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 2010 Issue
 二零一零年八月號

Content 內容提要


Feature
 封面文章

Analysis
本期關注

Focus
焦點

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

Index & Exchange Rates
索引及匯率

 

The Seekers

China Inc. has a new mandate: the quest for international assets. In the three years ending 2009, capital deployed for foreign assets, excluding investment in financial assets, virtually doubled from US$24.8 billion to US$43.3 billion. According to the Ministry of Commerce of the People’s Republic of China, the outflow of foreign direct investment capital during the first six months of the year, at US$17.8 billion, is an increase of 43.9%, compared to the corresponding period in 2009 (fig. 1). The foreign acquisition fever is sweeping across China, for both the state-owned and private sector enterprises. Significantly, they have emerged as a new breed of buyers of global private equity assets.

A Global Bridge in Oz
In July, China Merchants Group, one of China’s leading state-owned enterprises, claimed ownership of the Australia-based Loscam Ltd. (‘Loscam’) which was controlled by Affinity Equity Partners. It was not only the first buyout asset in Australia sold to a buyer from China, but also the largest in Asia, backed by private equity investors, being acquired by an investor group coming from there. The transaction thus concluded Loscam’s relationship with its financial sponsors which began in 2003 when DB Capital Partners took control of the logistics company.

Established during the 1940s, Loscam is a pallet pooling company that has not only successfully established market share in Australia, but also in Southeast Asia. After being held by DB Capital Partners for two years, in 2005 Affinity Equity Partners paid around A$250 million (US$227 million) and assumed full control of Loscam. While no transaction details were released, according to market sources the buyer placed Loscam’s value at between A$650 million and A$700 million.

The acquisition of Loscam is China Merchants Group’s first major overseas purchase. To the leading state-owned enterprise, Loscam is an important platform from which it ventures overseas, as one of its major business segments is transportation and related infrastructure. Loscam will help extend its new parent company’s supply chain infrastructure and services business. Loscam’s strategic value could have been China Merchants Group’s justification for committing to such a deal size. ......

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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Focus 焦點
The Economic Armistice
Economic integration on both sides of the Strait takes a giant step

After more than six decades divided by bitter political differences, on 29th June 2010, the island of Taiwan and mainland China were brought together by a landmark agreement – the Economic Cooperation Framework Agreement (兩岸經濟合作架構協議)(‘ECFA’)(fig. 6). From the moment when both inked the ECFA, the political and economic landscape on both sides of the Taiwan Strait was no longer the same. The ECFA represents the apex of a gradual warming of relations that commenced in 2008 when the Kuomintang swept into power. It certifies Taiwan as an integral piece in Greater China’s economic mosaic.

Courtship in PE Circle
China’s private equity heavyweights wasted no time in courting their Taiwanese counterparts. Less than ten days after the signing of the ECFA, Mr Zhang Yicheng (張懿宸), Chief Executive Officer of CITIC Capital Holdings Ltd., and currently chairman of the China Venture Capital Association (‘CVCA’), led a delegation to visit Taiwan. According to Economic Daily News in Taiwan, the visit was initiated by China Development Industrial Bank, the backbone of Taiwan’s venture capital industry. On CVCA’s agenda was a visit to the Hsinchu Science Park, home to the world’s largest OEM chip manufacturer, Taiwan Semiconductor Manufacturing Company Ltd. (台灣積體電路製造股份有限公司)(‘TSMC’).

While CVCA’s visit signals private equity investment activities on both sides of the Strait could be the trend in the foreseeable future, quite a number of private equity firms, through their China portfolio companies, have already accessed the Taiwan market. In June, Xtep International Holdings Ltd. (特步國際控股有限公司)(‘Xtep’), which counts The Carlyle Group among its private equity investors, opened its first retail store in Taiwan. A leading sports shoe manufacturer and brand in mainland China, Xtep aims to operate 300 stores in Taiwan.

Similarly, Daphne International Holdings Ltd. (達芙妮國際控股有限公司)(‘Daphne’), a top women’s footwear retailer which manufactures and distributes footwear, apparel and accessories in China, raised an aggregate US$146.7 million in 2009. Earlier, Daphne reached out to Taiwan’s Pou Chen Group (寶成國際集團)(‘Pou Chen’) as its partner.

In January this year, Daphne agreed to invest NT$1 billion (US$31.1 million) for a 60% stake in Pou Chen’s Aee. The acquired assets are held by Pou Chen through its Yue Yuen Industrial (Holdings) Ltd. Aee has over 200 stores in the mainland, Hong Kong and Taiwan. The acquisition will multiply Daphne’s distribution network, not only in China, but also on the other side of the Strait (fig. 7).

The share price movements of both Xtep and Daphne are clear indications of investors’ positive responses to both companies’ Taiwan strategies. Since announcing the establishment of a foothold on the island in late June, Xtep’s share price has been on an impressive rise, from around the HK$4.50 (US$0.57) mark in Jan this year to HK$5.58 end of July. Investors also rewarded Daphne’s astute move in taking a controlling interest in assets across the Strait. Daphne’s share price has advanced from around HK$7 in January this year to HK$7.21 by the end of July (fig. 8).

For Daphne, in particular, its partnership with Pou Chen is a necessary extension for its future growth. The shortage of skilled labour has been a major impediment to expansion by China-based manufacturers. As an illustration, Daphne had planned to open some 500 stores during 2010, so far, it had cut ribbons of only 140 new stores. Its alliance with Pou Chen could allow it access to a pool of skilled labour in Taiwan.

Interplays Among Institutions
Even institutions on both sides of the Strait are actively gesturing to each other, further suggesting that economic collaboration in the private equity market on both sides of the Strait will be the future trend.

The National Social Security Fund (全國社會保障基金)(‘NSSF’), the backbone investor of China’s private equity funds, made no secret of its intention to deploy capital to assets in Taiwan. In his recent inaugural visit to Taiwan, Mr Dai Xianglong, chairman of the NSSF, was unreserved in outlining his institution’s plans to diversify its investment mandate, with Taiwan being among the list of markets to which the NSSF would like to deploy capital. With Rmb776.5 billion (US$114.6 billion) of assets, NSSF’s wish to make capital commitments to Taiwan-based companies is significant given its massive hoard of capital under management.

In Taiwan, the Ministry of Economic Affairs (‘Ministry’) responded to NSSF’s gesturing with a firm signal. Coinciding with the signing of the ECFA, the Ministry made history when it approved TSMC to take an 8% equity position in Semiconductor Manufacturing International Corp. (中芯國際集成電路製造有限公司)(‘SMIC’), China’s largest foreign-owned chip maker. Although the transaction was part of the settlement agreement of a legal dispute between TSMC and SMIC that dated back to 2003, the Ministry’s green light has thus removed the bar that prohibited Taiwanese technology firms from investing in China, on the grounds of intellectual property issues. The watershed speaks volumes to the level of commitment displayed by the government of President Ma Yingjeou to pursue dialogue with mainland China.

TSMC itself, the symbol of the Taiwan government’s success in venture capital, had earlier expressed its interest in China’s chip manufacturing industry. Through its TSMC Partners, it recently committed US$5 million to Shanghai Walden Semiconductor Venture Capital Enterprise, which specialises in integrated-circuit design in China. This deal gives TSMC the platform it needs to access China’s semiconductor market.

The Prepared Financiers

The finance industries on both sides of the Strait have been eagerly preparing for the advent of ECFA. In June, China Everbright Securities Co., Ltd., the brokerage arm of China Everbright Group, a state-owned enterprise, formed a strategic partnership with Taiwan’s Polaris MF Global Futures. The deal involves each party taking a 20% stake in the other party, and paves the way for future collaboration in the China futures market (fig. 9).

China Construction Bank is drawing up blueprints to enter the Taiwan market, through a variety of avenues - branch office, joint venture and ownership of local banks.

Taiwan’s banking industry is petitioning its regulators to relax restrictions for cross-strait investments. Among the list of banks that could bolster their values are those backed by private equity, including The Longreach Group’s EnTie Commercial Bank, as well as Carlyle’s Ta Chong Bank Ltd. Jih Sun Financial Holding, which is backed by Shinsei Bank, has plans to expand into China by teaming up with local Chinese securities companies in Shanghai, Shenzhen and Dongguan.

Comments
The signing of the ECFA is only the beginning. Its implementation will require legislative review and ratification. While mainland China is a willing party, Taiwan remains divided. Less than ten days after the ECFA came into effect, Taiwan’s Executive Yuan descended into chaos as the opposition party voiced its disagreement to the ECFA. Yet this is just the beginning, and there is much room for compromise that would further propel economic growth and integration for these two economies.

The road ahead for private equity investors seeking opportunities in this new economic paradigm in Greater China shall be full of trials and tribulations, but the rewards ought to be outstanding given the sheer size of the market and prospects for economic growth.

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Divestments 資金套現

An Illusive Market
A-share market trumps in the number of IPOs, but not returns of cash

The Shanghai and Shenzhen stock markets are showing sure signs that they will lead the world in the number of initial public offerings (‘IPOs’) for the year. By the third week of July, these two bourses boasted 192 new listings since January that raised an aggregate Rmb300 billion (US$44 billion) from domestic investors. During the same period, their southern cousin, the Stock Exchange of Hong Kong (‘SEHK’), saw only a fifth of the IPOs in the A-share market. Despite a smaller number of IPOs, SEHK, the world’s sixth largest stock market by market capitalisation, saw over HK$148 billion (US$19 billion) raised during the same period. The development is a telling statement that while China’s A-share market is consumed with new IPOs, return of invested capital could have eluded investors.

The divestment profile of private equity-backed China-based companies across all bourses for the first six months of 2010 suggests an anomaly in the exit equation. While the number of divestment processes, at 118, represents a multi-fold increase from the 37 recorded for the same period in 2009, there has been no substantial increase in returned capital. From January to the end of June, an estimated US$2.9 billion was known to have been returned to investors. This is only a slight improvement from the US$2.8 billion recorded during the same period in 2009. In fact, around 74% of the US$2.9 billion realised came from sales to either a trade buyer or to an identified party, with the stock markets accounting for US$688 million, nearly a fifth of the returned capital (fig. 22).

During the first half of the year, public market activities which included IPOs, share transactions on the secondary market, and backdoor listings, accounted for more than 78% of the 118 divestment processes. The A-share market led as it recorded 50 IPOs as well as sales of shares on the open market, followed by SEHK and NASDAQ (fig. 23). Yet the towering number of IPOs on the A-share market did not translate into returned capital.

The Shenzhen and Shanghai stock markets paled compared to other stock markets when it comes to distribution of returned capital. During the first half of 2010, China’s A-share market was known to have returned a paltry Rmb308.7 million or US$45.6 million to private equity investors, a fraction of that recorded by the SEHK for private equity investors (fig. 24).

Of the US$688 million realised through the public market route, the Hong Kong bourse accounted for the lion’s share, at US$375 million. Even though the US stock market has been rather volatile, in the first six months of the year, both NASDAQ and the New York Stock Exchange have returned an aggregate US$203 million to investors with China plays. In Singapore, a private equity investor was able to realise a portion of its interest at the IPO of its China portfolio company. In April, China Minzhong Food Corporation Ltd. (‘China Minzhong’) made its debut on SGX. It was the Lion’s City biggest IPO. Olympus Capital Holdings Asia was able to sell down its interest at China Minzhong’s IPO and clock a return of US$170 million.

Ironically, it is trade sales rather than the public stock markets that have shored up the exit performance of investors with China portfolios. The US$1.2 billion realised by TPG in its partial sale of the Shenzhen Development Bank to Ping An Insurance (Group) Co. of China Ltd. (中國平安保險（集團）股份有限公司) was the single largest realisation achieved during the first half of the year. In this legendary exit, TPG was able to achieve an exhilarating multiple of over 13 times. With China Inc. seeking to acquire quality assets, this surging pool of trade buyers offers an alternative to the A-share market which has not only eluded investors with returned capital, but also imposes a lengthy lock-up period.

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