M&A Advisory

China Merchants Steams in to Compete with SoftBank’s Vision Fund — Financial Times

Leave a Comment / August 9, 2020

 

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China Merchants Group has been adopting new technology to resist foreign competitors for nearly 150 years. Founded in the 19th century, the company brought steam shipping to China so it could compete with western traders.

Now an arm of the Chinese state, CMG has been enlisted once again to buy up technology at a time when global private equity is vying for a share of China’s burgeoning tech market.

The country’s largest and oldest state-owned enterprise, CMG said this month it would partner with a London-based firm to raise a Rmb100bn ($15bn) fund mainly focused on investing in Chinese start-ups.

The China New Era Technology Fund will be launched into direct competition with the likes of SoftBank’s $100bn Vision Fund, as well as other huge investment vehicles raised by top global private equity houses such as Sequoia Capital, Carlyle, KKR and Hillhouse Capital Management.

“They have been very important to China in the past, especially in reform,” said Li Wei, a professor of economics at Cheung Kong Graduate School of Business in Beijing. “But you haven’t heard much about them in technology . . . It’s not too surprising to see them moving into this area, upgrading themselves once again.”

CMG is already one of the world’s largest investors. Since the start of 2015 its investment arm China Merchants Capital, which will oversee the New Era fund, has launched 31 funds aiming to raise a combined total of at least $52bn, according to publicly disclosed information.

But experts say little is known about the returns of those funds, most of which have been launched in co-operation with other local governments or state companies.

Before New Era, China Merchants Capital’s largest fund was a Rmb60bn vehicle launched with China Construction Bank in 2016. While almost no information is available on its investment activity, the fund said it would focus on high-tech, manufacturing and medical tech.

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CMG’s experience investing directly into Chinese tech groups is limited, although it has taken part in the fundraising of several high-profile companies. In 2015 China Merchants Bank joined Apple, Tencent and Ant Financial to invest a combined $2.5bn into ride-hailing service Didi Chuxing, a company that now touts an $80bn valuation. It also invested in ecommerce logistics provider SF Express in 2013.

Success in Chinese tech investing is set to become increasingly difficult as more capital pours into the sector.

“Fifteen billion dollars can seem like a droplet in China,” said Peter Fuhrman, chairman and chief executive of tech-focused investment banking group China First Capital, based in Shenzhen. “We’re all bobbing in an ocean of risk capital. Still, one can’t but wonder, given the quite so-so cash returns from China high-tech investing, if all this money will find investable opportunities, and if there weren’t more productive uses for at least some of all this bounty.”

CMG, however, has always set itself apart from the rest of the country’s state groups. It is unlike any other company under the control of the Chinese government as it was founded before the Chinese Communist party and is based in Hong Kong, outside mainland China. Recommended Banks China Merchants Bank accused of US discrimination

The business was launched in 1872 as China Merchants Steam Navigation Company, a logistics and shipping joint-stock company formed between Chinese merchants based in China’s bustling port cities and the Qing dynasty court.

Mirroring its New Era fund today, it was designed to compete for technology with foreign rivals. At that time it was focused on obtaining steam transport technology to “counter the inroads of western steam shipping in Chinese coastal trade”, according to research by University of Queensland professor Chi-Kong Lai.

Nearly a century later, after falling under the control of the Chinese government, CMG became the single most important company in the early development of the city of Shenzhen, China’s so-called “window to the world” as it opened to the west.

Then led by former intelligence officer and guerrilla soldier Yuan Geng, the company used its base in Hong Kong to attract some of the first investors from the British-controlled city into the small Chinese town of Shenzhen, which has since grown into one of the world’s largest manufacturing hubs.

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Its work in opening China to global investment gained CMG and Yuan, who led the company until the early 1990s, status as leading figures in the country’s reform era.

Today the company is a sprawling state conglomerate with $1.1tn in assets and holdings in real estate, ports, shipping, banking, asset management, toll roads and even healthcare. The company has 46 ports in 18 countries, according to the state-run People’s Daily, with deals last year in the sector including the controversial takeover of the Hambantota terminal in Sri Lanka and the $924m acquisition of Brazilian operator TCP Participações.

CMG did not respond to requests for comment. But one person who has advised it on overseas investments said the Chinese government was using it in the same way the company opened up Shenzhen to the outside world, helping “unlock foreign markets”.

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https://www.ft.com/content/e7e81928-7f57-11e8-bc55-50daf11b720d


 

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In Today’s China, Paradoxes Still Abound. But So Do Opportunities — Site Selection Magazine

Leave a Comment / November 21, 2017

 

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In September, China First Capital Chairman and CEO Peter Fuhrman, familiar to attendees at the World Forum for FDI in Shanghai last year, delivered a talk from China to Harvard Business School alumni. Here, with Mr. Fuhrman’s permission, we present excerpts from his remarks.

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GDP growth has never and will never absolutely correlate with investment returns.

Any questions? No? Great. Thanks for your time.

Of course I’m joking. But that key reality of successful investing is all too often overlooked, and China has provided all of us over these last 30-some-odd years with a vivid reminder that IRR and GDP are by no means the same animal.

China is, was and will likely long remain a phenomenal economy. The growth that’s taken place here since I first set foot in China in 1981 has been something almost beyond human reckoning. Since I first came to China as a postgrad in 1981, per-capita GDP (PPP) has risen 43X, from $352 to $15,417. China achieved so much more than anyone dare hope, a billion people lifted out of poverty, freed to pursue their dreams, to make and spend a bundle.

China this year will add about $1 trillion of new GDP. Just to put that in context, $1 trillion is not a lot less than the entire GDP of Russia. So who is making all this newly minted money? And how can any of us hope to get a piece of it? Another question: Why, if China is such a great economy, has it proved such a disaster area for so many of the world’s largest, most sophisticated global institutional investors, private equity firms and Fortune 500s?

Turning Inward

Let’s start with the fact that China is a part of the World Trade Organization, but not entirely of it — not fully subscribed in any way to the notion that reciprocity, openness, free trade, level playing fields and equal treatment are positive ends unto themselves. As China has gotten richer it has seen even less and less need to attract foreign capital and foreign investment. That’s a tendency we see in other countries, including obviously some of the rhetoric we now hear in the U.S. — that more of the gains of the national economy should belong to its citizens. But China’s way is different.

The renminbi is a closed non-tradable currency, so getting US dollars into and out of China has always been difficult. China now has the world’s second-largest stock and bond markets, but those markets are largely closed to any investors other than Chinese domestic ones. But China also continues to provide companies going public with by far the highest multiples anywhere in the world.

When I first came to China 36 years ago China was a 100-percent state-owned economy. Twenty years ago the first rules were put in place to allow a private sector to function. Today, according to anyone’s best estimate, it’s about 70 percent private and 30 percent state, and most of the value creation is being provided by that private-sector economy. So in theory there should be very interesting M&A opportunities. But it’s been exceedingly difficult to get successful transactions done. One of the core reasons is that by and large all private-sector companies in China, large and small, are family-owned.

The other thing important to consider is a Mandarin term: guifan. It’s the Chinese way of explaining the extent to which a company in China is abiding by all the rules of the road — the taxes you should pay, the environmental and labor laws you should follow. It’s not at all uncommon that successful private-sector companies in China are successful by virtue of having negotiated to pay little or no corporate tax on profits.

For foreign-owned companies in China it’s an entirely different story. They are by and large 100-percent compliant with the written rules. This has an enormous impact on the operating performance of any company, so you can imagine how potentially skewed the competitive environment becomes. And keep in mind that corporate taxation in China in the aggregate is, if not the highest in the developed world, then among the highest, and the environmental and labor laws are every bit as difficult, rigorous, tough and expensive to implement as they are in the U.S.

China is a country where local government officials are scored on the measurable success of their time in office, and success is overwhelmingly attributed to GDP growth. So it should be no surprise if what they’re trying to do is optimize GDP growth, the percentage of a company’s income that goes back to the government in taxation can have an adverse effect on that. Instead the government will continue to urge its local companies to take the money and, rather than pay tax, continue to invest, expand and therefore build local GDP.

The Hum of Consumerism

The reasons to stay engaged and find a viable investment angle include GDP growth. China’s GDP is likely to continue to grow by at least 6 percent a year. Second, across my 25 years of involvement in China, every one of the predictions of imminent collapse — financial catastrophe, local government debt, bad bank loans, real estate bubbles — have proved to be false. It appears China has some resiliency, and it’s certainly the case that the government has the tools and financial resources to ride out most challenges.

Third has been how effortlessly it’s made the transition that still bedevils lots of Europe, from a smokestack economy to a consumer-spending paradise. At this moment every major consumer market in China is booming both online and offline. Alibaba, Baidu and Tencent are now operating as three of the most profitable companies in the world.

How does China have a robust, booming consumer economy and an enormous appetite for luxury brands, yet on average salary levels that are still one-fifth or one-sixth the levels in the US? The simple answer is that almost all the Chinese now living in urban China — about half the population, compared to about 15 percent when I first got here — owns at least a single apartment if not multiple, which is more and more common. The single best-performing asset in history has probably been Chinese urban real estate over the last 30 years. It’s fair to say the average appreciation over the last 10 years is at least 300 percent.

Though China has a population whose incomes on paper look like those of people flipping burgers at McDonald’s, they seem to have the spending power and love of luxury goods like the people summering in East Hampton. Even Apple itself has no idea how big its market is here in China. It’s likely that at least 100 million iPhone 8s will be sold to Chinese over the next year. The retail price here in China is at least 30 to 40 percent higher than in the US, with most phones bought for cash, without a carrier subsidy.

‘You’ll Be Older Too’

So where is it possible to make money in China? One message above all: Active investing beats passive investing every time. What you need to do is either be the owner-operator or be a close strategic partner with one, and stay actively engaged.

There are four major areas of opportunity: Tech, health-care services, leisure and education (see graphic below). The potential for building out a chronic care business in China is enormous. Looking ahead 25 to 30 years, sadly China will likely suffer a demographic disaster. This country will become a very old society very quickly. That’s the inevitable product of 30 years of a one-child-per-family policy. By 2040 or 2050, 25 percent of China will be over the age of 65.

The overall rate of GDP growth is unlikely to ever rival that of a few years ago at 10 to 12 percent a year, but overall what we have is higher-quality growth. People in China are living well. Things should continue to motor along very smoothly at least for one more generation — a generation whose members are better educated, more skilled, ambitious and globalized than their parents.

There’s no denying the reality of what a better, happier, freer, richer country China has become since I first set foot here. I marvel every day at the China that I now live in, even while I occasionally curse some of the unwanted byproducts like heavy pollution in most parts of the country, overcrowding at tourist attractions, bad traffic, and a pushy culture that’s lost touch with some of China’s ancient glories.

China will continue to amaze, inspire and stupefy the world. The Chinese have done very well and will do better. At the same time, those of us investing in China may do a little better in years to come than we have up to now. More of the newly minted trillions in China just may end up sticking to our palms.

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China’s Soccer Push Puts a Storied Team Under Murky Ownership — The New York Times

Leave a Comment / August 11, 2020

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By SUI-LEE WEE, RYAN McMORROW and TARIQ PANJA

NOV. 16,    2017

Li Yonghong in April with David Han Li, left, of Rossoneri Sport Investment, part of A.C. Milan’s new ownership group, and Marco Fassone, the club’s chief executive.

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BEIJING — When the Chinese businessman Li Yonghong bought A.C. Milan, the world-famous Italian soccer club, virtually nobody in Italy had heard of him.

Virtually nobody in China had, either.

Mr. Li had never been named to one of China’s lists of the country’s richest people. The mining empire he described to Italian soccer officials was hardly known even in mining circles.

Nevertheless, Mr. Li seemed to have what mattered most: money. He bought the club in April for $860 million from Silvio Berlusconi, the former Italian prime minister, to clinch China’s biggest-ever soccer deal.

Today, Mr. Li’s acquisition of A.C. Milan appears to be emblematic of a string of troubled Chinese deals.

The soccer club, bleeding money after a spending spree on star players, is seeking new investors or a refinancing of the high-interest loan that Mr. Li took to buy the club. That loan comes due in a year.

Chinese corporate records show that — on paper, at least — someone else owns his mining empire. That company’s offices were empty on a recent visit, and a sign on the door from the landlord cited unpaid rent. A spokesman for A.C. Milan said Mr. Li’s control of the mining business had been verified by lawyers and banks involved in the transaction.

Chinese records also show a series of business disputes and run-ins between Mr. Li and Chinese regulators.

China’s emergence as a world economic power came with a ready checkbook for major brand names. Chinese owners now control the Waldorf Astoria hotel in New York, AMC theaters, the Hollywood production company Legendary Entertainment and A.C. Milan.

Then Chinese officials began to worry that the spending was simply part of an exodus of money from China so vast that it once threatened to destabilize the country’s economy, the world’s second largest. This summer, the government ordered its banks to scrutinize lending to some of the country’s biggest deal makers.

Outside China, some of the deals led regulators to ask questions about the tycoons behind them. Some wealthy people in China list their holdings under the names of relatives or associates to avoid scrutiny, a practice that has attracted criticism inside and outside the country.

In the case of Mr. Li, the mines that he told A.C. Milan he controlled have been owned by four different people since last year, according to Chinese corporate records. The business changed hands twice for no money, the documents show.

Mr. Li declined an interview request through A.C. Milan. The club spokesman defended Mr. Li on his business disputes, saying that sometimes he was a victim and that sometimes he was not aware of complicated rules. The spokesman also said the club was evaluating several refinancing proposals and was confident it could cover the loan.

Chinese spending on soccer totaled $1.8 billion over the past five years, according to Dealogic, a data provider, but Chinese officials are putting a stop to the spree amid concerns about the flight of money abroad.

“There’s a lot of ways to invest in football and the sports industry for much less money,” said Mark Dreyer, who tracks Chinese soccer investments on his website, China Sports Insider. “People were basically using the government’s previous push for sports as a way to diversify into different industries and get their money out of China.”

Mr. Li had plenty of reasons to buy A.C. Milan. President Xi Jinping had professed his love for soccer and wanted China to be a superpower in the sport by 2050. The Chinese government had laid out a plan for increasing sports investment.

An acquisition of A.C. Milan would be a marquee deal. A decade ago, the club was home to some of soccer’s biggest talents, including Ricardo Izecson dos Santos Leite, who is known as Kaká, and Andrea Pirlo. It was a seven-time European champion.

But it has not won an Italian championship for six years or a European title for 10. Fans welcomed Mr. Li’s arrival as a potential catalyst. This summer, A.C. Milan began to spend on new players in a way that seemed to signal a desire to compete again.

Still, Mr. Li and Mr. Berlusconi struck the deal at a difficult time. Beijing, spooked by the unprecedented capital outflows and a weakening currency, had imposed restrictions on overseas investment at the end of last year.

Mr. Li set up companies in the British Virgin Islands and Luxembourg that would put the club’s legal ownership outside China, according to Marco Fassone, A.C. Milan’s chief executive officer. Mr. Li also borrowed about $354 million from the hedge fund firm Elliott Management, a loan he must pay back by October 2018. A spokeswoman for Elliott declined to comment.

A.C. Milan remains debt laden and unprofitable, and could have trouble repaying what it owes on its own. It spent about $274 million to sign 11 players this summer, according to the club spokesman, making it among the biggest spenders in European soccer.

In August, A.C. Milan had to wait for the transfer of two players it had signed from other teams because it had not deposited the required bank bonds. The club blamed a timing issue for the delay, and the transfers were eventually completed. The team is in seventh place but, with more than two-thirds of the season left to play, must finish among the top four to earn a spot in European soccer’s elite Champions League next season. The team could lose valuable television revenue if it fails to reach that level.

It is unclear how much Mr. Li’s wealth might help the club address its troubles.

He was initially unknown to the deal makers trying to sell the club, the people involved in the transaction said. He was originally part of a group that included Sonny Wu, a well-known investor who is chairman of the private equity firm GSR Capital, these people said. But Mr. Wu pulled out of the deal.

In an email, Mr. Wu said he had not talked to bankers about Mr. Li or his consortium. Rothschild & Company, the investment bank that advised Mr. Li, declined to comment.

Mr. Li told A.C. Milan that his holdings included phosphate mining operations in the city of Fuquan in Guizhou Province.

But Chinese corporate filings show that the mines are owned by another party: Guangdong Lion Asset Management, an investment company. And Guangdong Lion has had a complicated ownership record over the past two years, involving a number of people with similar family names. (One court proceeding suggests Mr. Li has a relationship with Guangdong Lion, although it is not clear what kind.)

Originally, Guangdong Lion was ultimately owned by two investors, Li Shangbing and Li Shangsong, according to filings. Like Li Yonghong, the two men come from the same area of Maoming, a city on China’s southern coast, according to the documents. But in a phone interview, Li Shangbing said he did not know Li Yonghong.

Li Shangsong, who declined to comment, sold his interest in Guangdong Lion in 2015 to a person named Li Qianru, according to the documents. The documents did not include personal information about Li Qianru, who could not be reached for comment.

In May 2016, according to the filings, Li Shangbing and Li Qianru, sold Guangdong Lion to yet another Li: Li Yalu. The sale price: $0. The filings do not provide personal information about Li Yalu.

Three weeks later, Li Yalu sold a half stake in Guangdong Lion to a similarly obscure investor, Zhang Zhiling. The price: $0. Neither could be reached for comment.

Li is a common surname in China, and the relationships among the various Lis are unclear. The A.C. Milan spokesman declined to comment.

Li Yonghong, the A.C. Milan owner, and Li Shangbing have two things in common.

The first is a relationship with Guangdong Lion. A Chinese court cited Li Yonghong and Guangdong Lion in April for failing to resolve a loan dispute with another Chinese company, saying both parties had disappeared. The court did not specify the relationship. The A.C. Milan spokesman said that Li Yonghong had merely guaranteed the loan and that “he is a victim in this case.”

The second is an interest in investing in European sports.

In May 2016, a day before Li Shangbing sold Guangdong Lion for no money, he started a company called Sino-Europe Sports Asset Management Changxing Company, according to China’s corporate database.

Two days after he registered the Sino-Europe firm, another person registered a new company with a strikingly similar name: Sino-Europe Sports Investment Management Changxing Company. The two companies’ headquarters were in the same building in the city of Huzhou.

Sino-Europe Sports Investment owns a stake in A.C. Milan as a result of its role as a shareholder in Rossoneri Sport Investment, a Chinese company that is part of the group led by Li Yonghong that owns the soccer club.

In the phone interview, Li Shangbing denied setting up either Sino-Europe company and said he did not own any part of A.C. Milan. He declined to answer further questions. A.C. Milan declined to comment on Li Shangbing. The listed owner of the Sino-Europe Sports Investment Management Changxing Company, Chen Huashan, could not be reached for comment.

Guangdong Lion’s listed headquarters are in a fancy skyscraper in Guangzhou. In August, the offices were closed, with an eviction notice on the door. Inside, desks and chairs were in disarray, computers were missing hard drives, and maggots festered in a trash can.

The phone number listed for Guangdong Lion connects to a woman who said she helped companies register with Chinese regulators.

Li Yonghong has an extensive business history, but Chinese records show it includes disputes with regulators and others.

In 2013, China’s securities watchdog fined Mr. Li $90,250 for failing to report the sale of $51.1 million in shares of a real estate company. A.C. Milan said Mr. Li had simply been unfamiliar with listing rules.

In 2011, that same real estate company said in a stock filing that Mr. Li was the chairman of Grand Dragon International Holding Company, a Chinese aviation company. Grand Dragon said in June that he had no present or past association with the company. The A.C. Milan spokesman said he had no knowledge of this.

In 2004, Mr. Li’s family business, the Guangdong Green River Company, teamed up with two other companies to bilk more than 5,000 investors out of as much as $68.3 million, according to The Shanghai Securities News, the official newspaper of China’s financial watchdogs. They had sold contracts for lychee and longan orchards and promised investors hefty returns, according to the report.

Mr. Li’s father and brother were sentenced to jail. Mr. Li was investigated but not accused of wrongdoing, the report said.

A.C. Milan said the episode had nothing to do with Mr. Li, adding that “he was not aware of the situation until the investigation.”

Amid Chinese concerns about deals abroad, China’s purchases of soccer teams with prestige names is likely to slow considerably for some time to come.

“If outbound investment should have the purpose of ‘strengthening the nation,’ even within the broadest of definitions,” Peter Fuhrman, chairman of the investment bank China First Capital, said in an email, “buying a soccer team in the U.K. or Italy would hardly seem to qualify.”

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As published in The New York Times–

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China Investing, The Pain and the Perks — Harvard Business School Global Alumni Lecture

Leave a Comment / October 10, 2017

 

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It was a delight and a privilege to give a talk on China investing to Harvard Business School’s global alumni organization. If you’d like to see the slide deck, please click here. The audio version of the lecture, done by worldwide webcast,  is also up on YouTube.

The topic was a big one — why have China investment returns so often failed to keep pace with the phenomenal growth in the country’s economy, and can investors do anything to improve the odds of success? Given an hour to discuss, I could only really scratch the surface.

A key takeaway: the past needn’t be prologue. Investing in China may prove less vexatious in the future. In part, that’s because of the growth of a mass affluent consumer market in China, a shift that plays to the strengths of many US, European and East Asian companies and institutional investors. Second, of course, everyone now can learn from past mistakes and misperceptions.

As I said in closing, “China will continue to amaze, inspire and stupefy the world. Chinese have done very well and will do better. At same time, those of us investing in China may do a little better here in years to come than we have up to now. More of the newly minted trillions in China just may end up sticking to our palms.”

 

 

 

Why Has China’s GDP So Outpaced IRR?

Leave a Comment / September 23, 2017

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It’s the paradox at the core of China investing: why has such a phenomenal economy proved such a disappointing investment destination for so many global institutional investors, PE firms and Fortune 500s.

Financial theory provides a conceptual explanation. Investment returns are not absolutely correlated to GDP growth. China will likely go down in history as the best proof of this theorem. China as certainly delivered exceptional GDP growth. In per capita PPP terms, China is 43 times larger than in 1981, when I first set foot in China as a grad student. No other country has ever grown so fast, for so long and lifted so many people out of poverty and into the consumer middle class.

Commensurate investment returns, however, have been far harder to lock in. Harvard Business School’s global alumni organization invited me to give an hour-long talk on this topic this week. It required a quick gallop through some recent and not always happy history to arrive at the key question — does the future hold m0re promise for global institutional investors looking to deploy capital in China.

 For more detailed look at some reasons for the big disconnect between China’s national GPD growth and investment IRR, and some suggestions how to improve matters, please have a look by clicking here at the HBS talk slide deck.

Publicly-quoted shares in Chinese companies have failed by far and away to keep pace with the growth in overall national income. In the alternative investment arena, global PE and VC firms enjoyed some huge early success in late 1990s and first part of the 2000s. Since then, the situation has worsened, as measured in cash returns paid out to Limited Partners. One major reason — the explosion within China of Renminbi investment funds, now numbering at least 1,000. They’ve bid up valuations, gotten first access to better opportunities, and left the major global PE and VC firms often sitting on the sidelines. With tens of billions in dry powder, these global firms look more and more like deposed financial royalty — rich, nostalgic, melancholy and idle.

China this year will add approximately $1 trillion of new gdp this year – that’s not a lot less than the entire gdp of Russia. Indeed, China gdp growth in 2017 is larger than the entire gdp of all but 15 countries. Who is making all this money? Are all the spoils reserved for local investors and entrepreneurs? Can global investors find a way at last to get a bigger piece of all this new wealth?

Overall, I’m moderately sanguine that lessons have been learned, especially about the large risks of following the Renminbi fund herd into what are meant to be sure-thing “Pre-Ipo” minority deals. Active investment strategies have generally done better. With China’s economy well along in its high-speed transition away from smokestack industries and OEM exports to one powered by consumer spending, there are new, larger and ripe opportunities for global investors. In virtually all major, growing categories of consumer spending, Western brands are doing well, and will likely do better, as Chinese consumers preferences move upmarket to embrace high-quality, well-established global household brand names.

Harvard, its alumni and benefactors have a two hundred year history of investing and operating in China. So, there’s some deep institutional memory and fascination, not least with the risks and moral quandaries that come with the territory. The Cabot family, at one time among America’s richest, provided huge grants to Harvard funded in part by profits made opium running into China.

Harvard Management Company, the university’s $35 billion endowment, was an early and enthusiastic LP investor in China as well as large investor in Chinese quoted companies including Sinopec. Their enthusiasm seems to be waning. Harvard Management is apparently considering selling off many of its LP positions, including those in PE and VC funds investing in China.

This looks to be an acknowledgment that the GP/LP model of China investing has not regularly delivered the kind of risk-adjusted cash-on-cash returns sophisticated, diversified institutional investors demand. While China’s economy is doing great, it’s never been harder to achieve a successful private equity or venture capital investment exit. True, the number of Chinese IPOs has ratcheted up this year, but there are still thousands of unexited deals, especially inside upstart Renminbi funds.

While decent returns on committed capital have been scarce, the Chinese government continues to pour billions of Renminbi into establishing new funds in China. There’s hardly a government department, at local, provincial or national level that isn’t now in the fund creation business. Diversification isn’t a priority. Instead, two investment themes all but monopolize the Chinese government’s time and money — one is to stimulate startups and high-tech industry (with a special focus on voguish sectors like Big Data, robotics, artificial intelligence, biotech) the other is to support the country’s major geostrategic initiative, the One Belt One Road policy.

One would need to be visionary, reckless or brave to add one’s own money to this cash tsunami. Never before has so much government money poured into private equity and venture capital, mainly not in search of returns, but to further policy and employment aims. It’s a first in financial history. The distortions are profound. Valuations and deal activity are high, while returns in the aggregate from China investing will likely plummet, from already rather low levels.

Where should a disciplined investor seek opportunity in China? First, as always, one should follow the money — not all the government capital, but the even larger pools of cash being spent by Chinese consumers.

In China, every major consumer market is in play, and growing fast. This plays to the strengths of foreign capital and foreign operating companies. There are almost unlimited opportunities to bring new and better consumer products and services to China. Let the Chinese government focus on investing in China’s future. High-tech companies in China, ones with globally competitive technology, market share and margins are still extraordinarily rare, as are cash gains from investing here.

Meantime, as I reminded the HBS alumni, plenty of foreign companies and investors are doing well today in China’s consumer market. Not just the well-known ones like Apple and Starbucks. Smaller ventures helping Chinese spend money while traveling globally, or obtain better-quality health care and education options, are building defendable, high-margin niches in China. One company started by an HBS alumnus, a native New Yorker like me, is among the leading non-bank small lending companies in China. It provides small loans to small-scale entrepreneurs, mainly in the consumer market. Few in China know much about Zhongan Credit, and fewer still that it’s started and run by a Caucasian American HBS grad. But, it’s among the most impressive success stories of foreign investment in China.

Of course, such success investing in China is far from guaranteed. Consumer markets in China are tricky, fast-changing, and sometimes skewed to disadvantage foreign investors. For over two hundred years, most foreign investors have seen their fond dreams of a big China payday crash on the rocks of Chinese reality.

The rewards from China’s 35 years of remarkable economic growth has mainly — and rightly — gone to the hard-working people of China. But, there’s reason to believe that in the future, more of the new wealth created each year in China will be captured by smart, pragmatic investors from HBS and elsewhere.

 

As published by China Money Network

As published by SuperReturn

YouTube video of the full lecture to Harvard Business School alumni organization

 

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China Steps Up Warnings Over Debt-Fueled Overseas Acquisitions — The New York Times

Leave a Comment / August 11, 2020

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BEIJING — China moved on Friday to curb investment overseas by its companies and conglomerates, issuing its strongest signal yet that it wants to rein in runaway debt that could pose a threat to the country’s slowing economy.

Beijing has stepped up its efforts in recent months to restrict some of its most acquisitive companies from buying overseas assets, worried that a series of purchases by China’s conglomerates around the world has been driven by excessive borrowing.

In the latest move, a statement published by China’s cabinet, the State Council, said the authorities would punish companies for violating foreign investment rules, and establish a blacklist of businesses that did so. The statement was attributed to the National Development and Reform Commission, the commerce ministry, the foreign ministry and the central bank.

The statement pointed to acquisitions in sectors ranging from entertainment and sports clubs to hotels, but it was unclear whether or how the government would block deals.

It reiterated a warning issued in December that restrictions on overseas investments were being imposed because of “irrational” investment trends.

That statement said that the kinds of investments overseas it described were “not in accordance with macro-control policies.” The government wants to “effectively guard against all sorts of risks,” it said. The State Council document said the government nevertheless supported overseas investments in sectors such as oil and gas and in China’s “One Belt, One Road” program, which aims to promote infrastructure projects along the historic Silk Road trading route.

“It’s the loudest yet of wake-up calls that the government holds the keys to the lockbox of the country’s wealth, public and private,” Peter Fuhrman, chairman of China First Capital, an investment bank, said in an emailed response to questions. “Bad M&A is all but criminalized.”

A surge in overseas acquisitions by Chinese investors in recent years has ignited fears that soaring corporate debt levels could destabilize the country’s economy, the world’s second largest, and further weaken its currency.

Companies like Anbang Insurance Group, Fosun International, the HNA Group and Dalian Wanda Group have capitalized on cheap loans provided by state banks to snap up trophy assets such as the Waldorf Astoria hotel in New York and AMC Theaters.

Beijing’s clampdown on overseas investments shows how the interests of private business can collide with those of the Communist Party government. Beijing has made financial stability a priority this year, with the party’s congress scheduled in the fall. Among the party’s top concerns: controlling debt, stemming the flow of capital leaving the country, and China’s opaque “shadow banking” system.

But while the latest statement from the State Council is likely to have an impact on mergers and deals, a lot of Chinese money is already offshore and thus not easily restricted by the government in Beijing, said Alexander Jarvis, chairman of Blackbridge Cross Borders, which has advised Chinese companies on several soccer acquisitions.

“Deals are still going to happen,” Mr. Jarvis said. “There is plenty of Chinese capital overseas in offshore tax havens, in the U.S., across Europe, Hong Kong. I’m not sure they can fully control that capital.”

In a sign of that deal making, a Chinese businessman, Gao Jisheng, struck a deal to buy an 80 percent stake in Southampton Football Club, a soccer team in the English Premier League, for about $271 million. Mr. Gao obtained the loan from a bank in Hong Kong, a special administrative region of China that is administered under separate laws, Bloomberg reported on Thursday.

Geoffrey Sant, a partner at New York-based law firm Dorsey and Whitney, said it is likely that the latest announcement from Beijing will result in a “temporary pause” in overseas acquisitions.

“I think they are thinking there’s a bit of irrational exuberance in the market right now and they just want to cool that off,” said Mr. Sant, who represents Chinese companies. “It doesn’t make sense to permanently ban some of these areas.”

The State Council statement comes amid increased scrutiny of China’s “gray rhinos” — threats that are large and obvious but often neglected even so.

In recent months, the government has said it would increase scrutiny of companies’ balance sheets, warning that some of the largest companies could pose a systemic risk to the economy.

Encouraged by the slew of acquisitions made by some of the country’s most powerful tycoons, many smaller Chinese companies started looking overseas, spurred by China’s slowing economic growth to look for new markets.

Many, however, had no experience running the businesses they were targeting. In one such example, Anhui Xinke New Materials, a copper processing company in central China, made a deal to buy Voltage Pictures, an American film financing and production firm, for $350 million. A month later, Anhui Xinke pulled out of the transaction.

In other cases, it was not clear whether many of the big trophy acquisitions were actually good deals.

In 2015, Legendary chalked up a net loss of $540 million, according to a regulatory filing that Wanda Film filed on the Shenzhen Stock Exchange. Fosun International, meanwhile, paid a premium to buy French resort operator Club Med, which was until then an unprofitable company, eventually agreeing to a $1.1 billion price tag in 2015 after a long takeover battle. The firm made a small profit last year, according to Fosun’s filings. And last year, AC Milan, the Italian soccer club that was acquired by a Chinese consortium for about $870 million, made a net loss of about $88 million.

“I agree with the Chinese government. A lot of these deals are bad,” said Mr. Jarvis.

Companies have already started feeling the pinch of Beijing’s clampdown on overseas investments, which started in earnest in December.

The number of newly announced outbound mergers and acquisitions by Chinese firms fell by 20 percent in the first six months of 2017 compared to the same period in 2016, though it picked up in May and June, according to Rhodium Group, a New York-based research firm.

In March, Dalian Wanda, the Chinese conglomerate that owns AMC Theaters and Legendary Entertainment, was forced to abandon its $1 billion deal to buy Dick Clark Productions, the firm behind the Golden Globes and Miss Universe telecast after Beijing tightened its controls on capital outflows. Months later, Wanda sold a majority stake in 13 theme parks to property firm Sunac China Holdings and handed 77 hotels to R&F Properties, another real estate company based in the southern city of Guangzhou, for $9.5 billion.

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As published in The New York Times.

The New York Times Interview Transcript

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China Probe of Big Companies Could Redefine Their Role Overseas — VOA News

Leave a Comment / June 26, 2017

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China is probing the loan practices of a group of big private sector conglomerates who have been on a high-profile global spending spree over the past few years.And although the review targets only a few of the country’s most politically-connected companies, some analysts see an attempt to increase government control over the role played by the private sector in foreign markets.

“I think this is an attempt to change the direction (of) the role these Chinese companies play in the Chinese economy,” says Paul Gillis, a professor at Peking University’s Guanghua School of Management. “To align them more closely with the policies of the government and to reduce the risks that actions of these private companies could end up having a shock effect on the economy as a whole.”

Chinese authorities say they launched the probe because of worries that highly leveraged overseas deals pose risks to China’s financial system. Officials have already expressed worries over mounting debt among Chinese lenders, some of which may remain hidden by China’s opaque lending networks.

Notable companies targeted

According to media reports, the list of companies under review is a relative who’s who of Chinese enterprises.

Among those reportedly targeted are Dalian Wanda, which owns the AMC Theaters chain in the United States and has been actively courting deals in Hollywood. High-flying insurance company Anbang, which owns New York’s Waldorf Astoria and Essex House hotels. Also on the list is Hainan Airlines, which bought a 25 percent stake in Hilton Hotels last year and another insurance company Fosun, which owns Cirque de Soleil and Club Med.

Over the past few years, China has seen massive amounts of capital moving overseas with companies and wealthy individuals buying assets abroad. Authorities began taking steps late last year to tighten controls. But many big conglomerates view foreign investment as a golden opportunity – given the low global interest rate environment – and worth the risk of highly-leveraged investments.

Peking University’s Gillis says it appears the Chinese government is coming to terms with how to effectively regulate private enterprises, companies that behave more aggressively than their state-owned counterparts. But he also sees the move as a further consolidation of power by President Xi Jinping, bringing companies more under the control of the central government.

“I think many of the companies had a pretty favorable treatment from prior administrations, and I think Xi Jinping is less enamored of these large private companies than some of his predecessors were.”

Expensive acquisitions by companies like Wanda and Anbang have thrust China into the global spotlight. But the news and commentary that followed the companies’ mega-deals has not always been positive.

FILE - People walk past an entrance to the Anbang Insurance Group's offices in Beijing, June 14, 2017.

People walk past an entrance to the Anbang Insurance Group’s offices in Beijing, June 14, 2017.

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In some cases, the deals have given China a black eye, says Fraser Howie, author of the Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise. Anbang’s attempt last year to purchase Starwood Hotels is one example, he says.

“This is high profile, global Bloomberg headline, Chinese company buys Starwood Group, next week it’s all off because the funding was never there, the due diligence could never be completed there, it made all Chinese bidders look horrible,” said Howie. “It looks dreadful for the party and for the leadership that these private entrepreneurs are running out there and yet China as a country is being impacted by it.”

Earlier this month, the head of Anbang was the latest to be swept up in the ongoing financial crackdown.

Regulating private spending?

Authorities so far have not said specifically what the targeted companies may have done wrong, if anything. Some analysts argue that the probe is just a part of a process that began six month ago to curtail the flight of capital from China.

“If cross-border M&A deals make sense, if they deliver strong returns, then there should be no problem either for bankers or those doing the buying. But, if Chinese groups overpay and get the money to do so from Chinese banks providing risky or underpriced loans, then Chinese regulators have an obligation to step in,” Peter Fuhrman, Chairman and Chief Executive Officer of China First Capital tells VOA in an emailed response.

Others see a deeper message about Xi Jinping’s view on the role that private companies should serve broader national goals.

Howie says the probe challenges assumptions about the role of private enterprises in China.

“If anyone ever thought these companies were truly private in the sense of being independent or beyond government reach. Clearly that was never true,” he says. “Everyone operates at the discretion of the Communist Party, even if you’ve done nothing wrong and clearly even if you are wealthy.”

 

https://www.voanews.com/a/china-probes-big-comanys-overseas-loan-practices/3913190.html

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Goldman, Lazard China Dealmakers Decamp for Upstart Funds — Bloomberg

Leave a Comment / August 11, 2020

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(Bloomberg) — Veteran China dealmakers at Wall Street banks and Western buyout firms are heading for the exits, in search of the more lucrative deals and higher remuneration offered by smaller funds.

Three senior merger advisory bankers from Goldman Sachs Group Inc., Bank of America Corp. and Lazard Ltd. have resigned within the past month for senior roles at fledgling investment funds, according to people familiar with their departures, who asked not to be identified discussing private information. Carlyle Group LP Managing Director Alex Ying left the firm in January after two decades to set up Rivendell Partners, which focuses on mid-sized buyouts in Greater China and Vietnam, other people said.

The moves highlight the increasing challenges big banks face in retaining their top dealmakers in an environment of tighter regulations and shrinking fees. Revenue from investment banking in the Asia Pacific region fell 8 percent in 2016 to the lowest in at least five years, according to data from research firm Coalition. Merger advisory revenue dropped 4 percent, the figures show.

“Deal flow from China has come down considerably — those flows are severely curtailed relative to where they were,” said Henry Tillman, chairman of London-based advisory firm Grisons Peak LLP. “With investment banking revenue declining, people are going to look at their options.”

Imminent departures include Andrew Huang, a managing director advising on Greater China mergers and acquisitions at Goldman Sachs who has resigned to join Chinese private equity firm FountainVest Partners, according to the people. Peter Kuo, a China M&A banker at Lazard, is leaving to help run a technology fund backed by Chinese investors called Canyon Bridge Capital Partners, the investment firm confirmed in response to Bloomberg queries.

Higher Returns

Ellis Chu, head of China M&A at Bank of America, has also resigned and will be joining an Asia-focused fund, the people said.

Spokesmen for Bank of America, Goldman Sachs and Rivendell declined to comment on the departures. A representative for Carlyle confirmed Ying’s departure, declining to comment further. FountainVest Chief Executive Officer Frank Tang didn’t answer calls to his mobile phone seeking comment.

Running or working for a smaller, Asia-based fund can offer managers greater independence in decision-making on deals and give them a bigger share of fees and profits from exiting investments. Senior executives at global buyout funds in Asia typically have to share 40 percent to 60 percent of deal fees generated in the region with U.S. and European counterparts, people familiar with the practice said.

Smaller funds are also making more money. Private funds in Asia with assets of $500 million or less had a median internal rate of return of 16.1 percent over a three-year timeframe, compared with 11.5 percent at peers with more than $1 billion of assets, according to data compiled by research firm Preqin Ltd.

High Turnover

“A reason these guys are leaving likely also includes the fact those big firms have been having a challenging time of late in China, which leads to higher work pressure and unusually high turnover,” said Peter Fuhrman, chairman of Shenzhen-based China First Capital. “You can then try to set up on your own, make some deals, hope for success.”

The exits follow other recent moves to smaller outfits. KKR & Co.’s two most senior China executives left in December to form a China-focused investment firm. Richard Wong, an M&A veteran at Morgan Stanley, resigned this month after 16 years to help set up Nexus Point Partners, a China-focused buyout fund started by MBK Partners Ltd. co-founder Kuo-Chuan Kung.

The bankers and their new funds will face challenges when it comes to sourcing China deals. The government is clamping down on money outflows, which augurs poorly for outbound acquisitions. What’s more, competition is increasing from Chinese securities firms. Three Chinese banks ranked in the top 10 advisers on offshore acquisitions by mainland companies since the beginning of 2016, according to data compiled by Bloomberg.

Among the first buyout specialists to make the leap from big outfits were KY Tang, who left UBS AG’s private equity fund in 2004 to start Affinity Equity Partners, and Michael Kim, who set up MBK in 2005 with five other senior Asian executives from Carlyle. In 2010, TPG Capital lost Shan Weijian, who left to found PAG Asia Capital. The next year, Mary Ma departed to help start Boyu Capital.

https://www.bloombergquint.com/markets/2017/03/30/veteran-china-dealmakers-leave-wall-street-for-upstart-funds

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Turbulence and Paralysis: the Year Ahead in US-China Relations — Financial Times

Leave a Comment / August 11, 2020

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A month before his official inauguration, Donald Trump is already tossing diplomatic grenades in China’s direction. It is a sign of things to come. 2017 is shaping up to be a highly eventful, taut and precarious year for China-US relations. This is partly due to a simple scheduling coincidence.

2017 will be the first time ever when both the US and the PRC in the same year will usher in new governments. The US will kick things off on January 20th by swearing in Donald Trump as President. China, meanwhile, will undertake its own large political upheaval, its five-yearly change in political leadership, culminating in the 19th Communist Party Congress sometime late in the year. Virtually the entire government hierarchy, from local mayors on up, will be changed in a monumental job-swapping exercise orchestrated by Xi Jinping, China’s president.

The US under Mr Trump, with a Republican Congress at his back, seems intent to challenge China more assertively in trade, investment and as a currency manipulator while intensifying the military rivalry. China’s leadership, meantime, will become deeply absorbed in its own highly secretive, inward-looking and internecine political maneuvering. While Mr Xi tries to further consolidate his power, Mr Trump will likely be asserting his, leading to a globally ambitious US and an introspective China. This would represent something of a role reversal from recent precedent.

With the chess pieces all in motion, businesses should be plotting their moves in China with caution. The proposed Trans Pacific Partnership (TPP) trade deal is dead, leaving China’s still-evolving “One Belt,One Road” initiative as the main impetus for new trade flows in Asia. Donald Trump says he will push for what he claims to be more “more fair” bilateral trade deals. China, with its $365bn trade surplus with the US and high barriers to much inward investment, is clearly in his sights.

How will China react? The only certainty is that as the year progresses, China’s government apparatus will slow, and with it decision-making at policy-making bodies and many State-owned enterprises (SoEs). All will wait to hear what new tunes to march to, once the new ruling Politburo is revealed to the public in the fourth quarter.

Chinese officials at all levels are already jockeying for promotion. That means falling into line with Mr Xi’s anti-corruption campaign. The Party Secretary in Jiangsu province, one of China’s wealthiest, got an early head start. He instituted his own form of localized prohibition, ordering that government officials could no longer drink alcohol at any time, in any kind of setting, anywhere in Jiangsu.

The booze embargo did include one loophole. If senior foreign guests are present, alcohol can flow as before, like an undammed torrent.

As the Party Congress approaches, it will be even harder to get a deal with a Chinese SoE lined up and closed within any kind of reasonable time frame. Even after the Party Congress ends, it will likely take more months for any real deal momentum to return. Investment banking bonuses along with billings at global law, accounting and consulting firms are all likely to take a hit.

One other certainty: the renminbi will come under increasing pressure as the US ratchets up its moves to apply tariffs to Chinese exports and China’s own economy remains, relatively speaking, in the doldrums. How much pressure, though, is another question.

Anyone making predictions about the speed and degree of the renminbi’s decline is playing with a loaded weapon. A year ago some of the world’s biggest and loudest hedge fund bosses, including Kyle Bass, David Tepper and Bill Ackman, were proclaiming the imminent collapse of the renminbi. The renminbi, despite slipping by about 6 per cent during 2016, has yet to behave as the money guys predicted.

The Chinese government uses non-market mechanisms to slow the renminbi’s decline. A recent example: its abrupt move in November to tightly control outbound investment and M&A. But shoring up the currency will undercut one of China’s larger economic imperatives, the need to upgrade the country’s industrial and technological base. That will require a prodigious volume of dollars to acquire US and European technology companies such as recent Chinese deals to acquire German robot-maker Kuka and US semiconductor company Omnivision.

Chinese investors and acquirers not only face tighter controls on the outflow of US dollars. The US is also becoming more antagonistic toward Chinese acquisitions in the US and globally. Deals of any significant size need to pass a national security review overseen by a shadowy interagency body known as the Committee on Foreign Investment in the United States, or CFIUS.

CFIUS works in secret. In recent months, it has blocked Chinese investment in everything from a San Diego hotel, to Dutch LED light bulbs as well as US and European companies more explicitly involved in high-tech industry including semiconductor design and manufacturing. The strong likelihood is CFIUS will become even more restrictive once Mr Trump takes over.

Unlike most areas of bilateral tension between the US and China, this is one area where the Chinese have no room to retaliate in kind. China already has a blanket prohibition on investment by US, indeed all foreign companies, into multiple sectors of the Chinese economy, from tech industries like the internet and e-commerce all the way to innocuous ones like movies, cigarettes and steel smelting. So, for now, China quietly seethes as the US intensifies moves to prevent China investment deals from being concluded.

China will probably need to regroup and start playing the long game. That means investing more in earlier stage tech companies, especially in the Silicon Valley, and hoping some then strike it big. These venture capital investments generally fall outside the tightening CFIUS net. China wants to spend big and spend fast, but will find it often impossible to do so.

Even as political and military tensions rise between the US and China in 2017, one ironic certainty will be that a record number of Chinese are likely to go to the US as tourists, home buyers or students and spend ever more there. China’s ardour for all things American – its clean air, high-tech, good universities, relatively cheap housing, and retail therapy – is all but unbounded.

If informal online surveys are to be believed, ordinary Chinese seem to like and admire Mr Trump, especially for his business acumen. Mr Xi, understandably, may view the new US President in a harsher light. Xi faces cascading complexities as well as factional opposition within China. He could most use a US leader cast in the previous mold, committed to constructive cooperation with China. Instead, he’s likely to contend with an unpredictable, disapproving and distrustful adversary.

https://www.ft.com/content/b1801637-4219-3222-9f45-658740aa1187

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CICC eyes return to greatness — IFR Asia

Leave a Comment / August 11, 2020

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China International Capital Corp has unveiled its much-anticipated acquisition of unlisted China Investment Securities, in a move that may see the PRC’s oldest investment bank regain the top spot in the country’s securities industry.

CICC said on November 4 it planned to acquire 100% of Shenzhen-based CIS for Rmb16.7bn (US$2.47bn) through the issuance of 1.68bn domestic shares to current owner Central Huijin Investment at Rmb9.95 each. The issuance price represents a discount of 0.6% to CICC’s closing prior to the announcement of the proposed acquisition.

The move marks a significant shift in strategy for CICC, which has long flirted with the idea of setting up a retail brokerage unit as its share of business has dwindled, but has so far remained wedded to its institutional clients.

“If you look at CICC’s business model, it has a very strong institutional focus, but we all know China’s capital markets are primarily driven by retail investors,” said Benjamin Quinlan, chief executive officer and managing partner at Quinlan & Associates. “CIS has a strong retail franchise, so it seems to complement CICC’s existing business quite well.”

CICC made its reputation bringing some of China’s biggest state-owned enterprises and red chips to the equity and debt markets. This included the US$21.9bn IPO of Industrial and Commercial Bank of China in 2006 and the US$22bn IPO of Agricultural Bank of China four years later.

After being ranked the number one brokerage firm in China in 2010, it fell to number 23 last year, according to Securities Association of China data, as the flow of giant SOE listings dried up and other Chinese securities firms expanded rapidly, using their stronger capital bases and wider branch networks to build intermediary businesses, especially around margin trading.

Bi Mingjian, appointed CEO of CICC last December, has made expanding the bank’s brokerage and asset management units a key part of his overall strategy and has sought to reduce reliance on institutional and wealthy clients.

CICC has only 20 branches in the PRC versus the 200 of CIS, according to its website. CICC’s small retail footprint has affected its earning capacity from retail investors, who account for most of the trading in the onshore capital markets.

“CICC was originally founded to be China’s one ready-for-Wall Street, global investment bank, but that strategy is no longer perfectly aligned with the profits and priorities of China’s banking industry,” said Peter Fuhrman, chairman and CEO at China First Capital.

“Instead of trying to compete with Goldman Sachs and Morgan Stanley, CICC will now be matched against a group of domestic competitors. This is ideal as investment banking fees within China, both for IPOs and the secondary market, are high and not that troublesome to earn.”

ADVISORY BUSINESS

Most analysts consider the acquisition, at around 1.1 times forward book value, as good value and a good strategic fit that should help propel CICC up the league tables.

“If you aggregate the market share of both firms across the equity and debt capital markets and M&A advisory, the combined entity could come out as number one in all three rankings,” said Quinlan.

“This might not be the case, but we expect CICC to be at least a top-five player in ECM and DCM, following the acquisition, and most probably top three for M&A advisory.”

The proposed acquisition will boost CICC’s balance sheet. CICC ranked 24 in terms of total assets in 2015 with Rmb63bn, while CIS was 18th with Rmb92bn. Their ranking would advance to 13 after the integration, still far short of the industry leader Citic Securities with total assets of Rmb484bn.

CICC ranked 23 among China’s 125 securities firms in 2015 in revenue terms, while CIS ranked 17, according to the Securities Association of China.

Some questions have been raised about the potential cultural mismatch between the two firms and there have also been suggestions that the Chinese government may be directing the acquisition as it seeks to improve the sector’s reputation for probity.

China’s securities sector has expanded at a considerable pace in the last few years with the combined asset base of the 125 securities companies operating there increasing fourfold between 2011 and 2015 to Rmb6.4trn and there are few signs that the pace of growth is likely to abate.

“It could be a win-win situation for the two firms, because their business models are very complementary,” said an analyst.

“However, it is also a big challenge for CICC on whether it can generate the synergies it expects, by applying its strengths in high-end services to the huge customer base and network of CIS,” said the analyst.

Following the acquisition, CIS will become a wholly owned subsidiary of CICC, while Huijin’s stake in CICC will increase to 58.7% from 28.6%.

CICC and ABC International are financial advisers for the transaction. The deal requires approval from shareholders and regulators.

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The Big Sort — The Economist

Leave a Comment / August 11, 2020

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“THE vultures all start circling, they’re whispering, ‘You’re out of time’…but I still rise!” Those lyrics, from a song by Katy Perry, an American pop star, sounded often at Hillary Clinton’s campaign rallies but will shortly ring out over a less serious event: a late-night party in Shenzhen to kick off “Singles’ Day”, an online shopping extravaganza that takes place in China on November 11th every year.

The event was not dreamt up by Alibaba, but the e-commerce giant dominates it. Shoppers spent $14.3bn through its portals during last year’s event. That figure, a rise of 60% on a year earlier, was over double the sales racked up on America’s two main retail dates, Black Friday and Cyber Monday, put together. Chinese consumers are still confident, so sales on this Singles’ Day should again break records.

It points to an intriguing question: how will all of those purchases get to consumers? Around 540m delivery orders were generated during the 24-hour spree last year. That is nearly ten times the average daily volume, but even a slow shopping day in China generates an enormous number. By the reckoning of the State Post Bureau, 21bn parcels were delivered during the first three quarters of this year.

The country’s express-delivery sector, accordingly, is doing well. In spite of a cooling economy, revenues rose by 43% year on year in the first eight months of 2016, to 234bn yuan ($36bn). And although the state’s grip on China’s economy is tightening, the private sector’s share of this market is actually growing. The state-run postal carrier once had a monopoly on all post and parcels. Now far more parcels are delivered than letters, and the share of the market that is commanded by the country’s private express-delivery firms far exceeds that of Express Mail Service, the state-owned courier.

China’s very biggest couriers have been rushing to go public on the back of the strong growth. Most of them started life as scrappy startups, and are privately held. But because of regulatory delays, which mean a big backlog of initial public offerings, many companies have resorted to other means. Last month, two of them, YTO Express and STO Express, used “reverse mergers”, in which a private company goes public by combining with a listed shell company, to list on local exchanges. In what looks to be the largest public flotation in America so far this year, another, ZTO Express, raised $1.4bn in New York on October 27th. Yet another, SF Express, China’s biggest courier, recently won approval to use a reverse merger too.

But investors could be in for a rocky ride. Shares in ZTO, for example, have plunged sharply since its flotation. That is because the breakneck growth of courier companies masks structural problems. For now, the industry is highly fragmented, with some 8,000 domestic competitors, and it is inefficient.

One reason is that regulation, inspired by a sort of regional protectionism, obliges delivery firms to maintain multiple local licences and offices. Cargoes are unpacked and repacked numerous times as they cross the country to satisfy local regulations. Firms therefore find it hard to build up national networks with scale and pricing power. All the competition has led to prices falling by over a third since 2011. The average freight rate for two-day ground delivery between distant cities in America is roughly $15 per kg, whereas in China it is a measly 60 cents, according to research by Peter Fuhrman of China First Capital, an advisory firm.

A handful of the biggest companies now aim to modernise the industry. Some are spending on advanced technology: SF Express’s new package-handling hub in Shanghai is thought to have greatly increased efficiency by replacing labour with expensive European sorting equipment. A semi-automated warehouse in nearby Suzhou run by Alog, a smaller courier in which Alibaba has a stake, seems behind by comparison but in fact Alog is a partner in Alibaba’s logistics coalition, which is known as Cainiao. The e-commerce firm has helped member companies to co-ordinate routes and to improve efficiency through big data.

Other investments are also under way. Yu Weijiao, the chairman of YTO, recalls visiting FedEx, a giant American courier, in Memphis at its so-called “aerotropolis” (an urban centre around an airport) in 2007. He was awed by the firm’s embrace of advanced technology. He returned to China and sought advice from IBM on how his company could follow suit. YTO is using the proceeds of its recent reverse merger to expand its fleet of aircraft, buy automatic parcel-sorting kit and introduce heavy-logistics capabilities for packages over 50kg.

There is as yet little sign that China’s regions will begin allowing packages to move freely, so regulation will remain a brake on the industry. More ominously, labour costs are rising. There are fewer migrant labourers today who are willing to work for a pittance delivering parcels. This week China Daily, a state-owned newspaper, reported that ahead of Singles’ Day, courier firms were offering salaries on the level of university graduates.

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http://www.economist.com/news/business/21710004-chinas-express-delivery-sector-needs-consolidation-and-modernisation-big-sort

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China Inc.’s Investment Bank Dives Into Troubled Retail Market — Bloomberg

Leave a Comment / August 11, 2020

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China International Capital Corp., the investment bank ex-Premier Zhu Rongji set up two decades ago to help restructure the Chinese economy, is again taking on a role that fits with the government’s agenda.

CICC’s $2.5 billion acquisition of China Investment Securities Corp. will plunge the firm into the retail investor market, a segment it had long shunned because of thin margins and a traditional focus on institutional clients. The deal is part of Chief Executive Officer Bi Mingjian’s push to lessen dependence on volatile investment banking fees.

Yet the transaction also ties in with a key objective of the government, which will become CICC’s largest shareholder as a result of the purchase. Having used CICC to take some of the largest state companies public since the late 1990s, China is now looking for assistance in its quest to reform a retail-driven equities market that’s prone to speculative booms and busts.

In the wake of the latest such episode, a stock market meltdown last year, the government launched an unprecedented crackdown on the securities industry and arrested several high-ranking executives.

“CICC will once again play this civilizing and globalizing role, only with the more far-reaching aim of helping to professionalize the often-shambolic Chinese stock market,” said Peter Fuhrman, chairman of China First Capital, a Shenzhen-based advisory firm. “Its reputation is still unsullied in China, unlike other banks whose leaders have been marched out in handcuffs and whose market practices are widely blamed for the rampant speculative fever that often afflicts China’s domestic capital markets.”

Reforming Role

In announcing the takeover on Friday, CICC hinted at a reforming role by saying the two firms will “work together to improve the quality and efficiency of mass market services” through training and by upgrading technology systems at China Investment Securities’ 192 branches across the country that serve retail clients.

CICC is buying China Investment Securities from state-owned Central Huijin Investment Ltd. It will issue shares to Central Huijin, more than doubling the entity’s stake in CICC to 58.7 percent. CICC had to get a waiver from the Hong Kong Stock Exchange for the transaction, so that Central Huijin’s controlling stake wouldn’t be classified as a reverse takeover.

An additional rationale for the deal is Huijin’s push to consolidate the securities industry by combining institutional and retail brokerage businesses, said Zhang Chunxin, an analyst at CMB International Capital Holdings Corp. She cautioned that “the reform process will be long and gradual.”

China Investment Securities ranked 17th among Chinese securities firms by revenue last year, while CICC was 23rd, according to official data. Bi’s overhaul has the support of the firm’s foreign shareholders, who had already been pushing CICC to diversify into areas such as asset and wealth management, a person with knowledge of the matter said.

Sherry Tan, spokeswoman at CICC, declined to comment.

Shareholder Backing

The combined stakes of CICC’s main foreign backers — private equity firms TPG Capital and KKR & Co., and Singapore sovereign wealth fund GIC Pte — will drop to 15.3 percent as a result of the takeover. However, the foreign firms may buy additional stakes from Central Huijin in future, people familiar with the matter said.

When former premier Zhu Rongji created CICC in 1995, China was launching a shakeup of its state-run industrial sector, leading to the closure of some 60,000 firms and loss of 40 million jobs. Since then, CICC has worked on some of the biggest listings of state enterprises, such as China Construction Bank Corp. and China Mobile Ltd. It was the top adviser on mergers involving Chinese companies in 2014, 2015 and so far this year.

Buying China Investment Securities is a departure from former CEO Levin Zhu’s strategy. The son of the former premier, who ran the firm until two years ago, had long resisted expanding into retail broking, fearing it would erode margins and its differentiation from other Chinese securities firms, according to people familiar with the matter.

Last year’s leverage-fueled equities rally and the subsequent implosion brought worldwide attention to the shortcomings of China’s markets. The government responded with an effort that included enlisting securities firms in supporting the stock market as well as jailing senior brokerage executives for alleged wrongdoing. CICC wasn’t among the firms that took part in the stock-market rescue, but China Investment Securities was.

Market Manias

China’s 114 million individual investors account for the bulk of equities trading. That makes them a hard-to-ignore segment, but also one that tends to be susceptible to market manias. Critics contend that the government’s efforts to restore market calm last year only served to hurt investor confidence further.

The Shanghai Composite Index remains 39 percent below its June 2015 peak. Xiao Gang, who was removed from his post as chairman of China’s securities regulator this year, in January acknowledged loopholes and ineptitude within the regulatory system.

Some analysts aren’t convinced the deal is in CICC’s best interest. The stock fell 2.1 percent on Monday after a trading halt was lifted.

The transaction makes the firm “more like a state-owned company, which could compromise CICC’s corporate governance, operational autonomy” and its ability to retain top talent, said Fred Hu, Goldman Sachs Group Inc.’s former Greater China chairman.

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http://www.bloomberg.com/news/articles/2016-11-07/china-inc-s-investment-bank-dives-into-troubled-retail-market

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Has Yum Worked Out How Fast-Food Firms Can Crack China? — Bloomberg

Leave a Comment / August 11, 2020

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Global consumer companies trying to find a business model for China’s burgeoning domestic market will be watching closely as one of the oldest Western brands in the country starts a new strategy.

Yum! Brands Inc., which opened its first KFC restaurant in China in 1987 and also operates Pizza Hut outlets, has been losing market share thanks to a food-safety scare, changing tastes, increasing local competition and a host of other challenges that foreign companies face in China. It carved out its China operations into a separate company, Yum China Holdings Inc., which begins trading today in New York.

Ring-fencing the business, the largest independent restaurant company in China with 7,000 outlets and more than $900 million cash on hand, offers Yum a number of advantages in dealing with a fast-changing market. Yum’s example could provide a road map for other global consumer brands in the world’s most populous nation.

Yum China has issued 386 million shares at $24.36, which puts its valuation at around $9 billion, according to New Jersey-based research firm Edge Consulting Group LLC. The stock rose about 2 percent to $24.85 as of 9:59 a.m. in New York, while Yum Brands gained 0.7 percent to $62.49.

“When their China operations get so big and are clearly catering just to the China market, splitting off could unlock a lot of value for shareholders,” said Shaun Rein, Shanghai-based managing director of China Market Research Group. “If I were an activist hedge fund investor, I would be looking at carving out brands within large conglomerates that are China plays.”

Doing so allows Yum’s management of the China business to tailor its operations and products more swiftly to changing local conditions, such as the menu preferences of diners in different parts of the country, mobile-based payments systems, hiring and other factors.

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It also helps tap Chinese investors willing to pay high premiums for a stake of an international brand’s China operations. Yum sold a combined $460 million stake in its Chinese business to Primavera Capital Group and an Alibaba Group Holding Ltd. affiliate, Ant Financial Services Group, in September.

In recent years, Yum has ceded market share to local competitors because it was slow to react to market changes, said Rein.

“They didn’t make corporate decisions quickly enough, such as in adopting mobile payments, or adapting to consumers wanting more premium offerings,” Rein said. “Their ability to deal with the more complex environment here was held back by the lack of knowledge, the slowness of the U.S.”

Localization of offerings at KFC and Pizza Hut outlets in China will be an important component of the firm’s strategy for the country, Yum China Chief Executive Officer Micky Pant said at a briefing Tuesday in Shanghai. The company plans to increase investment in new outlets across its brands and does not plan to raise more capital, he said.

An activist hedge fund investor upset with the company’s handling of its China business is how Yum China came into being.

After a food-safety scandal in 2014 and cheaper local competition torpedoed Yum’s sales and profit in China, Corvex Management founder Keith Meister in mid-2015 urged the company to split off its Chinese operations — which contribute about half the group sales — saying that the move could generate an additional $16 a share in value for the Louisville, Kentucky-based company.

Yum’s total share of China’s market for fast-food chains dropped to 30 percent last year, from 40 percent in 2012, according to data from Euromonitor International. While sales have been growing again in China in the mid-single digits since late last year, the company has suffered from consumers shifting to healthier options and domestic chains sprouting up with more variety.


Volatility Reduction

Unlike Yum’s U.S. operations, where most of its restaurants are run by franchisees, Yum China directly operates over 90 percent of its outlets and plans to triple the number to more than 20,000 in the long term.

Yum’s spinoff would reduce volatility for its remaining business, while “giving investors with a higher risk tolerance access to a more pure-play China growth story,” said Jonathan Morgan, an analyst for Edge Consulting. “China’s economic slowdown could induce other U.S.-listed restaurant stocks to spin off their China businesses, to protect their core businesses.”

So far, companies with China consumer arms have often chosen instead to sell the division to a local competitor and take a stake in that business instead.

Wal-Mart Stores Inc. in June sold its e-commerce platform Yihaodian to China’s second-largest e-commerce company, JD.com Inc., for a 5 percent stake in JD. In August, Uber Technologies Inc. surrendered after a year-and-a-half battle with Didi Chuxing and agreed to sell its business in China. It departed the country in exchange for $1 billion in cash and a 17.7 percent stake in Didi.

McDonald’s Corp., meanwhile, is seeking to sell its 20-year mass franchise rights for China and Hong Kong for a reported $2 billion.

Starbucks Corp. is the only other major U.S.-listed food and beverage chain in China beside Yum, which owns and operates its outlets, numbering 2,400 stores across 110 cities.

China, Starbucks’ largest international market, represents the most significant opportunity for the company, said a company representative. The company has no intention to change its operation model in the market, according to the spokesperson.

Jackpot Valuations

“What we’ve seen across various industries is that foreign players eventually pull out or find a local partner,” said Hong Kong-based S&P Global Ratings’ restaurant and retail analyst Shalynn Teo. “It’s the local market knowledge and local relationships that determine which foreign businesses survive in China, and local players will always have an edge.”

With Chinese investors paying a premium for market share, such deals can prove attractive, said Peter Fuhrman, CEO of Shenzhen-based investment bank and advisory firm China First Capital. “As long as Chinese investors are offering jackpot valuations,

Those that don’t face the need to tailor their businesses to China’s widely diverse and morphing consumer market. Only from March this year did KFCs in China began accepting WeChat Pay; they started accepting Alipay mobile payments in July last year. Yet the country leads the world in the use of such transactions, with four out of 10 Chinese consumers using mobile payments at physical stores, research firm EMarketer estimated.

Starbucks stores in China still do not accept Alipay or WeChat, only Apple Pay, a decision which costs them 5 to 10 percent of sales, estimates China Market Research Group’s Rein.

Starbucks launched its own mobile payment system in China in July, allowing customers to pay with preloaded Starbucks Gift Cards via their mobile devices, according to the company.

As China’s consumer market continues to grow, more overseas companies may consider following Yum down the path of segregation.

“Four out of 10 spinoffs do not generate a return in the first year of separation,” said Edge Consulting’s Morgan. “How Yum China performs will help U.S.-listed companies evaluate their strategic options in China.”

 

http://www.bloomberg.com/news/articles/2016-10-31/yum-s-spinoff-offers-roadmap-for-western-brands-in-china-market

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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.

   Kindergartens

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.

 

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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