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July 2009 Issue
二零零九年七月號
Content 內容提要
Feature
封面文章
Analysis
本期關注
- Kaixin vs Kaixin001
Focus
焦點
- The Encore
News
動態透視
- China Trust Appoints Banking Veteran
- Baijia Boiled About Noodle Trademark
- Pudong’s Plan to Attract Foreign PE Firms
- IFC Promotes Alternative Energy in China
- CIC Seeks Global Talent
- Blackstone’s China Map
- Closer Memory Between Japan and Taiwan
- Stimulus Package Counters Downturn
- Carlyle Markets Shanghai Real Estate Project
People On The Move
人物花絮
Institutional Corner
機構投資者
Once Bitten Funds
基金動向
Industrial Strength Investments
投資聚焦
Indigenous Investors Divestments
資金套現
Curtain Rises on IPOs The Lens
圈內透視
The Scout Window of the world
世界之窗
Summary : Subscribers’ weekly
每週摘要
Summary : Deal
交易摘要
Stock Watch
股價表現
Index & Exchange Rates
索引及匯率
Act II
F ate has brought private equity and China’s number one home appliance distributor together once again. In late June, Bain Capital LLC (‘Bain’) clinched the deal to become the financial partner of GOME Electrical Appliances Ltd. (國美電器控股有限公司) (‘GOME’). The announcement lifted clouds of uncertainty that had been hanging over GOME since late November when it was suspended from trading.
The agreement with Bain is GOME’s second rendezvous with private equity capital. In 2006, the company raised US$125 million from Warburg Pincus. In the years between these two fundraising exercises, GOME solidified its position as China’s leading home appliance retailer, and it wasn’t until the arrest of its flamboyant chairman, Mr Wong Kwong-yu (黃光裕), in November 2008 that the company’s future was cast in doubt. With Bain’s involvement, the rehabilitation of GOME’s reputation is well under way.
Reaching the Global Stage
From its modest beginning as a clothing shop founded by Mr Wong in 1987, GOME grew to become a household name in China’s retail market in the 90’s. By the time it was listed on the Stock Exchange of Hong Kong in 2004, the company had nearly 200 stores across the country. For a number of years, Mr Wong was China’s richest man, according to Forbes magazine’s rankings.A year after GOME became a quoted stock in Hong Kong through a back-door listing route, Mr Wong was ready to drive the company onto the international stage. He chose private equity as the preferred vehicle. Warburg Pincus had the credentials to help Mr Wong advance his vision. The venerable private equity house was well acquainted with China, having first deployed capital in the country in 1995. Mr Wong also hoped to leverage on Warburg Pincus’ solid global network.
When Warburg Pincus announced its US$125 million subscription to GOME’s convertible bonds in January 2006, it was a landmark event that set the stage for investment in public equities by private equity investors in China plays.
Warburg Pincus was absolute in its belief that GOME would continue to enlarge its share of the electronics retail market. In the key terms for the issuance of the convertible bonds (CBs), Warburg Pincus agreed to an annual 1.5% coupon. Although GOME’s average share price in 2005 was HK$6.25 each (US$0.80), the agreed conversion price, at HK$6.4, underscored Warburg Pincus’ optimism in GOME’s future growth. Based on GOME’s historical and projected earnings before interest, tax, depreciation and amortisation (‘EBITDA’), the conversion price suggested a compounded annual growth rate of 27.02%.
Since announcing its commitment to GOME at the end of 2006, Warburg Pincus watched the share price trade on an upward path, reaching an historic high of HK$20.39 per share on 11th January 2008 (fig.2). When Warburg Pincus decided to liquidate a portion of its instruments, GOME was the epitome of a successful investment. In May 2007, in its first known share disposal, the global private equity firm sold half of the common shares in its hands and clocked an impressive return of US$155 million.....
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.
Funds 基金動向Industrial Strength
Industry-focused funds take offBeijing has established a new industrial mandate for the country’s private equity funds. Designated as “industrial funds”, such investment vehicles are being launched to advance China’s continuing industrialisation and fuel its economic growth. In May, the 10 billion yuan (US$1.5 billion) China Mining United Fund (中礦聯合基金) was launched. It is China’s first mining-focused industrial fund and the first yuan-denominated fund registered under the State Administration for Industry & Commerce. China Mining United Fund will not confine its investment targets to local non-listed mining industry companies, but will also look at listed foreign mining firms through an overseas subsidiary fund.
Within weeks of the mining fund launch, the Shenzhen listed Hunan Valin Iron and Steel Group Co., Ltd. (湖南華菱鋼鐵集團有限責任公司)(‘Hunan Valin’) announced a partnership agreement with Beijing-based China Huarong Asset Management Corporation (中國華融資產管理公司) to set up the country’s first industrial fund to invest in the steel industry. The fund will have an initial target size of 1 billion yuan. Significantly, earlier in the year, Hunan Valin deployed over A$1.3 billion (US$ 1.04 billion) to raise its stake in Australia’s Fortescue Metals Group to 17.4%.
It has been two and a half years since Bohai Industrial Investment Fund became China’s first industrial fund (渤海產業投資基金). At the end of June, the country had a total of 41 industrial funds, covering a broad spectrum of industries, from traditional manufacturing to advanced technology. No other Asian market rivals the kaleidoscopic array of industry-focused funds boasted by China.
As fund raising activities in other markets slowed to a virtual standstill, there was no shortage of sponsors launching industrial funds in China. In the first six months of 2009, the frameworks of 16 industrial funds were publicised. This, compared to 22 for the entire 2008, is an indication of the latest trend in China’s domestic private equity market. During the same six month period, industrial funds accounted for more than a third of the yuan-denominated funds being launched, evidence of their increasing importance in China’s growing domestic fund pool.
China is eager to deploy its bulging reservoir of foreign exchange reserves which reached US$2 trillion during the year. Of the 41 industrial funds launched, the median target fund size is 5 billion yuan, 89.4% higher than the average of all yuan-denominated funds established in China. The Shangdong State-owned Assets Investment Holdings Co., Ltd. (山東省國有資產投資控股有限公司)is the most ambitious. Its Ocean Industrial Investment Fund (海洋產業投資基金) is by far the largest launched, with a titanic target size of 50 billion yuan. At the end of June, a total of 41 industrial funds with an aggregated target fund pool of 399.7 billion yuan were seeking to raise capital. So far, only 13.7 billion yuan is known to have been committed.
The impetus behind the mushrooming of industrial funds comes from provincial governments and state-owned enterprises, which have launched industrial funds to leverage on a given expertise, geography or area of specific interest. Among them, the Shanghai Financial Industrial Fund (上海金融產業基金) is one of the best examples. The 20 billion yuan fund will be managed by a fund management firm in which China International Capital Corp. (中國國際金融有限公司),the country’s first joint venture investment banking institution, has a 40% interest. It will focus on making investments in the financial sector in Shanghai. There is also the Robeco TEDA Sustainable Private Equity Fund (泰達荷寶可持續發展私募股權基金) which is sponsored by the Tianjin (天津市) government to promote the city’s commitment to sustainable investment. The fund is partnering with the Netherlands-based Robeco Group, which has a background in this investment segment.
China’s industrial funds have yet to fulfill Beijing’s goal of directing capital to the country’s “Inner West” region. Nearly half of the industrial funds established so far have been sponsored by provincial governments or organisations located along coastal areas, where the country’s wealth gathers. It is also in this particular geographic region that some of the largest industrial funds have been established, including the Ocean Industrial Investment Fund. In the western region, including Sichuan province, only three industrial funds, with an aggregated target fund pool of 38 billion yuan, have been launched. To bring about a more even distribution of prosperity within its vast geography, it rests with Beijing to promote the merits of industrial funds in remote provinces.
The Lens 圈內透視The Scout
A savvy Asian investor claims ownership of Hejian after an eight-year waitFor the past eight years, Mr Robert Tsao (曹興誠), chairman of United Microelectronics Corp (聯華電子股份有限公司)(‘UMC’) has sought the formal endorsement of Taiwan’s government to work in partnership with Hejian Technology (Suzhou) Co. Ltd. (和艦科技(蘇州)有限公司) (‘Hejian’). Even though the island’s government eased its ban on investment in mainland China’s chip industry in 2002, official approval is still required prior to any capital deployment. Taiwan has been particularly cautious about safeguarding its intellectual property in this industrial sector.
In addition to being the founder of UMC, the world’s second largest customised chip maker, Mr Tsao is also an advocate of direct equity investment. UMC is the parent company of UMC Capital (宏誠創業投資股份有限公司) which has a capital pool of NT$4 billion (US$124 million).
In June, Mr Tsao’s patient efforts paid off when UMC claimed full ownership of Heijian, which is located in Suzhou, Jiangsu province. The acquisition of Hejian is a shining trophy for Mr Tsao. An established name in the global customised chip manufacturing sector, UMC will be the first Taiwan chip manufacturer to take full control of a semiconductor plant on the other side of the Strait. Although the acquisition of Hejian will represent a complete exit for its investors, it is being sold at a loss to UMC even though the global chip manufacturing industry is expected to enjoy increased demand in 2010.
Planting Roots on the Mainland
Hejian was founded by a consortium of foreign investors in November 2001 with a capital commitment of US$1.5 billion. Among the list of known investors were American International Group, SMBC Daiwa Capital (formerly known as NIF Ventures), Japan’s Softbank and the Economic Development Board of Singapore (‘consortium’). At that time, it was the largest undertaking by foreign investors in China’s semiconductor industry.From the outset, Mr Tsao exercised conspicuous influence in Hejian. Mr J H Shyu (徐建華), chief executive and president of Hejian, had formerly been Mr Tsao’s right hand man. When the island’s government began to probe Mr Tsao and UMC’s financial interest in Hejian, Mr Tsao confirmed his involvement in the mainland company. In a February 2005 open letter to explain his involvement with Hejian, Mr Tsao noted that some of his former staff members had urged him to find greener pastures in mainland China. It was also telling that Mr Shyu did not resign from UMC, nor had he left Mr Tsao on acrimonious terms. Using foreign investors as intermediaries, Hejian was created as UMC’s platform in mainland China and was manned by Mr Tsao’s loyal employees.
Four years after Hejian was founded, the Suzhou-based semiconductor company, as a token of appreciation for Mr Tsao’s past support, offered UMC a 15% stake in the company, with a book value of US$110 million.
The Rules and the Ruler
By late 2005, Mr Tsao was fighting to keep UMC from being directly implicated in the affair. In a 29th December 2005 letter to the shareholders of UMC, Mr Tsao described the actions taken by the Taiwan government as politically motivated “distortions”. To prevent UMC from becoming dragged deeper into the morass, Mr Tsao relinquished his fiduciary responsibilities in the company. In a statement levelled at the then political administration, Mr Tsao said he hoped that this action would direct “all external criticism or pressure being exerted by certain authorities” away from the company and toward him alone. He maintained that UMC and its one million shareholders were “innocent”.The toll of the battle between UMC and Taiwan’s government was costly for both Hejian and UMC. Hejian’s chief executive, Mr Shyu, was detained and fined for having made an investment in mainland China’s chip-making industry. He was subsequently released on bail, but was placed under travel restrictions.
As the global stock market ascended to euphoric heights in 2007, Hejian was not among the list of quoted stocks. At the time, there were reports suggesting that Hejian was mulling an initial public offering on the Singapore Stock Exchange, but even with the Development Board of Singapore on its side, the company’s listing goal in the Lion City went unrealised.
Following Mr Tsao’s decision to step down, UMC’s daily operations were entrusted to Mr Jackson Hu, its chief executive. UMC was fined NT$5 million (US$150,000) by the Ministry of Economic Affairs (‘MoEA’) for assisting and participating in the establishment of Hejian without prior government approval. On 16th February 2006, the day of the ruling, investors displayed their full confidence that both UMC and Mr Tsao would be able to ride through this politically-charged storm. Its American Depositary Receipts closed at US$3.24, and slipped only to US$3.14 each on the following day.
Tides Change
It was not until early 2007 that the tempest involving the chip maker and the government began to subside. The change in climate began when the then incumbent president, Mr Chen Shui-bian, became locked in a struggle for his political future. The Taipei High Administrative Court reversed the verdict on Mr Shyu and struck down the fine imposed by the MoEA against UMC. By late 2007, as political demonstrations rocked the island, the voices of officials vowing to appeal the court ruling were barely audible.A year after the current political party came into power and the icy Cross-Straits relationship began to thaw, UMC seized the opportunity to acquire Hejian, its cherished asset in mainland China.
Mr Tsao’s decision to move ahead with the acquisition now is particularly astute. After suffering one of its worst cyclical downturns, global Integrated Circuit utilisation is beginning to pick up. According to a report by Gartner, a research company on information technology services, capital spending in the semiconductor industry is expected to fall nearly 45% this year to US$24.3 billion, but is forecast to rise by 21% next year to US$29.4 billion. The acquisition of Hejian provides an additional platform for UMC to capture the surging demand in mainland China.
After more than eight contentious years in which Hejian’s management has been hounded by authorities, its founding shareholders are now ready to release Hejian despite the fact that the exit will represent a substantial loss on their original invested capital. Among them, American International Group is a willing seller. With a variety of factors favouring UMC, it is claiming ownership of the remaining 85% stake in Hejian for US$285 million, a fifth of the original outlay committed by the exiting investors.