Asia Private Equity Review - Greation China Edition

This online issue of the Asia Private Equity Review - Greater China Edition 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.

June 2009 Issue
 二零零九年六月號

Content 內容提要


Feature
 封面文章

Analysis
本期關注

Case Study
案例研究

News
動態透視

Institutional Corner
機構投資者

  • Buyers Please

    Funds
    基金動向

  • Conduit to Capital

    Investments
    投資聚焦

  • Look Before Leaping

    Divestments
    資金套現

  • Long Term Planning

    The Lens
    圈內透視

  • Mr Fang Fenglei

    Review
    評論

    Window of the world
    世界之窗

    Summary : Deal
    交易摘要

    Summary : Subscribers’ weekly
    每週摘要

    Index & Exchange Rates
    索引及匯率

     

    • The Integration

    B eams of sunlight are breaking through the dark financial clouds hanging over Greater China (大中華區). The global financial crisis that has undoubtedly afflicted this region’s economy has been the impetus in accelerating economic integration in Greater China. The data of the first quarter bears witness to the toll of the worst economic adjustment in a century: Hong Kong and Taiwan, both heavily reliant on exports, recorded contractions of 7.8% and 10.2% respectively on their gross domestic product. For mainland China, its industrial output slowed to 7.3% in April, a 1% drop from the preceding month. With the global economy in tatters, the world’s most populous nation is no longer enjoying the generous inflows of direct investment as in the past. The US$27.7 billion in direct investment recorded for the first four months represented a 21% decline compared to the same period in 2008. Mainland China and Taiwan have come to realise that closer economic ties, resulting in a dynamic Cross-Strait economic sphere, is necessary to foster sustained economic growth in their respective markets.

    Float on the Island
    As part of its long-term political objectives with respect to Taiwan, and in orchestrating the economic integration of the Greater China, Beijing has chosen the capital market as the backbone of its regional strategy. With Hong Kong having established its undisputed position in global capital markets, Taiwan’s own stock market is in need of immediate attention. In late May, Taiwan’s financial regulators announced the approval of the issuance of Hong Kong exchange-traded funds (‘ETFs’) that can be transacted on the island’s stock market. Before the concord was reached, investors in Hong Kong could only invest in Taiwan stocks directly through the island’s brokerage houses or by opening nominee accounts. The ETFs have served as a critical economic link between Taiwan and Hong Kong. It is also a telling development that economic integration in the Greater China region has reached the point of no return....

    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.

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    Investments 投資聚焦
    Look Before Leaping
    Investors mitigate risk in big and small deals alike

    Investment activities are gathering momentum after a period of much uncertainty. In the period since October last year, private equity in Greater China witnessed its first official hundred million dollar deal when TPG Capital made a US$131 million commitment to the publicly-listed Daphne International Holdings Limited (達芙妮國際控股有限公司)(‘Daphne’), a shoe wear manufacturing and retail company.

    It has become increasingly clear that for investors that are prepared to commit to deal size of hundred million dollar and above, their choice is publicly-listed assets, while those pursuing traditional capital deployment in unlisted companies, deal sizes below US$20 million has been the norm. Regardless of deal size, the common denominator is risk mitigation, with the smaller deployments commanding as much diligence as large-size investments.

    Covering the Bases
    In two transactions in which the target companies are publicly-listed, investors appeared to have preferred bonds and warrants, instead of taking immediate equity shares. In Daphne, TPG is subscribing first to a HK$624.8 million (US$80.1 million) unsecured convertible bonds issued by the company. The bonds carry an annual coupon of 3.125%. Separately, TPG will also receive warrants from Daphne. When the private equity firm decides to exercise these warrants, it will amount to a deployment of HK$400 million, if exercised in full. This initial non-equity structure is seen as an interim protective measure that would allow TPG time to access the Greater China consumer market which is beginning to show signs of revival.

    Investors took an equally cautious approach with the Singapore-listed Oceanus Group Limited (‘Oceanus’). The world’s largest land-based abalone producer with its principal operation in China, attracted commitments from both AIF Capital (殷庫資本有限公司) (‘AIF’) and Hupomone Capital Partners (華璞毅恆資本有限公司)(‘Hupomone’). Both investors have been careful in the process of providing a combined S$54.5 million (US$37.2 million) to Oceanus. The funds will be directed to the company in the form of cash term loans with a 9% coupon, payable twice a year. To harness Oceanus’ upside, both financial investors will also receive warrants issued by Oceanus.

    One private equity investor that is believed to have purchased public equities without using any protective instrument is Hopu Investment Management Co. (厚樸投資管理公司)(‘Hopu’). In Bank of America’s (‘BofA’) partial disposal of its shareholding in the Hong Kong-listed China Construction Bank (中國建設銀行)(‘CCB’), it has been widely reported that Hopu teamed up with Temasek Holdings in subscribing to the bulk of CCB shares sold by BofA. Hopu’s commitment is estimated at around US$350 million, according to analysts’ estimation. China Construction Bank is the country’s and the world’s second largest bank, Hopu’s investment in the state-owned lender is seen as a sure winner.

    Another two publicly-listed companies, GOME Electrical Appliances Holding Ltd. (國美電器控股有限公司) and China Huiyuan Juice Group Ltd. (中國匯源果汁集團有限公司), are also reportedly on the watch list of private equity investors. There have been numerous reports that investors are vying for a stake in these companies, with Kohlberg Kravis Roberts & Co. and The Blackstone Group, Bain Capital, TPG as well as The Carlyle Group being named as having expressed their interest.

    On the Beaten Path
    For most Asia-based and domestic private equity firms, the traditional private equity investment model is the preferred approach. Companies that had received earlier rounds of private equity capital appeared to have received more favourable review.

    In late May, CDIB Capital Ltd. (CDIB資本投資有限公司) announced its first investment when it led a US$15 million commitment to TouchMedia Co. (觸動傳媒公司). While it was a maiden investment for CDIB Capital Ltd., the Shanghai-based taxi-screen media company has an established record with private equity investors, with the latest investment being its third round of financing. CDIB Capital Ltd. enters TouchMedia with the knowledge that the company had previously passed muster with private equity investors.

    Similarly, in IDGVC Partners (‘IDGVC’)’s recent US$20 million investment in One Net Entertainment Limited (One Net網絡娛樂有限公司)(‘One Net’), which focuses on mobile and online personal computer gaming, the seasoned investors did not deploy the capital alone. IDGVC teamed up with Infiniti Capital Ltd., a Hong Kong-based investment firm, to make the commitment. Significantly, One Net is no stranger to private equity capital; its parent organisation, the NASDAQ-listed China Techfaith Wireless Communication Technology Limited. (‘Techfaith’), had earlier received funds from private equity investors. Between 2003 and 2004, Techfaith received an aggregate US$14 million from SeaBright Asset Management Ltd. (光大海基資產管理有限公司), HSBC Private Equity(Asia), Intel Capital and Qualcomm Ventures.

    Comments
    There are others that are prepared to be more adventurous and test new waters. KPCB China (凱鵬華盈創業投資基金) has ventured into the biotech area with its first investment in the sector. It invested US$15 million in Jinsite Science and Technology (Nanjing) Co. Ltd. (金思特科技(南京)有限公司) (‘Jinsite’), an international Contract Research Organisation that offers outsourcing research services. Jinsite is a subsidiary of the US-based GenScript Corp.

    The educational sector is another segment that investors are confident of its future prospects. A host of venture investors, including iD TechVentures Inc. (智基創投) (‘iD Tech’), DT Capital Partners (德同資本)(‘DT Capital’), and The CID Group (華威集團)(‘CID’) recently invested a total of US$8 million into Everlearn Group (睿稚集團). The Shanghai-based Everlearn was established in 2004 and now has 31 centres in China. Its FasTracKids programme, a so-called early MBA programme for 3 to 6 year-olds, has enrolled nearly 20,000 students since coming into operation.

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    The Lens 圈內透視
    Mr Fang Fenglei

    In the China private equity market, Mr Fang Fenglei (方風雷) has had a meteoric rise. Although his firm, Hopu Investment Management Co. (厚樸投資管理公司) (‘Hopu’), is among the youngest fund management firms, to join China private equity, Mr Fang has drawn the attention of global investors.

    Hopu is known to have been established some time in late 2007 by Mr Fang, when he stepped down from Goldman Sachs Gao Hua Securities Company Limited (高盛高華證券有限公司)(‘Gao Hua Securities’), a joint venture with Goldman Sachs. Hopu’s maiden fund, Hopu USD Master Fund I, L.P., broke all records of first time managers by achieving a closing at US$2.5 billion. No other such fund managers have been able to rival such a record. While it is a very formidable challenge for most first time funds to garner institutional commitments, Hopu USD Master Fund enlisted a long list of globally-known institutions, including Temasek Holdings, Goldman Sachs, Japan’s Norinchukin Bank and Daiwa Securities Group Inc. Ltd., Canada’s Public Sector Pension Investment Bank, as well as Shell Pensionenfonds Beheer B.V. The fund was so well received that Temasek Holdings had to cut back its US$1 billion commitment to US$800 million, while Goldman Sachs is believed to have earmarked US$300 million.

    Hopu has a penchant to invest in publicly-listed companies, and has teamed up with Temasek Holdings, in two of the three transactions it is known to have consummated.

    In April last year, the US$300 million commitment to the Hong Kong based Lung Ming Investment Holdings Ltd. (香港龍銘投資控股有限公司)(‘Lung Ming’) was Hopu’s maiden transaction. Hopu USD Master Fund accounted for the lion’s share of that deal size, estimated to be between US$150 million to US$200 million. However, in the recent estimated US$4.6 billion purchase of shares of China Construction Bank with Temasek Holdings, the Singapore sovereign wealth fund would be responsible for the major portion of capital to be deployed. China Construction Bank is in fact the second banking deal completed by Hopu. Its first was made in Bank of China early this year.

    These three transactions shed light on Hopu’s investment strategy, which appears to focus on situations that align with China’s national interests. Lung Ming holds a 53% interest in a mining company in the Eruu Gol district in Mongolia and China is known for its keen interest to pursue commodities to fuel its economic growth. In both banking transactions, Hopu’s purchase of shares being disposed of by foreign investors, i.e., Royal Bank of Scotland’s Bank of China shares and Bank of America’s China Construction Bank shares, are seen as moves to cushion any fall of two financial institutions’ share prices when the respective foreign investors had to dispose of their holdings.

    Born in 1952, Mr Fang is known to be extremely well-connected in China’s finance industry. A graduate from the Zhongshan University (中山大學), Mr Fang lived in the USA briefly in the early 90’s and returned home in 1992. He was an architect in the formation of China International Capital Corp. (中國國際金融有限公司)(‘CICC’) in 1995, and Mr Fang was its deputy chief executive for five years. In 2000, he joined Bank of China International and assumed the responsibilities of chief executive. His relationship with Goldman Sachs began in 2003 when he helped the US financial institution to lay the foundations for Guo Hua Securities, a joint venture between Mr Fang himself and Goldman Sachs. After a three-year partnership, Mr Fang decided to venture into private equity. He first launched a 10 billion yuan (US$1.5 billion) fund with Suzhou Ventures Group (蘇州創業投資集團) before announcing the formation of Hopu USD Master Fund. In July last year, Mr Fang became the first president of China’s first private equity association - Beijing Private Equity Association (北京股權投資基金協會). The appointment suggests Mr Fang will play a central role in shaping the future course of private equity in China.

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