Note: This article was first published on TechNode China (in Chinese).
Hillhouse Capital is a top investment institution whose investment moves are often regarded as trendsetting when related to US-listed Chinese firms. This year, the firm’s latest investment disclosure showed its new position: heavily selling Chinese EV trio Nio, Xpeng, and Li Auto, reorienting several bets in e-commerce, and keeping investments in biotechnology with some adjustments.
The detailed investment moves can be found in a report filed by HHLR Advisors, the fund management arm of Hillhouse. HHLR Advisors filed its first-quarter 13F form on May 16, a quarterly report required to be filed by institutional investment managers overseeing at least $100 million in assets. It discloses their holdings and acts and is something of a cheat sheet for investors assessing their own positions.
In the first quarter, HHLR held 64 stocks in the US stock market, 13 fewer than the previous quarter. Hillhouse sold holdings of 17 well-known companies (including Airbnb, Amazon, and Coinbase) from their portfolio, adding four Chinese companies. The total holdings of the institution were $4.8 billion, down 26% from the previous month.
Half of Hillhouse Capital’s top 10 stocks are from US-listed Chinese firms: Beigene, JD.com, Legend Biotech, Vipshop, and iQiyi. Among the 64 stocks held by Hillhouse Capital in the first quarter of this year, 24 were Chinese firms, accounting for about 38% of the total amount.
Hillhouse Capital has reduced its holdings of Legend Biotech, ZTO Express, Li Auto, Mogu, and Huazhu Hotels Group since the first quarter of this year and cleared its holdings of Boss Zhipin, as well as Nio, Pinduoduo, and Xpeng.
The institution has also increased its holdings in Vipshop, JD.com, Ke Holdings, and Acm Research. Didi, Full Truck Alliance, Futu Holdings, and a number of EV firms were added to Hillhouse Capital’s portfolio in the first quarter. Its holdings in Sohu, Uxin, Yatsen Holding, and another 11 Chinese companies remain unchanged.
Hillhouse invested in Didi, Full Truck Alliance, and Ke Holdings before they went public, so, the invested shares of these companies, which were previously private investments, were converted into American Depositary Shares (ADS). Hillhouse Capital participated in Didi’s Series D+, two strategic rounds with Full Truck Alliance, and Ke Holdings’ Series D, according to enterprise database Qichacha.
Selling EV holdings
Hillhouse heavily sold off its holdings of China’s electric vehicle trio Nio, Xpeng, and Li Auto. Hillhouse sold all of its shares in Nio and Xpeng, only retained part of its shares in Li Auto, and reduced its holdings by more than half to 2.51 million shares compared to the fourth quarter of 2021.
In addition to Hillhouse Capital, Susquehanna International Group, The Goldman Sachs Group, and a number of other investment institutions also reduced their holdings (in Chinese) of the three EV makers’ stocks in the first quarter. Meanwhile, BlackRock, UBS, and other institutions that increased holdings in the trio saw their market positions shrink, with their books showing losses.
The increased amount of selling and the shrinking values are partly due to the EV companies’ stock performance. In the first quarter of this year, the stock prices of Nio, Xpeng, and Li Auto fell by 33%, 45%, and 19%, respectively.
The trio is trading at a much lower price than their respective all-time highs, despite achieving fast growth, as they face a possible delisting from the US market and show no signs of turning a profit any time soon.
Last year, shipments from Nio, Xpeng, and Li Auto increased (in Chinese) by 109.1%, 263%, and 177.4%, respectively. Annual revenue increased by 122.3%, 259.1%, and 185.6% respectively, compared to 2020. The cash flow and gross margins of the three companies also saw improvement in 2021, according to their financial results.
In the first quarter of this year, Nio delivered 25,769 new vehicles (in Chinese), a growth of 28.5% year-on-year. Xpeng sold 34,561 vehicles, 59.1% more than the same period last year. Li Auto delivered 31,716 vehicles, a yearly increase of 152.1%. Xpeng’s revenue grew 159% compared to the first quarter of last year to RMB 7.5 billion ($1.1 billion); its net loss was RMB 1.7 billion, a year-on-year increase of 116%. During the same period this year, Li Auto made RMB 9.6 billion in revenue (168% growth), while its net loss reduced by 97% to RMB 10.9 million.
This March, the three firms were added to a provisional list for possible delisting from the US stock markets by the Securities and Exchange Commission (SEC). In response to this, both Li Auto and Xpeng listed in Hong Kong late last year, while Nio moved a little slower but was ultimately listed in Hong Kong in March by way of introduction. Nio also debuted in the Singapore stock market, becoming the first automaker to list on three different stock markets.
Shi Jinman, Sealand Securities’ chief analyst, focusing on the auto industry, told TechNode that traditional automakers are profit-oriented, whereas newcomers often operate on losses to chase growth. Shi added that the three automakers referenced above can not compete with bigger traditional companies for now, but nonetheless offer some promise in a demanding market.
Reorienting in e-commerce sector
Another major adjustment in Hillhouse Capital’s holdings came in the e-commerce sector, making a variety of different decisions for its holdings in Pinduoduo, Mogu, JD.com, and Vipshop.
Data shows that HHLR started to build positions in Pinduoduo in 2018 when its stock price was at a low level of $16. At the end of 2020, Hillhouse Capital held over 10 million shares in the firm, making it the investment institution’s largest position at the time. In 2021, the number of active buyers on Pinduoduo surpassed those of Alibaba for three consecutive quarters, and its stock price rocketed to over $212 in the first quarter of 2021. Alibaba overtook Pinduoduo again in the fourth quarter of 2021, and Hillhouse Capital responded fast, reducing its holdings by about 91.8% in the younger firm. At this point, Hillhouse Capital had made about 10 times its initial investment in Pinduoduo. Now, as Pinduoduo’s rapid growth has slowed, its stock price has also fallen back to around $40, and Hillhouse Capital has made a clean exit.
By contrast, Mogu has proven to be a flop for the investment firm. Mogu started as a shopping guide provider but missed the social e-commerce trend started by Xiaohongshu and hasn’t been able to make a pivot to other more successful verticles. Although it had a short-lived revival thanks to livestream e-commerce, the firm’s stock price now hovers 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% within the six-month lockup period, showing a steep decline. Mogu’s current market value is just RMB 19.1 million, with Hillhouse Capital losing 99% of its investment. Hillhouse Capital has gone from Mogu’s largest shareholder to its third-largest, reducing its holdings by more than 91% in the first quarter. However, it is yet to complete a full exit.
In the third quarter of 2020, Hillhouse Capital took a position in JD.com when the firm’s strategy to focus more on China’s lower-tier cities paid off, with the number of annual active buyers increasing by more than 100 million (in Chinese) for two consecutive years. Yet, Hillhouse reduced its holdings in the firm in the following three quarters, before once again increasing its holdings by nearly 30% in the third quarter of 2021. JD’s number of active buyers continued to grow to 570 million in the fourth quarter of 2021, according to JD’s annual report. In the first quarter of this year, that number grew to 580.5 million, and Hillhouse’s latest position in JD.com is nearly double what it was in the fourth quarter of 2021.
Hillhouse Capital has simultaneously built its position in Alibaba and Vipshop since the first quarter of 2021 and followed the same strategy in the following two quarters. In the fourth quarter of 2021, Hillhouse sold 24,560 shares in Vipshop and cleared its holdings in Alibaba. According to its financial report, Vipshop performed poorly in the fourth quarter of 2021, with revenue of RMB 34.1 billion, a 5% year-on-year fall. Its net profit was RMB 1.4 billion, falling 41.7% compared to the same quarter last year. The firm had 49.3 million active users, losing 3.7 million users in 2021.
In the first quarter of this year, Vipshop’s revenue, profit, and user numbers continued to fall. Still, Hillhouse Capital’s holdings in Vipshop more than doubled from the fourth quarter of last year, making the firm one of Hillhouse Capital’s top 10 holdings for the first time.
JD and Vipshop represent Hillhouse Capital’s second and seventh largest positions, at $488 million and $199 million.
Li Chengdong, an indepent analyst focusing on e-commerce in China, wrote in an analysis published on NetEase News that Vipshop now has a mature operation model along with loyal users and notable suppliers. The firm has built barriers to competition in its sector and built a unique advantage, which explains Hillhouse Capital’s expanded bet on Vipshop.
Waiting for a biotech boom
Biotech has been Hillhouse Capital’s most outstanding bet and also one of the most important categories that the institution holds. In the last two years, biotech-related stocks have represented 40% of Hillhouse Capital’s holdings, with the market cap of biotech companies at one point becoming the top category, surpassing that of tech companies.
The pandemic has made biotech stocks hot trades for the past two years. Nowadays, biotech firms have gradually cooled and entered a more serious and competitive phase. Compared with the fourth quarter of last year, Hillhouse Capital’s positions in BridgeBioPharma, CytekBiosciences, GossamerBio, InstilBio, and MereoBiopharma have remained unchanged. However, the market caps on their positions have decreased by 23% to 39%.
Hillhouse Capital has also begun to adjust its holdings in medical tech firms, clearing its positions in Prometheus Bio, Rallybio, Regenxbio, and more, and reducing its holdings in Chinese firm Legend Biotech from 11.805 million shares to 6.9 million shares. Following this adjustment, Legend Biotech fell from the third-largest holding of Hillhouse Capital to the fifth-largest.
Hillhouse’s shares in the other two Chinese biomedical stocks, Beigene and I-Mab, remained unchanged, with their market caps ranking first and 11th among Hillhouse Capital’s holdings, respectively. In total, Hillhouse Capital owns more than 10% of the three biotech companies (Legend Biotech, Beigene, and I-Mab), according to Shanghai-based financial data firm Wind.
Founded in 2011, Beigene is one of the four leading drug developers invested by Hillhouse Capital that researches PD-1 cancer drugs. Hillhouse Capital’s investment has covered the whole life cycle of Beigene. According to Qichacha, Hillhouse participated in Beigene’s Series A, Series B, and two private placement rounds after the firm’s US and Hong Kong IPOs.
In December 2021, Beigene succeeded in listing in China, thus becoming the only innovative drug company listed on three different stock markets. From participating in the $74.5 million Series A financing in 2014 to participating in the $2.1 billion private placement in 2020, Hillhouse Capital has bet more than RMB 8 billion on Beigene.
The research and development of innovative drugs generally come with heavy a upfront investment, a long development cycle, and high risk. Financial results show that Beigene has been in the red for seven years since its listing in the US.
In the first quarter of 2022, Beigene’s revenue was RMB 1.9 billion, a 50% yearly decrease. Its net loss fell almost tenfold to RMB 2.9 billion compared to the same quarter last year. In the first quarter, sales of Beigene products increased by 146% yearly. Among them, global sales of Zebutinib, a medicine used to treat cancer, hit $104.3 million, a 372% growth compared to the first quarter of 2021.
Hillhouse Capital held a position of 5.5 million shares in Beigene on the US market until the first quarter of this year. As of May 25, the stock price of Beigene was $123. Given the market valuation of $103 billion disclosed in the F13 document, Hillhouse Capital has suffered a loss of about $360 million due to its position in Beigene.
As of May 25, Hillhouse Capital’s holdings in Legend Biotech represent a surplus of $18.7 million, and its holdings in I-Mab a loss of $40.9 million.
As many US-listed Chinese stocks trade at a lower price, Hillhouse Capital has bucked the trend to increase its holdings in such firms, demonstrating its optimistic view of China-related assets. Yet the gradual disappearance of traditional Chinese tech giants such as Alibaba in its top 20 positions shows the institution’s appetite for higher growth assets. Hillhouse’s continuous adjustments of certain stocks also reflect the significant changes in the structure of the Chinese e-commerce industry over the years.
Hillhouse Capital is noted for its precision and high return on investment, but no investment firm is entirely infallible. The firm’s track record is impressive, and its dealings potentially offer some valuable insight into oncoming market trends, but ordinary investors should always be wary of blindly following any institution when it comes to playing the stock market.