Investment Exits in China's Space Industry

Plus a planned Malaysian launch site 🚀, "China's O3b" announces a new HQ 🛰️, and USPACE's dubious Spanish satellite factory 🇪🇸

Dear Readers,

This month was a doozy, with what seemed like dozens of international announcements, the China Space Day Conference, and a crewed space launch. But before digging into that, a piece on financial returns in China’s commercial space sector, and some important questions about the nature of capital markets in China.

A Real Estate Giant Reveals Details of China’s Space Sector

Country Garden is a struggling real estate behemoth in China. One of the country’s first private real estate developers, Country Garden is, to some extent, near and dear to my heart, having built many developments around Shenzhen, my first home post-university from 2011 to 2017. For much of the 1990s, 2000s, and early 2010s, Country Garden represented the promise of China’s economic miracle: always-rising property prices and an unusual tendency for buyers to pay for their properties upfront as they were being built allowed Country Garden to grow exponentially, buying land on the cheap, selling dreams to newly middle-class Chinese home buyers, using part of the money to build the homes and part of the money to buy more land. Rinse and repeat.

The company levered up tremendously, and moving into the mid-2010s, began to take on a number of more dubious projects, most famously “Forest City” in Johor Bahru, Malaysia, which has emerged as arguably the world’s largest ghost town (it looks damned cool, though). Stories abound of Chinese buyers being lured by literally free flights from third-tier cities to Malaysia for property showings.

All of this leverage, combined with a shaky Chinese property market, have led Country Garden to liquidate many non-essential holdings. Which brings us to space, because in addition to building Malaysian ghost cities, in the late 2010s, Country Garden got into the business of space investment. In 2019, the company led what was at the time the largest single investment into a Chinese commercial space company with a ¥500M round into Landspace. The company took part in a couple of other Landspace funding rounds over the ensuing ~18 months, leading to a total investment of just under ¥1B.

This month, as a result of financial woes, Country Garden liquidated its entire position in Landspace, revealing a few interesting nuggets about the transaction, and Chinese commercial space more broadly.

First, the numbers. Country Garden sold their Landspace stake in two separate transactions:

• On 7 April, they sold 4.536% of Landspace’s total shares (10,997,780 in total) to Qingdao Haifa Venture Capital for ¥535M (US$73M)

• On 25 April, they sold another 6.527% of Landspace’s shares (15,798,112 in total) to the Qingdao Gold Star Fund for ¥770M (US$106M)

• For a total proceed of just over ¥1.3B. According to company filings, this represented a pretax profit of ¥370M, “based on the difference between the transaction consideration and the initial investment cost”.

• We can therefore derive a total return of just under 40% (i.e. ¥370M profit / ~¥930M total investment). Assuming a weighted investment time frame of ~5 years (original investment was 5.5 years ago, follow-on investment was ~4.5 years ago), we have an approximate annual return of some ~7%.

That ¥1B invested into an extremely high-risk venture, like a commercial launch company in China in the late 2010s before commercial space was well-defined in any meaningful way, is returning 7% per year should raise eyebrows. Granted, there may be extenuating circumstances surrounding the sale, namely that Country Garden is bleeding cash and needs liquidity, and they’re trying to sell a big stake in a big company, but nonetheless, I would venture to say most space VCs would scoff at the idea of 7% annual return on what was some of the highest-risk of high-risk investing.

The sale also appears to have marked down Landspace’s valuation, which was implied to be ¥11.8B at the time of sale, compared to ¥16B at the end of 2024, according to Chinese hi-tech research house Taibo. Again, this could be because of a distressed seller, or because its hard to liquidate a big piece of a big company, but…it’s inarguably less optimistic than if the valuation had increased during that time.

The ho-hum returns and declining valuation could be due to any number of reasons, but I think there are largely two: 1) Chinese financial markets are different from western financial markets, and 2) Chinese commercial space remains a pretty bad business model.

Chinese Financial Markets Are Different from Western Financial Markets

Chinese financial markets are different. The state plays a more active role, both on the regulation side and on the supply of capital side. On the regulation side, sometimes CEOs are neutered if they fly too close to the sun (just ask Jack Ma), and the state has no issue with cancelling IPOs or otherwise destroying shareholder value for what is seen as the greater societal (or Party) good (just ask Ant Financial).

Company valuations are inflated by provincial and city governments that invest, not to get juicy returns on their money, but to align with national strategies and bring jobs and economic activity to their province and city. This can make it easier for very early-stage investors to get a nice return (if you invest in a seed round of a company that catches a wave from a province, the valuation can jump), but if you get in during a later round, the valuation is probably elevated, making your investment expensive.

At the same time, companies are often making investments with the goal of developing technology that aligns with national policies, rather than commercially viable technologies. Look no further than CGSTL, who built and launched ~150 satellites with a limited number of customers to whom they can sell, and likely with a mandate to provide China’s military apparatus with many Petabytes of remote sensing data from one of the world’s largest EO constellations. This can create challenges for investors, because if you invest into CGSTL expecting it to behave like a commercial company, and they spend money building out nationally strategic but commercially non-viable infrastructure, the returns on that investment won’t be there (at least not for a very long time).

This should clearly give pause to the very small number of non-Chinese investment firms taking a glance at the Chinese space sector. Not only might you be investing in technology that’s being used to build up China’s military capabilities, but you’re investing into companies that are building infrastructure that might never be commercially viable. And for certain Chinese investors (again, provinces and cities), the commercial viability question is answered with a different set of parameters, artificially boosting company valuations and making it more expensive for commercially-oriented investors to turn a profit.

In the long-run, one could reasonably argue that for certain strategic industries like space, a less razor-sharp focus on financial returns makes sense. One could also argue that US space companies, in their rush to SPAC in 2021, created a whole different type of bad incentives that led to the long-term harm of US commercial space competitiveness. Be that as it may, these warped incentives in China make the space sector a tough investment case, and pretty bad business model for the time being.

Chinese Commercial Space Remains a Pretty Bad Business Model

Partly as a result of these warped financial incentives, Chinese commercial space remains a tough business. Just ask the good folks at CGSTL, who, in addition to allegedly selling data to the Houthis in their spare time (yeah, that happened this month), have had immense trouble in completing their IPO, so much so that they recently shelved it. Why? Because their business model, in addition to building and launching a mind-blowing number of EO satellites, is also incinerating cash.

Taking us back to the Country Garden example, the same is true in launch. The peculiarities of China’s financial markets have allowed for dozens of commercial launch companies to spring up. Landspace alone has seen lots of top executives depart over the years to found their own launch companies, because everyone in China has a launch company. In the near-term, this has made it difficult for the industry to consolidate: there are still tens of launch companies fighting it out, whereas if there was less new company formation, it could be that all the brightest minds would be more concentrated in a few, bigger launch companies that could move faster and enjoy less competition.

Even in the medium-term, as the field thins out, the margins that companies can charge on their launch services are likely to be tight because of that cutthroat competition. Only in the long-term, after the industry has consolidated around a few players, might there be room for pricing power, and subsequent profit taking (similar to what we’ve seen with Chinese electric vehicles).

Satellite manufacturing is no different, with manufacturer/operator ADA Space filing for a Hong Kong IPO earlier this year. In their prospectus, the company reported a widening net loss in 2023 compared to 2022, and an even faster-widening net loss in first 9 months of 2024 compared to the same period in 2023. To put some numbers to it, in first 9 months of 2024, for every $1 of revenue that ADA Space saw come in the door, they reported $0.90 of net loss. This is, again, driven in part by too much competition, with many satellite manufacturers both commercial and state-owned fighting over a pretty measly pie. This is partly driven by a lack of substantial government spending on commercial space products and services, but that’s another conversation for another day.

Conclusions

Ultimately, Chinese space may end up being like Chinese electric vehicles: an absolute blood bath for some time, leading to a 90% company failure rate and the 10% end up being champions. But unlike electric vehicles, not everyone needs their own satellite. And unlike 5-10 years ago when China’s EV champions were rising from the ashes of tens of billions of subsidies thrown at the industry, the risk of Chinese oversupply and dumping of goods into markets is well-understood today.

China is finding a plethora of foreign partners for its space program, but most of these countries are in the developing world. And again, while average folks in Ethiopia and Thailand can buy $10,000 BYDs in large numbers in an example of “win-win”, average space agencies in these countries have relatively limited budgets, and even if they buy the odd Chinese satellite here and there, they’re unlikely to make a real business case for Chinese reusable launch vehicles or constellations.

This is not to say that there are no exceptions. Counterintuitively, unsexy, commoditized parts of the Chinese space sector (rocket fairings, for example) seem to be a very decent business model, and in some cases those areas are also far away from government/military connections, making them more market-based, and possibly friendlier to investors.

Only time will tell, but there is one thing we learned for sure this month from Country Garden’s exit from Landspace: Chinese commercial space remains a tough business, and for investors, exits are going to likely be painful affairs. Invest wisely, and know before you cut the check that the economics in China are different.

And in other news this month

The China Space Day Conference took place in Shanghai, with this the 10th year of the annual event that coincides with the anniversary of the launch of Dongfanghong-1, China’s first satellite, on 24 April 1970. A lot of updates and announcements emerged, and there was a non-trivial international presence including a Thailand and a GISTDA booth. We had folks on the ground there, reach out for info on our conference debriefs.

At the same time, the NewSpace Africa Conference took place in New Cairo, Egypt, where a limited number of Chinese companies came out in force. CAST, Star.Vision, and MinoSpace were by far the most visible, with Star.Vision in particular having an impressive degree of localization in the region via its Omani JV Oman Lens.

Shenzhou-20 launched 3 taikonauts from Jiuquan on 24 April, and as per usual, the supplier data points gushed out. We collected information on ~150 specific systems and components from the launch, get in touch if you’d like more info on our China Space Industry Supplier Database product (now at >10,000 data points).

A flurry of Sino-Malaysian collaboration activity emerged from Xi Jinping’s state visit. Most notable was the announcement of a launch site in Peninsular Malaysia to be built in the next 3-5 years just 3 degrees north of the equator. Other announcements included a JV between GeeSpace and the Tradewinds group, an MoU between satellite manufacturer Smart Satellite and DBSpace, and a visit by CALT, CAST, CGWIC, and ICBC to Measat that smelled slightly like a possible satellite deal. Topping it off was an official communique from the Xi visit that called for “jointly enhancing space capabilities, cultivating the space economy, promoting technological progress, and safeguarding national security”.

Tsingshen Technology announced a new headquarters in the Lingang Area of Shanghai that includes a constellation R&D center, satellite ground station, measurement & control center, and test laboratory. The company has long planned the unfortunately-named “Smart SkyNet” Medium-Earth Orbit (MEO) comms constellation resembling SES’s O3b, and in 2024 launched their first two satellites with support from the Shanghai Government and Tsinghua University. The company noted that the establishment of the new HQ marks a change from R&D phase to satellite industrialization, manufacturing, and commercial operation phase.

Hong Kong-based house of cards USPACE announced a satellite AIT Center in Spain 🇪🇸, this a few weeks after they announced a similar initiative in Malaysia. With an alleged investment of US$100M and showcasing of a meteorological satellite allegedly customized for EUMETSAT, the press release quoted an unidentified (of course) ESA representative as saying that "the birth of this satellite proves that cross-border division of labor is not an obstacle, but the key to improving competitiveness". Several weeks on from the event, we have seen zero announcement from ESA on the topic 🇪🇺

The city of Chengdu published an ambitious three-year space industry development plan. Goals by 2027 include a space industry of more than ¥50B (up from ¥20B in 2024), capacity to build 200 satellites per year, and more than 40 “specialized and innovative enterprises”. The city expects investment and financing in the space sector to exceed ¥30B. No word on the exit plan for financiers.

Communications payload manufacturer Ubinexus announced a Pre-A+ and A-round of funding, with money coming from the extremely active Liangxi District Government, Essential Capital, and others. The funding will be “invested in satellite communication payload research, development and manufacturing, LEO satellite networking, and accelerate the construction of a space-ground integrated system”.

GeeSpace announced collaboration with China Unicom in an event attended by Geely Chairman Li Shufu and China Unicom Chairman Chen Zhongyue, indicating a high degree of importance assigned by both companies. The two parties will “carry out in-depth cooperation in satellite communication technologies, innovative applications of internet of vehicles, global business collaboration, and digital transformation”.

And finally, we saw a strategic cooperation agreement between constellation operator SpaceSail and Thailand’s National Telecom (NT), calling to “promote the development of Thailand’s digital economy based on deepening cooperation in commercial space and low-orbit satellite internet services”. If you’re interested in more information on SpaceSail, reach out to our sister company at Orbital Gateway Consulting for info on our China NGSO Communications Constellations Report, available now.

If you’ve made it this far, as always, thanks for reading. See you next month.

Blaine