On Sunday, 15 November 2015, 14:09, DannyToe wrote:

China and The GFC (Global Financial Crisis)

Welcome to ICH,

Starting out as Internet Century Holdings 15 years ago, we have reinvented ourselves many times, from incubator, consultancy to financial advisory to fund management and direct investments. We have changed our names along the way, to International Capital Holdings and now ICH.

It has been a tough journey and I am very heartened to see the group now on a firm footing to embark on its next 15 years and more. The DNA of the company has been the DNA of the 2 founders, me and my brother Vincent. I am a technologist at heart turned investor and Vincent an outstanding ECM banker.

Having built, sold, listed and closed numerous technology and non-technology start-ups, the experience has been invaluable in honing my investment decisions. This together with our experience in financial advisory has allowed us a very unique due diligence of companies we invest into. Over the years, we have invested and exited many good investments including Alibaba, LiNing, YangZiJiang shipbuilding, amongst many others.

I used to write the annual newsletter for our investors, partners and employees till 2010. Why did I stop and why I am continuing again?

China and The GFC (Global Financial Crisis) have a big part to this. ICH’s growth is invariably linked to the phenomenal growth of China over the last 15 years. We were fortunate enough to have made the right decision to bet all our business in China back in 2001 after I sold my technology start-up in US in 2000.

That China is a major power and ICH’s continuous presence and investments into China has never been in doubt. However, the breakneck growth and the toll it takes on the world resources have made rethinking our strategy a necessity. The 4 trillion yuan stimulus package announced by then Premier Wen in 2009 changed everything for the world, in my opinion. We began to see huge overcapacity build up in an already weak economy backdrop caused by the subprime crisis. China began a major spree in exporting capital goods deflation and asset inflation to the world. I saw China exporting Stagflation to the already feeble world economy.

Henceforth, after the GFC, ICH only invested in 2 sectors: China consumer and China environment. Our investments in environment have yielded us superior returns but we took the wrong bet on the China consumer, betting on the old China consumer where we should be betting on the new china consumer. I began to have doubt, and in 2011 decided to retreat from all investments and put on hold all major decisions. I spent the whole of second half 2011 to first half 2012 travelling, talking to smart people, resting and practicing my yoga. Later part of 2012, I decided to bet big again on technology, something close to my heart and helped gave me my first break in financial success. Why technology?

My reasoning was simple enough. There is an undisputable rise of China consumers despite the GFC but the taste of China consumers have changed drastically because of technology. Privileged insights into 2 of our previous star investments bear strong evidence to this.

Lining Co. saw inventory build up of more than 36 months, a huge sign of inventory surplus for the whole sports goods sector. YZJ Shipbuilding has a similar problem. Strangely, ship scrapping became more profitable than shipping physical goods due to high steel prices. Commodity prices were high while the real world economy was reeling. The only explanation for this was FREE MONEY. A huge anomaly was presenting itself. But technology players selling goods on the internet were doing brisk sales. China tourism was booming despite all these capital goods build-up.

If China is to step out of this huge overcapacity, it has to rely on the China Consumer. With China having no technology standard legacy burden and the Chinese being the most entrepreneurial people in the world, the next big trend in the world will be the rise of both Technology and the China Consumer. You cannot bet on either one of them – you must bet on both, because they either happen together in sync or they don’t happen at all. I took the view that both will happen in sync. The trigger point will be when the free money wakes up and exits from the anomaly mentioned above and pour into China Internet and China Consumer. The next big trend is the commoditisation of technology (from the previous commoditisation of physical commodities!). In my opinion, we are only in the 3rd/4th inning of the commoditisation of this China internet/technology trend.

I began to actively deploy money to VCs in China, and started active engagement with China and US technology companies and co-investing with good name investors. This pivot for ICH is the third major pivot for ICH since its inception. The first was our decision to uproot and bet all in China back in 2001/2. The second was to set up our advisory and fund management business in 2004/5. In 2014, I set up Third I Investments to commemorate this major milestone for ICH. (Third I meaning Third pivot, Third ICH, with the “I” sounding like EYE, signifying the next vision).

It has been a tough 2 years transiting from an advisory and investments firm focusing on the traditional China to an investments firm focusing on the new China. Managers, business partners, financial resources all have to be redeployed. I am glad that the reinvention of ICH has reached an inflexion point and is primed for the next take off. By 2020, you will see a stronger ICH, in terms of financial resources, geographical reach and wisdom.

Looking forward to telling you more on all the wonderful investments we have made. See you in Jan 2016.

Danny Toe

Founder and Chairman

15 Nov 2015

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