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.

April 2010 Issue
 二零一零年四月號

Content 內容提要


Feature
 封面文章

Focus
焦點

Case Study
案例研究

News
動態透視

Institutional Investors
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

Window of the world
世界之窗

People on the Move
人物花絮

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

 

The West

The chorus of calls coming from President Barrack Obama’s government asking China to consider appreciating its currency, the renminbi, is getting louder. Yet at the conclusion of the recent meeting of Central Committee of the Communist Party of China, Premier Wen Jiabao expressed his country’s discomfort over pressure exercised on China to adjust the value of its currency. The relationship between the East and West is now more tenuous than it has been for years. Ironically, for an aspiring group of enterprises in China, an effective relationship with the West is imperative for their future growth as they seek to brand their names in the global financial scene.

In late February, the Shanghai-based Fosun Group (‘Fosun’) captured global headlines when its joint venture partnership with The Carlyle Group (‘Carlyle’) became public. The announcement coincided with an announcement by China Investment Corporation (中國投資有限公司)(‘CIC’) that it would partner with Intel Capital in its global pursuit of breakthrough technology companies. These latest incidents affirm that a growing pool of Chinese enterprises is looking West for their future resources and asset creation.

Increasingly, the East-West joint ventures have become the dominant business model in China. This is evidenced by the rise of joint venture funds in China. In 2007, there were three joint venture funds launched, representing 3.4% of the number of funds launched during that year. In the 12 months ending 2008, the numbers had escalated to 16. Since 2007, there has been 32 joint venture funds known to have been launched in mainland China (fig. 1). The development further affirms that collaborations between the East and the West will be the future operational framework, especially when the world economy is dominated by two juggernauts, China and the USA.

Until Chinese enterprises have mastered the complexities of the international markets, partnerships with global marquee firms appear to be the best conduits to secure a position on the global platform. Fosun’s recent joint venture with Carlyle unveiled an aspiring private sector company’s efforts in adopting an international business model for its future. .....

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Investments 投資聚焦
The Earth
China’s agricultural sector attracts keen interest

At the recent Third Session of the 11th National People’s Congress (第十一全国人民代表大會), Premier Wen Jiabao (温家寶) said that China will increase its investment in the agricultural sector to Rmb818.3 billion (US$119.8 billion), up 12.8% from the money spent in 2009. For China to focus on improving farming infrastructure in rural areas, developing agricultural science and technology, and encouraging modern farming techniques, Premier Wen revealed that some Rmb133.5 billion has been earmarked to subsidise agricultural production.

In the past decade, China saw the nation’s rising demand for agricultural products change its status from being an exporter to an importer. In 2000, China imported US$11.25 billion of agricultural goods while its exports amounted to US$15.7 billion. But by 2004, the equation had changed and the imported figures exceeded those for exports. Since then, there has been no improvement in the trend, and by 2009 imported agricultural goods chalked up to US$52.25 billion; while that for exports was US$39.6 billion (fig. 14). The need for modernisation of agriculture in China is pressing and savvy private equity investors are seizing the opportunity in the sector.

In March, a consortium of investors, enlisting some of the most marquee names in the global private equity industry, committed to the largest transaction known in China’s agricultural sector. The transaction, initiated by Capital International Private Equity Funds (‘Capital International’), saw pledges of combined US$600 million from The Blackstone Group, Atlantis Investment Management, and Orchid Asia, as well as Warburg Pincus, to Dili Group Holdings Co. Ltd. (‘Dili’), one of China’s largest agricultural wholesale market operators.

Dili has built an extensive platform from which to trade agricultural products. In Shandong Province, a major vegetable producer in China, Dili owns Shouguang Agricultural Products Logistics Park Company Ltd. (壽光農產品物流園). In Heilongjiang Province, Dili controls Harbin Hada Agricultural and Sideline Products Joint Stock Company Ltd. (‘Harbin Hada’), as well as Qiqihar Hada Agricultural and Sideline Products Company Ltd. Harbin Hada is a leading wholesale market for agricultural products in its own province (fig. 15).

Since China announced the restructuring of its agricultural sector in 2004, private equity investors have been vying for investment opportunities and there have been glowing examples of successful investments. In 2006, UOB Capital Partners (大華創業投資管理有限公司) and SkyVen Asset Management jointly invested US$3.6 million in China XLX Fertiliser Ltd. (中國心連心化肥有限公司)(‘China XLX Fertiliser’), the sixth largest coal-based producer of urea in terms of production capacity in China. In less than a year since the two Singapore-based investors had injected capital into China XLX Fertiliser, the latter went public on the Singapore Stock Exchange. Both exited from China XLX Fertiliser during its IPO in June 2007 and clocked an aggregate return of US$16.8 million, representing an exhilarating internal rate of return of over 900%.

On CDH Investments’ (鼎暉投資) books, Guangdong Haid Group Co., Ltd. (廣東海大集團有限公司)(‘Haid’), an aquatic and livestock feeds producer, is another company that will further embellish China’s leading private equity firm’s illustrious track record. In late 2006, CDH Investments invested around US$12.3 million in Haid, which was subsequently listed on the Shenzhen Stock Exchange in late 2009. Since then, Haid’s stock has risen nearly 30%. Based on the share price of Haid at the end of March, CDH Investments would have clocked a return multiple of more than seven times (fig. 16).

The emerging opportunity arising from China’s agricultural sector has aroused institutional interest from China’s domestic investors. In January, CITIC Trust Co., Ltd. (中信信託投資有限責任公司), a subsidiary of CITIC Holdings Ltd. (中信集團有限公司), joined hands with Henan Agriculture Synthesis Exploitation Co. to launch the Rmb4.8 billion Henan Agricultural Development Industrial Fund. It is China’s first agricultural fund and bespeaks of a new set of opportunities deriving from China’s rich soil that is awaiting fertiliser from private equity investors.

For more than four thousand years, agriculture has come to shape every fibre of the Chinese society. But as the country’s economic reform advances, a new phase of development now awaits China’s agricultural sector. The change is unleashing a new pool of investment opportunities to investors.

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Divestments 資金套現
The Public Story Continues
Quoted stocks command premiums that shore up return performance

In the first three months of the year, investors of companies in China saw US$288.2 million returned to their coffers. Of this, shares sold in the public market accounted for 65% of the returned capital, underscoring the critical importance of this exit avenue for private equity investors. The recent two profitable divestments are prime examples of the premium commanded by shares that are publicly traded (fig. 19).

The Hong Kong-listed Digital China Holdings Ltd. (神州數碼股有限公司)(‘Digital China’) is controlled by Legend Holdings Ltd. and is a major information technology platform for its parent company. It is also the largest information technology products distributor and system integrator in China. When Hony Capital (弘毅投資)(‘Hony’), which is the buyout investment arm of Legend Holdings, teamed up with SAIF Partners and IDG Capital Partners (IDG資本) and invested in Digital China back in November 2007, the latter was trading at an average HK$3.86(US$0.49) per share.

Digital China
In November 2007, Hony subscribed to Digital China’s share placement and paid HK$3.5 per share, representing a deployment of HK$270.64 million, or US$35 million. Since then, all shareholders of Digital China have received dividend payments from the information technology products company each year.

Among the three groups of investors that invested in Digital China, Hony was the last to initiate its divestment process. It was an astute decision as Digital China’s share price has been on the rise since receiving capital from private equity investors in 2007. In mid-March this year, Hony sold a third of its shares in Digital China at HK$13.7 each. The transaction price was nearly four times the price it paid back in 2007. Hony clocked a return of over US$44.1 million. Based on the prevailing share price enjoyed by Digital China, the remaining some 52 million shares in its hands represent an aggregate value of over US$92 million.

Digital China has proven to be a winner for all private equity investors that had invested in it. When General Atlantic Partners exited from Digital China in 2007, it recorded a return of US$52.3 million for an invested capital of US$37.1 million.

Late last year, riding on Digital China’s soaring share price movements, SAIF Partners initiated a partial exit and IDG Capital Partners concluded its partnership with Digital China. Both have been able to clock a return multiple of almost three times and an internal rate of return of over 60% (fig. 20).

China Lodging
As an indication of investors’ preference to have liquid shares, when China Lodging Group, Ltd. (‘China Lodging’), holding company of Hanting Hotels, decided to offer its shares to the public, a willing buyer, Ctrip.com International Ltd. (‘Ctrip’), was already on the perch. The NASDAQ-listed Ctrip is China’s largest online travel agency. It was eager to gain a shareholding position in China Lodging’s initial public offering (‘IPO’).

China Lodging counted a long list of investors as its backers, including Chengwei Ventures (成為投資咨詢有限公司), Northern Light Venture Capital (北極光創投), CDH Investments (鼎輝投資), IDG Capital Partners and Pinpoint Capital (保銀資本). Together they invested an aggregate US$60.61 million in Hanting Hotels in 2007.

Ctrip offered to buy an approximate 8% of China Lodging’s total ordinary shares. Based on China Lodging’s offer price of US$12.25 per American Depositary Share, which equates to four ordinary shares, Ctrip is to pay US$57.73 million for its interest in China Lodging. Ctrip acquired a portion of the shares held by each of the private equity investors. In this first phase of exit, on average, each of the investors was able to double its portion of invested capital. The transaction demonstrates the magnetic pull of publicly-listed shares, as evidenced by Ctrip’s choice of timing in buying China Lodging’s shares (fig. 21).

Huiyin Household
But not all IPOs would lead to positive returns. In late March, Huiyin Household Appliances (Holdings) Co., Ltd. (匯銀家電(控股)有限公司), backed by ARC Capital Partners (‘ARC Capital’), went public on the Stock Exchange of Hong Kong. The investment firm did not dispose of its shares at Huiyin’s IPO even though it invested in the household appliances company back in November 2007. Had it disposed of its shares it would not have generated positive results for this investment.

At the time of investing in Huiyin, ARC Capital paid HK$1.9 for each of Huiyin’s shares, representing a deployment of US$48 million. Despite the fact that Huiyin aspires to become China’s largest home appliances chain store operator that would rival GOME Electrical Appliances Holdings Ltd., its markets are largely confined to second- and third-tier cities in the Jiangsu and Anhui provinces. It offered its shares at HK$1.69, below ARC Capital’s entry price.

However, after the first day of trading, Huiyin’s share price was up, at HK$2.44 and may rise in the coming months. Under China’s Rmb4 trillion stimulus package, under the Rural Appliances Rebate Programme, the purchase of home appliances receives a subsidy. With consumption expected to rise, especially in China’s rural areas, ARC Capital can only patiently wait with the hopes that Huiyin’s share price will surge in due course.

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