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DECEMBER 2008 Issue
In BriefForeign PE Could Consolidate their position in China as the country seeks massive capital and management talents to counter economic woes from the prevailing global financial crisis Feature
Destructive Power of Debts exposed as investors recorded a brief investment holding period in ABC Learning Analysis
Asian Institutional Investors Seize opportunities to ensure long-term income from financially beleaguered institutions in the USA Focus
China’s SOEs Act as Custodian of state assets as exemplified in the recent sale of CSPC Pharmaceutical Institutional Investors
Allocations from Institutions Flow to Asian fund of funds despite prevailing inclement economic climate Institutional Corner –Funds
QIC Shows Its Savvy in Making its first power assets acquisition in New Zealand Institutional Corner - Investments
Impending Sale of Sanyo Could be one of the most profitable exits in Japan General Section - Divestments
Investors Show Clever Exit Skills in the impending sale of BankThai General Section - Divestments
Yuan Funds Continue to Mushroom company shows India’s nascent buyout market reaches a new milestone Greater China – Funds
Chinese Co. with Strong Financials are not spared from being battered as financial storm blows hard Greater China – Investments
India’s Grand Infrastructure Plans expected to meet hiccups as inflow of foreign capital in decline, but local firms could take on a principal role India Corner – Analysis
Content
Analysis
Focus
Institutional Corner
News
Institutional Investors
Funds
Investments
General Section
News
Divestments
Greater China
News
Funds
Investments
Patience is a Virtue
India Corner
News
Analysis
Pressing Needs
People on the Move
Subscriber Weekly Summary
Summary
Index & Exchange Rates
Opportunity in Crisis
As the winds of the global financial storm continued to howl without respite, China joined other nations in announcing a colossal stimulus package designed to spur economic growth. On 10th November, the world stood still when Beijing unveiled its 4 trillion yuan (US$586 billion) stimulus package. This titanic amount represented 16% of the country’s 2007 gross domestic product. By all measures, the world’s most populous nation’s move to spur economic growth at home overshadows similar undertakings by any other nation on earth.
The State Council has identified ten principal areas or industries that fall into seven categories that would benefit from this stimulus package. Among them are industries associated with railways, roads and airports, as well as the reconstruction of the Sichuan earthquake areas are the biggest benefactors. The distribution of funds will span a period of at least three years between now and 2010.
But within days after the package had been announced, it became clear that Beijing is not to be the sole source of funds for this audacious economic stimulus plan. In an interview published by the Financial Times five days after the stimulus package was announced, Mr Mu Hong, vice chairman of the National Development and Reform Commission, indicated that Beijing itself has earmarked only around a quarter of the 4 trillion yuan for the planned stimulus package. At home, Mr Mu further elaborated in his remarks to the local press that the government would be committing some 1.18 trillion yuan, with the remaining amount expected to come from a host of entities, with private equity capital being one of the sources.
As China faces its slowest economic growth in two decades, its urgent call for a large pool of capital could present an unprecedented opportunity to foreign private equity firms, which have found the Middle Kingdom investment terrain increasingly rugged and themselves marginalised by the surging pool of domestic funds and investors. ...
This online issue of the Asia Private Equity Review is made available with abbreviated content. To read the full content together with more in-depth news, perspectives, and analysis, please subscribe or contact us to purchase back issues.
Greater China - InvestmentsModels for Survival
Investors can only wait as their star portfolio companies dim under the financial stormAs economic woes continue to unfold, few fund management firms have been spared from being plagued by disappointing news about their portfolio companies. The Shanghai Securities Journal reported that China Real Estate Network’s (‘China REN’) relentless expansion has now taken its toll. In 2005, China REN raised US$45 million from The Carlyle Group and SAIF Partners, and had set its sight on a NASDAQ public offering during 2008.
Since receiving funds from private equity investors, China REN has embarked on an aggressive expansion trail, increasing the number of its outlets from 900 to 1,200 covering 40 cities across the country. However, the onslaught of the credit crunch has effectively crushed China REN’s public offering plan. The private equity firms have to now wait for the appropriate opportunity for its portfolio company to embark on a public journey.
There have also been reports that suggest a key manager at Morbet Semiconductor has gone missing. In 2005, Morbet received an undisclosed amount of funding from Mayfield and GSR Fund. But, since mid year Morbet has not been able to meet salary payments for its workers. In early October, according to Morbet staff members, the boss of the company has gone missing.
In the meantime, the former chief at Nissin Leasing (China) Co. Ltd. has laid charges against TPG over its alleged wrongful dismissal of the previous management team, as well other associated irregularities. The high-profile dispute has drawn the attention of both local and global media, and will test TPG’s public relationship skills.
With no respite in the prevailing hostile economic situation, few companies that are leaders in their respective industries have been able to withstand the onslaught, even though they are financially sound.
The Mighty Butcher
Headquartered in Nanjing in Jiangsu Province, China Yurun Food Group (‘China Yurun’) boasts one of the largest meat processing and hog slaughtering operations in China. Close to 79% of the company’s revenues in the first half of 2008 were derived from chilled pork and frozen pork products; while other meat products make up the remaining income. Its products are sold under its flagship brand, “Yurun” and other brands such as “Furun” and “Wangrun”.
China Yurun first received funds from private equity investors in late 2004, just a year before it became a publicly-listed company on the Stock Exchange of Hong Kong (‘HKSE’). It had successfully raised US$70 million from CDH Investments (‘CDH’), GIC Special Investment Pte Ltd. (‘GIC’) and Goldman Sachs. Together, they took a combined 24.8% equity stake in the company.
In October 2005 China Yurun was among the new batch of companies, backed by foreign private equity, to test global institutional investors’ appetite for China stocks. It offered its shares at HK$3.70 (US$0.474), at the top of its initial public offering (‘IPO’) price range. Eight months later in 2006, CDH and GIC had released all of their stakes in the hog slaughtering company, and earned a return multiple of more than two times their original invested capital. Goldman Sachs, which had committed US$30 million, continued to hold its interest in China Yurun.
Over the past four years since China Yurun first partnered with private equity investors, it has come a long way. In addition to achieving the milestone of being a quoted stock on HKSE, it has been able to maintain meaty net profit margins. Its net income soared to US$110.2 million in 2007, compared to US$47.3 million in 2005. For the first half of 2008, China Yurun’s net profit towered to US$86.2 million, 78% of that achieved for the entire 2007 year. Its bank vault has a cash pile of HK$1.7 billion.
China Yurun has secured bankers’ confidence even though they have been held to a tight purse string. In August this year, it received a HK$450 million syndicated loan facility to help its expansion plans. Although the Hang Seng Mainland Composite Index has lost more than 53% since the beginning of the year, China Yurun’s share price has been able to rally against the unfavourable tides and, at the end of November, its share price was trading at HK$8.60, 19% above the index since the beginning of the year. Overall, in the first 11 months of the year, China Yurun’s share price has tumbled by 34%.
China Yurun is in a unique position to win investor confidence. The falling prices of hogs have improved the company’s margins, especially in the downstream products, such as processed pork products. Significantly, China Yurun has largely focused on the domestic consumption market with less than 20% of revenues derived from exports. This income strategy has shielded China Yurun from suffering a sharp decline in revenues, the anguish that many export-oriented companies in China had to deal with in recent months.
A Sturdy Boat in the Yangzijiang River
In China’s shipbuilding industry, Yangzijiang Shipbuilding Holdings (‘Yangzijiang’) commands a pristine reputation. Its shipbuilding history dates back to 1956. Significantly, it is known for delivering vessels either ahead of or on schedule. It has delivered more than 60 vessels of capacities between 1,000 and 2,500 TEU. As of mid-October this year, Yangzijiang’s order book was full until 2010, comprising 90 container ships and 75 bulk carriers, representing US$7.3 billion worth of contracts.Ten months before Yangzijiang became the largest shipbuilding company to be listed on the Singapore Exchange Ltd. (‘SGX’), it raised US$20 million from a consortium of investors including SEAVI Advent Corp., UOB Capital Partners LLC and ICH Capital. The investors took a combined 4.9% stake in the shipbuilding company when they converted their convertible bonds into equity shares prior to Yangzijiang’s initial public offering. In April 2007, Yangzijiang went public on the SGX and offered its shares at S$0.95 (US$0.63) each. China’s leading shipbuilder then received overwhelming interest from investors with its shares being 39 times oversubscribed. On its first day of trading, its share price soared by 41% to close at S$1.34 each. None of the private equity investors from the consortium sold their stakes.
Since the beginning of the year, Yangzijiang has significantly bolstered its assets. It completed the buyout of the Jiangsu New Yangzi Shipbuilding which was valued at 10.6 billion yuan (US$1.5 billion). In the six months ending September this year, Yangzijiang delivered impressive results to its shareholders. Its net profit had more than doubled to US$117.7 million, compared to US$48.6 million in the corresponding period in 2007. Significantly, its cash reserve stood at 5.6 billion yuan equating to one-third of its total assets.
But all these glamorous financial highlights failed to stem Yangzijiang’s share price from falling. On 5th March 2008, its shares fell below its IPO price of S$0.95, as investors expressed concerns over the global shipbuilding industry which is facing an oversupply of ships. Added to this concern was Yangzijiang’s revenues which have been derived principally from European countries. In 2007, Germany accounted for over 74% of the company’s turnover. With Europe’s largest economy having entered its first recession in six years, the future appears to be challenging to Yangzijiang.
To arrest the fall of its share price, by mid November, Yangzijiang has bought back 192.90 million shares, representing 6.0% of the company’s issued shares. At the end of November, Yangzijiang’s shares price closed at S$0.415, less than half of its IPO price. Under the gloomy economic skies, it appears investors have decided to cut short their honeymoon with Yangzijiang.
Master in Digital TV
China Digital TV Holdings (‘China Digital TV’) is one of the leaders in providing Conditional Access (‘CA’) systems to the rapidly growing digital television market in China. CA systems allow digital television network operators to control the distribution of content and value-added services to their subscribers and to block unauthorised access to television networks. Its core products and services also include end-to-end CA systems, other digital television application software for television network operators, and set-top box designs.In China’s digital television market, China Digital TV has been a private equity investor darling. It first received capital from SAIF Partners in 2004 when, the private equity firm injected US$7 million into the company. In late December 2006, less than a year before China Digital TV went public, it raised an additional US$75 million from a host of investors including Capital International, MUS Roosevelt Capital Partners and Indus Capital Partners. From these two capital deployments over a period of 24 months, China Digital TV received more than US$83 million from private equity investors. It was by far one of the largest commitments undertaken by investors in this industrial sector.
In October 2007, when China stocks wielded enticing power, China Digital TV was listed on the New York Stock Exchange. Its IPO price was US$16.00 per American Depository Share (‘ADS’), each of which equated to one ordinary share. Like many other Chinese companies that just managed to make their debuts before the end of 2007, when the global stock markets began to turn sour, China Digital TV enjoyed feverish interest from investors. On its first day of trading, its share price closed at US$39.40, more than double its offer price. Within days, China Digital TV’s ADS reached giddy heights when they changed hands at US$55.31 each.
After having joined the cosmos of publicly-listed technology companies, earlier in the year China Digital TV introduced several new and promising product lineups, including a new Set-top Box for high definition television, an electronic Programme Guide advertising system and several other new platforms for media content. It has also successfully enlisted heavyweights as its business partners, among them Intel Corp., Microsoft Corp., Panasonic Corp. and ViXS Systems, Inc.. China Digital TV has also been able to boast an illustrious financial performance. For the six months ending 30th September this year, its net income increased by 32% to US$19 million, compared to US$15 million during the same period in 2007.
But all is positive data failed to hold investor confidence. In less than a year since it was listed, by early September China Digital TV’s ADS was already trading well below its offer price. It moved decisively to implement a share buyback programme, and announced to purchase up to US$40 million worth of its outstanding ADS. At the end of November, China Digital TV’s ADS closed at US$4.91, approximately a third of its offer price.
Comments
It has been a harrowing experience for these solid companies to witness the value of their share prices virtually erased by an unprecedented display of a lack of confidence from investors. But these are unusual times. When the storm is over, it is these companies, with strong cash flows and low gearing ratios that will be the shinning stars. In the meantime, patience is the motto. India Corner - AnalysisPressing Needs
Infrastructure investment in India is expected to slow in the wake of the global credit crunch
In May 2006, the then Finance Minister of India and new Minister of Home Affairs following the recent terrorist attack in the country, Mr Palaniappan Chidambaram announced the most ambitious infrastructure development plan ever for his nation. He revealed that the government wanted to attract US$150 billion of overseas investment over a period of 10 years to upgrade India’s roads, power generation and other facilities in order to entice foreign manufacturers. Two years since the drive was launched, it has become increasingly clear that this ambitious goal will take a longer horizon to be fulfilled. Added to the impact of prevailing global financial crisis was the recent terrorist attack targeting foreign visitors at the heart of India’s commercial centre. With more than 100 civilians killed and over 300 injured, India’s image as one of most-favoured emerging markets on the globe was temporarily tarnished.
Funds for Infrastructure Development
In response to the Indian government’s new agenda, private equity investors have been swift in launching infrastructure funds. Since 2007, 18 infrastructure funds were known to have been launched with an aggregate target of a staggering US$15.6 billion. As an illustration of investors’ overwhelming interest in infrastructure investing in India, earlier in the year, IDFC Private Equity announced the final closing of its latest fund, recipient of global institutional commitments to the tune of US$700 million. It was by far the largest infrastructure fund raised by a domestic firm. Significantly, in a space of 2 years and 2 months, IDFC Private Equity was able to announce closings for its latest two funds that helped its fund pool swell by an additional US$1.14 billion.In the first eleven months of the year, India saw close to US$3.0 billion of fresh capital raised for infrastructure opportunities in India. Although foreign fund management firms have been expected to be the principal force in launching such funds, it is in fact domestic firms that accounted for more than half of the year’s fund pool. It is also a development that foretells the major role that domestic parties are expected to take up to propel infrastructure financing in the India As the global economic crisis deepens, the inflow of foreign capital that India has been enjoying during the past few years is likely to take a break until there is an improvement in the macro economic environment. According to the Securities & Exchange Board of India’s latest revelation dated 5th November, outflow of capital by foreign institutional investors peaked at US$2.7 billion in June this year from a modest US$155 million in April. This speedy expatriation of funds by foreign institutional investors was an alarming development.
Infrastructure Deals
There appears to be a mismatch of deployment capital in Indian infrastructure financing between domestic and foreign fund management firms. Despite claiming the lion’s share of the 2008’s fund pool, the transaction total achieved by local fund management firms amounts to just US$262 million, or 18% of the US$1.4 billion transaction value thus far in the year.The development warranting attention is the decrease in capital deployed so far this year compared to that in 2007. In the 12 months ending December 2007, India saw 52 infrastructure deals, representing a transaction total of US$3.2 billion, completed. That amount is more than double what has been attained during the first 11 months of this year. Significantly, over 65% of the transaction value in 2008 took place in the first quarter - before the onset of credit crunch in Asia. As the year nears its end, infrastructure investment in India came to a virtual standstill, recording a dismal US$4.4 million transaction sum in two deals.