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.

November 2009 Issue
 二零零九年十一月號

Content 內容提要


Feature
 封面文章

Analysis
本期關注

Focus
焦點

Case Study
案例研究

News
動態透視

Institutional Corner
機構投資者

Funds
基金動向

Investments
投資聚焦

Divestments
資金套現

The Lens
圈內透視

  • A Role Model

    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 Dragon Dance

    For more than 10 years, China has been planning to launch its own version of NASDAQ, in the hopes of grooming its own Bill Gates. On 30th October, the ChiNext market commenced trading operations. A total of 28 companies were listed and together they raised an aggregate Rmb15.52 billion (US$2.28 billion). ChiNext marked the first major step in China’s pursuit of technological supremacy, as well as breeding its own technology talent. In this ambitious undertaking by the world’s third largest economy, private equity and venture capital investors, both local and foreign, will be a central component for this modus operandi.

    The Selected 28
    In its quest to build up this capital raising platform for young and promising technology companies, China chose 28 companies that have enjoyed high growth in recent years. During the first three quarters of the year, the average growth rate of these companies was 75.58%, compared to the same period in 2008. In presenting this first batch of companies, Beijing has ensured that they are representative of a broad spectrum of industries including healthcare, information technology and industrial manufacturing.

    However, the market values of this celebrated maiden list of companies are far from small. Lepu Medical Technology (Beijing) Co. Ltd. (樂普(北京)醫療器械股份有限公司)(‘Lepu’) backed by Warburg Pincus, is the largest. Based on its initial public offering price, it boasted a market capitalisation of Rmb11.77 billion (US$1.73 billion). Of the remaining 27 companies, their market values ranged from Rmb7.33 billion to less than Rmb786.4 million. A substantial portion fall within the range of between Rmb1 billion to Rmb3 billion, or around the US$400 million mark.

    Significantly different from those currently listed on either the Shanghai or Shenzhen bourses, ChiNext’s first 28 listees are all privately-owned enterprises, suggesting China’s determination to groom the country’s next generation of technology talent without the state’s influence.....

    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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    Divestments 資金套現
    Trickle of Cash
    Cash begins to return to investors’ coffers, albeit in trickles

    Since this July, when investor sentiment started to improve, there has been no abatement in the flurry of initial public offerings (‘IPOs’) on the bourses of both Hong Kong and Shenzhen. Up to the end of October, there have been 76 listings, fuelled by ChiNext, China’s new technology board which began trading on 30th October. A year after the financial crisis, Hong Kong and Shenzhen, the two neighbouring cities in Southern China, have been the focal points for IPOs. (fig. 25)

    Despite the string of IPOs in recent months, hard cash has eluded those private equity investors with their portfolio companies listed during the past few months. Yingde Gases Group Co., Ltd. (盈德氣體集團有限公司)(‘Yingde’) was the exception. On 8th October, it was listed on the Stock Exchange of Hong Kong (‘HKSE’) and its sole private equity backer, Baring Private Equity Asia, was able to rake in a return of capital for this investment. The trend highlights a sharply different IPO market environment since the onslaught of the global financial storm last year.

    Against the Odds
    By all accounts, Yingde’s IPO commanded celebrations. Its stock was over-subscribed by 37.44 times for the retail portion in Hong Kong. By the time it made its debut, with the number of H-shares already flooding the market, investors were showing signs of IPO fatigue. A number of stocks preceding Yingde’s listing had witnessed disappointing first day trading performance. Among them, Peak Sport Products Co., Ltd. (匹克體育用品有限公司)(‘Peak Sport’), which counted Sequoia Capital China (紅杉資本中國基金), CCB International Asset Management Ltd. (建銀國際資產管理有限公司) and Legend Capital (聯想投資有限公司) as its investors, received a lukewarm response from investors. Listed a week before Yingde, Peak Sport’s first day closing price was down 17% from its offering price.

    The Shanghai-based Yingde bucked the trend. In addition to being a heavily-subscribed stock, Yingde was able to sustain investors’ interest. Its first day closing price, at HK$7.84 (US$1.01) per share, was a 12% premium compared with its IPO price. Despite the enthusiastic response from the public market, Baring Private Equity Asia had decided to dispose of only a parcel of its holdings, returning US$39 million to its coffers, almost double the total equity amount that it had invested in Yingde.

    Baring Private Equity Asia’s first commitment to Yingde dated back to 2006 when the private equity firm pledged over US$20 million to the company that was then jointly owned by the current management of Yingde and the Shenzhen-listed Torch Automotive Group. Since then, Baring Private Equity Asia had made further commitments. In the heydays of the stock market rallies, investors would have attempted to pare down a much larger portion of their holdings at a company’s IPO, but times are different and Baring Private Equity Asia is astute. Nonetheless, based on the IPO price of Yingde, the private equity investor’s remaining holding will represent US$209 million on the books, a hefty 10 times of its original invested capital.

    Adjusted Expectations
    Private equity investors are realistic. The past substantial sum or one-time return of capital is history. In Kasen International Holdings Ltd. (卡森國際控股有限公司)(‘Kasen’), Warburg Pincus, through a series of disposals of shares, has returned an aggregate US$7.8 million in recent weeks. It is indeed a far cry from the private equity firm’s past divestiture records in which returned capital would come in double digits and in US currency.

    Between 2003 and 2004, Warburg Pincus had committed an aggregate US$37 million to Kasen, China’s leading leather maker. When Kasen went public on the HKSE in October 2005, the private equity giant sold a portion of its holdings and returned US$23.4 million to its coffers. At the time when Kasen was listed, its IPO price was HK$2.55 per share. At the end of October, its share price stood at HK$1.94.

    The trickle of cash is a critical source of optimism. Infinity-CSVC Partners was jubilant and announced having made an over 2.5-fold return of capital from Digital China Holdings Ltd. (神州數碼控股有限公司)(‘Digital China’) after an investment holding period of just over a year. In September last year, Infinity-CSVC Partners, through its Infinity I-China Fund, purchased the Hong Kong-listed Digital China’s shares, at HK$2.43 each. At the time when it sold a portion of Digital China’s shares, the shares changed hands at HK$6.8 each. Infinity-CSVC Partners raked in US$11 million.

    Comments
    A number of divestments are expected to complete in the weeks leading up to the end of the year, but investors of these exits are not expected to boast a high percentage premium on these investments.

    VisionChina Media Inc. (華視數字移動電視有限公司) has recently announced its intention to acquire Digital Media Group (DMG數碼媒體集團)(‘DMG’) which is backed by NTT DoCoMo, Dentsu, Gobi Partners, as well as Oak Investment Partners. The buyer has committed US$160 million in both cash and in shares. The first instalment of US$100 million will be made at the close of the transaction; with the remainder to be made over a period of two years.

    Since 2004, DMG has successfully raised over US$73 million from its backers who are not expected to be able to claim hefty returns of capital from this investment.

    Similarly, when Citi Venture Capital International (‘CVCI’) sells Landwind International Medical Science Pte. Ltd. (藍韻公司)(‘Landwind’) to Avenue Capital Group, the private equity investment arm of Citigroup is unlikely to be able to take too much cream off from this investment. According to market sources, the hedge fund is believed to be committing to a US$100 million transaction. This is virtually the same amount paid by CVCI when it made its investment in Landwind back in 2007.

    A year after the financial crisis struck, despite the return of the IPO momentum and that both the Hong Kong and Shenzhen stock exchanges have been recording rallies, so far, the divestment game rules are no longer the same as before (fig 26). With the impending listing of China Pacific Insurance Co., Ltd. (中國太平洋保險(集團)股份有限公司) which is backed by Carlyle, a new level of the divestment game is in the making. The foreign investors are estimated to reap a more than five-times return of their invested capital when the insurer is listed on the HKSE.

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