The unicorn is a mythical beast, described first in the fifth century BC by Greek physician and historian Ctesias. In his book Indika (“On India”) he described them as fleet-footed “wild asses” with a 28-inch horn.
References to the unicorn continued throughout the Middle Ages and the Renaissance. The word “unicorn” even appears in the King James version of the Bible no less than nine times, in five different books…
“And the unicorns shall come down with them, and the bullocks with the bulls; and their land shall be soaked with blood, and their dust made fat with fatness.”
And when it came to catching a unicorn in the wild, the primary method involved using a virgin as bait. As Leonardo Da Vinci wrote;
The unicorn, through its intemperance and not knowing how to control itself, for the love it bears to fair maidens forgets its ferocity and wildness; and laying aside all fear it will go up to a seated damsel and go to sleep in her lap, and thus the hunters take it.
In 2013, the term was applied by a venture capitalist named Aileen Lee, to startup companies valued at over US$1 billion. Purportedly the name epitomised the extreme rarity of such valuable private companies.
And because… well… this is Silicon Valley, the terminology didn’t stop there. A decacorn describes US$10 billion companies, and a hectocorn for US$100 billion valuations (not surprisingly these last two haven’t really caught on).
No virgins required
Unicorns – of the venture capital type – are far less mythical these days than they were back in Ctesias’s time. In fact today there are over 200 globally according to tech market intelligence platform CB Insights. The biggest, on-demand car app Uber, is also the most well-known. But you’re also likely familiar with, or even a user of, others like AirBnB, Pinterest, Spotify and Lyft.
But the well-known U.S. names only tell half the story. Take a look at the table below, which shows the largest 20 unicorns by valuation. You’ll see that not all unicorns live in the U.S.
In fact, 4 of the 10 largest, and 7 of the top 20, are Chinese. And in my experience, most investors in the west have never heard of them! Not only that, but they also don’t know that they also have some exposure to these non-listed companies in their portfolios.
For example, China’s version of Uber, Didi Chuxing (formerly Didi Kuaidi, formed by the merger of Kuaidi Dache and DiDi Dache) is the largest Chinese unicorn with a valuation of… well, we don’t know. The company raised US$5.5 billion in April but didn’t disclose its valuation.
But if you own shares of Apple for example, or any kind of S&P500 ETF (in Apple is the largest constituent), then you own some Didi. Apple invested US$1 billion into the company earlier this year.
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Right now, China makes up 7 of the top 20 largest unicorns, with the U.S. accounting for 10. But it won’t be long before that ratio is reversed.
As I wrote back in May, China is far more advanced when it comes to technology than many investors in the West give it credit for. The notion that China is a nation of knock-offs, pirate software and shoddy copycats is simply outdated.
Just 20 miles north of where I sit in Hong Kong over the Chinese border, Shenzhen has become a Chinese Silicon Valley.
The CNY3 trillion (US$455 billion) technology giant Tencent’s new headquarters is testament to the kind of infrastructure being built in this technology hub.
And if you’ve ever considered buying a drone, you would have likely considered one of the DJI Phantom series – DJI being a Shenzhen-based drone and camera maker (number 15 on the unicorn list).
I recall a group of investment analysts visited Peter and myself in Hong Kong last year. Peter took them out on his yacht and one of them had a new camera. I pointed out it was made by DJI. The American owner had never even heard of DJI, let alone realise that it was a US$10 billion company (sorry, a “decacorn”) based right next to Hong Kong.
Tech savvy consumers and entrepreneurs
As of the end of January this year, there were 790 million 4G mobile phone users in China… just two years after 4G was rolled out in the mainland.
People in China use their mobile phones for everything. Paying with cash, for example, is almost quaint in major Chinese cities.
And to give you an idea of the scale I’m talking about here, consider this: in 2016, the U.S. did US$112 billion in mobile payments. By comparison, China did US$5.5 trillion…. That’s a 50-fold difference.
Even people who busk (play music) on the streets will put up their personal digital wallet QR code on a sign for people to send them payments with their phone, instead of a hat for notes and coins.
In addition to an enormous mobile-savvy population user base, China is generating millions of graduates every year. In 2017, some 8 million students will graduate from Chinese universities.
But crucially, according to the World Economic Forum (2016 data), over half of these graduates (4.7 million) specialise in Science, Technology, Engineering and Mathematics (STEM). That’s 4.1 million more, or 8 times as many STEM graduates as the U.S.
And with good reason. Take a look at the top university graduate salaries in China in the chart below. The top 5 highest paying graduate jobs are in tech, and 7 of the top 10 are in tech. (Note: CNY5,000 a month is around US$9,250 a year).
What does this mean?
China is churning out a tech-skilled workforce, millions of graduates every year, and millions more than the next largest country, India.
Everything points to Chinese unicorns breeding over the next few years. In other words, you should be long Chinese technology stocks.