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.

AUGUST 2009 Issue
 二零零九年八月號

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

  • Acquisitive Nature

    Funds
    基金動向

  • The Displacement

    Investments
    投資聚焦

  • China Storage
  • The Mating Ritual

    Divestments
    資金套現

  • Bit by Bit
  • Slow Boat to Exit

    The Lens
    圈內透視

  • Leveraging on Legacy

    Window of the world
    世界之窗

    Summary : Subscribers’ weekly
    每週摘要

    Summary : Deal
    交易摘要

    Index & Exchange Rates
    索引及匯率

     

    • The Yoke

    J uly 2008: China’s dairy industry is in turmoil. The toxic chemical, melamine, is found in milk products directly linked to the deaths of infants. By September, China Mengniu Dairy Company Ltd. (中國蒙牛乳業(集團)股份有限公司) (‘Mengniu’), one of the most respected names in the mainland’s dairy industry, is implicated in the tainted milk scandal. Melamine is found in both baby milk powder and liquid milk manufactured by Mengniu. The scandal dragged Mengniu, one of the largest and privately-owned dairy products makers in China, to a low point in its corporate history.

    On 23rd September 2008, when Mengniu resumed trading on the Stock Exchange of Hong Kong, its shares plunged to HK$7.95 (US$1.02) each. Less than three months earlier, Mengniu’s share price had reached a high of HK$25 each.

    A year after the melamine scandal erupted, Mengniu has regained much of its lost lustre. Two days before it announced forming alliances with its latest group of investors, its share price closed at HK$19.10. On 5th July, a new page in Mengniu began with its decision to partner with the Hong Kong subsidiary of COFCO Ltd.(中糧集團有限公司) and HOPU Investment Management Ltd.(厚樸投資管理有限公司) (‘HOPU’). COFCO(Hong Kong) Ltd. (‘COFCO (HK)’) and the private equity firm HOPU will jointly take up a 20% stake in Mengniu through a HK$6.12 billion (US$784.6 million) commitment. COFCO(HK) will account for HK$4.32 billion while HOPU will commit HK$1.8 billion.

    Mengniu was listed on the Stock Exchange of Hong Kong in June 2004. Following the dairy’s successful float, its founder, Mr Niu Gensheng, along with some of the company’s management, established Inner Mongolia Laoniu Community Welfare Development Association (‘Laoniu Welfare’), a non-profit social organization independent from the dairy company.

    Becoming Wholesome
    Mengniu’s capital raising comes at a time when its treasury is flush with cash. At the end of 2008, after weathering a recall of its products during the tainted milk scandal, Mengniu’s net cash balances still weighed in at Rmb1.31 billion (US$193 million), a 32.5% drop from the preceding 12 months. The negative impact of the melamine scandal was acutely felt by the dairy in the second half of 2008. During this six-month period, the company’s net income plunged into negative territory, at minus Rmb1.5 billion, compared to a positive net income of Rmb583 million in the preceding six months. This resulted in Mengniu reporting a net loss of Rmb948.6 million for 2008 .....

    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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    Funds 基金動向
    The Displacement
    China’s fund management firms rule the roost

    Once the concept of private equity and venture capital reached China, it didn’t take long for domestic fund management firms to embrace it wholeheartedly. In less than a decade, this asset class in China has evolved to a point where private-sector players are now among its most ardent proponents.

    In the first half of 2009 alone, a total of US$2.72 billion of fresh capital has come into China’s private equity market, of which foreign currency-denominated funds sponsored by foreign organisations account for 33.6%, while domestic investors take up 47%. The remainder falls into the category of joint ventures. Since the second half of 2007, funds raised by domestic fund management firms have consistently surpassed funds raised by their foreign counterparts.

    It is no longer the government, in the form of state-owned enterprises and provincial government-linked entities, driving the industry’s growth. There are signs that the private sector is becoming adept at setting up funds designed to help them expand their presence on the sprawling map of China. Among them, some prime examples include Silicon Paradise Venture Investment Co., Ltd.(硅谷天堂創業投資有限公司) (‘Silicon Paradise’), Sinowisdom Investment Management Co., Ltd.(浙江華睿投資管理有限公司) (‘Sinowisdom’) and Comway Capital Group (同華投資集團) (‘Comway’).

    Bordering Shanghai, Zhejiang province is where these private-sector fund management firms first flourished. Although Silicon Paradise is now headquartered in Beijing, it traces its roots back to Hangzhou, a major city in Zhejiang. Sinowisdom and Comway are based in Hangzhou and Shanghai, respectively.

    Silicon Paradise, with more than Rmb5 billion under management, is among the largest fund management firms sponsored by the private sector. As far back as 2000 it focused on investing in early-stage high technology companies. In 2005, it decided to include private equity in its business scope. Today, Silicon Paradise has operations in Shanghai, Shenzhen and Wuhan.

    Since 2006, Silicon Paradise is known to have launched 12 funds that cover investment opportunities in companies at various stages of growth. It also launched two buyout funds and another vehicle for socially responsible investing. As an indication of the increasingly integrated domestic market, in which government-sponsored funds are now entrusted to private-sector managers, in 2008, Silicon Paradise was appointed manager of the Wuxi Municipal People’s Government Guidance Fund (無錫市人民政府引導基金) which has a target size of Rmb100 million.

    Sinowisdom is another fund management firm formed through private sector resources in 2002. Although it currently trails behind Silicon Paradise with Rmb2 billion under management, its fund sizes are substantially larger. Its Zheshang Blue Stone Venture Capital Fund (浙商•藍石創投基金) was formed in mid 2008 and has a Rmb350 million fund pool. Sinowisdom is currently raising two funds for growth/expansion situations that will add an additional Rmb800 million to its fund pool when the target sizes of the funds are met.

    Unlike Silicon Paradise, which focuses on major Chinese cities like Beijing, Shanghai, Wuhan, Wuxi and Shenzhen, Sinowisdom focuses mainly on companies based in Zhejiang province.

    Among these three fund management firms, Shanghai-based Comway’s profile comes closest to mirroring that of a foreign firm. Formed in 2000, it is currently managing four funds with a total capital pool of Rmb1.45 billion. Comway seeks opportunities across the whole of China in companies that are in growth/expansion stages. Significantly, it manages substantially larger funds, with the smallest one amounting to Rmb 200 million. In early 2008, it launched its current fund, Comway Capital Fund IV that has a target fund size of Rmb2 billion, close to US$300 million. Such a fund size indicates a very different level of skill sets attained by Comway’s managers compared to those at Silicon Paradise and Sinowisdom.

    With the growth of domestic private-sector fund management firms in China, foreign fund managers are trying to carve out space in an industry that is becoming increasingly small for non-domestic players.

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    Divestments 資金套現
    Bit by Bit
    Investors turn A-shares into cash at a snail’s pace

    Soon after the worst of the financial crisis had passed, New Horizon Capital (新天域資本) committed funds to BBMG Corp. (北京金隅股份有限公司) in a show of support for the state-controlled construction materials company. The sizzling initial public offering (‘IPO’) of BBMG Corp. on 29th July on the Stock Exchange of Hong Kong indicated the dramatic return of the investors’ confidence. The IPO was 774 times over-subscribed and successfully raised HK$6.85 billion (US$884 million.) Meanwhile, in Shanghai, the world’s largest IPO since March 2008 took place without much fanfare. The IPO of China’s largest home builder, China State Construction Engineering Corp. raised Rmb50.16 billion (US$7.37 billion) just weeks after Beijing reopened its IPO market to domestic enterprises.

    It has now been over a month since the moratorium on IPOs was lifted, and already five companies have raised an aggregate Rmb54 billion on the public market: Guilian Sanjin Pharma, Zhejiang Wanma Cable, YourMart, Sichuan Expressway and China State Construction. On average, the five floats were 37 times oversubscribed, with more than Rmb3.72 trillion amassed to partake in the public shares.

    On the heels of this first batch of IPOs, several domestic enterprises that had received funds from venture capital investors (‘VCs’) are expected to make their public debuts. Since the beginning of the year, four VC-backed companies filed listing prospectuses with the China Securities Regulatory Commission, including Fujian Sunner Development Co., Ltd. (福建聖農發展股份有限公司), Shenzhen Comix Stationery Co., Ltd. (深圳市齊心文具股份有限公司) and Anhui Xinlong Electrical Co., Ltd. (安徽鑫龍電器股份有限公司). The companies have been given the go-ahead for their public floats, while applications by Zhejiang Yotrio Group Co., Ltd (浙江永強集團股份有限公司) and Shanghai Chaori Solar Energy Science & Technology Co., Ltd. (上海超日太陽能科技股份有限公司) were rejected.

    Based on past divestment patterns, it is unlikely that investors will see a substantial pool of capital returning to their coffers, at least not in the short-term. In the first half of the year, 13 domestic venture investors were known to have sold holdings on the secondary market, clocking an estimated aggregate return of Rmb 796.3 million. Unlike other stock markets where investors generally complete exits in less than five tranches, investors of A-shares have adopted a multiple-sale schedule of disposals, despite the fact that the invested capital has been relatively small, generally under US$6 million.

    Shenzhen Capital Group Co., Ltd. (深圳市創新投資集團有限公司) invested Rmb10 million (US$1.29 million) in Shenzhen Yuanwanggu Information Technology Co., Ltd. (深圳市遠望谷信息技術股份有限公司) (‘Yuanwangu’) in 2003. A year after the company’s IPO in August 2007, its venture investors began to pare down holdings. Between August 2008 and February 2009, it undertook at least six rounds of sales but sold only half of its shares in Yuanwangu.

    Similarly, in mid 2006, Haitong-Fortis Private Equity Fund Management Co. Ltd. (海富產業投資基金管理有限公司)(‘Haitong Fortis’) invested Rmb45 million in Nanjing Yunhai Special Metals Co. Ltd. (南京雲海特種金屬有限公司)(‘Yunhai’). The joint venture fund management firm that was sponsored by the Belgian government did not commence to sell down its holdings in Yunhai until February this year, 15 months after Yunhai was listed. By July, Haitong Fortis has disposed of 40% of its shares in Yunhai, but the sales were done through six separate rounds over six successive months.

    Even Suzhou Venture Group (蘇州創業投資集團), which is one of the largest venture investors in China, is enduring a tedious divestment procedure. In July this year, it completed the sale of around 50% of its holdings in Jiangsu Alcha Aluminum Co. Ltd. (江蘇常鋁鋁業股份有公司) (‘Alcha’) through eight rounds of share disposals that commenced in August 2008, 12 months after Alcha was listed. Significantly, with the exception of the disposal that took place in December 2008, the number of Alcha’s shares sold by Suzhou Venture Group in any given disposal never exceeded 0.45% of the company’s issued shares. Suzhou Venture Group invested around Rmb21.6 million in Alcha back in 2003 .

    Zhejiang Silicon Paradise Venture Group (浙江天堂矽谷創業集團有限公司) (‘Silicon Paradise’) also sought to return capital to its investors. From March 2008 to February 2009, the firm pared down its holding in Shenzhen Laibao Hi-Tech Co., Ltd. (深圳萊寶高科技股份有限公司) (‘Laibao’) harvesting slowly a US$30 million return. Silicon Paradise invested US$5.5 million in Laibao in mid 2005.

    The revival of China’s IPO market will undoubtedly usher in a new phase of divestment for investors in possession of A-shares. VCs still have to rely almost entirely on the open market for disposing of their stakes in listed portfolio companies. Releasing substantial equity stakes may require various regulatory approvals. Negotiated trades, which involve an exchange’s intermediaries and can facilitate more substantial share disposals, are a feature of the Hong Kong bourse, whereas on the Shanghai stock market shares are disposed of differently. No record of such negotiated trades for A-shares is known. Therefore, based on the divestment patterns of the recent listings of VC-backed portfolio companies, even though China’s A-share market is among the best performers this year, extracting substantial cash remains a laborious process.

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