The early-stage growth-focused manager, which counts JD.com as an LP and strategic partner, is keen on consumer plays that leverage online and offline channels, emerging local brands, and Hong Kong IPOs

China’s retail sales growth extended a three-month streak of declines in March, while consumer price growth remains muted. Concerns are rife in the international community that Beijing’s efforts to deliver a manufacturing-led economic revival will result in goods being dumped overseas – in part because there isn’t enough demand for them at home.

However, GenBridge Capital remains resolutely invested in the Chinese consumer story. The early-stage specialist deployed nearly USD 20m across four deals last year even as other investors with US dollar-denominated funds held back. A discount store chain, a beverage brand, and a restaurant chain were among those added to the portfolio, underlining a commitment to the mass market.

“Although problems in the real estate sector are impacting consumers, there are still ample structural opportunities,” said Robert Chang, a co-founder and managing partner at GenBridge. “We find increasingly that high-value items are being bypassed in favour of lower-cost consumption brackets, which ultimately improve quality of life.”

Rather than spend on new properties, consumers are channelling their budgets into renovating existing apartments and stocking them with affordable brands, from electric vehicles to home appliances, Chang added. He pointed to a 7.2% year-on-year increase in consumer goods sales in 2023, compared to 0.2% in 2022. Residential real estate sales fell 6%, according to government data.

Chang’s 18-year career in consumer investment spans the rise and saturation of e-commerce, and he’s seen it from both sides. The first six years were spent at Capital Today China Group, where highlights included backing JD.com. Chang was recruited by JD.com in 2013 as head of strategic investment, and two years later, he established GenBridge with support from the e-commerce giant.

The first fund – launched with co-founders Victor Zhang, a fellow JD.com alumnus, and Hugh Li, formerly of TPG – closed at the hard cap of USD 500m in 2017. Asia Alternatives served as the anchor LP, with JD.com committing a significant sum. Other investors included funds of funds, corporates, sovereign wealth funds, endowments, and family offices.

Fund II coincided with weakening LP sentiment on China, closing at USD 400m – below the USD 600m target – in the second quarter of 2023 after more than two years in the market. The two anchor LPs re-upped, while the likes of DEG, LGT Capital Partners, and 57 Stars came in.

Andy Bao, a managing director at GenBridge, observed that the LP base has remained relatively stable between Funds I and II, market volatility notwithstanding. Endowments, which were a small part of Fund I, were among those that retreated. Meanwhile, more strategic investors have joined.

Digging for growth

GenBridge has witnessed the segmentation of e-commerce with the incursion of social media, the expansion from basic consumer goods into areas like fresh produce, and the emergence of group-buying platforms. Names such as Pinduoduo, Douyin, Xiaohongshu, Missfresh, Dingdong Maicai, Meicai, and Nice Tuan have flourished or floundered.

While GenBridge retains a strategic alliance with JD.com, it is not defined by e-commerce. The consumer thesis captures online and offline elements, depending on the nature of the market opportunity and the customer pain points it addresses.

“We conducted in-depth research into China’s online businesses – they excel at trading standard items like mobile phones. However, distributing groceries, especially food-focused items, remains a challenge for online models,” Chang said.

Indeed, GenBridge’s debut investment in 2017 was an operator of brick-and-mortar community grocery stores called Qiandama. Chang visited an outlet in southern China after hearing that a friend’s mother was choosing Qiandama over big-brand supermarkets, and moved quickly to become the company’s first and largest institutional investor.

He was enthused by the commitment to product quality. In accordance with a slogan that read “We never sell overnight meat,” Qiandama staff would begin clearing the shelves every day at 7 p.m. Everything was sold – or cleared – on the day it was shipped in.

“We firmly believe that offline grocery chains are investable in China,” Chang added. “Many residential communities have commercial facilities, so people don’t necessarily want to go to wet markets. The most relevant product categories are available through specific stores with high efficiency. People can buy ready-to-cook fresh produce and other groceries in a few steps.”

Since GenBridge first invested, Qiandama’s footprint had grown from 230 to 3,500 stores as of 2023, with revenue rising from sub-CNY 1bn to more than CNY 15bn (USD 2.1bn).

In a similar vein, the private equity firm has also backed Himo, a photo studio chain specialising in family portraits, snack food players Lingshi Henmang and Xueji Chaohuo, coffee shop chain M Stand, and convenience store operator New Joy Mart.

Another key tenet of the private equity firm’s strategy involves using data analytics and trend mapping tools to identify top performers on platforms like JD.com and Alibaba. It expects a wave of nascent local brands to sink roots in China’s new economy infrastructure that encompasses internet platforms, urban logistics, and digital payment systems.

“Larger players tend to react slowly to the emergence of technology and infrastructure upgrades, while companies like Shiyue Daotian and Botare [suppliers of staple foods and packaging products, respectively] seize this window of opportunity to expand their business,” Bao said.

Botare launched on Pinduoduo and then expanded to Alibaba Group’s Tmall and Taobao. From there, it went to Douyin, where the brand achieved over CNY 100m monthly sales, more than double what it achieved on Tmall.

Making an impression

This investment – like furniture retailer Yeswood – was sourced on a proprietary basis via Tmall. Shiyue Daotian was discovered in collaboration with JD.com. The company ranked first across multiple platforms in the pre-packaged northeast rice category, which commands a mid-to-high price point, with a more than 50% market share.

“The founders saw a business scale of CNY 3 bn. We thought it could get to CNY 10bn, and we envisioned a future Chinese food group with multiple product categories and full-channel distribution,” Chang said. “We told them we could help them get there.”

GenBridge made an impression on Shiyue Daotian from the outset, going into the fields of Northeast China to conduct due diligence despite the pandemic. Bin Wang, the company’s CEO, also appreciated the depth of GenBridge’s pre-meeting research, its deep industry understanding, and its insights into competitive advantages and how different strategies could improve performance.

“Most investors we met generally believed there was limited scope for growth in the rice and grains category,” he added. “GenBridge has its own unique perspective and judgment.”

The private equity firm took a 15% stake at a price-to-equity multiple of 10x, becoming Shiyue Daotian’s first and largest external shareholder. Early initiatives included expanding from online into offline distribution, broadening of the product portfolio to include gains and corn as well as rice, and supporting the execution of an existing plan to build out supply chains.

On a general level, GenBridge advised on issues ranging from capital strategy to talent development and enabled the implementation of operations and management tools used by JD.com. It also made introductions to Yonghui Superstores, Walmart, and Qiandama. Yonghui and Walmart, which were accessed through JD.com, became Shiyue Daotian’s first offline distribution partners.

The company went public last October, raising HKD 843.8m (USD 108m) through a Hong Kong IPO. It currently trades at 36% premium to the offering price with a market capitalisation of approximately HKD 22bn. Following the IPO, GenBridge held 8.31% of Shiyue Daotian’s H-shares and 3.56% of its unlisted domestic shares. It was sitting on a more than 6x return.

“GenBridge has played a key role as we sprint towards the CNY 10bn revenue benchmark,” Wang said. The company posted CNY 4.9bn for 2023 and he is keen for GenBridge to continue on the journey, helping Shiyue Daotian explore M&A opportunities and leveraging the JD.com connection.

Chang considers JD.com to be GenBridge’s most important strategic partner: as an LP; as a contributor to deal sourcing and value creation; and as an industry touchpoint. The two remaining founders – Li has left the firm – have JD.com heritage and several other ex-JD.com employees are members of the portfolio management team.

GenBridge is now 24-strong, including eight investment professionals and seven people who work on value creation.

Refining the strategy

From the beginning, steps were taken to ensure robust governance and address any perception issues around JD.com’s involvement. The firm is fully owned by management, with JD.com receiving a share of the carried interest in recognition of its strategic contribution. This share was adjusted downwards in Fund II and JD.com shifted from member to observer of the investment committee.

According to Chang, the two parties will continue to the discuss how the partnership may evolve in future funds. They would like closer cooperation, but not at the cost of GenBridge’s independence.

One existing LP observed that the strategic advantages of the JD.com connection outweighs any concerns about potential misalignment. Moreover, the private equity firm is upfront about the relationship. “They are a super-transparent GP compared to most managers in China,” the LP added.

GenBridge aims to make one or two significant investments per year – narrowed down from a field of 600-800 candidates – while writing a few smaller cheques for other companies. For the larger deals, it will commit USD 20m-USD 40m for a 5%-10% stake. For two-thirds of the current portfolio, it was the first and largest external shareholder.

The strategy is early growth rather than venture. GenBridge believes the most attractive entry point in the consumer sector is once the business model has been proven and it is starting to scale. At this stage, annual revenue tends to be in the CNY 500m to CNY 1bn range.

“We hope that these companies can achieve 5x to 10x growth [in terms of revenue] in the five years following our investment,” Chang added.

There is an expectation that – as demonstrated in other markets – consumer demand for quality necessities will remain despite China’s economic challenges, even as the luxury segment contracts. GenBridge has identified convenience stores and discount stores as likely emerging trends, with Chinese equivalents to 7Eleven and Daiso likely to find a footing.

This is consistent with a preference for consumer staples, cost-efficient consumer discretionary products, and consumer products that provide spiritual fulfilment. Chang believes these three categories will benefit from digitally and socially enabled next-generation consumption. The spiritual fulfilment angle is already visible in GenBridge’s portfolio through M Stand and Himo, he added.

Opportunities are not only viewed through the lens of an expanding middle class. GenBridge goes deeper, for example, recognising the potential of downward-reaching consumer markets, defined as tier-three cities and below. Two-thirds of China’s population lives in such areas.

Guoquan Shihui, a hotpot ingredients supplier that listed in Hong Kong towards the end of last year, may fit this profile. More than 70% of its 10,000 outlets are in cities beyond China’s provincial capitals and 40% are considered county-level cities or townships. It can tap into faster growth in per capita disposable income – from a lower base – for rural dwellers than their urban peers.

Exit routes

Fund I is fully deployed and marked at a 3x gross multiple and a 30% gross IRR. Fund II is 50% invested. Across the two vintages, GenBridge has made 30 investments, of which 20 were consumer sector companies. The portfolio value has appreciated more than fourfold in the past five years, and 85% of companies are now profitable.

In Shiyue Daotian and Guoquan Shihui, GenBridge has portfolio companies that completed Hong Kong IPOs in less-than-ideal market conditions. There have been six IPOs to date and that channel accounts for 30%-40% of exit value. Another 30%-40% is trade sales. The firm is also employing structures that allow existing or new LPs to acquire direct positions in companies, Bao said.

Chang is confident the flow of IPOs will continue, but he acknowledged that Hong Kong’s capital markets are challenged from a valuation perspective. GenBridge must lower its expectations in terms of valuation multiples and extend the time horizon for delivering cash returns.

“The Hong Kong stock market upholds high standards, demanding future growth potential from industries,” he added. “However, valuations are approached cautiously. If companies still want to enter the capital markets, they must put out good prospectuses.”