Li Ka-shing

Hong Kong IPO Today for China First Capital Client Hydoo

Leave a Comment / October 31, 2013

Hydoo Prospectus

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Welcome good news today from Hong Kong’s capital markets. The Chinese commercial real estate developer Hydoo (Chinese name 毅德) successfully IPOs on the Hong Kong Stock Exchange, raising over USD$200mn in new capital. With IPO channels for Chinese companies mainly blockaded, it’s especially welcome to see a Chinese private sector company raising so much from the stock market.  In this case, the delight is greater because Hydoo is a client of China First Capital. We acted as Hydoo’s investment bankers raising USD$80mn from Chinese private equity firm Hony Capital.  Hony’s 2011 investment, based on today’s IPO price, is now worth USD$150mn.

In addition to Hony, China’s giant financial services group Ping An also invested before IPO.  In total, Hydoo raised USD$140mn (Rmb 860mn) of institutional capital before IPO. Over 60% of the IPO shares (worth over $120mn) were sold by underwriters ahead of time to so-called “cornerstone investors“, including two large Chinese SOEs, Huarong and China Taiping Insurance, as well as retailer Suning (in which Hony owns a share).

I’m happy for Hony and the other investors, but happier still for Hydoo founders, particularly its chairman, Wang Zaixing, known to friends and family  as “Laowu”, literally “Venerable Fifth”. He is the fifth-born of ten children all of whom played a part in building Hydoo. The family is originally from Chaozhou in Guangdong, and speak the distinctive Chaozhou dialect. But, they ended up after 1949 in Ganzhou, Jiangxi Province.

The business Laowu started 18 years ago is now worth over $1 billion. The first time I met him, I told Laowu my goal as his investment banker, and my emphatic expectation,  was that his company would be worth at least that much at the time of its IPO. Another priority of mine was that he and his family members would still hold majority control after IPO.  That too has been achieved.  They hold almost 60% of the now publicly-traded business.

For me, Laowu personifies in many ways the large economic changes China has undergone in the last 30 years. He started life as a long-distance truck driver and from that humble start saw and grasped an opportunity to build wholesale trading centers for the emerging army of small businesspeople in China.

I first met Laowu and his company in 2009. The business was then called Haode (豪德). It was then still an old-school Chinese family business. There was no corporate structure in the traditional sense. Laowu and his brothers, sister and nephews would pair up, or act independently, to do individual large wholesale trading centers around China. When I met them, the family had already done 19 such projects. All had done very well. At the time, I’d never met a Chinese private company as profitable over as many years as Haode.

Over the last three years, the company has been transformed into a more professional enterprise. Hydoo provides a useful excellent template for how a Chinese family-owned business can make this transition to a publicly-traded company. Part of that process was splitting up the family’s existing business between a group that would follow Laowu and become shareholders of Hydoo, and five other siblings who chose not to participate, but remain active in some cases building their own wholesale trading centers.

As the IPO prospectus puts it,  this division was “a complex, delicate process involving the allocation of assets or interests in the existing businesses among a group of closely connected family members, who decided to split up into two independent groups with diverging goals going forward. Under the special circumstances, no written agreements were entered into in respect of the Family Allocation and no valuation appraised by independent valuers was undertaken when negotiating the Family Allocation. Instead, the Wang Family Group placed their focus on more subjective, personal factors.”

Me and my firm played a small part by advising Laowu and his siblings on the pros and cons of being part of a company planning for an IPO. But, as you’d expect, most of this was done within the private confines of a large, closely-knit family.  Along the way, though, I gained a deeper appreciation of the unique ways Chaozhou people do business.

Chaozhou natives are rightly famous both in China and throughout much of Southeast Asia for their business acumen. They are often described by other Chinese as “the Jews of China”.  As a Jew in China, I tend to think the description flatters my people. Chaozhou people seem to have an instinctive and unsurpassed talent for making money and entrepreneurship. Look around the world at the most successful Chinese business people, including the leading business families in Thailand, Indonesia, Singapore, Malaysia and Hong Kong, and a large percentage, including Asia’s richest magnate, Li Ka-shing, Thailand’s richest businessman Dhanin Chearavanont  and Indonesia’s top tycoon, Mochtar Riady, are either from Chaozhou or are descended from people who immigrated from there.

As this suggests, Chaozhou people are able and willing to uproot themselves and chase opportunities. Laowu didn’t leave China, but in building Hydoo, he did venture far afield from where he and his family were raised. He saw very early and profited richly from an economic shift within China that few others noticed 15 years ago. At the time, much of China’s economic growth was centered in southern China, and large coastal cities like Shanghai, Shenzhen, Xiamen. Laowu looked inland, especially in Shandong Province, one thousand miles north of Chaozhou.

As the economies of Shanghai and big southern coastal cities began to cool, inland areas, led by Shandong, began to boom. Shandong’s GDP growth, over the last ten years, has been among the highest of any part of China. Shandong is a huge market to itself (population 95mn) as well as a vital crossroads for commerce between north and south, east and west in China. Laowu built large wholesale parks to accommodate thousands of small traders, creating new clusters of small-scale commerce and entrepreneurship.

When you visit one of these centers, you get the impression that half of Shandong’s gdp is going in and out the doors. It’s crowded and vibrant. Even the smallest traders own their own small shop inside the Hydoo centers. That’s Hydoo’s model: they build the buildings, and as they do, sell off most of the units to thousands of individual small traders. Hydoo helps them get mortgages and often acts as guarantor on the loans. This lets thousands of small businesspeople become property-owners. As the Hydoo centers thrive (and they all do, as far as I know) the value of the real estate rises.

I know of no other businessman in China that has done as much as Laowu to build wealth and provide an entrepreneurial hub for such a large number of people in China. Hydoo is now spreading across more areas of China. It’s is building huge new wholesale parks in Sichuan, Hunan, Guangxi, Gansu.

I see Laowu infrequently these days. But, I’m as impressed now as I was when I first met him by his accomplishments. He and his family founded a business back when China was a different and less developed place. They stuck with it, kept reinvesting and now, through today’s IPO,  own shares worth more money than I can imagine. But, more important for me is that they still own the business, still own the majority and so answer to no one else. As an entrepreneur who helped create and sustain so many other entrepreneurs, Laowu deserves nothing less.

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Qinghai Province – The Biggest Small Place in China

2 Comments / October 2, 2010

Taersi

In most things to do with China, the “law of big numbers” applies. A population of 1.4 billion mandates that. So, whether it’s the fact there are over 50 cities larger than Rome, provinces with populations larger than any European country, or that more of just about everything is sold every year in China than anywhere else, the reality of China’s huge population is always a hulking presence.

Except for Qinghai Province. Here, the numbers are so small Qinghai can seem like one of the Baltic States. The province is a little larger than France, yet has a population of only 5.2 million, or 0.3% of China’s total. The capital city, Xining, where I’m now writing this, has about one million residents. Tibet to the south and Xinjiang to the north are both autonomous regions, rather than provinces. Both are far more well-known and talked-about, both inside China and out, and benefit from much more investment from the central government.

Qinghai is unlike anywhere I’ve been in China. It is so empty as to be almost desolate. Xining is in the midst of a very rapid transformation from a dusty low-rise backwater to a more obviously modern Chinese city, with high rises, two new expressways, broad boulevards and shiny new shops selling brands familiar in other parts of the country. It sits alongside a tributary of the Yellow River, wedged like a sliver between low barren brown mountains.

Xining is also the most conspicuously multi-cultural city I’ve been to in China, with a Han majority sharing the city with a large contingent of Tibetans, and a very significant population of Hui Moslems. The Dongguan mosque, on the city’s main street, is one of the largest in China. As many as 30,000 people can worship there. Every twenty paces or so you’ll pass a small brazier with a Hui cook barbecuing lamb kebabs.  Most also sell yak milk yogurt. It’s delicious, in case you’re wondering.

The Tibetans are more concentrated outside Xining. Qinghai makes up most of the Tibetan region of Amdo, and much of the province’s landmass is inhabited by Tibetan herdsmen. The current Dalai Lama was born not far from Xining, and had some of his first schooling at Kumbum Monastery, a 450 year-old establishment that has long been among the most important sites of religious worship and study for Tibetan Buddhists.

Kumbum is a half-hour drive from Xining.  I’ve wanted to go there for about 30 years, and finally got the chance on this trip. I always felt a pull towards Kumbum because it was established to venerate Tsongkhapa, the founder of the Gelugpa tradition in Tibetan Buddhism. I’ve lived for the last 15 years with a beautiful thangka of Tsongkhapa, and hang it near where I sleep. Here it is:


Tsongkhapa

If I had a patron saint, it would be him. Tsongkhapa was born where the Monastery now sits, in a small mountain village. The Monastery spreads lengthwise about one mile up a hillside. At its height, it was home to 3,600 monks. Now there are said to be about 500. A lot of the more ancient buildings were destroyed during the Cultural Revolution, and have since been rebuilt. There are also some newer structures in traditional Tibetan monastic style, including one built with a donation from Hong Kong’s richest man, Li Ka-shing.

Tibetan pilgrims circumambulate the important buildings, do their prostrations, and leave offerings of money and butter. They share Kumbum with Chinese tour groups, who are for the most part respectful, attentive.

After visiting the Monastery in a steady drizzle, I went to see a doctor at the nearby hospital. I was feeling just fine, but for a little sleepiness from the high altitude.  I’ve had a long, intense interest in Tibetan medicine, and the hospital here is staffed by lamas educated at Kumbum and graduated with the equivalent of a PhD in Tibetan medicine.

I saw a physician named Lopsang Chunpai, dressed in maroon and yellow monastic robes. He took my pulse, pronounced me healthy, and prescribed a Tibetan herbal medicine called Ratna Sampil, a combination of 70 herbs that is compounded at the hospital. According to the package, it’s used “clearing and activating the channels and collaterals”.

Though I saw only a very small part of it, Qinghai struck me as an especially lovely place:  a wide, open and arid plateau not unlike parts of the American West. Even accepting the cold winter (with temperatures of 20 to 30 degrees below zero centigrade), it’s hard to understand the high vacancy rate here. It’s population density, at 7 people per square kilometer, is 0.3% of Shanghai’s.

It’s empty, of course, because comparatively few Chinese have emigrated here. That seems likely to change. The air is clean, the economy is booming and the infrastructure improvements of recent years are integrating the province much more closely with the highly-populated parts of China to the east.

Neighboring Tibet and Xinjiang have experienced large Han Chinese migration over the last 60 years. Not so Qinghai. Geography is destiny.  Qinghai, unlike Xinjiang and Tibet, does not border any other country. It has far less military and strategic importance. Xinjiang borders Russia and Tibet borders India. China has fought border wars with both.

Xinjiang and Tibet have also both recently had some serious ethnic conflicts, including anti-Chinese riots in both places in the last two years.  Although its population is about 20% Moslem and 20% Tibetan, Qinghai has stayed peaceful. It is China’s melting pot.

Qinghai is rich in mineral resources, including large seams of high-grade coal. As the transport system improves, more Chinese will migrate there to work in mines. Xining, as small as it is, is the only proper city in all of Qinghai.

The ostensible reason for my visit was to speak at a conference on private equity. The provincial government has a target to increase the number of Qinghai companies going public. The mayor of Xining, who I met briefly, was until recently a successful businessman, running one of the province’s largest state-run companies.

I met a few local entrepreneurs and visited one factory making wine from buckthorn berries, using technology developed by Tsinghua University. It’s a healthier, lower-proof alternative to China’s lethal “baijiu”, the highly alcoholic spirit, mainly distilled from sorghum,  that is widely consumed across China.

Up to now, as far as I can tell,  there’s been no private equity investment in Qinghai. I’d like to change that. It’s a special part of China. Though it’s statistically one of the poorest provinces, Qinghai will continue every year to close the gap. More capital, more opportunity, more prosperity — and more inhabitants. This is Qinghai’s certain future.