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AUGUST 2008 Issue
In Brief

Local Investors Now Compete Direct against their foreign counterparts as their economic muscle grows Feature
Credit Squeeze and Inflation are reshaping dynamics in Asian private equity Analysis
Asia Media’s Future in Doubt as the company faces rising negative operating cash flow Focus
Asian Institutions Reform to Compete for a slice of the private equity pie Institutional Corner
CDC Taking on a Pragmatic fund allocation approach Institutional Corner - Funds
Sovereign Claims on Territorial Waters could have ramifications even after deal completion General Section – Investments
Exit Date from Adaro Energy remains elusive as the company is mired in legal disputes General Section – Divestments
Unfavourable Stock Market conditions lend opportunities to private equity investors Greater China – Investments
A Well-planned Exit Went Astray as it fell prey to volatile stock market conditions Greater China – Divestments
European Investors Connect to India through private equity funds India Corner – Funds
Foreign Investors Flock to India even though the country faces soaring inflation and declining stock market performance India Corner – Investments
Tokyo Allows Tax Exemption to offshore funds, albeit with a host of caveats. Expert opinions from a leading law firm in Tokyo Commentary
Content

Analysis
Focus
First In and First Out?

Institutional Corner
News
Institutional Corner
Funds
Racing to Fund

General Section
News
Investments
Divestments

Greater China
News
Funds
Investments
Divestments

India Corner
News
Funds
Investments

Commentary

Subscriber Weekly Summary
People on the Move
Summary
Index & Exchange Rates

The Natives

For more than 33 months, The Carlyle Group (‘Carlyle’) had been locked in discussions with the Chinese authorities over the proposed plan to be a shareholder in Xugong Group Construction Machinery Co. Ltd (‘Xugong’). In October 2005, both parties had gleefully announced their joint agreement by which Carlyle was to become an 85% shareholder through a deployment of US$375 million, while existing shareholders of Xugong would take up the minority position. It was supposed to be a landmark transaction that would set the tone for future buyout dynamics in China. But on 22nd July, Xuzhou Construction Machinery Science & Technology Co., Ltd. (‘Xuzhou S&T’) announced that its parent organisation, Xugong, had terminated this marathon courtship by Carlyle.

Xugong is to now rely on its subsidiary, Xuzhou S&T, for a capital injection. The listed arm of Xugong announced that it will be selling a parcel of shares in order to raise as much as US$820 million to buy assets from its parent company.

Xugong is the latest affirmation of the growing economic muscle of domestic investors that have become competitive forces to foreign investors. Statistics on the latest trend in Asian private equity also pointed to such conjecture, especially the rising dominance of China.

Institutional Investors and Funds

The financial returns of private equity have gripped the interest of Asian institutions. In the first half of 2008, Asian establishments that have participated in allocating capital to private equity funds accounted for 70% of the number of allocations, an impressive rise compared to 57% during the first half of 2007. It was, however, establishments in China that have largely fuelled the growing pool of “limited partners”. Twelve months ago, China Inc. accounted for 17% of the allocations. That percentage has more than doubled to 43% during the first half of the year. India takes comfort in the fact that it is home to the second largest pool of investors of funds in Asia, although it trailed far behind its giant neighbour in the East.

The choice of domestic institutions to park capital with home-grown managers has in turn led to a rise of funds sponsored by domestic establishments, particularly in China. Beijing’s efforts to promote its own domestic private equity industry is bearing fruit. It is therefore not surprising that, for the first time, fresh capital coming into the China fund pool has not only led in Asia, but has also surpassed the amount being raised by pan-Asian investors including buyout funds. In the first half of 2008, the Middle Kingdom boasted a record US$11.4 billion of new funds. Of this, yuan-denominated funds, as well as those formed by local entities, accounted for over 61.2% of the capital pool. The percentage is virtually double that recorded 12 months ago.

Although the pool of “limited partners” in India is much smaller compared to that in China, the country’s private equity market ...

Focus

First In and First Out?

Japan’s first China IPO faces the grim reality of being delisted

Champagne flowed in April 2007 when the Tokyo Stock Exchange (‘TSE’) and Sequoia Capital China celebrated a milestone in their respective charters. Asia Media Co. Ltd. (‘Asia Media’), in which the China investment arm of Silicon Valley’s legendary Sequoia Capital had been an investor since 2005, became the first company based in the People’s Republic of China to make its debut on Asia’s largest stock market by capitalisation. But, as it concluded its 15th month as the first China play anointed by the TSE, the media company faced “significant doubt” as a “going concern”, according to a statement released on 31st July.

Between May and July, Asia Media’s boardroom was enveloped in turmoil. It first announced the appointment of a new chief financial officer, and then unveiled misappropriation of funds by its former chief executive officer. Along with these announcements came the resignations of outside directors including Mr Zhang Fan, a partner of Sequoia Capital China. Mr Zhang’s departure came only two days before the abrupt departure of Mr Cui Jianping, founder of Asia Media, who confirmed having misappropriated the company’s funds.

When Asia Media finally released its much-awaited financial results for the three months ending 31st March 2008, its books were filled with red ink, sharply different from the pages of previous years, in which all financial figures were presented in black monotone .

Rosy Figures Broadcast

Asia Media was founded in July 2004. It specialises in providing television programming data via its website, www.chinaip.tv, cable television, computer and mobile phone. A year after it was established, it received no less than US$4.58 million from Sequoia Capital China I LP, an investment vehicle managed by Sequoia Capital China. At the time when the partnership was consummated, the investor had every reason to believe that the target company would be a budding growth story waiting to be told.

In the 12 months ending December 2005, Asia Media’s turnover stood at US$7.03 million, while clocking a net income before income taxes of US$3.81 million. The rosy broadcast continued over the subsequent two years. By the end of 2007, Asia Media’s revenue had surged to an impressive US$65.58 million. During this period, its net income also trebled to reach US$14.29 million. But when the first quarter result of 2008 was finally released in late July, the loss of US$8.68 million for this period shed light on a company that might not have been transmitting accurate data to its shareholders. The Anchorman According to official statements from Asia Media, between 2006 and 2008, Mr Cui had pledged the fixed bank deposit receivables of Beijing China IP.TV Co., Ltd. (‘IP.TV’), a 100% wholly-owned subsidiary of Asia Media, as collateral to secure loans on behalf of Beijing Dolphin Science & Technology Development Co. (‘Dolphin’). The latter was in fact founded by Mr Cui together with teachers and students from Tsinghua University in 1994. It described itself as a leader in the research and development of high-performance serial communication equipment and network communication in China. Its top brand, CanHigher, had been reliable expert support for serial communication equipment. Although Mr Cui is believed to have severed his financial tie with Dolphin in January 2005, half a year after Asia Media was formed, his sister is currently a director as well as a shareholder of Dolphin.

Yet, since January 2006, Dolphin has been entangled in a court case with Deluxe Family Co. Ltd (‘Deluxe Family’), formerly known as Xinzhi Science and Technology Co., Ltd., which is listed on the Shanghai Stock Exchange. The exact details of this dispute remain unclear as the labyrinth of events unfolds.

It would appear that, back in 2003, Dolphin owed Deluxe Family 5.2 million yuan (US$0.64 million). The outstanding sum remained a mystery to the auditors, as records of such a transaction between Dolphin and Deluxe Family could not be found.

Along the way, Haitong Securities Co. Ltd. became involved and, in January 2006, Deluxe Family filed suit against the brokerage house. When the plaintiffs announced having reached a settlement with the defending parties in December last year, Dolphin’s name appeared on the court documents. Deluxe Family was awarded an aggregate 27.8 million yuan from Dolphin and Haitong Securities.

Comments

Although Mr Cui had not been an officer of Dolphin, he remained associated with the company through his sister. Asia Media itself was also associated with Dolphin through an executive director of the company, Mr Yang Lianwei. For a period of 10 months ending April this year, Mr Yang was also concurrently a manager of Dolphin. According to Deluxe Family’s 2005 annual report, Mr Yang was also one of the directors of the company.

As Mr Cui’s embezzlement came to light, a web of complexities surrounded Asia Media. It remains unclear whether Sequoia China Capital was aware of the entangled relationship between Mr Cui, Dolphin and Deluxe Family at the time when it made its commitment to Asia Media.

Whatever the conjecture may be, Asia Media’s share price slumped to ¥31 (US$0.29) per share at the end of July, a petite percent of its initial public offering price of ¥640. Sequoia Capital China I LP’s holdings in Asia Media was worth US$1.57 million. at the end of July.

As the beleaguered company faces an approximate total 106 million yuan of loans being called by banks, it alerted its shareholders that “the prospects for Dolphin repaying the Loan...are considered extremely low...”. On 31st July, Asia Media advised that the company and its subsidiaries (‘Group’) had sustained a net loss of US$31.01 million during 2007, while facing a mounting negative operating cash flow, at US$27.9 million. It concluded that the Group shall have “difficulty ...to secure enough working capital” for the coming year and added that “there is a significant doubt on the Group’s premise of a going concern”.

Institutional Corner - Funds

Racing to Fund

CDC has emerged as one of the most dynamic fund of funds investors in Asian private equity

In one breath, through two public announcements, the UK-based CDC Group has made public its recent string of allocations to ten Asian private equity funds which amounted in total to US$290 million. These allocations covered a broad spectrum of funds in both China and India.

Armed with a war chest of over £2.7 billion (US$5.35 billion), CDC detailed its commitments to four funds in China, including both those with seasoned track records as well as those emerging managers. Its allocations ranged from US$10 million to US$40 million. Among these, CDC has chosen to pledge its largest allocation to FountainVest China Growth Fund, which is the maiden fund for FountainVest, a fund management firm formed by a former executive of Temasek Holdings.

However, on a comparative basis, CDC favoured India as it has identified six management firms that it would partner with in their respective current funds. The allocation range was also larger than that for China funds, from US$20 million to US$50 million. Among them, Baring Private Equity India is the most seasoned fund management firm. Its Baring India Private Equity Fund III has secured US$50 million from CDC.

Despite being affiliated with the British government, CDC’s speedy commitments to Asia is in radical contrast to the traditional low profile and rather cautious approach adopted by funds of funds. Significantly, its positive assessment of Asian private equity is an indication that European institutions are ready to emerge from the shadows of the institutional world, which has long been dominated by US establishments.