China First Capital

PAG Said to Pay About $250 Million for Chinese School Operator — Bloomberg

Leave a Comment / August 12, 2020

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By Cathy Chan

(Bloomberg) — PAG Asia Capital has paid about $250 million for Golden Apple Education Group, a Chinese company that’s been embroiled in legal action brought by creditors of its former owner, according to people familiar with the matter.

The Hong Kong-based private equity firm acquired Golden Apple from Sichuan Harmony Group, a Chengdu-based property developer, the people said, requesting anonymity because the details of the transaction are private. Golden Apple became involved in legal cases brought since 2014 by Sichuan Harmony’s creditors because it guaranteed some of the property developer’s loans, the people added.

The sale of Golden Apple helped resolve legal claims from about 60 individuals and money lenders, some of which had foreclosed on Sichuan Harmony assets, according to an official at Sichuan Financial Assets Exchange, the state-backed entity which was appointed to lead the Sichuan Harmony debt restructuring together with PAG.

“It’s highly unusual for a foreign private equity firm to buy a Chinese company undergoing court-supervised administration,” said Peter Fuhrman, the chairman of China First Capital, a Shenzhen-based investment banking and advisory firm.

The unwillingness of many Chinese creditors to write off part of their loans, a concession needed to restructure debt and give a company a new start, makes such deals “worlds away both in complexity and investment appeal” from other private equity transactions, Fuhrman said.

 One-Child Policy

A spokesman for PAG declined to comment. A spokeswoman for Golden Apple referred to an Aug. 25 media interview posted on the company’s website which said it is partnering with PAG and plans to invest 2 billion yuan ($295 million) in its facilities over the next two to three years. She declined to comment further on the PAG acquisition or on the company’s legal issues.

PAG, co-founded by former TPG Capital veteran Shan Weijian, is buying Golden Apple partly because China’s move to repeal its decades-old one-child policy has bolstered the prospects of the education industry, according to the people. The Chinese government has estimated that the change is likely to add three million newborns each year. Investors have taken note, with venture capital companies conducting 10 fundraising rounds in the first half for startups in the maternity and pediatric market, according to VC Beat Research, which tracks internet health-related investment and fundraising.

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Golden Apple operates 33 kindergartens and two primary schools, mostly based in Chengdu, with more than 12,000 students, the people said. PAG plans to expand the number of primary schools and develop secondary schooling after acquiring the business, according to the people.

Sichuan Harmony has reduced its outstanding loans from state-backed lenders from 2.5 billion yuan to 1.9 billion yuan, according to the Sichuan Financial Exchange official, who asked not to be identified by name. The company has 4.5 billion yuan of assets and will focus on its medical and community nursing- home businesses, the official added.

The market for online education services in China has also attracted overseas interest. KKR & Co. last year agreed to invest $70 million in Tarena International Inc., which offers in-person and online classes in information technology, marketing and accounting. GIC Pte and Goldman Sachs Group Inc.

were among investors putting $200 million into TutorGroup, a Chinese online education platform, in its third round of financing in November. CVC Capital Partners in May sold its stake in Education International Corp., China’s biggest overseas educational counselling service provider, to a consortium led by Chinese private equity fund NLD Investment LLP.

 

An Unspoiled African Paradise Where Many of the World’s Most Valuable Diamonds Wash Ashore — Fortune

Leave a Comment / August 12, 2020

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Much has been written about “blood diamonds” and how these precious jewels fuel lawlessness and vicious feuds in parts of Africa. But, many of the world’s most valuable raw diamonds travel a much less violent pathway to market. They take a 90 million year waterborne journey, starting from a riverbank in inland South Africa and eventually wash ashore on the pristine Atlantic coastline of Namibia. There is no more tranquil, low-tech nor more valuable mining going on anywhere in the world. Diamonds are collected off the beach like seashells, as The Wall Street Journal highlighted in an article last week.

Sound far-fetched? If I hadn’t been there myself, I would have said the same. I’m one of the relatively few outsiders allowed into the “Forbidden Area” in Namibia. At the time, I was a journalist living in London and for years I gently but persistently prodded De Beers in London and South Africa to let me visit. I had first learned about the Forbidden Area as a school kid, when I saw it in an atlas. I made it then my goal to visit it some day. Not easy to do, but I did finally succeed. After seven years or so of asking, De Beers finally agreed.

I stayed there for two days in 1989 as a guest of De Beers. The first diamonds were discovered on the beach here in 1908 and almost immediately after, a 10,000 square-mile tract of southern African coastline and desert was closed off as a diamond concession. De Beers gained exclusive control soon after and has been gathering diamonds along the Forbidden Area’s 200 mile-long pristine beach ever since.

Over the years, political control over the Forbidden Area, also known by its German name the Sperrgebiet, has changed hands three times, from Germany, to South Africa and since 1990, it’s been a part of the independent African state of Namibia. The Forbidden Area makes up about 3% of that country’s total land mass, and is off limits to almost the entire citizenry. The Namibian government is now a 50-50 partner with De Beers, sharing the revenues from this most lucrative of all commodity operations.

Today, the Forbidden Area is probably the most unspoiled large plot of land left on the planet. The diamonds that come ashore here are particularly prized because on average, they are larger and higher- quality than those dug out of the ground. Sea currents over tens of millions of years gradually polish these raw stones to a state of unusual
clarity and brilliance.

As far as geologists can determine, beginning sometime during the Jurassic Age, the diamonds that wash up in Namibia were pushed to the surface by Kimberlite Pipes about 800 kilometers to the east, along what’s now the Orange River. The biggest, heaviest diamonds were gradually pulled down the river by currents and then eventually far out into the sea in Namibian coastal waters. The tides are now slowly but surely pushing them back on land.

About 10 years ago, De Beers began experimenting with ways to accelerate their recovery of these sea diamonds. They now have a fleet of five sea-going vessels that vacuum small quadrants of the seabed about 20 kilometers from the coast.

When I visited, De Beers relied almost exclusively on men from the Ovambo tribe to do the diamond harvesting along the beach. The De Beers facility inside the Forbidden Area was identical in appearance, if not in purpose, to a high-security prison. The Ovambo workers stayed in barracks near the beach for six months at a time. When their stay was up, they were subjected to a full manual body search as well as an x-ray search. I too had to undergo both.

The security is tight for a good reason. Today, almost 10% of Namibia’s economy, estimated at $2.5 billion, comes from the Namibian government’s share of the money collected from selling sea diamonds to cutters and polishers in Tel Aviv, London and Antwerp.

The raw Namibian diamonds sell for around $1,000 a carat, at least triple the price of the high-quality stones mined in Botswana, and well over 10 times the price of most other rough diamonds.

When big money is at stake, however, human ingenuity will often find ways to outsmart the most elaborate security systems. As I was told during my stay, one Ovambo worker did come up with a successful way to smuggle diamonds out of the Forbidden Area. Each time his six-month stint was up, he would return to his village and collect a homing pigeon. He would then smuggle the pigeon back into the Forbidden Area each time he returned. The X-ray search was only on the way out.

Once back in his barrack, he took the biggest diamonds he had hidden away during his last six-month shift, put it in a small pouch around the pigeon’s neck, and let the bird loose. It flew over the tall barbed wire fences and found its way back home. When his six-month shift was done, he returned home to find the pigeon and the diamonds waiting for him.

Even the De Beers Afrikaner guards spoke with admiration about the brilliance and audacity of it. How then was he discovered? One time he got a little too greedy and put so many diamonds in the pouch the pigeon could barely gain the speed and altitude to make it over the fence. One of the guards in a guard tower saw it and a team of them quickly hunted the struggling pigeon down. The guards removed most of the diamonds from the pouch, and followed the pigeon back on its slow flight to its roost. Once there, they asked who owned the pigeon roost. They then knew immediately which of the workers had devised this almost-foolproof smuggling method. They drove back to the Forbidden Area. The worker confessed and returned to De Beers the diamonds he had kept hidden in his home.

While diamond prices continue to go up, lately because of surging demand in China, the total supply of new rough diamonds is in steep long-term decline. Many of the original diamond mines in South Africa are tapped out. But, as far as geologists can estimate, there are still about 80 million carats washing around in the waters off the Forbidden Area’s coastline. Assuming no big changes in tides or technology, the last of these stragglers — likely to be among the biggest and most valuable of all — will be gathered up by De Beers before the end of this century.

Peter Fuhrman is chairman & chief executive officer of China First Capital, an investment bank and advisory firm based in Shenzhen, China. Neither he nor his firm are investors in De Beers.

As published by Fortune

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ZTO Spurns Huge China Valuations For Benefits of U.S. Listing — Reuters

Leave a Comment / August 12, 2020

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By Elzio Barreto and Julie Zhu | HONG KONG

Chinese logistics company ZTO Express is turning up the chance of a much more lucrative share listing at home in favor of an overseas IPO that lets its founder retain control and its investors cash out more easily.

To steal a march on its rivals in the world’s largest express delivery market, it is taking the quicker U.S. route to raise $1.3 billion for new warehouses and long-haul trucks to ride breakneck growth fueled by China’s e-commerce boom.

Its competitors SF Express, YTO Express, STO Express and Yunda Express all unveiled plans several months ago for backdoor listings in Shenzhen and Shanghai, but ZTO’s head start could prove crucial, analysts and investors said.

“ZTO will have a clear, certain route to raise additional capital via U.S. markets, which their competitors, assuming they all end up quoted in China, will not,” said Peter Fuhrman, CEO of China-focused investment bank China First Capital.

With a backlog of about 800 companies waiting for approval to go public in China and frequent changes to the listing rules by regulators, a New York listing is generally a quicker and more predictable way of raising funds and taps a broader mix of investors, bankers and investors said.

“ZTO will have a built-in long-term competitive advantage – more reliable access to equity capital,” Fuhrman added.

U.S. rules that allow founder Meisong Lai to retain control over the company and make it easier for ZTO’s private equity investors to sell their shares were some of the main reasons to go for an overseas listing, according to four people close to the company. U.S. markets allow a dual-class share structure that will give Lai 80 percent voting power in the company, even though he will only hold 28 percent of the stock after the IPO.

Most of Lai’s shares are Class B ordinary shares carrying 10 votes, while Class A shares, including the new U.S. shares, have one vote. China’s markets do not allow shares with different voting power.

ZTO’s existing shareholders, including private equity firms Warburg Pincus, Hillhouse Capital and venture capital firm Sequoia Capital will also get much more leeway and flexibility to exit their investment under U.S. market rules. In China, they would be locked in for one to three years after the IPO.

As concerns grow about a weakening Chinese currency, the New York IPO also gives it more stable dollar-denominated shares it can use for international acquisitions, the people close to the company said.

IN DEMAND

Demand for the IPO, the biggest by a Chinese company in the United States since e-commerce giant Alibaba Group’s $25 billion record in 2014, already exceeds the shares on offer multiple times, two of the people said.

That underscores the appeal of the fast-growing company to global investors, despite a valuation that places it above household names United Parcel Service Inc and FedEx Corp.

The shares will be priced on Oct. 26 and start trading the following day.

ZTO is selling 72.1 million new American Depositary Shares (ADS), equivalent to about 10 percent of its outstanding stock, in the range $16.50 to $18.50 each. The range is equal to 23.4-26.3 times its expected 2017 earnings per share, according to people familiar with the matter.

By comparison, Chinese rivals SF Express, YTO Express, STO Express and Yunda shares trade between 43 and 106 times earnings, according to Haitong Securities estimates.

UPS and FedEx, which are growing at a much slower pace, trade at multiples of 17.8 and 13.4 times.

“The A-share market (in China) does give you a higher valuation, but the U.S. market can help improve your transparency and corporate governance,” said one of the people close to ZTO. “Becoming a New York-listed company will also benefit the company in the long-term if it plans to conduct M&A overseas and seek more capital from the international market.”

China’s express delivery firms handled 20.7 billion parcels in 2015, shifting 1.5 times the volume in the United States, according to consulting firm iResearch data cited in the ZTO prospectus.

The market will grow an average 23.7 percent a year through 2020 and reach 60 billion parcels, iResearch forecasts.

Domestic rivals STO Express and YTO Express have unveiled plans to go public with reverse takeovers worth $2.5 billion and $2.6 billion, while the country’s biggest player, SF Express, is working on a $6.4 billion deal and Yunda Express on a $2.7 billion listing.

ZTO plans to use $720 million of the IPO proceeds to purchase land and invest in new facilities to expand its packaged sorting capacity, according to the listing prospectus.

The rest will be used to expand its truck fleet, invest in new technology and for potential acquisitions.

“It’s a competitive industry and you do need fresh capital for your expansion, in particular when all your rivals are doing so or plan to do so,” said one of the people close to the company.

http://www.reuters.com/article/us-zto-express-ipo-idUSKCN12L0QH

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Google Returns to China, As a Hardware Company — Financial Times

Leave a Comment / August 12, 2020

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The end is in sight for Google’s seven wilderness years in China. With none of the theatrics that accompanied its voluntary withdrawal from the country due to web-search censorship in January 2010, Google is now firmly on a path not only to return to China but also to potentially seize a spot alongside Apple as one of the most profitable tech companies there.

This is a likely outcome of Google’s announcement last week that it is entering with full force the global consumer hardware industry. Google Pixel mobile phones, Google Home artificial intelligence-enabled speakers, Google Daydream View virtual reality headsets, these will be the engines of Google’s revival in China. Based on what Google has so far revealed – including pricing – these products may find a large market among Chinese consumers.

The company has made no specific mention of plans to re-enter China. China’s government will not likely strew the ground with rose petals to welcome Google back.

Instead, Google can rely on China’s enormous grey market for electronics hardware to bring its products into China’s on-and-offline retail network. Hong Kong is usually the main transshipment point, not only because prices are lower than in the PRC, but the quality of hardware sold there is considered to be higher.

There is a precedent here. Apple took six years after the iPhone’s launch to ramp up its official sales channels in China by doing a deal with the main carrier, China Mobile. By that point, an estimated 30m to 50m grey market iPhones were already in use in China.

Mobile phones running Google’s Android system already dominate the Chinese market, with about 300m sold this year. Most are sold unlocked without carrier subsidy. None can freely access Google search, storage or maps. The Google Pixel will likely have similar limitations.

But Pixel will have huge advantages no other Android phone can match of closely integrating the operating system and device hardware to optimise the performance of everything else on the phone.

All of China’s many Android brands will be impacted, but none more so than the current market leader, Huawei. It now dominates the high-end Android market in China, even more so with Samsung’s recent woes. The Pixel will be priced to compete directly with Huawei’s flagship models.

It is not only in its home market of China that Huawei may get battered. It has also set great store on becoming the world’s leading Android phone brand in Europe. That will certainly be far harder to achieve now.

As it happens, Google’s announcement came at a time when just about everyone at Huawei, along with everyone else in China, was enjoying a week-long national holiday. They return to their desks this week to find the tech world disrupted. No one quite predicted Google would amp up its hardware strategy to this level.

Google had toyed around before, selling small volumes of its outsourced Nexus-branded mobile phone to showcase more of Android’s features. Huawei was one of the companies making Nexus phones. Google also bought in 2011 Motorola’s mobile phone business and unloaded it two-and-a-half years later to China’s Lenovo, a deal that has not worked out at all well for the Chinese company.

But, this time Google says it is not dabbling. It defines its future strategy as becoming, like Apple, a fully vertically-integrated hardware and software business, but one with the world’s most powerful system of proprietary voice and text-enabled artificial intelligence.

Google introduced three hardware products last week. More are certain to follow, including perhaps a mid-priced phone that will take aim squarely at China’s Xiaomi (among others), already reeling from falling sales and an inability to crack the more lucrative higher-end Android market.

Google’s advantages run so deep they can seem unfair. Not only does it own and develop the Android software its competitors except Apple rely on, it also already has one of the world’s best and most recognizable brands. Also worth noting, Google now has about $70bn in cash, mainly sitting outside the US, looking for new markets to conquer.

As for the other new Google hardware products – the home speaker and virtual reality (VR) headset – the market seems ripe for the taking. Despite billions of government dollars invested into Chinese companies working on machine-learning, artificial intelligence and VR, none has come to market in any significant way.

Even if they now do, none can match Google’s enormous breadth, capability and experience in human-machine dialogue.

Though a success in the US, Amazon’s Echo home speaker, which is capable of interacting with the human voice, is a non-entity in China. It does not understand spoken Chinese. Google, on the other hand, is quite adept at Chinese. While Google Maps, Gmail, Drive are all blocked in China, Google Translate is not.

Indeed, the Chinese government quietly stopped blocking it about a year ago. It’s the only one of Google’s major online offerings that can be readily accessed in China. The reason: Google Translate has become an essential tool for Chinese companies active internationally, as well as for many of the 150m middle class Chinese now vacationing abroad each year.

If Sundar Pichai, Google’s CEO, is correct, the world including China is moving from a “mobile-first to an AI-first world”. Google is already miles farther down this path than any Chinese company. It need not reestablish its search engine business in China to be a major force there.

As for China’s government, however it chooses to react to Google hardware products sweeping into China, its own aspirations to nurture globally-competitive indigenous tech companies probably just got a lot harder to achieve.

In the seven years since Google departed, China became in many areas even more of a tech Galapagos. Poised now to reenter China by the back door, Google should like the way the competitive landscape looks there.

If Google takes just 1 per cent of the China Android market – and my prediction is it will do markedly better – it will have $2bn of annual revenues in China, a business larger, more valuable and unassailable than when it pulled out.

Peter Fuhrman is Chairman & CEO of China First Capital, a boutique investment bank

 

As published in the Financial Times

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Can Xiaomi Reverse Its Slide in China? — CNBC Interview

Leave a Comment / September 28, 2016

 

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From King-of-Mobile to possible also-ran in two short years, China’s Xiaomi is struggling to reclaim its spot at the top of China’s domestic phone market. Here’s my interview on CNBC on the tough challenges Xiaomi faces. Nerves are starting to fray among investors who put money into the company less than two years ago at a $45 billion valuation.

To watch the interview, please click here.

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What Alibaba Can Teach G20 Leaders — China Daily OpEd Commentary

Leave a Comment / August 12, 2020

China Daily

Rural Taobao

It’s been 740 years since Hangzhou could rightly claim to be the most important city on earth. Back then, it was the capital of the world’s wealthiest and most developed nation, China during the Southern Song Dynasty. This week Hangzhou will briefly again be the center of the world’s attention and admiration, as the leaders of twenty of the world’s most developed countries arrive in the city to participate in the two-day G20 Summit.

The world’s spotlight will fall both on Hangzhou’s most famous historical landmark, West Lake, as well as its most famous local company, Alibaba, which also happens to be the world’s largest e-commerce company. Alibaba’s founder and chairman Jack Ma, is a Hangzhou native. He has spoken often of his pride that the G20 will be held in his hometown, boasting “Hangzhou has become the driving force of China’s new economy.” He suggests G20 visitors might want to rise one morning at 5am to walk about West Lake, to see Hangzhou scenery ancient and modern.

Alibaba has changed Hangzhou and changed China. But, to really grasp the full and positive extent of that change, world leaders would need to venture out from Hangzhou and visit some of China’s smallest, poorest and most remote rural villages. Here Alibaba’s impact is perhaps the most transformational. That’s because Alibaba has made a special effort to bring the benefits and convenience of online shopping to China’s rural families, the 45% of China’s population that still live on the land.

Since Alibaba listed its shares on the New York Stock Exchange in 2014, the company announced plans to spend RMB 10 billion on rural e-commerce infrastructure, to make it possible for people in over 100,000 Chinese rural villages for the first time to buy and sell on Alibaba’s Taobao marketplace.

It’s impossible to overstate the importance of this effort. E-commerce now offers the fastest and most durable way to improve living standards among China’s traditional peasants. By getting online they can shop more widely and buy more cheaply a vast range of products never before available in village China. In addition, also for the first time, they can sell directly their farm products, both fresh and packaged, to tens of millions of customers living in cities across China.

I’m one of those urban dwellers in China who now does some of his food shopping from tiny rural family businesses on Taobao. In the last week I bought dried chili peppers from Sichuan, apple vinegar from Shanxi, goji berries from Qinghai and dried sweet potato chips from Shandong. Everything I buy from rural folks is great. But, for me and probably many others, the real enjoyment comes from knowing that, thanks to Alibaba, my money can go directly to the people working hard to build a better life for themselves and their families in rural China. This, in turn, helps narrow the income gap between rural and urban.

Unlike the two big US e-commerce companies, Amazon and eBay, Alibaba takes no commission on purchases made on Taobao. This is what economists call “frictionless trade”, where buyers and sellers can transact without any middlemen taking a cut. It’s a dream of farmers worldwide, to sell products directly to customers and so earn more for their hard work.

Online shopping in rural China is now growing far faster than in cities. And yet what’s most exciting, we’re still in the early days. In the future, farmers should be able to save significant money and improve harvests by buying seeds, fertilizer and tools on Taobao and other specialized online sales platforms.

To get there, Alibaba is paying for tens of thousands of “Village Taobao” centers across China. Here, farmers can get free help to buy and sell online. Nowhere else on the planet is e-commerce being as successfully introduced into the lives of small village farmers. The world should take note, and China should take pride.

This year marks the first time China has hosted a G20 summit. Looking at the agenda, the twenty world leaders will hold detailed discussion on trade, fostering innovation and eradicating poverty. Meantime, Alibaba is busy putting such talk into action. Its efforts to spread e-commerce in China’s countryside provide concrete proof of how tech innovation can be both inclusive and helpful to all of society.

By Peter Fuhrman

The author is chairman and CEO of China First Capital.

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http://www.chinadaily.com.cn/opinion/2016-09/06/content_26709314.htm

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Chinese Private Equity Funds Are Taking on the World’s Giants — Bloomberg

Leave a Comment / August 12, 2020

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Cathy Chan 

July 21, 2016 — 12:00 AM HKT

  • PE firms from China pursue overseas deals at record pace
  • One Italian target says China links are what matter most

Giuseppe Bellandi never imagined that his company, a 30-year-old maker of industrial automation components in the foothills of the Italian Alps, would end up in the hands of a private-equity fund from China.

But when the chief executive officer of Gimatic Srl realized that Asia’s largest economy was key to his firm’s future, and that Chinese PE executives had the expertise to help him grow there, Bellandi jumped at the chance to partner up. Last month, Gimatic turned down bids from Europe and the U.S. in favor of selling a majority stake to AGIC Capital, the PE firm founded by Chinese banker Henry Cai with backing from the nation’s sovereign wealth fund.

“I was really surprised when I realized how strong Chinese private equity firms are,” Bellandi said by e-mail.

China’s PE industry is expanding globally at an unprecedented pace, putting firms like AGIC, Legend Capital and Golden Brick Capital in competition with European and U.S. counterparts like never before. Fueled by China’s growing wealth, investor sophistication and desire to gain exposure to overseas assets, homegrown funds have taken part in at least $16.4 billion of cross-border deals so far this year, exceeding the previous annual record of $11 billion in 2012, according to Asian Venture Capital Journal.

The overseas push marks a coming of age for an industry that just a few years ago was better known for “buy-and-flip” investments in local companies already primed to go public. The approach was so pervasive that Chinese regulators asked KKR & Co.’s Henry Kravis, a private equity pioneer, to lecture domestic players on how to add more value.

This year, Chinese PE firms have participated in the $3.6 billion takeover of U.S. printer company Lexmark International Inc., the $2.75 billion purchase of Dutch chipmaker NXP Semiconductors NV’s standard products unit and the $600 million acquisition of Oslo-based Opera Software ASA’s web browser business. The sum of overseas transactions so far in 2016 is higher than Asian deals by foreign PE firms for the first time, according to AVCJ.

“These Chinese funds are already beginning to alter the calculus for buyout deals worldwide,” said Peter Fuhrman, the chairman and CEO of China First Capital, a Shenzhen-based investment banking and advisory firm. “It’s about buying companies that, once they have Chinese owners, can start making really big money selling products in China.”

For a QuickTake explainer China’s outbound M&A, click here.

The firepower to pull off such deals comes in part from China’s growing army of high-net worth individuals, whose ranks expanded at the fastest pace worldwide last year despite the country’s weakest economic growth in a quarter century, according to Capgemini SA. Rich Chinese investors are increasingly keen to diversify overseas after last year’s devaluation of the yuan spurred concern of more weakness to come.

“There’s a lot of domestic capital available, obviously looking for a home, and that’s fueling the emergence of these funds,” said Michael Thorneman, a partner at Bain & Co., a Boston-based consulting firm.

It’s no coincidence that the increased focus on international deals comes amid a record overseas shopping spree by Chinese companies, who have announced about $149 billion of outbound acquisitions so far this year. In some cases, PE funds are working with Chinese corporates and financial firms to help structure the deals and amplify their buying power.

For the Lexmark purchase, Legend Capital partnered with PAG Asia Capital and Apex Technology Co., a Chinese maker of ink cartridge chips. On the $9.3 billion takeover of U.S.-listed Qihoo 360 Technology Co., Golden Brick Capital teamed up with Chinese investors including Ping An Insurance (Group) Co.

Domestic Players

“PE funds like us have very experienced teams, who can do the whole thing from deal sourcing to negotiation to due diligence to deal structure,” said Parker Wang, the CEO of Beijing-based Golden Brick, which has invested about $2 billion since it opened in 2014 and also led the purchase of Opera Software’s browser unit.

It hasn’t always been smooth sailing. The Opera Software deal, for example, was originally supposed to be a takeover of the entire company, but suitors including Golden Brick failed to secure government approval.

Chinese funds are also becoming more active in their home market. They’ve been helped by a regulatory bottleneck for initial public offerings — which encouraged companies to turn to PE firms for financing — and the rise of China’s Internet industry, a business that the government shields from foreign ownership.

Local funds participated in domestic investments worth $48 billion last year, exceeding Chinese deals by foreign PE firms by a record margin, according to AVCJ. The number of active Chinese funds, at 672 during 2013-2015, was the highest in at least five years, according to data compiled by Bain & Co.

For more on one of the latest China PE investments, click here.

Among the most high-profile firms doing domestic deals is Yunfeng Capital, founded by Alibaba Group Holding Ltd. Chairman Jack Ma. The firm has purchased stakes in Citic Securities Co. and smartphone maker Xiaomi, while also participating in offers for U.S.-listed Chinese companies such as iKang Healthcare Group Inc. and WuXi PharmaTech.

Domestic funds typically have a home-field advantage over foreign firms in identifying promising investment targets, according to William Sun, general manager of Beijing Jianguang Asset Management Co., a PE firm that focuses on the technology industry.

“We’re all optimistic about China opportunities, but we probably have a better grasp of them than foreign funds,” Sun said.

To be sure, overseas players aren’t walking away from China. Some have partnered with domestic PE firms on consortium deals, as California-based Sequoia Capital did with Yunfeng on the WuXi PharmaTech takeover.

Growing Competition

Others have identified niches. KKR has spent about $1 billion on five food-related investments in China since 2008, betting that its global track record in the industry will help it thrive in a country that’s faced several food-safety scandals in recent years.

More broadly, foreign firms may be concerned about rising valuations in China, according to Bain & Co.’s Thorneman. The average PE-backed Chinese acquisition target in 2015 had an enterprise value of about 18 times earnings before interest, taxes, depreciation and amortization, up from about 11 in 2013, according to data compiled by Bain.

“There’s just more competition out there,” Thorneman said. “That translates typically into higher valuations, more competitive deals, and more players pushing prices up.”

Most signs point toward a bigger role for Chinese PE firms both at home and abroad. They controlled the largest portion of an estimated $128 billion cash pile in Asia-focused PE funds at the end of 2015, data compiled by Bain show.

Given that China is still growing faster than most major countries, any PE firm with the ability to help companies thrive there will have a leg up on international competitors, said Cai, the former Deutsche Bank AG investment banker who started AGIC last year and calls it an “Asian-European” PE firm. The fund, which counted Chinese insurance companies among its early investors, has offices in Beijing, Shanghai, Hong Kong and Munich.

“Few companies nowadays would care about the money or how much you pay them,” Cai said. “They care if the investor can help them break into the Greater China market.”

http://www.bloomberg.com/news/articles/2016-07-20/chinese-funds-that-kravis-urged-to-grow-up-are-now-kkr-rivals

Investors rush to fund China tech start-ups — Singapore Straits Times

Leave a Comment / August 12, 2020

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 Investors rush to fund China tech start-ups

Staff at Beijing-based tech start-up ABD Entertainment. Many such firms have been drawing substantial investments from the government and venture capitalists, even amid China's slowing economy.
Staff at Beijing-based tech start-up ABD Entertainment. Many such firms have been drawing substantial investments from the government and venture capitalists, even amid China’s slowing economy.
Published  Jun 27, 2016, 5:00 am SGT

Amid flow of money, hopeful entrepreneurs warned that innovation is crucial to success

Chong Koh Ping  China Correspondent In Beijing

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Former media man Lei Ming has programmers, budding actresses and even an Internet celebrity on staff at his data-driven start-up in Beijing.

His two-year-old firm focuses on using big data and analytics – a relatively new tech sector worldwide – to help consumer brands figure out how to get the best bang for their marketing buck.

“There’s an immense amount of data we can glean from weibo accounts,” said Mr Lei, referring to the Chinese version of Twitter, which now has 261 million monthly active users.

Through data analysis, he aims to help clients find the most cost-effective ways to sell their products – through celebrity endorsement, product placement or other innovative means, especially on online platforms.

Valued at about 100 million yuan (S$20 million), the start-up received nearly 10 million yuan in funding last year.

While Mr Lei, 34, is not anxious about revenue for now, he is very clear that he must focus on making his start-up profitable. “It is important that we must be able to make money on our own instead of relying on investors’ money,” he said.

The next step is to become a major player in entertainment advertising – a market he estimates is worth 100 billion yuan. In three years, he aims to get the firm listed on a stock exchange. Mr Lei’s start-up is one of millions that have sprung up in China in recent years amid a tech startup boom. According to a report on the China.org.cn government website, some 4.9 million new companies were set up between March 2014 and May last year, with more than half being Internet firms.

Despite a slowing economy, tech start-ups of all sizes are attracting billions of dollars in investment funds from the government and venture capitalists.

According to research firm Preqin, private investors had poured around US$26.2 billion (S$35 billion) into 796 Chinese tech firms as of the middle of this month.

And last year, government-backed venture funds targeted at tech start-ups raised about 1.5 trillion yuan, increasing the amount under management to 2.2 trillion yuan, according to a Bloomberg report. However, regulations and market practices have yet to be finalised, and it is unclear how quickly the funds will be deployed, said the report.

Even though many of these 780 government guidance funds have been around for more than 10 years, the tech investment boom started after Chinese Premier Li Keqiang rolled out his “Internet Plus” initiative in 2014, encouraging innovation and entrepreneurship. This comes as China seeks to move away from a reliance on low-end manufacturing and heavy industries.

With labour and living costs on the rise, China can no longer rely on labour-intensive industries to keep its economy humming, said Ms Jenny Lee, a Shanghai-based venture capitalist who has been investing in Chinese tech firms for the past 15 years. “The old way of throwing labour at tasks is over,” she said. “China must change.”

It must adopt firms that leverage on technology, for these will help increase efficiency and sometimes replace labour, she added.

But while there is no shortage of money out there, with billions of dollars being poured into thousands of tech start-ups each year, just as many are going belly-up for shortage of funds or failure to commercialise their products.

This is because investors and consumers are becoming more discerning, and it is no longer enough for entrepreneurial hopefuls to just go and copy someone else’s idea and hope to thrive, investors and entrepreneurs told The Straits Times.

“These firms need to innovate to compete,” said Ms Lee. And innovation can be in terms of the business model, product or technology.

Some venture capitalists, such as Beijing-based James Tan, find Chinese tech firms to be very good at localising new ideas from Silicon Valley and achieving superior results on the mainland.

Still, Mr Peter Fuhrman, the chairman of China First Capital, a Shenzhen-based investment bank and advisory firm, pointed out that while this strategy has helped some of the home-grown tech giants to grow, it is not sustainable.

Successful tech players like Baidu, Alibaba and Tencent benefited greatly from an intellectual property and legal regime that allowed them to copy American business models and intellectual property without punishment, he said.

China’s market is also closed to foreign competitors, so that domestic firms can grow and thrive within a walled garden free from outside competition, he added.

However, he noted, it is harder now for China to shield its domestic firms from competition than in the late 1990s, when the tech giants got started, as China has since become a World Trade Organisation member.

“Walled gardens are basically illegal under WTO,” he said.

Another problem that could make it hard for China to grow the tech sector is the unique and “occasionally dysfunctional” capital market and initial public offering (IPO) regime, he said.

“This has now made it between difficult and impossible for Chinese tech companies to IPO within China,” he said.

Despite the problems, the push towards innovation and entrepreneurship looks set to continue, with more than 1,600 high-tech incubators nurturing start-ups across the nation.

Ms Mao Donghui, the executive director of Tsinghua x-lab, a university-based education platform for start-ups, said China is just beginning to wake up to the need for innovation. For start-ups to succeed, however, being innovative is not good enough – young people also need to know how to do business. For them to have the right combination of innovation and entrepreneurship would “require years of effort, right methods and experience”, said Ms Mao.

“It’s not that easy to just shout about innovation and entrepreneurship for a year or two, and expect to see results blossom, and affect economic growth. There is still a long way to go,” she said.

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http://www.straitstimes.com/asia/east-asia/investors-rush-to-fund-china-tech-start-ups

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The silver lining in high-priced urban land — China Daily commentary

Leave a Comment / August 12, 2020

China Daily logo–

Chinadaily–

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For those of us living in prosperous first- and second-tier cities in China, the land beneath our feet is exploding in value. Every week seems to set a new price record, as real estate developers buy up land to build on in Beijing, Shanghai, Shenzhen, Guangzhou, Hangzhou, Nanjing and elsewhere.

This has two ill effects. First, it adds more upward pressure on already high housing prices. Second, since the land buyers have mainly been large State-owned enterprises, they will need to sell the apartments they plan to build at one of highest prices per square meter in the world to make profits. It’s another matter that the SOEs are meant to help solve, rather than exacerbate, the serious lack of affordable housing for China’s ordinary urban population.

But there is one hidden and perhaps surprising benefit. The high and rising land prices are confirmation that land sales are becoming more transparent, less prone to potential favoritism and insider dealing. That is ultimately good for just about everyone in China. In the recent record-high land sales, the seller is the local government. In some cases, the price paid was more than double of what the government itself estimated the land would fetch. So it is up to the government now to spend the windfall wisely, in ways that will improve living standards for everyone in the city.

Too often in the past, urban land for residential development was sold for less than its true market price. The unfortunate result was that a comparatively few lucky real estate developers were able to buy land at artificially low prices and then make unconscionably high profits. Not for nothing was it said over the past 20 years that the easiest way in the world to make big money was to become a realty developer in one of China’s major cities.

When a local government sells land at artificially low prices to developers, it can amount to a transfer of wealth from China’s ordinary folks, the laobaixing, to those favored real estate companies. That’s because the developers take the cheap land and then build and sell expensive apartments on it. And the government itself gets less revenue than it should have. This means less money to spend on services that benefit everyone: urban transport, affordable housing, schools, parks, hospitals and the like.

Few Chinese developers have mastered the art and business of building and marketing high-quality apartments on time and within a set budget. Apartment prices have almost always risen during the three years it takes to go from an undeveloped plot to a finished building. If a developer got a good deal on land, he/she was able to sell the new apartments during construction, use the cash to pay off the bank loans and lock in a very high profit.

Going forward all this will become far more challenging. When a developer goes bankrupt, the real victims are usually the ordinary folks who have bought apartments during the construction phase. Time and again, it has proven difficult, nerve-wracking and time-consuming for these buyers to get their money back or make sure the apartments they bought are completed.

As the risk of bankruptcies rise with land prices, I’d like to see rules requiring residential developers to buy insurance to automatically reimburse buyers in case they go bust. The insurance will also put additional and useful pressure on developers to complete work on time and maintain an acceptable quality. If the developer isn’t making progress, or there are other signs of trouble, the insurance company would either withdraw coverage and reimburse buyers or require a new and more reliable developer to take over. Either way, the goal must be to protect, in a transparent and predictable way, the investment of ordinary homebuyers.

Up to now, too much pressure and risk has landed on the shoulders of buyers rather than builders, with cities also short-changing themselves. A fairer and better balance may now be emerging.

The author is chairman and CEO, China First Capital.

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http://www.chinadaily.com.cn/opinion/2016-06/22/content_25798648.htm

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Investing in emerging markets — Financier Worldwide Magazine

Leave a Comment / May 25, 2016

 

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Financier

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 by Richard Summerfield

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During the strains and stresses of the financial crisis, the world’s undeveloped nations proved a safe haven for investors. Flush with resources and opportunities, emerging markets such as Brazil, Russia, India, China and others were the ideal destination for beleaguered investors.

For years, the emerging markets experienced astronomical growth and development. Infrastructure projects were announced and completed, financial hubs developed and a consuming middle class emerged. For a while, the emerging markets were posited as the next influential force in global business and economics.

Yet in 2016, the rapid ascent enjoyed by many of the emerging markets is now a thing of the past. Brazil is in the midst of its worst recession in living memory and gripped by a political corruption scandal. Russia is beset by financial and geopolitical difficulties. China is wrestling with a substantial economic shift as its ruling class re-tools the national economy away from manufacturing and production toward a service based economy. Though China’s economy is still growing at a pace that many western leaders would happily accept, it is a shadow of what it was just a few years ago.

Though the stratospheric growth experienced in the emerging markets was never going to be infinite, the scale and speed of the decline has been eye opening. And investors, in recent years, have responded by shunning emerging markets and diverting their capital elsewhere.

This reversal in fortunes experienced is reflected in declining inbound M&A. KPMG International’s Cross-border Deals Tracker recorded a 3 percent decline in developed to emerging market deals last year, including a 50 percent drop in developed to emerging market activity in China. Much of the decline in investment into China from developed markets relates to the difficulties foreign firms encounter when entering the Chinese economy. Although it is a global powerhouse, the growth of the country’s economy does not really translate into viable investment opportunities for overseas investors, according to Peter Fuhrman, chief executive officer of China First Capital. China’s unwillingness to allow foreign investors into its financial markets and currency act as considerable barriers to international investment. “As long as this situation persists, China will likely continue to be rather unfriendly terrain for global capital,” says Mr Fuhrman. “The result is that the non-Chinese world’s investment institutions remain under-allocated to China. Its economy and capital markets are the second-largest in the world. But that size doesn’t translate into genuine global financial clout.”

BRICS and beyond

Given the scale of the opportunities available to investors, it is imperative to think beyond the traditional BRIC nations – Brazil, Russia, India and China – when considering the developing world. Though it is true that the BRICs have dominated the discussion around emerging markets since the acronym was first used in 2001, they have suffered more than most over the last few years and other developing nations have risen to prominence and attracted considerable investment.

Countries like Mexico – which has enacted considerable internal reforms to make it more attractive to investors – have risen out of the ashes of the BRICs. For every Brazil and Russia there is a Mexico and Philippines. While some of the BRICs have stumbled in recent years, a number of non-BRIC nations have driven emerging market growth. ASEAN and GCC countries have made great strides, as have a number of Sub-Saharan African states. Indonesia, Nigeria, Bangladesh, Mexico and Pakistan have also seen considerable activity. Mexico has emerged as a burgeoning Latin American powerhouse. According to a new study by the IE Business School, Mexico is the top investment destination in Latin America, and this optimistic outlook is supported by a recent announcement by Ford Motor Company which will be expanding into Mexico, creating 2800 new jobs by 2020. The country has also attracted considerable attention – and investment – from Asian investors of late.

Chile, too, has seen a rise in foreign investment. Its economic performance has been far from stellar in recent years – the country’s GDP has failed to recover from the steep slowdown seen in 2014-2015 – yet it has remained attractive to foreign investors. For Francisco Ugarte, a partner and co-head of corporate M&A at Carey, there are a number of reasons for the uptick in dealmaking activity in the country. “Among the most relevant reasons is the large currency depreciation that emerging markets have experienced, posing their assets at cheaper prices in dollar terms,” he says. “In Chile, for instance, $1 was 549 pesos about two years ago, whereas today $1 equals 661 pesos. Also, the current lacklustre market conditions make, in-house investing projects look less attractive and as a result industry consolidation cycles are triggered in search of greater operational efficiencies. We have seen this in Chile. A few examples are the US$600m acquisition of Cruz Verde by Mexican Femsa and the US$1bn acquisition of 50 percent of Zaldivar by Antofagasta Minerals.”

Turning the tide

Despite the headwinds prevalent across developing nations, it would seem that investors are slowly returning to emerging markets. In March and April alone, around $10bn of capital entered the emerging markets – a reversal in fortunes when compared with 2013-2015 which, according to research from Bank of America Merrill Lynch, saw $103bn leave emerging market debt.

Much of this resurgence has been predicated on a number of factors, including low valuations, currency movements, diversification and commodity prices which have risen gradually since February following persistent declines over the last two years. Furthermore, investors have been drawn back to emerging markets by expectations that the Federal Reserve will raise US rates in 2016 fewer times than previously thought.

Argentina, too, has contributed to the emerging market resurgence. In April, it issued debt to the international capital markets for the first time since its default in 2001, selling $15bn in the biggest single issuance of debt from an emerging market country, according to Dealogic.

One key stock index for emerging nations, the MSCI, is up 6.5 percent so far in 2016. That is markedly better than European markets, and ahead of the recent turnaround in US markets. “If valuations continue to be attractive relative to overall market conditions, deals will continue to be made,” says Wael Jabsheh, a partner at Akin Gump. “For the time being, as long as global markets remain stable and the cost of capital remains low, investment in emerging markets should not significantly subside.”

According to the Institute for International Finance, foreigners ploughed some $36.8bn into emerging stocks and bonds in March 2016 – the highest inflow of capital in nearly two years and well above monthly averages for the past four years. Investors were especially drawn to by Brazil’s equities, due to attractive valuations and hopes for political change in the wake of the ongoing corruption scandal and potential impeachment of President Dilma Rousseff. Investors also sought out emerging markets as commodity prices slowly began to rebound and confidence grew that the Fed was on a slower path to raise interest rates.

Although there have been fears around the performance of emerging markets of late, there are many reasons why companies should not abandon the developing world yet. By taking a nuanced, measured approach, investors can still benefit. They must adopt a more studied approach, taking into account a number of factors including location, sector and risk-hedging strategies.

Patience will also be key for companies pursuing deals or investments in emerging markets. The rapid decline of prices may serve as a beacon for firms to dive in. Currently, emerging market stocks are trading at lower prices than developed stocks, but may not have bottomed out. Furthermore, prices may not be low enough to offset the high risk of investing in some markets. Nevertheless, the developing nations, with their burgeoning populations and nascent middle classes, are the future of global economic growth.

Local focus

For companies looking to invest in emerging markets, there are a number of precautions they must take. Chief among these is tapping into local knowledge and experience. Without embracing local experts, investors risk misunderstanding local business culture, which may be very different to their own. Equally, by utilising local expertise, investors can speed up processes and improve communications. “Local knowledge for investing in emerging markets is fundamental,” says Mr Ugarte. “Developed economies tend to be alike but each developing economy has its own rules. Several failures have happened when companies from developed markets operate in the developing world assuming certain rules as theirs. Successful deals in developing markets require knowledgeable local advisers, local insiders and usually a mix of local-foreign management capacity. Collaboration is likely to play a vital part in the successes – or failures – of many organisations’ efforts in the emerging markets.” As such, engaging with local talent and drawing on their knowledge and expertise is a step which investors should not overlook. Acknowledging that the cultural gap varies tremendously between countries does also help. “Chile, which has a free market economy and a good political stability index, is impregnated with western business culture, which in turn makes the country much more predictable for investors that relate to similar values. This partially explains the economic success we have seen in past years.”

Local experience can provide investors with an insight into issues which they might not otherwise have taken into consideration. “When investing in new markets, investors can sometimes fail to appreciate some of the intangible factors involved in their deals,” says Mr Jabsheh. “The political and cultural dimensions of the market and the business in which you are investing are just as important to understand as the legal and regulatory dimensions. While clearly there is no substitute for conventional due diligence, investors often overlook these less tangible factors because they are not necessarily top of mind when those investors do deals closer to home,” he adds.

Future prosperity

The end of the commodity boom has dealt a significant blow to the economic prosperity of the developing markets. But all is not lost. Many developing markets will continue to prosper, although that will be relative. “China provides proof that investment returns do not correlate neatly with GDP growth,” says Mr Fuhrman. “While the Chinese economy will add $600bn in new output during 2016 – more than the entire GDP of Taiwan – it remains a place where global investors’ hearts are routinely broken. It’s proven so hard consistently to make money there.”

Yet China is stabilising. Although only 2.8 percent growth was recorded in the Chinese stock market, all is not lost. Since February, the economy has been relatively stable, and with the Chinese economy in the midst of a huge transitional period, moving away from domestic stimulus and infrastructure development toward a more ‘Western’ model of relying on domestic consumers and urbanisation. The fact that China’s financial markets and currency are still out of bounds for non-Chinese investors acts as a roadblock, according to Mr Fuhrman; nevertheless, it makes sense for investors to keep China on their radar.

Emerging market investment will continue to be a risky business. Political and economic risks are a fact of life when operating in certain emerging markets, and investors must be mindful of the risks inherent in pursuing opportunities. But for those investors with the requisite appetite, there may yet be rich rewards.

 

http://www.financierworldwide.com/investing-in-emerging-markets#.V0TwZ-Qc1RI

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China to fine-tune back-door listing policies for US-listed companies — South China Morning Post

Leave a Comment / May 19, 2016

 

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–China reverse mergers

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Mainland China’s securities regulator will fine-tune policies related to back-door listing (reverse merger)attempts by US-listed Chinese companies, industry insiders say, but it is unlikely to ban them or impose other rigid restrictions.

“It is clear that the regulator does not like the recent speculation on the A-share markets triggered by the relisting trend and will do something to curb such conduct, but it seems impossible they would shut good-quality companies out of the domestic market,” Wang Yansong, a senior investment banker based in Shenzhen, said.

The China Securities Regulatory Commission (CSRC) was considering capping valuation multiples for companies seeking relisting on the A-share market after delisting from the US market, Bloomberg reported on Tuesday. Another option being discussed was introducing a quota to limit the number of reverse mergers each year from companies formerly listed on a foreign bourse.

To curb speculation, it is most important to show the authorities have clear and strict standards for approving these deals
Wang Yansong.

However, Wang said the CSRC was more likely to strengthen verification of back-door listing deals on a case-by-case basis.

“To curb speculation, it is most important to show the authorities have clear and strict standards for approving these deals, and won’t allow poor-quality companies to seek premiums through this process,” she said.

US-listed mainland companies have been flocking to relist on the A-share market since early last year, when the domestic market started a bull run, in order to shed depressed valuations in American markets.

The valuations of relisted companies have boomed, and that has triggered a surge in speculation on possible shell companies – poorly performing firms listed on the Shanghai or Shenzhen bourses. In a process called a reverse takeover or back-door listing, a shell can buy a bigger, privately held company through a share exchange that gives the private company’s shareholders control of the merged entity.

The biggest such deal was done by digital advertising company Focus Media. Its valuation jumped more than eightfold to US$7.2 billion after it delisted from America’s Nasdaq in 2013 and relisted in Shenzhen in December last year, with private equity funds involved in the deal reaping lucrative returns.

Peter Fuhrman, chairman of China First Capital, an investment bank and advisory firm, said the trend of delisting and relisting was “one of the biggest wealth transfers ever from China to the US”.

“The money spent by Chinese investors to privatise Chinese companies in New York ended up lining the pockets of rich institutional investors and arbitrageurs in the US,” he said.

However, a tightening or freeze on approval of such deals would threaten not only US-listed Chinese companies in the process of buyouts and shell companies, but also the buyout capital sunk into delistings and relistings.

“The more than US$80 billion of capital spent in the ‘delist-relist’ deals is perhaps the biggest unhedged bet made in recent private equity history … if, as seems true, the route to exit via back-door listing may be bolted shut, this investment strategy could turn into one of the bigger losers of recent times,” he said.

On Friday, CSRC spokesman Zhang Xiaojun sidestepped a question about a rumoured ban on reverse takeover deals by US-listed Chinese companies in the A-share market, saying it had noticed the great price difference in the domestic and the US markets, and the speculation on shell companies, and was studying their influences.

http://www.scmp.com/business/markets/article/1943386/china-fine-tune-back-door-listing-policies-us-listed-companies

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For article on a related topic published in “The Deal”, please click here

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Leapfrogging the IPO gridlock: Chinese companies get a taste for reverse takeovers — Reuters

Leave a Comment / August 12, 2020

Reuters–

Leapfrogging the IPO gridlock: Chinese companies get a taste for reverse takeovers

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HONG KONG | By Elzio Barreto
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 China reverse takeover–

Chinese firms looking to jump a massive queue of companies seeking to do initial public offerings (IPOs) and start trading their shares on the Shanghai or Shenzhen markets are increasingly going through the backdoor by taking control of companies that already have coveted listing status.

The fashion for so-called reverse takeovers is seeing some unlikely combinations, such as a mobile game developer getting listed through a shoe company and a pharmaceutical distributor tying up with a brewer. In such deals, a listed company buys a bigger privately-held company through a share exchange that gives the private company’s shareholders control of the merged entity.

Companies in the IPO queue, and those advising them, had hoped China would shift to a faster registration-based system for stock market flotations from the current approval regime this March. But the new securities regulator said it would take time to draft the new rules, leaving 762 companies lined up seeking to do IPOs and many of them concerned that the process could take years.

This is prompting companies to consider acquiring listed entities whose businesses are often very modest or deteriorating in a bid to gain quick market access.

“It’s a sign of companies’ complete lack of confidence in their ability to calculate how long they would have to wait to get a primary IPO listing in China. It’s absolutely unknowable at this stage,” said Peter Fuhrman, CEO of China-focused investment bank China First Capital.

BIG PREMIUMS

These deals are proving lucrative for investors in the companies being acquired – often at sizable premiums to their stock market value – but they also raise governance concerns as those getting backdoor listings do not get the same scrutiny they would face in a formal IPO.

Reverse takeovers also bring back memories of a series of accounting scandals in 2011-2012 involving Chinese firms that gained access to U.S. markets through those transactions. The U.S. Securities and Exchange Commission suspended trading and revoked the registration of some companies, with more than 100 of them delisted or suspended from trading at the New York Stock Exchange over the two-year period because of fraud and accounting issues, according to a McKinsey & Co report.

In a public bulletin in June 2011, the SEC warned investors that “many companies either fail or struggle to remain viable following a reverse merger,” and noted there had been “instances of fraud and other abuses involving reverse merger companies.”

The regulator later approved tougher standards for reverse mergers at both the NYSE and Nasdaq exchanges.

Some other markets, including Hong Kong and Australia, also tightened and clarified rules on backdoor listings to prevent similar problems.

“The main concern with backdoor listings is…that they are often easier than IPOs and companies do not have to go through the IPO application process and accompanying scrutiny,” said Jamie Allen, secretary general of the Asian Corporate Governance Association.

An average of 10 companies a month were granted approval to list on the two Chinese exchanges this year and at that rate the backlog will take nearly six-and-a-half years to clear.

The China Securities Regulatory Commission (CSRC), the markets’ regulator, did not respond to a request for comment. Chinese companies have carried out $20.6 billion worth of reverse mergers so far this year, including a $2.7 billion deal by Alibaba-backed logistics company YTO Express in late March to merge with a Shanghai-listed clothing maker.

That’s higher than the $19 billion of deals over the same period last year and comes after a record $66.9 billion of backdoor listing activity in all of 2015, which was also spurred by a temporary shutdown of the IPO market in China, Thomson Reuters data showed. By comparison, volumes were $46.5 billion in 2014 and $27.4 billion in 2013.

Digital advertising company Focus Media, which delisted from the Nasdaq in 2013, relisted in Shenzhen in a $7.2 billion backdoor listing in December, the biggest ever such deal.

Chinese tycoon Wang Jianlin’s Dalian Wanda Commercial Properties may also seek a backdoor listing on the Shanghai stock exchange if it does not get regulatory approval to launch a planned IPO there soon, according to two people with knowledge of the matter.

Most of the deals have happened with concurrent secondary offerings to raise new funds for the merged companies.

WILLING TO WAIT

A China listing can come with a big bump in valuation. Companies listed on Shenzhen’s ChiNext board for high-tech and fast growing companies trade at an average price-to-earnings ratio of 70 times, compared with 13.4 times in Shanghai, where China’s largest state-owned firms are listed, 9.3 times in Hong Kong and 20.3 at the Nasdaq.

The price in shares of Focus Media’s ‘shell’ target Hedy Holdings have nearly doubled in value since the companies announced in August the reverse merger that allowed Focus Media to list in Shenzhen. Shares in Kingnet Network Co Ltd have soared 154 percent since April 2015, when Taiya Shoes made a bid for the mobile game developer.

Still, some companies that only recently entered the China IPO queue are willing to wait.

“We are not sure how long (until) we can get listed, but we understand that a lot of companies are applying for IPO and may need to wait for a long time,” said an investor relations officer at Jiangsu Heshili New Material, which produces materials used for fiber optic cables and filed to go public in Shenzhen in March.

MAY NOT BE CHEAPER

Reverse takeovers can sometimes be more expensive than IPOs. An IPO can cost a lot in advisory fees and work with lawyers and auditors to get a company’s accounts and controls in shape to pass muster with regulators and exchanges. But with a takeover, there are also advisory fees and a lot of those same auditor and legal fees once the deal is completed – plus there is the cost of taking control of the listed company at a premium to its share price.

Indeed, the flurry of deals is pushing the price of shell companies in China through the roof, making reverse mergers only practical for sizeable companies. There were 33 reverse mergers involving Chinese companies in 2015, putting the average deal size at about $2 billion, with the average price more than doubling to $4.1 billion so far in 2016, according to Thomson Reuters data.

“If you’re the nervous investors that took Focus Media private for a couple of billion in the U.S., if you’re a delivery company and you need money to buy airplanes, you can’t wait for two, three or five years,” Fuhrman said, in reference to the way in which being listed allows companies to raise funds more easily – whether for investments or to let shareholders cash out.

“You gotta suck it up and pay the money.”

(Additional reporting by Tris Pan; Editing by Martin Howell)

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http://www.reuters.com/article/us-china-ipo-idUSKCN0XW2HV

Qianhai investors fret over soaring property prices — China Daily

Leave a Comment / August 12, 2020

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Qianhai investors fret over soaring property prices

By Zhou Mo

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Qianhai

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Shenzhen – Hong Kong and foreign enterprises operating in the Qianhai special economic zone have expressed concern over Shenzhen’s high property prices and entrepreneurs’ ability to integrate with the mainland market.

But, they acknowledge that Qianhai’s preferential policies and open environment have made the zone an ideal place for businesses from Hong Kong and abroad to tap into the mainland market.

“From the aspect of government administration and environment, Shenzhen, I believe, is the best place to set up business in the country, and Qianhai is the best area in Shenzhen,” said Peter Fuhrman, chairman and chief executive officer of China First Capital, an investment bank.

“However, from the aspect of cost, it’s not the best. Soaring property prices in the city have increased costs for businesses, and there needs to be a solution,” the US entrepreneur said.

Wednesday marked the first anniversary of Shenzhen’s Qianhai and Shekou zones coming into operation as part of the China (Guangdong) Pilot Free Trade Zone, which also includes Zhuhai’s Hengqin and Guangzhou’s Nansha districts.

As of April 15, more than 91,000 enterprises had been registered in the zone, with registered capital amounting to 4 trillion yuan ($616 billion). Among them, over 3,100 were Hong Kong-funded enterprises, which contributed nearly one-third of the zone’s tax revenue.

“Qianhai will continue to focus on cross-border cooperation between Shenzhen and Hong Kong, and strive to create a platform to support Hong Kong’s stability and prosperity,” Tian Fu, director of the administrative committee of Qianhai and Shekou, said at a ceremony marking the first anniversary on Wednesday.

Innovation and entrepreneurship are among the key areas of cross-border cooperation. To attract Hong Kong entrepreneurs to set up business across the border, the Qianhai Shenzhen-Hong Kong Youth Innovation and Entrepreneur Hub (E Hub) was launched, providing tax incentives, funding opportunities and free accommodation to Hong Kong entrepreneurs. As a result, more and more startups from the SAR are setting up offices in the E Hub.

“The opportunity cost in Hong Kong for entrepreneurs is relatively high, with high rents and labor costs, and the Hong Kong market is small,” said Amy Fung Dun-mi, deputy executive director of the Hong Kong Federation of Youth Groups. “Therefore, it’s wise for them to tap into the mainland market.”

Many of the companies have been doing well, Fung said, while noting that some have not made much progress so far.

Fung said when Hong Kong entrepreneurs start operating on the mainland, it’s necessary that mentors are provided to help them, as environment, laws and policies between Shenzhen and Hong Kong are different.

She also urged the authorities to provide more support to help Hong Kong startups find investors.

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http://www.chinadailyasia.com/business/2016-04/28/content_15424101.html

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How Renminbi funds took over Chinese private equity (Part 2) — SuperReturn Commentary

1 Comment / August 12, 2020

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How Renminbi funds took over Chinese private equity

(Part 2)

By Peter Fuhrman –
 
Large and small ships traverse the Huangpu River 24 hours a day, 7 days a week, and 365 days a year.

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Part two of a series. Read part one.

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Gresham’s Law, as many of us were taught a while back, stipulates that bad money drives out good. There’s something analogous at work in China’s private equity and venture capital industry. Only here it’s not a debased currency that’s dominating transactions. Instead, it’s Renminbi private equity (PE) firms. Flush with cash and often insensitive to valuation and without any clear imperative to make money for their investors, they are changing the PE industry in China beyond recognition and making life miserable for many dollar-based PE and venture capital (VC) firms.

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Outbid, outspent and outhustled

From a tiny speck on the PE horizon five years ago, Reminbi (RMB) funds have quickly grown into a hulking presence in China. In many ways, they now run the show, eclipsing global dollar funds in every meaningful category – number of active funds, deals closed and capital raised. RMB funds have proliferated irrespective of the fact there have so far been few successful exits with cash distributions.

The RMB fund industry works by a logic all its own. Valuations are often double, triple or even higher than those offered by dollar funds. Term sheets come in faster, with fewer of the investor preferences dollar funds insist on. Due diligence can often seem perfunctory.  Post-deal monitoring? Often lax, by global standards. From the perspective of many Chinese company owners, dollar PE firms look stingy, slow and troublesome.

The RMB fund industry’s greatest success so far was not the IPO of a portfolio company, but of one of the larger RMB general partners, Jiuding Capital. It listed its shares in 2015 on a largely-unregulated over-the-counter market called The New Third Board. For a time earlier this year, Jiuding had a market cap on par with Blackstone, although its assets under management, profits, and successful deal record are a fraction of the American firm’s.

The main investment thesis of RMB funds has shifted in recent years. Originally, it was to invest in traditional manufacturing companies just ahead of their China IPO. The emphasis has now shifted towards investing in earlier-stage Chinese technology companies. This is in line with China’s central government policy to foster more domestic innovation as a way to sustain long-term GDP growth.

The Shanghai government, which through different agencies and localities has become a major sponsor of new funds, has recently announced a policy to rebate a percentage of failed investments made by RMB funds in Shanghai-based tech companies. Moral hazard isn’t, evidently, as high on their list of priorities as taking some of the risk out of risk-capital investing in start-ups.

Dollar funds, in the main, have mainly been observing all this with sullen expressions. Making matters worse, they are often sitting on portfolios of unexited deals dating back five years or more. The US and Hong Kong stock markets have mainly lost their taste for PE-backed Chinese companies. While RMB funds seem to draw from a bottomless well of available capital, for most dollar funds, raising new money for China investing has never been more difficult.

RMB funds seldom explain themselves, seldom appear at industry forums like SuperReturn. One reason: few of the senior people speak English. Another: they have no interest or need to raise money from global limited partners. They have no real pretensions to expand outside China. They are adapted only and perhaps ideally to their native environment. Dollar funds have come to look a bit like dinosaurs after the asteroid strike.

Can dollar-denominated firms strike back?

Can dollar funds find a way to regain their central role in Chinese alternative investing? It won’t be easy. Start with the fact the dollar funds are all generally the slow movers in a big pack chasing the same sort of deals as their RMB brethren. At the moment, that means companies engaged in online shopping, games, healthcare and mobile services.

A wiser and differentiated approach would probably be to look for opportunities elsewhere. There are plenty of possibilities, not only in traditional manufacturing industry, but in control deals and roll-ups. So far, with few exceptions, there’s little sign of differentiation taking place. Read the fund-raising pitch for dollar and RMB funds and, apart from the difference in language, the two are eerily similar. They sport the same statistics on internet, mobile, online shopping penetration: the same plan to pluck future winners from a crop of look-alike money-losing start-ups.

There is one investment thesis the dollar PE funds have pretty much all to themselves. It’s so-called “delist-relist” deals, where US-quoted Chinese companies are acquired by a PE fund together with the company’s own management, delisted from the US market with the plan to one day IPO on China’s domestic stock exchange. There have been a few successes, such as the relisting last year of Focus Media, a deal partly financed by Carlyle. But, there are at least another forty such deals with over $20bn in equity and debt sunk into them waiting for their chance to relist. These plans suffered a rather sizeable setback recently when the Chinese central government abruptly shelved plans to open a new “strategic stock market” that was meant to be specially suited to these returnee companies. The choice is now between prolonged limbo, or buying a Chinese-listed shell to reverse into, a highly expensive endeavor that sucks out a lot of the profit PE firms hoped to make.

Outspent, outbid and outhustled by the RMB funds, dollar PE funds are on the defensive, struggling just to stay relevant in a market they once dominated. Some are trying to go with the flow and raise RMB funds of their own. Most others are simply waiting and hoping for RMB funds to implode.

So much has lately gone so wrong for many dollar PE and VC in China. Complicating things still further, China’s economy has turned sour of late. But, there’s still a game worth playing. Globally, most institutional investors are under-allocated to China.  A new approach and some new strategies at dollar funds are overdue.

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Peter Fuhrman moderates our SuperReturn China 2016 Big Debate: ‘How Do You Best Manage Your Exposure To China?’. Discussants include:

  • John Lin, Managing Partner, NDE Capital (GP)
  • Xisheng Zhang, Founding Partner & President, Hua Capital (GP)
  • Bo Liu, Chief Investment Officer, Wanda Investment (LP)
The Big Debate takes place on Tuesday 19 April 2016 at 11:55 – 12:25 at SuperReturn China in Beijing. Can’t make it? Follow the action on Twitter.
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