SoftBank Group Corp. will likely ramp up technology investments in South Korea and the U.S. after pausing plans in China amid regulatory uncertainty.
The Japanese company may boost activity in South Korea due to the country's predictable regulatory regime and a "young, tech savvy population," said Justin Tang, head of Asia research at United First Partners. The U.S. offers similar stability, as well as fitting in with Softbank's focus on artificial intelligence.
"Any reduction in China investments indicates more for the U.S.," said Kirk Boodry, an analyst at Redex Research. "[Softbank CEO Masayoshi] Son has always been clear that the leading markets for artificial intelligence are the U.S. and China."
Softbank is set to redeploy funds after Son told investors in August that he will halt investment in China for "one to two years" to assess new cybersecurity and data-handling rules. The country accounts for 23% of Softbank's investments.
The technology investor is stepping back from the Asian nation after Vision Fund 1 companies became subject to investigation by the Cyberspace Administration of China in July. The authority ordered Chinese app stores to remove ride-hailing app DiDi Global Inc. and prohibited two subsidiaries of "Uber for trucks" startup Full Truck Alliance Co. Ltd. from registering new users during its probe.
SoftBank did not respond to S&P Global Market Intelligence's request for comment.
Softbank already has a presence in the U.S. as 34% of its three main portfolios are invested in the country, including stakes in Uber Technologies Inc. and WeWork Cos. Inc., according to company data. South Korea has also been profitable territory for Softbank, even if only two of the 100-plus investments made by $40 billion Vision Fund 2 are in South Korean businesses.
Rich pickings
Son will probably target private companies if Softbank expands further in South Korea, Tang said. The country had produced 11 unicorns, or private companies worth more than $1 billion, as of August 2021, trailing only China and India in Asia, according to CB Insights. The South Korean government has run an acceleration program since 2016, giving tech startups access to expert guidance, research labs, corporate partnerships and grant money.
The nation is home to one of SoftBank's recent success stories — Coupang Inc. Softback's Vision Fund 1 made a gross return of $28 billion following the e-commerce company's $4.55 billion IPO in March. The sale was the largest foreign listing in the U.S. since Alibaba in 2014.
The company has also invested in local marketplace app, Karrot, and travel and leisure firm Yanolja Co. Ltd.
In the U.S., some of Vision Fund 2's larger investments include banking services provider Chime Financial Inc. SoftBank also led a $775 million investment in Boston-based Whele LLC, known as Perch, a technology company that buys and sells third-party brands found on Amazon.com Inc.
SoftBank plans to invest in companies that are using artificial intelligence to disrupt their industries, CFO Yoshimitsu Goto said during an earnings presentation in August. As of June 30, 2021, 22% of Vision Fund 2's investments were in the consumer sector, 20% in enterprise and 19% in logistics.
Meanwhile, in China SoftBank must "pick and choose" which holdings to divest amid new regulations, said Boodry.
Boodry said one sector SoftBank may reconsider is online education, after an earlier investment in startup Zuoyebang Education Ltd. China in July tightened rules on tutoring services that teach school subjects, forcing operators to become not-for-profit businesses. Shares in Hong Kong-listed New Oriental Education & Technology Group Inc. Endowment Arm fell 47% on the announcement.
SoftBank might have to cut China stakes more generally once the full extent of the damage to Vision Fund 1 and 2 becomes clear, said Atul Goyal, managing director, equity research at Jefferies. The company will announce its earnings results for the second quarter of the financial year ending March 2022 in November.
One Chinese investment that Softbank will likely hang onto, whatever happens, is its Alibaba Group Holding Ltd. stake, Boodry and Tang said. The investment accounted for about 47% of SoftBank's net asset value as of June 2021, and it is often used by the company to finance projects and debt paydowns. In July 2020, for example, the Japanese conglomerate paid $9.4 billion of borrowings using Alibaba shares. Alibaba did not respond to a request for comment.
SoftBank put about $20 million into Alibaba more than two decades ago, which has now become a $110 billion stake. That is even after a 46% slump in Alibaba's stock since November 2020, when Chinese regulators halted the IPO of finance affiliate Ant Group. In April, they fined Alibaba $2.8 billion for antitrust violations.
