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Archive for October, 2007

Facebook China Strategy

Pacific Epoch reported that Facebook is considering an acquisition strategy in China, instead of just porting its existing site out there.  The tip is from an insider, rumoring that China’s version of Facebook (Zhanzuo.com) has rejected a US$85mn acquisition from Facebook. 

If the information is correct, it speaks of an extremely smart strategy – history has shown that past global companies have not been able to crack the China market.  eBay, Google, now MySpace.  It is sound business strategy as Facebook will then be able to acquire existing community rather than having to build from scratch.  If you think about it, Facebook was v. successful because of its novelty back then – it had first mover advantage as the first social networking site for college kids (at least the first with any scale).  Brands are built a country at a time – it’s not a easy task for Facebook to build a sustaining brand in China given how the market has developed.  Arguably this applies much more to the Internet where China is on par, if not ahead, of the US in terms of development.

The price offer of US$85mn, if this is indeed correct, is also alarming.  Given Facebook’s latest $15bn valuation, investors in Zhanzuo will have an elevated valuation expectation.  If you then slap on the size of China’s market and its potential, I suspect this acquisition will have to cost Facebook close to what Microsoft has put in.  My guess is that Facebook will end up acquiring just a minor stake in Zhanzuo (or any sigificant player in China).  We shall see –  

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Dispassionate Spectators

I wonder if my Chinese friends ever get bored with answering the same questions from “foreigners”.  It generally fits into the following categories. 

1. Isn’t pollution bad for you?
2. How much did your family suffer during cultural revolution?  How can you not hate Mao? 
3. Is China a bubble?  Will it burst?
4. What do you think of the rapid developments in China? 
5. What about piracy? 

It reminds me of back around 1997, when everyone asked me about what I thought of the Hong Kong handover.  As a participant during the change, my focus was on my family and the changes that has brought us.  When you’re immersed, you don’t see the big picture.  With change comes anxiety, and that’s pretty much it.  You don’t stop and ponder about the big picture; you adapt the best way you know how.  

I wonder if the same applies to China today.  Are they tired of the analyses (and criticisms) from distant commentators like us? 

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China Real Estate

Some interesting findings about real estate in China:

– There exist only a primary market for residential real estate.  There’s really no second hand market as of yet.  This can be attributed to a few different reasons: 1) If you have money in China to buy real estate, you’d have enough to afford quality ones; 2) With the lack of property market in the past century, existing buildings are old and crappy (with exception of the really old ones, like Beijing courtyard houses); 3) Chinese like new things; this is the same with most developing countries as hand-me-downs is symbolic of poverty

– Most new developments are over-subscribed before construction.  Thus, most buy properties based on beautiful drawings and floor plans.

– You buy an empty shell and are responsible for all interior design/construction work.  Nowadays, there are companies set up to help buyers design and build interiors.  I’ve heard also that most people will wait 6 months after renovation before moving in because they’re worried about harmful chemicals in paints and other construction materials.

– They use the metric system.  Prices quoted per sqm.  1 sqm = ~11 sqft

– Developments are named after US/Europe streets or districts.  Some examples are: Versailles, 5th avenue, Wilshire Bouvelard, Yosemite, Irvine, Pasedena, …

Some websites with information about China real estate:
www.focus.cn (chinese), www.soufun.com (chinese), world.soufun.com (Soufun’s english portal), www.xindichan.com.cn (chinese), www.beijingrealestate.com (english, small site)

And here are some properties listed in Beijing:

优山美地概述

Very high-end, targeting really wealthy Chinese or expats. 

The Yosemite Villa in outskirts of Beijing 
www. yosevilla.com

Large houses (8,500 sqft) going for $2-5mn USD.  Pretty darn nice, I’d have to say. 

        And this is what is called “regular residence”.  In an area close to the Silicon Valley of Beijing, still in outskirts of the city.  USD2000/sqm, which is about $200/sqft.  So, about $250k for a 1250sqft 3-br apt. 

As a side note, I’ve asked many Chinese friends, and the consensus of the best place to live in the US is San Diego.  Perhaps a reflection of the pace and stress in China these days… 

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Bigger is Better

Note: I meant to write about the equity market in China and whether it is a bubble or not.. but then I got distracted to some totally irrelevant topic.  Oh well, bubble talk another day!  

In case you’re not aware… the Shanghai Composite index is close to 6000 points.  This time last year, it was at 1800.   So what kind of return is that?  I lost count.  Well, for 2007 to date, it “only” grew by 118%.  Difficult to conceive for us here in the US where a 12% return is very respectable.  These numbers are astronomical!  But then again, almost everything in China is astronomical – number of people, the great wall, tiananmen square, pollution, manufacturing farms… If I enter China and largest in Google search, I get the followings:

– world’s largest gene bank
– world’s largest dam
– world’s largest navy
– world’s largest internet market (not sure about this one)
– world’s largest national park
– world’s largest people tracking network (hmm)
– world’s largest dragon sculpture
– world’s largest hand (yep, actual hand)

And the list goes on and on. 

The idea that bigger is better is everywhere.  Hopefully this will change – bigger is not always better.  Better is better. 

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Yao Ming’s book

A friend sent me the Yao Ming book: Yao – A Life in Two Worlds.  I did not have much expections when I started, though now I think it is one of the most enjoyable and insightful books about the world through the eyes of a modern Chinese man.  While Yao is by no means an average man, he represents this generation of Chinese youth presented with opportunities undreamed of.  The book also gives tremendous insight into Yao’s path to the NBA, including perspectives from his parents and agents.  If you have any interest in cultural differences, this book is top of the list.

p.s. I have updated the Book Review page, adding a few new books.

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Spirit of Giving

In connection to my previous post on SOHO… I read an article by Dealbook and also one by Forbes which pointed to another phenomenen.  Read this:

Pan, SOHO China’s chairman, no longer owns any stake in the firm after he transferred his holdings to his wife as gift. Zhang, the company’s CEO, exercises control through a 66.48% stake held in an offshore trust managed by HSBC. – Dealbook.Country Garden’s largest shareholder is the founder’s 25-year-old daughter, Yang Huiyan, to whom the founder gave all of his shares in 2005. She is thought to be the richest person in China, with shares now valued at about $16 billion. – Forbes.

Founders are feeling extremely generous in transferring all their shares to their family members.  Why?  Is this really just family values, or is there something else going on? 

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SOHO China

The hottest IPO this week… is a commercial real estate developer called SOHO in China.  They develop large scale, modern, western-style, stylish, grade A office buildings in China (primarily Beijing).  Developers in China will do well as long as there are speculators in the market; and there are plenty.  From what I hear from my travels, SOHO did particularly well due to one key factor: the access to cheap land as result of a corrupte/inefficient land allocation process.  Apparently this advantage has eroded over time.  I suspect the profit margins for future projects will decline considerably.   

I also recall walking through one of SOHO’s office complexes in the Cental Business District in Beijing.  It is a 20+ tower complex.  I commented on the eerie silence whereby my Beijing friend told me that the occupancy rate is terribly low.  But that’s not a problem for SOHO, but rather, for the owners who bought the space.  Apparently, the supply of AAA buildings much exceed the demand.  For property owners though, it’s the capital appreciation that they are looking for.  In the game of musical chairs, it’s not going to be pretty when the music stops.  Those who timed well though, will make a fortune. 

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