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 2010 Issue
 二零一零年六月號

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 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

People on the Move
人物花絮

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

 

Opportunity Knocks

ITiming is everything. When Ping An Insurance (Group) Company of China, Ltd. (中國平安保險(集團)股份有限公司)(‘Ping An’) decided to buy TPG’s 16.76% stake in Shenzhen Development Bank (深圳發展銀行)(‘SDB’) mid last year, the giant insurer was searching for an investment that would advance its strategic expansion agenda, but with minimum inherited risks. For, at that time, the wound of writing down its Rmb23.87 billion (US$3.28 billion) investment in Fortis Bank Ltd. (富通銀行)(‘Fortis’) was still fresh. At the same time, TPG was seeking a buyer for its stake in SDB after having taken control of the southern lender since the second half of 2004. It was the perfect potion of willing buyer and willing seller that engineered one of the most legendary exits in China private equity (fig. 1). In particular, it was TPG’s risk appetite and swift move in disposing of a portion of Ping An’s shares in its hands that has sanctified this investment.

The Landmark Deal
From the very beginning when TPG, through its Asian arm, Newbridge Capital Asia, decided to take a controlling position in SDB, it was an unusual investment. At the end of 2004, SDB was among the smallest of the state-owned lenders. It was troubled with a low capital adequacy rate of 2.3% while the industry standard was 8% or higher. Furthermore, the ratio of non-performing loans stood at 11.4%, in comparison to 8.49% at the end of 2003. The investment was nonetheless a landmark event as it was the first bank in China to cede control of its boardroom to foreign investors. SDB was thus the first bank in China to greet a foreign national as its chairman.

In the initial round of investment, TPG invested around US$149 million for close to an 18% equity stake. In 2007 and 2008, TPG pledged its unwavering support to SDB when it exercised its options and deposited an additional US$138.4 million into SDB. Altogether, TPG’s exposure in SDB added up to just over US$288 million.

After managing SDB for five years, TPG boosted the southern lender’s vault and changed its client’s profile. At the end of 2009, SDB’s net profit reached Rmb454.6 billion, representing a healthy 26% increase compared to the preceding year, while over 84% of SDB’s deposits came from corporate clients instead of retail customers (fig. 2)......

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Focus 案例研究
Deepened Integration
Cross Strait activities advance as Beijing opens its office in Taipei

For sixty-one years they were so close and yet so far apart. The political chasm that long divided mainland China and Taiwan became substantially narrower in early May when politicians on both sides of the Strait officiated at the opening of the Taipei office of Beijing’s Cross-Strait Tourism Exchange Association (‘CTEA’). For the first time in 61 years, Beijing has a formal presence on the island of Taiwan. The opening of CTEA in Taipei was by far the most powerful pledge of commitment from the two economies that they are now ready to take political dialogue to a new stage. Three days prior to the opening of CTEA’s office in Taipei, the Taiwan Strait Tourism Association also opened its first tourism office on the mainland (fig. 8).

Political Tunes
Behind this historical event, a flurry of activity has been fuelling the rapidly changing political skies over the Taiwan Strait. Significantly, it is now an open affair that agencies that are directly linked to Beijing are now knocking on Taiwan’s doors. In a recent interview, Mr Dai Xianglong (戴相龍), chairman of National Council for Social Security Fund (全國社會保障基金)(‘NSSF’), disclosed NSSF’s interest in investing in Taiwan as part of its recently-adopted overseas investment programme.

With Rmb770 billion (US$112 billion) in its coffers, NSSF is eager to use its war chest to win Taiwan. In addition to satisfying the State’s political agenda, NSSF is also keen to tap into the pool of managerial talents in Taiwan. NSSF had long made its gesture to Taiwan. Last year, Mr Xiang Huangcheng (項懷誠), former chairman of NSSF, visited Taiwan and also made a similar overture (fig. 9).

In response to such a direct gesture from Beijing, Taiwan’s China Development Financial Holdings Corporation (‘CDFH’), parent company of China Development Industrial Bank (中華開發工業銀行), recently expressed its interest in forming a joint venture fund management firm. Mr Simon Dzeng (曾垂紀), director of CDFH, in a recent interview with the local press, also confirmed courtships from a number of mainland China’s local governments.

Until recently, when the Koo family became a substantial shareholder of CDFH, the latter had long been the investment vehicle for Taiwan’s incumbent political regime. CDFH’s revelation of its plans in the mainland is by far the most indicative statement that President Ma Yingjeou’s (馬英九) government is ready to further thaw the stretch of icy political water that has separated the two economies for more than six decades.

Measured Strategies
Yet Taiwan’s institutions have been measured in advancing into the mainland market. After having led the trail in establishing a series of joint ventures in mainland China, in accessing China’s A-share market, the island’s leading financial institution, Fubon Financial Holdings Co. (‘Fubon’) has chosen to team up with the Changsha-based Founder Securities Co. (‘Founder Securities’) instead of with those in major cities. The two recently initiated the formation of Founder Fubon Fund Management Co. Ltd. (方正富邦基金管理公司)(‘Founder Fubon Fund’).

Founder Securities is a subsidiary of the Shanghai-listed Founder Technology Group Corp. (‘Founder Group’). It is currently the biggest securities firm in the western part of China. It covers 15 major provincial cities. Despite being located in Hunan province, Founder Securities has long established relationships with global financial institutions. It is the controlling shareholder of Credit Suisse Founder Securities Co., Ltd. (瑞信方正證券有限公司), a Sino-Foreign securities company, and Founder Futures Co. (方正期貨有限公司).

In Founder Fubon Fund, Founder Securities will commit Rmb133 million for a 66.7% stake, with the remaining interest to be taken up by Fubon’s subsidiary, Fubon Securities Co., Ltd., which will subscribe Rmb67 million. Founder Fubon shall enter the cross Strait financial market’s record books as the first joint venture fund management operation jointly subscribed by investors from mainland China and Taiwan since the memorandum of understanding for the cross-Strait financial industry (兩岸金融合作監理備忘錄) was inked back in January this year.

Even though Taiwan’s Uni-President Enterprise Corp. (‘Uni-President’) has long established its presence in the mainland China market as one of the largest food product makers there, in setting up its first public equities joint venture fund management firm, it has chosen to stay within the provincial borders of Fujian which is home to the largest pool of Taiwanese nationals. President Industrial Fund Management Co., Ltd. (統一興業基金管理有限公司) is a joint venture between President Securities Corp. (統一綜合證券股份有限公司), a subsidiary of the island’s largest food and beverage conglomerate, and Union Trust Ltd. (聯華國際信託有限公司), which is the only trust company in Fujian province. President Securities Corp. is to contribute Rmb49 million for a 49% stake, with the balance shared by its mainland counterparts. However, when it comes to private equity funds, Uni-President appears to be less conservative. In the recent launch of its private equity fund that has a target size of up to Rmb3 billion and focuses on consumer and related industries in China, Uni-President joined hands with Shanghai International Group Asset Management Co., Ltd. (上海國際集團資產管理有限公司) This is Uni-President’s second private equity joint venture fund in China. In June 2008, the food and beverage manufacturer launched a joint venture fund, China F&B Venture Investments, with Singapore-based United Overseas Bank Group and Suzhou Venture Group.

Comments
Those who are eager to seize emerging economic opportunities arising from improved economic ties between mainland China and Taiwan have brushed aside their respective political ideologies. Hong Kong-listed Shimao Property Holdings Ltd. (世茂房地產控股有限公司) recently joined forces with Taiwan-listed Farglory Group (遠雄企業團) to launch a US$10 billion fund, to be known as Straits Construction Investment (海峽建設投資公司), according to various news reports. The partnership is to identify real estate opportunities in both mainland China and Taiwan.

There is also Chinatrust Financial Holding Co., Ltd. (中國信託金融控股公司)(‘Chinatrust’) a leading financial institution in Taiwan. In preparation for taking a slice of the China financial market, Chinatrust is to upgrade its operation in Shanghai to become a wholly-owned subsidiary.

The economic benefits of such heightened movements between Taiwan and the mainland are showing pleasing results. In the first quarter of 2010, Taiwan recorded a striking 13.27% growth in its gross domestic product, compared with that a year ago (fig. 10). It is the highest growth rate for a quarter in 32 years. During the same period, Taiwan’s exports to China rose by 52.5%, while private investments surged by 37.11%. The figures are the best since the third quarter of 1974 (fig. 11).

As economic integration between mainland China and Taiwan deepens, it is companies with an established cross-Strait platform, such as Industrial Bank Co., Ltd., that have become the latest prized asset for private equity investors.

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