the United States. Its latest investment filing this year revealed a new positioning: actively selling shares in the Chinese EV trio Nio, Xpeng and Li Auto, reshuffling several e-commerce bets, and maintaining its biotechnology investments with some adjustments.
Detailed investment data is available in the filing submitted by HHLR Advisors, Hillhouse’s fund management arm. HHLR Advisors filed its first-quarter Form 13F on May 16 — a quarterly report required from institutional investment managers with at least $100 million in assets under management. It discloses their holdings and transactions and serves as something of a reference sheet for investors evaluating their own positions.
In the first quarter, HHLR held 64 stocks in the U.S. equity market, 13 fewer than in the previous quarter. Hillhouse exited positions in 17 well-known companies, including Airbnb, Amazon and Coinbase, while adding four Chinese companies. Its total assets stood at $4.8 billion, down 26% from the previous month.
Five of Hillhouse Capital’s 10 largest holdings were U.S.-listed Chinese companies: BeiGene, JD.com, Legend Biotech, Vipshop and iQiyi. Of the 64 stocks held by Hillhouse Capital in the first quarter of the year, 24 were Chinese companies, accounting for approximately 38% of the total.
Since the first quarter, Hillhouse Capital reduced its holdings in Legend Biotech, ZTO Express, Li Auto, Mogu and Huazhu Hotels Group, while fully exiting Boss Zhipin, Nio, Pinduoduo and Xpeng.
The firm increased its positions in Vipshop, JD.com, KE Holdings and ACM Research. Didi, Full Truck Alliance, Futu Holdings and several EV companies were added to Hillhouse Capital’s portfolio in the first quarter. Its positions in Sohu, Uxin, Yatsen Holding and 11 other Chinese companies remained unchanged.
Hillhouse had invested in Didi, Full Truck Alliance and KE Holdings before their IPOs, so its previously private investments in these companies were converted into American Depositary Shares (ADS). According to enterprise database Qichacha, Hillhouse Capital participated in Didi’s Series D+, two strategic funding rounds of Full Truck Alliance, and KE Holdings’ Series D.
Selling EV Stocks
Hillhouse actively sold down its positions in the Chinese EV trio — Nio, Xpeng and Li Auto. Hillhouse sold all of its shares in Nio and Xpeng, retained only part of its Li Auto position, and cut its holdings in the company by more than half to 2.51 million shares compared with the fourth quarter of 2021.
In addition to Hillhouse Capital, Susquehanna International Group, The Goldman Sachs Group and several other investment institutions also reduced their holdings in the three EV manufacturers during the first quarter. Meanwhile, BlackRock, UBS and other funds that increased their positions in the trio saw the market value of those holdings decline and their portfolios record losses.
The increase in selling and decline in value can partly be explained by the performance of EV stocks. In the first quarter of the year, shares of Nio, Xpeng and Li Auto fell by 33%, 45% and 19%, respectively.
Despite rapid growth, these companies’ shares were trading far below their historical highs, as they faced the possibility of delisting from the U.S. market and showed no signs of becoming profitable in the near future.
Last year, deliveries by Nio, Xpeng and Li Auto increased by 109.1%, 263% and 177.4%, respectively. Annual revenue rose by 122.3%, 259.1% and 185.6%, respectively, compared with 2020. The three companies also improved their cash flow and gross margins in 2021, according to their financial results.
In the first quarter of this year, Nio delivered 25,769 new vehicles, up 28.5% year on year. Xpeng sold 34,561 vehicles, an increase of 59.1% compared with the same period last year. Li Auto delivered 31,716 vehicles, representing year-on-year growth of 152.1%.
Xpeng’s revenue rose 159% compared with the first quarter of the previous year to RMB 7.5 billion ($1.1 billion), while its net loss reached RMB 1.7 billion, up 116% year on year. During the same period, Li Auto reported revenue of RMB 9.6 billion, an increase of 168%, while its net loss narrowed by 97% to RMB 10.9 million.
In March of this year, the U.S. Securities and Exchange Commission (SEC) placed all three companies on a provisional list for possible delisting from U.S. stock exchanges. In response, Li Auto and Xpeng listed in Hong Kong late last year, while Nio listed in Hong Kong in March 2022. Nio also debuted on the Singapore stock market, becoming the first automaker to be listed on three different stock exchanges.
Shi Jinman, chief automotive analyst at Sealand Securities, told TechNode that traditional automakers focus on profitability, while newcomers often operate at a loss in pursuit of growth. Shi added that the three automakers mentioned above are not yet able to compete with major traditional manufacturers, but nevertheless offer some potential in a demanding market.
Repositioning in E-Commerce
Another major adjustment in Hillhouse Capital’s portfolio took place in the e-commerce sector, where the company made a series of different decisions regarding its positions in Pinduoduo, Mogu, JD.com and Vipshop.
Data shows that HHLR began building its position in Pinduoduo in 2018, when the company’s share price was as low as $16. By the end of 2020, Hillhouse Capital owned more than 10 million shares in the company, making it its largest institutional investor at the time.
In 2021, the number of active buyers on Pinduoduo exceeded Alibaba’s for three consecutive quarters, while the company’s share price surged to more than $212 in the first quarter of 2021.
In the fourth quarter of 2021, Alibaba overtook Pinduoduo again, and Hillhouse Capital responded quickly by reducing its holdings in the younger company by 91.8%. By that point, Hillhouse Capital had achieved roughly a tenfold return on its original investment in Pinduoduo.
Now that Pinduoduo’s rapid growth has slowed, its share price has also fallen to around $40, and Hillhouse Capital has exited the company.
By contrast, Mogu turned out to be an unsuccessful investment for the firm. Mogu started out as a provider of shopping guides but missed the social-commerce trend pioneered by Xiaohongshu and failed to pivot into other more successful areas.
Despite a brief revival driven by livestreaming-based e-commerce, the company’s share price now fluctuates below $5. Hillhouse Capital pushed for the merger of Mogu and Meilishuo, but after Mogu went public in 2018, its market value fell by 60% over a six-month period, illustrating a sharp decline.
Mogu’s current market capitalization stands at just RMB 19.1 million, with Hillhouse Capital having lost 99% of its investment. Hillhouse Capital went from being Mogu’s largest shareholder to its third largest after cutting its stake by more than 91% in the first quarter. However, it has not yet fully exited the company.
In the third quarter of 2020, Hillhouse Capital opened a position in JD.com after the e-commerce giant’s strategy targeting consumers in China’s lower-tier cities paid off, with the number of annual active buyers increasing by more than 100 million people for two consecutive years.
Nevertheless, Hillhouse reduced its stake over the following three quarters before increasing it again by nearly 30% in the third quarter of 2021.
JD’s number of active buyers continued to grow, reaching 570 million in the fourth quarter of 2021, according to the company’s annual report. In the first quarter of this year, that figure rose to 580.5 million, while Hillhouse’s latest position in JD.com nearly doubled compared with the fourth quarter of 2021.
Hillhouse Capital simultaneously increased its positions in Alibaba and Vipshop from the first quarter of 2021 and followed the same strategy over the following two quarters.
In the fourth quarter of 2021, Hillhouse sold 24,560 Vipshop shares and exited Alibaba. According to its financial report, Vipshop delivered weak results in the fourth quarter of 2021: revenue reached RMB 34.1 billion, down 5% year on year. Net profit totaled RMB 1.4 billion, down 41.7% compared with the same quarter of the previous year. The company had 49.3 million active users, having lost 3.7 million users during 2021.
In the first quarter of this year, Vipshop’s revenue, profit and user numbers continued to decline. Nevertheless, Hillhouse Capital more than doubled its stake in Vipshop compared with the fourth quarter of the previous year, allowing the company to enter Hillhouse’s top 10 holdings for the first time.
JD and Vipshop ranked second and seventh in Hillhouse Capital’s portfolio, with positions valued at $488 million and $199 million, respectively.
Li Chengdong, an independent analyst specializing in Chinese e-commerce, wrote in an analysis published by NetEase News that Vipshop currently has a mature business model, along with loyal users and well-known suppliers. The company has built competitive barriers in its segment and created a distinctive advantage, helping explain Hillhouse Capital’s decision to increase its bet on Vipshop.
Waiting for a Biotechnology Boom
Biotechnology has been one of Hillhouse Capital’s most prominent bets and one of the most important categories in the fund’s portfolio.
Over the past two years, biotechnology-related stocks accounted for 40% of Hillhouse Capital’s total equity holdings, while the market value of biotechnology companies at one point became the largest category in the portfolio, surpassing technology companies.
The pandemic made biotechnology stocks particularly attractive over the previous two years. The sector has now cooled somewhat and entered a more mature and competitive phase.
Compared with the fourth quarter of last year, Hillhouse Capital’s positions in BridgeBio Pharma, Cytek Biosciences, Gossamer Bio, Instil Bio and Mereo Biopharma remained unchanged. However, the market capitalizations of these companies declined by 23%–39%.
Hillhouse Capital also began adjusting its positions in medical technology companies, fully exiting Prometheus Bio, Rallybio, Regenxbio and others, while reducing its holding in Chinese company Legend Biotech from 11.805 million to 6.9 million shares.
Following this adjustment, Legend Biotech moved from Hillhouse Capital’s third-largest holding to its fifth-largest.
Hillhouse Capital’s stakes in two other Chinese biomedical companies, BeiGene and I-Mab, remained unchanged, with their market values ranking first and 11th in Hillhouse Capital’s portfolio, respectively.
In total, Hillhouse Capital owns more than 10% of the shares of three biotechnology companies: Legend Biotech, BeiGene and I-Mab.
Founded in 2011, BeiGene is one of four leading drug developers backed by Hillhouse Capital and is engaged in research on PD-1 cancer therapies.
Hillhouse Capital’s investment in BeiGene spans the company’s entire lifecycle.
According to Qichacha, Hillhouse participated in BeiGene’s Series A, Series B and two private placement rounds following the company’s IPOs in the United States and Hong Kong.
In December 2021, BeiGene successfully listed in China, becoming the only innovative pharmaceutical company listed on three different stock markets.
From participating in a $74.5 million Series A funding round in 2014 to taking part in a $2.1 billion private placement in 2020, Hillhouse Capital invested more than RMB 8 billion in BeiGene.
Research and development of innovative medicines generally involves substantial upfront investment, long development cycles and high risk. Financial results show that BeiGene had remained loss-making for seven years since its U.S. listing.
In the first quarter of 2022, BeiGene reported revenue of RMB 1.9 billion, down 50% year on year. The company’s net loss narrowed nearly tenfold to RMB 2.9 billion compared with the same quarter of the previous year.
During the first quarter, BeiGene’s product sales grew 146% year on year. Among them, global sales of Zebutinib, a cancer treatment, reached $104.3 million, up 372% compared with the first quarter of 2021.
As of the first quarter of this year, Hillhouse Capital held 5.5 million BeiGene shares in the U.S. market. As of May 25, BeiGene’s share price stood at $123.
Based on the market valuation of $103 billion stated in the F13 filing, Hillhouse Capital incurred losses of approximately $360 million on its BeiGene position.
As of May 25, Hillhouse Capital’s stake in Legend Biotech was valued at $18.7 million, while its stake in I-Mab was valued at $40.9 million.
Conclusion
As many U.S.-listed Chinese stocks traded at lower prices, Hillhouse Capital moved against the trend by increasing its holdings in some of these companies, demonstrating an optimistic view of China-related assets.
At the same time, the gradual disappearance of traditional Chinese technology giants such as Alibaba from its top 20 holdings demonstrates the institution’s appetite for assets with higher growth rates.
Hillhouse’s repeated adjustments to specific holdings also reflect significant changes in the structure of China’s e-commerce industry over the years.
Hillhouse Capital is known for its accuracy and strong returns, but no investment firm is completely infallible.
The company has an impressive track record, and its transactions may provide valuable insight into emerging market trends. However, ordinary investors should always be cautious about blindly following any institution when investing in the stock market.
Challenges, opportunities, technologies, investments, startups, China — we take a closer look.
Hillhouse actively sold down its positions in the Chinese EV trio — Nio, Xpeng and Li Auto. Hillhouse sold all of its shares in Nio and Xpeng, retained only part of its Li Auto position, and cut its holdings in the company by more than half to 2.51 million shares compared with the fourth quarter of 2021.
In addition to Hillhouse Capital, Susquehanna International Group, The Goldman Sachs Group and several other investment institutions also reduced their holdings in the three EV manufacturers during the first quarter. Meanwhile, BlackRock, UBS and other funds that increased their positions in the trio saw the market value of those holdings decline and their portfolios record losses.
The increase in selling and decline in value can partly be explained by the performance of EV stocks. In the first quarter of the year, shares of Nio, Xpeng and Li Auto fell by 33%, 45% and 19%, respectively.
Despite rapid growth, these companies’ shares were trading far below their historical highs, as they faced the possibility of delisting from the U.S. market and showed no signs of becoming profitable in the near future.
Last year, deliveries by Nio, Xpeng and Li Auto increased by 109.1%, 263% and 177.4%, respectively. Annual revenue rose by 122.3%, 259.1% and 185.6%, respectively, compared with 2020. The three companies also improved their cash flow and gross margins in 2021, according to their financial results.
In the first quarter of this year, Nio delivered 25,769 new vehicles, up 28.5% year on year. Xpeng sold 34,561 vehicles, an increase of 59.1% compared with the same period last year. Li Auto delivered 31,716 vehicles, representing year-on-year growth of 152.1%.
Xpeng’s revenue rose 159% compared with the first quarter of the previous year to RMB 7.5 billion ($1.1 billion), while its net loss reached RMB 1.7 billion, up 116% year on year. During the same period, Li Auto reported revenue of RMB 9.6 billion, an increase of 168%, while its net loss narrowed by 97% to RMB 10.9 million.
In March of this year, the U.S. Securities and Exchange Commission (SEC) placed all three companies on a provisional list for possible delisting from U.S. stock exchanges. In response, Li Auto and Xpeng listed in Hong Kong late last year, while Nio listed in Hong Kong in March 2022. Nio also debuted on the Singapore stock market, becoming the first automaker to be listed on three different stock exchanges.
Shi Jinman, chief automotive analyst at Sealand Securities, told TechNode that traditional automakers focus on profitability, while newcomers often operate at a loss in pursuit of growth. Shi added that the three automakers mentioned above are not yet able to compete with major traditional manufacturers, but nevertheless offer some potential in a demanding market.
Repositioning in E-Commerce
Another major adjustment in Hillhouse Capital’s portfolio took place in the e-commerce sector, where the company made a series of different decisions regarding its positions in Pinduoduo, Mogu, JD.com and Vipshop.
Data shows that HHLR began building its position in Pinduoduo in 2018, when the company’s share price was as low as $16. By the end of 2020, Hillhouse Capital owned more than 10 million shares in the company, making it its largest institutional investor at the time.
In 2021, the number of active buyers on Pinduoduo exceeded Alibaba’s for three consecutive quarters, while the company’s share price surged to more than $212 in the first quarter of 2021.
In the fourth quarter of 2021, Alibaba overtook Pinduoduo again, and Hillhouse Capital responded quickly by reducing its holdings in the younger company by 91.8%. By that point, Hillhouse Capital had achieved roughly a tenfold return on its original investment in Pinduoduo.
Now that Pinduoduo’s rapid growth has slowed, its share price has also fallen to around $40, and Hillhouse Capital has exited the company.
By contrast, Mogu turned out to be an unsuccessful investment for the firm. Mogu started out as a provider of shopping guides but missed the social-commerce trend pioneered by Xiaohongshu and failed to pivot into other more successful areas.
Despite a brief revival driven by livestreaming-based e-commerce, the company’s share price now fluctuates below $5. Hillhouse Capital pushed for the merger of Mogu and Meilishuo, but after Mogu went public in 2018, its market value fell by 60% over a six-month period, illustrating a sharp decline.
Mogu’s current market capitalization stands at just RMB 19.1 million, with Hillhouse Capital having lost 99% of its investment. Hillhouse Capital went from being Mogu’s largest shareholder to its third largest after cutting its stake by more than 91% in the first quarter. However, it has not yet fully exited the company.
In the third quarter of 2020, Hillhouse Capital opened a position in JD.com after the e-commerce giant’s strategy targeting consumers in China’s lower-tier cities paid off, with the number of annual active buyers increasing by more than 100 million people for two consecutive years.
Nevertheless, Hillhouse reduced its stake over the following three quarters before increasing it again by nearly 30% in the third quarter of 2021.
JD’s number of active buyers continued to grow, reaching 570 million in the fourth quarter of 2021, according to the company’s annual report. In the first quarter of this year, that figure rose to 580.5 million, while Hillhouse’s latest position in JD.com nearly doubled compared with the fourth quarter of 2021.
Hillhouse Capital simultaneously increased its positions in Alibaba and Vipshop from the first quarter of 2021 and followed the same strategy over the following two quarters.
In the fourth quarter of 2021, Hillhouse sold 24,560 Vipshop shares and exited Alibaba. According to its financial report, Vipshop delivered weak results in the fourth quarter of 2021: revenue reached RMB 34.1 billion, down 5% year on year. Net profit totaled RMB 1.4 billion, down 41.7% compared with the same quarter of the previous year. The company had 49.3 million active users, having lost 3.7 million users during 2021.
In the first quarter of this year, Vipshop’s revenue, profit and user numbers continued to decline. Nevertheless, Hillhouse Capital more than doubled its stake in Vipshop compared with the fourth quarter of the previous year, allowing the company to enter Hillhouse’s top 10 holdings for the first time.
JD and Vipshop ranked second and seventh in Hillhouse Capital’s portfolio, with positions valued at $488 million and $199 million, respectively.
Li Chengdong, an independent analyst specializing in Chinese e-commerce, wrote in an analysis published by NetEase News that Vipshop currently has a mature business model, along with loyal users and well-known suppliers. The company has built competitive barriers in its segment and created a distinctive advantage, helping explain Hillhouse Capital’s decision to increase its bet on Vipshop.
Waiting for a Biotechnology Boom
Biotechnology has been one of Hillhouse Capital’s most prominent bets and one of the most important categories in the fund’s portfolio.
Over the past two years, biotechnology-related stocks accounted for 40% of Hillhouse Capital’s total equity holdings, while the market value of biotechnology companies at one point became the largest category in the portfolio, surpassing technology companies.
The pandemic made biotechnology stocks particularly attractive over the previous two years. The sector has now cooled somewhat and entered a more mature and competitive phase.
Compared with the fourth quarter of last year, Hillhouse Capital’s positions in BridgeBio Pharma, Cytek Biosciences, Gossamer Bio, Instil Bio and Mereo Biopharma remained unchanged. However, the market capitalizations of these companies declined by 23%–39%.
Hillhouse Capital also began adjusting its positions in medical technology companies, fully exiting Prometheus Bio, Rallybio, Regenxbio and others, while reducing its holding in Chinese company Legend Biotech from 11.805 million to 6.9 million shares.
Following this adjustment, Legend Biotech moved from Hillhouse Capital’s third-largest holding to its fifth-largest.
Hillhouse Capital’s stakes in two other Chinese biomedical companies, BeiGene and I-Mab, remained unchanged, with their market values ranking first and 11th in Hillhouse Capital’s portfolio, respectively.
In total, Hillhouse Capital owns more than 10% of the shares of three biotechnology companies: Legend Biotech, BeiGene and I-Mab.
Founded in 2011, BeiGene is one of four leading drug developers backed by Hillhouse Capital and is engaged in research on PD-1 cancer therapies.
Hillhouse Capital’s investment in BeiGene spans the company’s entire lifecycle.
According to Qichacha, Hillhouse participated in BeiGene’s Series A, Series B and two private placement rounds following the company’s IPOs in the United States and Hong Kong.
In December 2021, BeiGene successfully listed in China, becoming the only innovative pharmaceutical company listed on three different stock markets.
From participating in a $74.5 million Series A funding round in 2014 to taking part in a $2.1 billion private placement in 2020, Hillhouse Capital invested more than RMB 8 billion in BeiGene.
Research and development of innovative medicines generally involves substantial upfront investment, long development cycles and high risk. Financial results show that BeiGene had remained loss-making for seven years since its U.S. listing.
In the first quarter of 2022, BeiGene reported revenue of RMB 1.9 billion, down 50% year on year. The company’s net loss narrowed nearly tenfold to RMB 2.9 billion compared with the same quarter of the previous year.
During the first quarter, BeiGene’s product sales grew 146% year on year. Among them, global sales of Zebutinib, a cancer treatment, reached $104.3 million, up 372% compared with the first quarter of 2021.
As of the first quarter of this year, Hillhouse Capital held 5.5 million BeiGene shares in the U.S. market. As of May 25, BeiGene’s share price stood at $123.
Based on the market valuation of $103 billion stated in the F13 filing, Hillhouse Capital incurred losses of approximately $360 million on its BeiGene position.
As of May 25, Hillhouse Capital’s stake in Legend Biotech was valued at $18.7 million, while its stake in I-Mab was valued at $40.9 million.
Conclusion
As many U.S.-listed Chinese stocks traded at lower prices, Hillhouse Capital moved against the trend by increasing its holdings in some of these companies, demonstrating an optimistic view of China-related assets.
At the same time, the gradual disappearance of traditional Chinese technology giants such as Alibaba from its top 20 holdings demonstrates the institution’s appetite for assets with higher growth rates.
Hillhouse’s repeated adjustments to specific holdings also reflect significant changes in the structure of China’s e-commerce industry over the years.
Hillhouse Capital is known for its accuracy and strong returns, but no investment firm is completely infallible.
The company has an impressive track record, and its transactions may provide valuable insight into emerging market trends. However, ordinary investors should always be cautious about blindly following any institution when investing in the stock market.
Challenges, opportunities, technologies, investments, startups, China — we take a closer look.
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