2012.02.29 China Business News Views:
This week, 365house.com (300295), which was invested by CoStone Capital five years ago, will soon be open for subscription on the ChiNext. However, CoStone Capital Chairman Zhang Wei said in an exclusive interview with China Business News this Tuesday that the high returns from IPO exits were unsustainable. In contrast, he believes that exits through the merger and acquisition market will be more attractive with the adjustment of the valuation system of the capital market.
Zhang Wei: The Promising M&A Market Brings More Opportunities
This week, 365house.com (300295), which was invested by CoStone Capital five years ago, will soon be open for subscription on the ChiNext. However, CoStone Capital Chairman Zhang Wei said in an exclusive interview with China Business News this Tuesday that the high returns from IPO exits were unsustainable. In contrast, he believes that exits through the merger and acquisition market will be more attractive with the adjustment of the valuation system of the capital market.
“In the beginning, institutions generally have a more accurate knowledge about the market due to their limited funds. The yield of IPO exits is 2 to 3 times that of backdoor listings and mergers and acquisitions, and the huge interest rate difference have made IPO exits become the main method for PE firms to exit. As for the recent situations and future trends, Zhang Wei said that “The capital market will not continue to tolerate mediocre companies easily getting too high IPO prices. In this case, the price difference between the capital market and the merger and acquisition market will be smaller. Therefore, the M&A market will become increasingly attractive for PE exits.”
In the United States where the PE/VC industry is highly developed, while the number of IPO exits accounts for only about 10% of all exits, the number of exits through mergers and acquisitions accounts for nearly half. Zhang Wei believes that in China’s PE industry, mergers and acquisitions and shareholders’ repurchases will soon replace IPOs and become the most popular and important investment methods.
“From another perspective, both good companies and slightly immature and mediocre young companies can get capital due to the abundance of capital in China. However, this does not mean that every invested company can successfully complete the IPO on schedule. There has appeared the trend that mergers and acquisitions or major shareholder repurchases will become another important channel for PE/VC exits.” Zhang Wei pointed out that a quarter of exits in the United States were involved in disputes about transfer of interests due to the existence of inter-institutional projects.”
In addition, from the perspective of looking for investment projects, Zhang Wei argues that acquisitions and mergers also provide a lot of opportunities for PE/VC.
“Most industries in China are highly fragmented, and each industry will go through a process from fragmentation, accumulation to mergers and acquisitions to form a large-scale.”
Zhang Wei notices that the Chinese economy has transformed from the old growth model of sharing export growth and demographic dividend and entered a stage of steady or slowing growth. Therefore, many uncompetitive companies that have occupied the market earlier are facing the needs of mergers and acquisitions for further development. Meanwhile, the shareholding structure of many listed companies has begun to change, with the largest shareholder’s shares decreasing, which results in dispersed ownership. Moreover, during the intergenerational inheritance of family enterprises, when the second-generation owners cannot cope with the diversified operations created by the first-generation entrepreneurs, there will be a need for merges and reorganizations.
Zhang Wei said, “we believe that there is a great opportunity in the field of mergers and acquisitions because of these changes in China’s economic activities.”
Rewritten by: Yang Yang, Edited by: Du Zhixin, Li Yunzhen
Over the past year, the bull market returned, with technology leading the way.
As I said back in October 2024, the rally that began on September 24 was not merely a rebound, but a reversal. Since then, China's capital markets have undergone a broad revaluation, moving from undervaluation toward fair value.
The Shanghai Composite Index reached its highest level in a decade. The "Yi-Zhong-Tian" trio—Eoptolink, Zhongji Innolight and TFC Communication, three prominent Chinese optical communications stocks—saw their share prices multiply severalfold in a single year. Cambricon's market capitalization briefly exceeded RMB 600 billion. Elsewhere in the technology sector, triple-digit price-to-earnings ratios and valuations exceeding RMB 10 billion became commonplace.
Some investors were greedy; others, fearful. Still others asked me: Are technology stocks in a valuation bubble?
My answer is that what we are witnessing is the hunger and anxiety of an era, reflected in the capital markets. Once you understand this, the current fervor for technology investing is no longer difficult to explain.
Investment has nothing to do with macroeconomics, but everything to do with geopolitics.
China-US relations will shape the investment landscape for decades to come. Geopolitics has played a major role in shaping the hunger and anxiety of our times, fundamentally reshaping the way we invest.
What, then, lies at the heart of China's hunger and anxiety?
The Fourth Industrial Revolution is already underway, yet China has not fully overcome the technological shortcomings left by the Third. There is no time to lose.
This is why some people wonder: Why do Chinese computing chip companies command such high valuations when their technologies still lag so far behind NVIDIA's? Why does NVIDIA trade at just 50 times earnings, while a company hailed as "China's answer to NVIDIA" commands a multiple of 300?
To me, this gets the logic exactly backward.
It is precisely because these companies cannot catch up with NVIDIA in the near term that they command a higher strategic premium. The wider the technological gap, the greater the strategic value.
The further something lies beyond our reach, the stronger our hunger. The harder it is to catch up, the deeper our anxiety. If China were to achieve a complete breakthrough in computing chips one day, valuations might actually come down.
Where can one find China's most spectacular natural landscapes?
Much of the answer, I believe, lies in and around the Hengduan Mountains: the Meili Snow Mountains, Jade Dragon Snow Mountain, Mount Gongga, Mount Siguniang, Jiuzhaigou, and many others. Vast differences in elevation and deep fault lines have given rise to landscapes of extraordinary grandeur.
Hard-tech investing follows a similar logic.
Technological gaps, discontinuities in capabilities, and missing links in industrial systems: a leap in difficulty brings a leap in valuation, and a successful breakthrough can, in turn, bring a leap in returns.
This logic extends well beyond computing chips. It is equally evident in memory semiconductors, commercial spaceflight, and other sectors where China still faces substantial technological gaps with other countries.
It was precisely this conviction that led CoStone Capital, starting in 2016, to decisively focus its investments on three areas: hard tech, emerging industries, and life sciences and healthcare. In this context, "hard tech" refers specifically to important industries in which China faces a technological gap with the United States.
Thanks to this forward-looking strategy, CoStone Capital established an early presence across the full value chains of key sectors, including semiconductors, artificial intelligence, and robotics.
Looking ahead, the frontiers of technological progress and industrial upgrading are boundless. Nor can the gaps in hard technology be closed overnight. The twin windows of opportunity presented by technological innovation and the development of homegrown alternatives to foreign technologies have only just begun to open.
The road ahead is long, but the future holds immense promise.
As an investment firm, CoStone Capital will continue to invest where the hunger and anxiety of each era run deepest, move forward with the tensions that shape our times, and extend our reach toward the most challenging—and most important—frontiers.
Spring 2026