Peter Fuhrman

China still lacking in innovation — Nikkei Asian Review

1 Comment / June 25, 2016

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blueprint China

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China still lacking in innovation

January 23, 2015 1:00 pm JST

By Peter Fuhrman

China’s economy suffers from an acute case of “not invented here” syndrome. Everything can be, and increasingly is, manufactured in China, but almost nothing of value is invented here.

The result is an economy still centered on low-pay, low-margin drudge work manufacturing products designed, patented and marketed by others. This is as true for advanced medical diagnostic equipment from General Electric as it is for Apple’s iPhones and tablets.

While manufacturing accounts for almost 50% of China’s gross domestic product and keeps 100 million people employed, China has few if any domestic companies selling sophisticated, premium-priced manufactured products to the world. As long as this remains the case and China remains a huge economy with only the tiniest sliver of consequential and profitable innovation, it will grow harder each year for the country to sustain high economic growth rates and big increases in living standards.

The government is increasingly anxious. “China is now standing at a critical stage in that its economic growth must be driven by innovation,” warned the State Council, China’s cabinet, in May.

With the talk comes money. Lots of it. Billions of dollars are being allocated to government-backed research projects and venture capital. But for all the rhetoric, government policies and cash, China remains a high-tech disappointment, more dud than ascending rocket. As an investment banker living and running a business in China, I very much wish it were otherwise. But I still see no concrete evidence of a major change underway.

On others’ shoulders

Indeed, the flagship products of China’s advanced manufacturing sector are still built largely on foreign components, technologies and systems, with Chinese factories serving as the assembly point.

Consider Xiaomi, which achieved great success in China’s mobile phone market last year and began getting some traction overseas. The company now has a market valuation of $45 billion, far higher than Sony, Toshiba, Philips, Ericsson and many more of the world’s most famous innovators.

Xiaomi’s handsets rely on components and software from a group of mainly U.S. companies, including Broadcom, Qualcomm and Google. They, along with U.K. chipmaker ARM Holdings and foreign screen manufacturers, are the ones making the real money on Android phones like Xiaomi’s.

Many of Xiaomi’s phones, like those of Apple and other leading brands, are assembled in China by Hon Hai Precision Industry, a Taiwanese company better known as Foxconn. As of now, Foxconn has no Chinese competitor that can match its production quality at a comparable low cost. Its superior management systems for high-volume production underscore another critical area where China’s domestic technology industry is weak.

The picture is similar with products such as computers, cars and aircraft. China’s military and commercial jet development programs have relied on foreign engines because of the country’s continuing failure to design and produce its own. Compare this with the Soviet Union, which, though an economic also-ran all the way up to its extinction in 1991, was producing jet engines as early as the 1950s; Russia still supplies advanced military engines for Chinese military jets. The picture is little better with jet brakes and advanced radar systems.

Stumbling blocks in China’s jet engine development continue at the manufacturing level with difficulties in serial production of minute-tolerance machinery, at the materials level with a lack of special alloys, and at the industrial level where a state-owned monopoly producer faces no local competitor to drive innovation as has been seen in the dynamic in the U.S. between GE and Pratt & Whitney.

China’s inability to make its own advanced jet engines casts light on problems China has, and likely will continue to have, developing a globally competitive indigenous technology base. This challenge, to bring all the parts together in a high-tech manufacturing project, is also evident in China’s failure, up to now, to develop and sell domestically developed advanced integrated circuits, pharmaceuticals and new materials globally.

China has, by some estimates, spent more than $10 billion on pharmaceutical research, but it has had only one domestically developed drug accepted in the global market, the modestly successful anti-malarial treatment artemisinin, or qinghaosu. Interestingly, it is derived from an herbal medicine used for 2,000 years in China to treat malaria; the drug was first synthesized by Chinese researchers in 1972.

Missing pieces

It’s simply not enough to count Chinese engineers and patents, or to rely on the content of the government’s technology-promoting policies. China still lacks so many of the basic building blocks of high-tech development, such as a mature, experienced venture capital industry staffed by professional entrepreneurs and technologists. A transparent judicial system is also essential, not only for protecting patents and other intellectual property, but for managing the contractual process that allows companies to put money at risk over long periods to achieve a return. Nondisclosure and noncompete agreements, a backbone of the technology industry in the U.S. and elsewhere, are basically unenforceable in China.

Tencent Holdings’ WeChat mobile messaging service is an example frequently cited by those who claim to see a dawning of innovation in China. An impressive 400 million phone users have signed up for the service. The basic application, though, is similar to that of Facebook’s WhatsApp, Japan’s Line and others.

WeChat’s real technological strength is in its back end, in building and managing the servers to store all the content that is sent across the network, including a huge amount of video and audio files. Tencent does this because it’s required to do so by Chinese internet rules and government policies on monitoring Internet content. Tencent might be able to commercialize and sell its backend storage architecture globally, but it’s not clear anyone would be interested in buying it. It’s a technology that evolved from specific Chinese requirements, not market demand.

China’s record of invention is the stuff of history: gunpowder, the compass, paper, oil wells, porcelain, even alcoholic beverages, kites and the fishing reel. All that occurred over 1,000 years ago. China’s greatest modern invention has been its singular pathway out of poverty as the economy expanded 200-fold over the last 35 years. But growth is now slowing, costs are rising sharply and profit margins are shrinking. To go on prospering, China needs to invent a new path and discover a new wellspring of breakthrough innovation, and it needs to do so in a hurry.

Peter Fuhrman is the founder, chairman and chief executive of China First Capital, an investment bank based in Shenzhen, China.

 

http://asia.nikkei.com/Viewpoints/Perspectives/China-still-lacking-in-innovation

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Nanjing: A Special Kind of Chinese Boomtown

Leave a Comment / November 25, 2014

Nanjing City Investment Promotion Consultant

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In 1981, when I first arrived in Nanjing as a student,  the ancient and rather sleepy city had a population of four million and a GDP of Rmb 4 billion. Today, the population has doubled to eight million and GDP is two hundred times larger. Yes, you read that right. This year’s GDP will exceed Rmb 850bn. Even by recent Chinese standards, that kind of growth rate for a major city is just about unheard of. Since 1981, Nanjing’s GDP has grown almost twice as fast as China as a whole. It is now richer in per capita terms than Beijing, and its economy continues to expand more quickly than the capital, Shanghai and just about every other major city in the country.

I was back in Nanjing in the last week to visit friends and clients, as well as receive from the Nanjing city government an official appointment as an “investment promotion consultant”. That’s me in the photo above celebrating with Mr. Kong Qiuyun, the cultured an charismatic director-general of Nanjing Municipal Investment Promotion Commission. It’s an especially welcome honor since I consider Nanjing, all these years later, my hometown in China, my  “laojia”. Every return is a homecoming.

With or without the official status, saying good things about Nanjing comes easily. It’s a special kind of boomtown. Despite the steep economic ascent over the last 33 years, today’s Nanjing is visibly woven from strands of its 2,500 year-old history as a city at the core of Chinese civilization. Old parks, streets and buildings stand. Though stained by tragedy – including the Nanjing Massacre in 1937 and bloody civil war at the end of the Taiping Rebellion civil war 73 years earlier — Nanjing is a city with a lightness of spirit and an intimate association with Chinese traditional culture of painting, calligraphy, poetry.

There is an ease, prosperity and comfort to life in Nanjing that is largely absent in Beijing. One is built upon the parched steppes below the Gobi Desert. Camel country. The other is set amid China’s most fertile, well-irrigated patch of bottomland –a kind of Chinese Eden, saturated by rivers, lakes, ponds and paddies, where just about everything can be grown or reared in abundance. The city is a symbiosis of man and duck. In a typical year, the people of Nanjing will consume over one hundred million of them. Every trip, including this most recent one, I return to Shenzhen with a suitcase padded out with three or four salt-preserved Osmanthus-scented ducks. Each trip back to the US I carry several with me and deliver them to my father in Florida. Somehow, age 82, he has developed a fine appreciation for them.

Nanjing took awhile to get its economic act together. During much of the 1980s, it was a backwater, trailing far behind the nearby cities of Shanghai and Suzhou as well as the coastal cities of Guangdong and Fujian. Earlier it had a reputation for being not very well-managed. Today the opposite is true.

Nanjing is the most ideally-situated large city in China. It is at the back door of China’s richest, most developed region, the Yangtze River Delta, stretching from Shanghai through Hangzhou, Suzhou, Wuxi and Changzhou. It is also now the front door for China’s huge market of the future, the inland regions where growth is now strongest, particularly the provinces of Hubei, Sichuan, Chongqing, Anhui farther up the Yangtze.

Nanjing’s is a large economy but without especially large and dominant companies. Few even in China can name its largest businesses or employers. This sets it apart from Beijing, Shanghai, Shenzhen, Hangzhou, Tianjin. Credit Nanjing government’s hands-on far-sighted economic management. It’s made up for the lack of large businesses by encouraging the growth of smaller mainly private-sector entrepreneurial businesses, as well as bringing in investment from abroad. Sharp, BASF, A.O. Smith, ThyssenKrupp are among the larger foreign companies with significant investment in Nanjing.

Major American investors are still comparatively few. This needs correcting. I hope to help in my new role as a consultant. Americans in the first half of the 20th century played a conspicuously positive role in Nanjing’s development. US academics and missionaries helped establish the city’s two oldest universities, Nanjing University (where I studied) and Nanjing Normal University. They remain the rock-solid backbones of Nanjing’s outstanding university system with over 25 institutions of higher learning.

An American team of architects and urban designers were responsible for creating the layout of much of the modern city of Nanjing, including the city’s main shopping district of Xinjiekou. The city was designed to combine elements of Paris and Washington D.C., with wide boulevards, stately traffic roundabouts like the Place de l’Etoile, and an elegant diplomatic quarter with large mansions spread along arching plane tree-shaded streets.

During the pre-1949 era, American companies were the most prominent and successful businesses in Nanjing. Two in particular – Socony (then the world’s leading petroleum company, a part of the Rockefeller Standard Oil group, and now ExxonMobil.) and British American Tobacco – managed large operations in China from their headquarters in Nanjing. They were then among the largest companies in China of any kind. They left in 1949 never to return to Nanjing and their previous prominence.

An individual American, a long-term resident of Nanjing, wrote while there the most popular and influential book about China in English. It was then made into a successful film which etched in the minds of many Westerners the enduring image of China’s Confucian values and pre-revolution rural poverty. Pearl Buck’s “The Good Earth” was for years a best-seller and played an influential role in winning her the Nobel Prize for Literature in 1938. *

To my thinking, America has an unfulfilled destiny in Nanjing. It’s a smart place for smart capital to locate. In modernizing, it has kept its soul intact.

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* For sharing his rich and consummate knowledge of America’s multi-facetted engagement with  Nanjing in the first half of the 20th century, I’m indebted to John Pomfret. John’s book “Chinese Lessons”, about his years as a student at Nanjing University and the lives thereafter of his Chinese classmates, is as good as anything published about China’s remarkable transformation these last thirty years. You can read more about the book, and about John, by visiting http://www.johnpomfret.org/

 

The Abacus. A Crowning Achievement of Chinese Innovation

Leave a Comment / November 14, 2014

 

abacus China First Capital

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While China’s recent performance may be a disappointment, averaged across the millennia no other nation has provided the world with such an abundant wellspring of innovation. Have a look at this long list of Chinese inventions. Not a day passes for most of us when we don’t rely on at least one product of Chinese ingenuity, be it paper money, the bristle toothbrush, toilet paper, oil wells. A slightly smaller group of us wouldn’t want to long tolerate life without noodles, steamed or stir-fried food, tofu, tea, alcoholic drinks.

Left off the Wikipedia list is one other Chinese gadget that played a central role in people’s lives, especially in East Asia, for centuries and then abruptly disappeared over the last two decades. It’s also my personal favorite among all Chinese inventions, the abacus. I grieve over its extinction.

When I first got to China in 1981, the abacus was ubiquitous — in every shop, bank, schoolroom and government office. If it had to be counted or calculated, an abacus was required. I still remember the loud and ceaseless clicking sound inside the main room of Nanjing’s cavernous People’s Bank as dozens of clerks tabulated and re-tabulated sums, louder and more rhythmic than the clatter of cicadas outside. Cheap electric calculators and PCs not only killed off the abacus they also have turned China’s banks and offices into quieter more monotonous spaces.

Among all Chinese inventions, nothing quite rivals an abacus, or “算盘 suanpan” in Chinese,  for pure “out of the box” ingenuity. There’s no clear predecessor machine, and no real evolution or improvement from the device that is first described almost eight hundred years ago in Chinese books and begins appearing in Chinese paintings five hundred years ago.

Though the name of the inventor (or inventors) is lost to history, none but a towering genius could invent a portable lightweight tool and the accompanying fingering technique to allow a few rows of beads separated on two stacked decks, five beads on the lower and two on the upper, to perform high-speed, accurate multiplication, division, addition, subtraction, square root and cube root operations. In geek-speak, hardware and software are proprietary and seamlessly integrated. The abacus, unlike the modern electronic calculator, is as easily used for calculations in base ten (decimal), base 16 (hexidecimal) or any other base you might choose.

Europe and America, so dominant in most spheres of invention these last 400 years, contributed in the 17th century the slide rule and adding machine to the technology of calculation. But, neither achieved the widespread use in teaching and daily life the abacus enjoyed for centuries. Most Chinese aged over 30 (as well as tens of millions in other parts of Asia) were taught in school to use an abacus. While most have since sadly forgotten how to use one, they once could manipulate the wooden beads as quickly and accurately as skilled touch typists.

I recently went off to see if I could buy an old wooden abacus. It’s harder than you’d think. My guess is there were at least 400 million abacuses in China thirty years ago. Today, they’ve completely disappeared from sight. I can’t recall a single time I’ve seen one in use during the last five years living full-time in China. Something of great functional beauty and utility has gone out of Chinese lives.

I did eventually succeed in finding one at an antique market in Shenzhen. It looked to me, based on the filigree bronze hinges, to be about 120 years old. The seller, in his early 60s, had forgotten how to use it, as did everyone else who gathered around to watch me bargain for it, with the exception of one handsome older woman trained in the early 1970s as an accountant. I asked the seller to give us some random four-digit numbers to add and subtract, with me using the calculator on my phone and her using the old abacus. In each case, she was quicker than me. I had to repeat each number in my head before tapping on the keyboard. Her fingers, on the other hand, were in motion from the first sound. It was a virtuoso performance.

An abacus is not a calculator, in the sense that you punch in numbers and it spits out an answer. “The person operating the abacus performs calculations in their head and uses the abacus as a physical aid to keep track of the sums, the carrys,” explain the experts at Canada’s Ryerson University.

After polishing away the dust, I put the abacus on the table in the CFC’s meeting room. I’m determined to learn better how to use it, but conscious of ebbing mental and physical dexterity.

It looks like nothing else on the planet, and yet it shares similarities with an iconic device invented 800 years later (in 2007) in Silicon Valley. A swipe-operated high-tech tool, with a simple rectangular design, its engineering elegant yet practical, and an intuitive interface that allows anyone with a little practice, from kids to old folks, to solve routinely and quickly a host of problems once thought too challenging for ordinary folk. The iPhone is the abacus of our age.

 

Investment in China PIPEs grows on Alibaba’s coattails — The Deal

Leave a Comment / December 5, 2014

deal

 

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Investment in China PIPEs grows on Alibaba’s coattails

By Bill Meagher    Updated 07:45 PM, Sep-09-2014 ET

 

Fueled by the anticipated initial public offering of Alibaba Group Holding Ltd., a renewed wave of investor interest has swept into U.S.-registered Chinese companies.

Such companies have raised $4.43 billion in 35 private-investment-in-public-equity transactions this year, compared to $276.8 million in 13 PIPEs last year, according to PrivateRaise, The Deal’s data service that tracks the PIPE market. Those figures exclude transactions that raised less than $1 million.

“Everything ultimately comes back to Alibaba,” said Peter Fuhrman, CEO of China First Capital, an investment bank in Shenzhen, China.

Alibaba’s imminent IPO has increased investor awareness that all things related to Internet shopping in China could be a “money-spinner,” Fuhrman said in an e-mail.

“Pretty much all the China IPOs in US this past 12 months have been internet-related. Now comes the Daddy of them all,” he wrote. “This perception of a boom of titanic proportions in online shopping in China is well-founded. The challenge for US investors is whether the companies that have gone public, with exception of Alibaba and to a lesser extent Jingdong will be able to scale up and make real money over time in China.”

To read complete article, click here.

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Neue Zurcher Zeitung Interview

Leave a Comment / December 5, 2014

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Monday’s “Neue Zurcher Zeitung” of Switzerland published an article based on the interview I gave last week while in London with the newspaper’s financial editor Christof Leisinger. For those whose German is up to the task, click here to read the article in full.

To get a flavor of what we discussed, here are some of the quotes, in English:

“China has the world’s second largest economy and capital market. GPD growth and corporate earnings are both growing far faster than in OECD countries. And yet, global institutional capital is in almost all cases seriously underweight China. How to explain this? Simple, there are just too few attractive and legal ways for international capital to invest in China.

“The Chinese companies quoted in the US and Hong Kong mainly come from two unrepresentative pools: large, slower-growing Chinese state-owned companies, and internet and mobile services “concept” stocks often with limited revenues and profits. The powerful engine of long-term economic growth in China, its millions of successful private sector entrepreneur-founded businesses serving domestic market, are almost all off-limits to non-Chinese investors. To invest, you need state approval to buy Renminbi and later permission to convert back into dollars, Euros or other freely-tradable currencies.

“China no longer especially needs or wants Western capital to finance its economic growth. The best way now to invest in China, to increase allocation there,  is probably through M&A, by putting money into US or European companies that are aggressively acquiring good Chinese private sector ones.”

“Overall, the country is doing an excellent job managing the transition from export-reliance to domestic consumption, a economic challenge Germany is still struggling with. The Chinese economy has undergone enormous structural change over the last five years, most of it positive, with more and more of economic activity coming from the private sector, rather than state-owned one, from producing and selling products to satisfy the needs of  China’s 1 billion consumers rather than those of Wal-Mart shoppers in the US.

“On the macro level I do not expect any big change anytime soon, no free convertibility for the Renminbi. But, more quietly and pragmatically, the Chinese government has solved a rather large problem related to this, by making it legal and simple now for every Chinese citizen to use Renminbi to buy up to $50,000 a year in dollars, to pay for travel, educating their children, or buy shares or other assets outside China. In other words, the capital account remains closed, but Chinese individually now have a lot of the benefits of free exchange between dollars and Renminbi. It’s one of the reasons the Champs d’Elysees and Bond Street are jammed with Chinese tourists.”

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WH’s canceled IPO shows dangers of misjudging demand — China Daily Article

Leave a Comment / May 17, 2014

China Daily

WH’s canceled IPO shows dangers of misjudging demand

By Michael Barris (China Daily USA)

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It could have been the largest IPO in a year. Instead the canceled initial offering of Chinese pork producer WH Group became an epic flop and an example of the pitfalls of failing to accurately gauge investor demand for IPOs.

Eight months ago, in the biggest-ever Chinese acquisition of a US company, WH, then known as Shuanghui International Holdings Ltd, acquired Virginia-based Smithfield Foods Inc, the world’s largest hog producer, for $4.7 billion. Awash in kudos for tapping into China’s increasing demand for high-quality pork, a Shuanghui team began working on a planned Hong Kong IPO.

By late April, however, the proposed offering was in deep trouble. Bankers slashed the deal’s marketed value to $1.9 billion from $5.3 billion. Finally, the company, now renamed WH Group, announced it would not proceed with the IPO because of “deteriorating market conditions and recent excessive market volatility”.

The decision handed the company a setback in its effort to cut the more than $2.3 billion of debt it took on in the Smithfield purchase and dealt a blow to Asia’s already struggling IPO market and the stock prices of some formerly high-flying Asian companies. The WH IPO debacle is even seen as possibly hampering the much-anticipated New York IPO of Chinese e-commerce giant Alibaba Group, expected to occur later this year and valued at an estimated $20 billion.

WH's canceled IPO shows dangers of misjudging demand

What went wrong? To put it simply, investors scoffed at the idea of paying top price for WH shares without any clear indication of how the Smithfield acquisition would save money.

The price range of HK$ 8 to HK$ 11.25 per share ($1.03 to $1.45) was at a valuation of 15 to 20.8 times forward earnings. “The synergies between Shuanghui and Smithfield are untested. Why do investors have to buy in a hurry?” Ben Kwong, associate director of Taiwanese brokerage KGI Asia Ltd, was quoted in the Wall Street Journal. “They would rather wait until the valuation is attractive.”

A disease that infected pigs, inflating US prices, also turned off investors. US pork typically trades at about half the meat’s price in China, because US feed tends to be cheaper. But Chicago hog futures have soared 47 percent this year to $1.25 a pound. Investors also saw corporate governance practices which awarded shares to two executives before the listing occurred as worrisome.

“I just couldn’t get over, in reading the SEC documents filed at the time of the takeover, the brazenness of it,” China First Capital CEO and Chairman Peter Fuhrman wrote on the Seeking Alpha investment website. “These big institutions seemed to be betting they could repackage a pound of sausage bought in New York for $1 as pork fillet and sell it for $5 to Hong Kong investors and institutions.

The Smithfield acquisition “never made much of any industrial sense”, Fuhrman wrote. The private equity firms behind WH – CDH Investments, Singapore state investor Temasek Holdings and New Horizon – “have no experience or knowledge how to run a pork business in the US. In fact, they don’t know how to run any business in the US”, he wrote.

One man’s meat, however, is another man’s poison. As Fuhrman wrote, the debacle has ended up putting smiles on the faces of the mainly-US shareholders who last year reluctantly sold their Smithfield shares at a 31 percent premium above the pre-bid price. Some of these same shareholders had protested that the Chinese company’s offer for the pork producer was too low. Ultimately, the sellers received the satisfaction of knowing they got the “far better end of a deal against some of the bigger, richer financial institutions in Asia and Wall Street,” Fuhrman wrote. And that, he said, has likely made them as delighted as pigs in muck.

 

http://usa.chinadaily.com.cn/2014-05/14/content_17508033.htm

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IPO rules overhauled for PE and VC firms — China Daily

Leave a Comment / May 1, 2014

China Daily article

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Shanghai stock exchange trading floor

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Friday, January 3, 2014

Private equity and venture capital firms will have to conduct their business differently in China in 2014, after regulators overhauled initial public offering rules.

Chinese PE and VC companies used to evaluate the companies by the standards of the China Securities Regulatory Commission for quicker IPOs, but now the market will play a more important role, said Peter Fuhrman, chairman, founder and chief executive officer at China First Capital.

“Under the new IPO system, the share pricing of an IPO company is decided by its strength and competitiveness, so investors will choose companies with real potential to invest in and provide them with the resources of strategy, management and market development to make their own return the best,” said Fuhrman *.

Private equity and venture capital firms will not find it easy to earn money any more after the new share-listing reform plan is carried out, because even if the companies they invested in get listed, they will still face the risk of losses, said Jin Haitao, chairman of leading Chinese equity investment firm Shenzhen Capital Group Co Ltd.

Jin said PE and VC institutions should cultivate real investment capabilities including those in value-discovery and negotiating. Pre-IPO deals cannot be guaranteed to earn money any more.

A total of 83 Chinese companies completed the examination and received approval from the China Securities Regulatory Commission. About 50 are expected to have finished all IPO procedures and be listed before the end of January. More than 760 companies are in line for approval. It will take about a year to audit all the applications.

In the IPO reform plan announced at the end of November, information disclosure has become more important and the China Securities Regulatory Commission will only be responsible for examining applicants’ qualifications, leaving investors and the markets to make their own judgments about a company’s value and the risks of buying its shares.

More and more Chinese companies applying for IPOs asked for cooperation with multinational accounting institutions, according to Hoffman Cheong, an assurance leader at Ernst & Young China North Region.

Cheong said the information disclosed can be different after the IPO reform plan is carried out.

According to the IPO reform plan, so long as an issuer’s prospectus is received by the commission, it will be released on the commission’s website. The company should buy back shares if there is a false statement or major omission. Also it should compensate investors if they lose money in certain situations.

http://www.chinadailyasia.com/business/2014-01/03/content_15109395.html

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(* Note: I never spoke to the reporter. As far as I can tell, the quote was translated into English, rather clumsily, from a Chinese-language commentary of mine published recently in a Chinese business publication. If asked, I would have said that companies need to choose PE investors carefully, and vice versa.)–

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Chinese IPOs Try to Make a Comeback in US — New York Times

Leave a Comment / June 24, 2016

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I.P.O./Offerings

Chinese I.P.O.’s Try to Make a Comeback in U.S.

BY NEIL GOUGH

HONG KONG — Chinese companies are trying to leap back into the United States stock markets.

The return, still in its early days and involving just a handful of companies, comes after several years of accounting scandals that pummeled their share prices and prompted scores of companies to delist from markets in the United States.

But the spate of recent activity suggests investors may be warming once more to Chinese companies that seek initial public offerings in the United States.

Qunar Cayman Islands, a popular travel website owned by Baidu, China’s leading search engine company, began trading on Nasdaq on Friday and nearly doubled in price. On Thursday, shares in 58.com, a Chinese classified ad website operator that is often compared to Craigslist, surged 42 percent on the first trading day in New York after its $187 million public offering.

The question now — for both American investors and the companies from China waiting in the wings to raise money from them — is whether these recent debuts are an anomaly or have truly managed to unfreeze a market that was once a top destination for Chinese companies seeking to list overseas.

Peter Fuhrman, chairman of China First Capital, an investment bank and advisory firm based in Shenzhen, China, said that for both sides, the recent signs of a détente between American investors and Chinese companies is “a matter of selectively hoping history repeats itself.”

“Not the recent history of Chinese companies dogged by allegations, and some evidence, of accounting fraud and other suspect practices,” he added. “Instead, the current group is looking back farther in history, to a time when some Chinese Internet companies with business models derived, borrowed or pilfered from successful U.S. companies were able to go public in the U.S. to great acclaim.”

That initial wave of Chinese technology listings began in 2000 with the I.P.O. of Sina.com and later featured companies like Baidu, which has been described as China’s answer to Google. In total, more than 200 companies from China achieved listings on American markets, raising billions of dollars through traditional public offerings or reverse takeovers.

But beginning about 2010, short-sellers and regulators started exposing what grew into a flurry of accounting scandals at Chinese companies with overseas listings. In some cases, such accusations have led to the filing of fraud charges by regulators or to the dissolution of the companies. Prominent examples include the Toronto-listed Sino-Forest Corporation, which filed for bankruptcy last year after Muddy Waters Research placed a bet against the company’s shares in 2011 and accused it of being a “multibillion-dollar Ponzi scheme.”

Concerns about companies based in China were reinforced in December when the United States Securities and Exchange Commission accused the Chinese affiliates of five big accounting firms of violating securities laws, contending that they had failed to produce documents from their audits of several China-based companies under investigation for fraud.

In response, American demand for new share offerings by Chinese companies evaporated, and investors dumped shares in Chinese companies across the board. It became so bad that the tide of listings reversed direction: Delistings by Chinese companies from American markets have outnumbered public offerings for the last two years.

Despite the renewed activity, it is too early to say whether Chinese stocks are back in favor. The listing by 58.com was only the fourth Chinese public offering in the United States this year, according to Thomson Reuters data. LightInTheBox, an online retailer, raised $90.7 million in a June listing but is trading slightly below its offering price. China Commercial Credit, a microlender, has risen 50 percent since it raised $8.9 million in August. And shares in the Montage Technology Group, based in Shanghai, have risen 41 percent since it raised $80.2 million in late September.

Still, this year’s activity is already an improvement from 2012, when only two such deals took place, according to figures from Thomson Reuters. Last month, two more Chinese companies — 500.com, an online lottery agent, and Sungy Mobile, an app developer — submitted initial filings for American share sales.

But the broader concerns related to Chinese companies have not gone away. In May, financial regulators in the United States and China signed a memorandum of understanding that could pave the way to increased American oversight of accounting practices at Chinese companies. But the S.E.C.’s case against the Chinese affiliates of the five big accounting firms remains in court.

The corporate structure of many Chinese companies is another unresolved area of concern. Because foreign companies and shareholders cannot own Internet companies in China, both 58.com and Qunar rely on a complex series of management and profit control agreements called variable interest entities. Whether such arrangements will stand up in court has been a cause for concern among foreign investors in Chinese companies.

And short-sellers continue to single out companies from China, often with great success.

In a report last month, Muddy Waters took aim at NQ Mobile, an online security company based in Beijing and listed in New York, accusing it of being “a massive fraud” and contending that 72 percent of its revenue from the security business in China last year was “fictitious.”

NQ Mobile has rejected the accusations, saying that the report contained “numerous errors of facts, misleading speculations and malicious interpretations of events.” The company’s shares have fallen 37 percent since the report was published.

(http://dealbook.nytimes.com/2013/11/01/chinese-i-p-o-s-attempt-a-comeback-in-u-s/?_r=1)
 
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Smithfield & Shuanghui: One little piggy comes to market — Week In China

Leave a Comment / June 24, 2016

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A record bid for America’s top pork producer isn’t quite as it first appears

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“What I do is kill pigs and sell meat,” Wan Long, chairman at Henan Shuanghui Development, told Century Weekly last year.

It’s an admirably succinct job description for a man who has been lauded by China National Radio as the “Steve Jobs of Chinese butchery” (Jobs, a vegan, probably wouldn’t have approved).

Starting out with a single processing factory in Luohe in Henan province, Shuanghui is now the largest meat producer in China, having benefitted in recent years from a shift in the Chinese diet away from rice and vegetables towards more protein.

So the announcement that it is now making a bid for the world’s largest hog producer, Smithfield Foods from Virginia in the US, prompted a flurry of headlines about the significance of the deal; its chances of getting security clearance from the Committee on Foreign Investment in the United States (CFIUS); and the broader implications for the meat trade in both countries if the takeover goes through.

Yet although Wan makes his profession sound like a simple one, Shuanghui’s bid for Smithfield turns out to be rather more complicated than many first assumed. Far from a case of a Chinese firm swooping in on an American target, the takeover reflects more complex trends too, including some of the peculiarities of the Chinese capital markets.

What first made headlines on the deal?

Privately-owned Shuanghui International has bid $7.1 billion for Smithfield Foods (including taking on its debt) in what the media is widely presenting as the biggest acquisition yet by a Chinese company of a US firm.

Shuanghui has processing plants in 13 provinces in China and produces more than 2.7 million tonnes of meat each year. But the plan is now to add Smithfield’s resources to the mix. “The acquisition provides Smithfield the opportunity to expand its offering of products to China through Shuanghui’s distribution network,” Wan announced. “Shuanghui will gain access to high-quality, competitively-priced and safe US products, as well as Smithfield’s best practices and operational expertise.”

What’s behind the move?

Most analysts have chosen to focus on Shuanghui’s desire to secure a more consistent supply of meat. Currently, it raises 400,000 of its own hogs a year, only a small share of the 11 million that it needs. That makes it reliant on other breeders in a country where the latest scare about contaminated meat is never far from the headlines. In the most recent case in March, the carcasses of thousands of pigs suddenly started floating down the Huangpu river upstream of Shanghai, after an outbreak of disease in nearby farms and a clampdown on the illicit sale of infected meat (see WiC186).

Now Shuanghui is said to be looking further afield to secure meat, and from a source that would allow it to differentiate its product range from that of its competitors.

“They’re a major processor who wants to source consistent, large volumes of raw material. You want to look at the cheapest sources and in the US, we’re very competitive,” Joel Haggard from the US Meat Export Federation told Bloomberg. Average hog prices in China are currently about $2.08 per kilo or a third higher than in the United States, Haggard also suggested.

How about changes in the industry in China?

A second theory is that Shuanghui is developing a more integrated supply chain in China and wants Smithfield’s help to complete the process.

This was something that C Larry Pope, chief executive at Smithfield, cited as a key factor in its willingness to pay a 31% premium for Smithfield stock. If so, that’s something of an irony: Continental Grain, Smithfield’s largest investor, has been pushing for a break up of the business to unlock more value for investors.

Still, an argument can be made that industry conditions are different in China, where the supply chain is shifting away from its reliance on more traditional household farming (the Mandarin character for “home” depicts a pig under a roof, for instance) to one in which large-scale, industrialised production begins to dominate.

Food safety concerns and the need to improve quality standards are also driving change across the industry. Yet despite signs of consolidation in hog breeding and slaughtering, integration across the full supply chain is a challenge. Shuanghui has already been trying to develop more of its own cold chain rather than rely on third parties (it operates seven private railways to transport its goods to 15 logistics centres, for instance, and has also invested in hundreds of its own retail outlets). But the Smithfield acquisition could help further with the integration effort, especially in areas such as adopting technology that tracks meat from farm to fork.

Paul Mariani, a director at agribusiness firm Variant Capital Advisors, told the Wall Street Journal last week that these systems have huge food safety benefits, allowing producers to track meat back to “where it was grown”. By contrast, Chinese suppliers struggle to achieve the same level of control, especially for meat sourced from the large number of smaller, family-owned firms.

How about in the US? Are Americans pleased with the deal?

The bid has already been referred to CFIUS, the committee that reviews the national security implications of foreign investments in US firms. But Smithfield’s Pope sounds confident, saying that he doesn’t expect “any concern” from the regulatory committee.

“We’re not exporting tanks and guns and cyber security,” he told reporters. “These are pork chops.”

All the same, the regulators will look at Smithfield’s supply contracts with the military, as well as whether any of its farms and factories are close to sensitive locations, an issue that has led to transactions being blocked or amended in the past.

For instance, the Obama administration intervened in the purchase of four Oregon wind farms by a Chinese acquirer this year because they were too close to a naval base.

“There’s a difference between a foreign company buying Boeing and one buying a hot dog stand,” Jonathan Gafni, president of Compass Point Analytics, which specialises in security reviews of this type, told the New York Times. “But it depends on which corner the stand is on.”

The committee will also look at whether Shuanghui could be in a position to disrupt the distribution of pork to American consumers. Indeed, Charles Grassley, the Republican Senator of Iowa, has already urged regulators to look closely at whether the Chinese government has any influence on Shuanghui’s management.

More ominously on Wednesday the chairwoman of the Senate’s Agriculture Committee expressed her concerns. Debbie Stabenow said those federal agencies considering the merger must take into account “China’s and Shuanghui’s troubling track record in food safety”. She further added that those agencies must “do everything in their power to ensure our national security and the health of our families is not jeopardised”.

Despite such concerns, the food security argument looks limited in scope, although some of the Chinese newspapers don’t expect the review to pass without issue. “Even the conspicuous absence of national security factors can hardly guarantee that US protectionists will not poke their noses into it,” the China Daily suggested pointedly.

Back in Washington, Elizabeth Holmes, a lawyer working for the Center for Food Safety, has also called for regulators to consider the bid from the wider perspective of food safety. “They’re supposed to identify and address any national security concerns that would arise,” she warned. “I can’t imagine how something like public health or environmental pollution couldn’t be potentially construed as a national security concern.”

The implication is that the takeover might damage Smithfield’s operations in the United States in some way, even leading to contamination among its locally sold products. Hence the fact that Shuanghui was forced to recall meat tainted by the additive clenbuterol two years ago has been seized upon by the deal’s critics.

Again, the Chinese media response has tended to be indignant, with widespread reference to Smithfield’s own use of ractopamine, an additive similar to clenbuterol that’s banned in hog rearing in China but not by authorities in the US.

According to Reuters, Smithfield has been trying to phase out its usage of the drug, presumably to clear the way for an increase in sales to China. And in response to American anxiety about food safety post-takeover at Smithfield, both parties have gone out of their way to reiterate that the goal is to export more American pork to the Chinese, and not vice versa. Smithfield’s chief executive Pope has argued the case directly, citing the superiority of American meat. “People have this belief…that everything in America is made in China,” he told reporters. “Open your refrigerator door, look inside. Nothing in there is made in China because American agriculture is the most competitive and efficient in the world.”

Similarly, Shuanghui executives are insisting that nothing will change in how Smithfield serves up its sausages to American customers. The company will continue to be run on a standalone basis under its current management team, no facilities will be closed, no staff will be made redundant and no contracts will be renegotiated. Food safety standards will remain as today. “We want the business to stay the same, but better,” Wan said.

So it sounds like the Smithfield deal could turn out to be a major coup for the Chinese buyer?

Not really, says Peter Fuhrman, chairman of China First Capital, a boutique investment bank and advisory firm based in Shenzhen. He thinks that much of the analysis of the bid for Smithfield has completely missed the point. That’s because Shuanghui International – the entity making the offer – is a shell company based in the Cayman Islands. It isn’t a Chinese firm at all, he says.

Shuanghui International also has majority control of Shuanghui Development, the Shenzhen-listed firm that runs the domestic meat business in China. But it is controlled itself by a group of investors led by the private equity firm CDH (based in China but heavily backed by Western money) and also featuring Goldman Sachs, Temasek Holdings from Singapore and Kerry Group.

The management at Shuanghui, led by Wan, holds a small stake in the new, offshore entity. But as far as Fuhrman is concerned, Shuanghui International has no legal or operational connection to Shuanghui’s domestic operations.

“If the deal goes through, Smithfield Foods and Shuanghui China will have a majority shareholder in common. But nothing else. They are as related as, for example, Burger King and Neiman Marcus were when both were part owned by buyout firm TPG. The profits and assets of one have no connection to the profits or assets of the other.”

Of course, this raises questions about how the bid for Smithfield is being debated, especially its portrayal as the biggest takeover of a US firm by a Chinese one to date. It prompts queries too about the national security review underway in Washington, particularly any focus on the supposedly Chinese identity of the bidder. As it turns out, the Shuanghui bidding vehicle simply isn’t constituted in the way that people like Senators Grassley and Stabenow seem to believe.

So what is going on? Fuhrman says the bid for Smithfield is actually a leveraged buyout, made during a period in which private equity firms have been prevented from exiting their investments in China by blockages in the IPO pipeline (see WiC176 for a fuller discussion on this).

Instead, the investors that own Shuanghui are borrowing billions of dollars from the Bank of China and others to fund their purchase, with Fuhrman noting speculation that the plan is to relist Smithfield at a premium in Hong Kong in two or three years time.

How Shuanghui International is going to meet the interest payments on its borrowings in the meantime is less clear. But one possibility is that it will lean on Shuanghui Development, the operator in the Chinese market, to share some of the financial load. That could be problematic, raising hackles at the China Securities Regulatory Commission. It also prompts questions about the potential conflicts of interest (“among the most fiendish I’ve ever seen,” says Fuhrman) in the relationship between the investors that own Smithfield and the fuller group of shareholders at Shuanghai in China.

Ma Guangyuan, an economics blogger with more than half a million readers, takes a similar view. “If Shuanghui International acquires Smithfield Foods and sells the meat at high prices to Shuanghui Development, this will increase profits for the privatised Smithfield, but may not do much to help Shuanghui Development,” he predicts.

A further possibility is that having to service the LBO debt could curtail much of the investment envisaged by those who see the Smithfield purchase as a game-changing move for the industry. Of course, if it all goes to plan, the bid for Smithfield might turn out to be a game-changer for a small group of highly leveraged investors.But the jury must still be out on whether it will be quite so transformational for China’s domestic meat industry at large.

 

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Shenzhen: A beacon for private enterprises — China Daily

Leave a Comment / June 24, 2016


 

–A beacon for private enterprises

2013-04-20

By Hu Haiyan and Chen Hong ( China Daily)

Shenzhen bears a superficial resemblance to Shanghai. There are dozens of multinationals and gleaming skyscrapers casting their shadows over narrow lanes. Their respective economic performances last year were also similar: Shenzhen’s GDP hit 1.3 trillion yuan ($210 billion), gaining by 10 percent from 2012. Shanghai GDP reached 2 trillion yuan, increasing by 7.5 percent from 2011.

Both are testing grounds for China’s economic reform policies. Still, for Peter Fuhrman, 54, Shenzhen is a private-sector city, a city that has its face pointed toward the future.

In 2009, Fuhrman moved to Shenzhen from California. The chairman and CEO of China First Capital, an international investment bank and advisory firm focused on China, he is always struck by how similar Shenzhen and California are.

“Both are places where new technologies, and valuable new technology companies, are born and nurtured. I treasure the role Shenzhen has played over these last 30 years in helping architect a new China of renewed purpose and importance in the world,” Fuhrman says. “It is impossible to imagine a US without California. It is so much the source of what makes America great. Shenzhen, too, is a major source of what makes China great, what makes this country such a joy for me to live in. “

More…

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Chinese Market Loses Its Bite — Private Equity News Magazine

Leave a Comment / December 6, 2014

–PEnews

 

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A stagnant exit market is likely to cause problems for firms that ventured into China in the boom years

Statistics rarely tell the whole story. However, as China celebrates the Year of the Snake, the most recent figures for private equity exits in the country make sobering reading for those who were convinced that the surge in private equity in the world’s most populated nation was the ticket to easy returns. In the final quarter of 2012, there was no capital raised by sponsors through primary initial public offerings of companies they backed, no capital raised through sales to strategic buyers and just $30 million from secondary buyouts, according to data from Dealogic.
That collapse in the exit market is creating a huge backlog of businesses in private equity hands that could force many companies to the wall and drive a shakeout in the industry, losing investors billions in the process. Global private equity firms, from large buyout specialists TPG Capital and Carlyle Group to mid-market players like 3i Group, all flooded
into the Chinese market raising capital from international investors for deals on the expectation of outsized returns as the economy opened and boomed. They were joined by thousands of domestic players that raised capital in local currency from the growing band of China’s wealthy individuals eager to get a slice of the market.

Incredible Success

Peter Fuhrman, chairman and CEO of investment bank China First Capital, said: “In the course of the last five years China has grown into the largest market by far for the raising and deploying of growth capital in the world. It has been an incredible success story when it comes to talking investors into opening up their wallets and allocating much-needed capital to thousands of outstanding Chinese entrepreneurs.” More…

 

 

China private equity specialist says IPO drought means investors must rethink — Week in China

Leave a Comment / May 1, 2014

 

week in china

 

 

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With China’s IPO gusher now reduced to a trickle, prospects for some of the privately-owned companies which have traditionally boosted much of China’s economic growth could be at risk.

So says Peter Fuhrman, founder and chief executive at China First Capital, a boutique investment bank and advisory firm. His firm has just released a new report warning that new private equity investment has basically come to a halt in China since the middle of last year.

Fuhrman talked to WiC this week about the reasons for the slowdown, and why he would like to see more investors considering alternative exits, including sales in the secondary market. More…

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The indispensable economy? — The Economist

Leave a Comment / June 25, 2016

 

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The indispensable economy?

China may not matter quite as much as you think

 

THE town of Alpha in Queensland, Australia, has only 400 residents, including one part-time ambulance driver and a lone policeman, according to Mark Imber of Waratah Coal, an exploration firm. But over the next few years it should quintuple in size, thanks to an A$7.5 billion ($7.3 billion) investment by his company and the Metallurgical Corporation of China, a state-owned firm that serves China’s mining and metals industry. This will build Australia’s biggest coal mine, as well as a 490km (300-mile) railway to carry the black stuff to the coast, and thence to China’s ravenous industrial maw.

It is hard to exaggerate the Chinese economy’s far-reaching impact on the world, from small towns to big markets. It accounted for about 46% of global coal consumption in 2009, according to the World Coal Institute, an industry body, and consumes a similar share of the world’s zinc and aluminium. In 2009 it got through twice as much crude steel as the European Union, America and Japan combined. It bought more cars than America last year and this year looks set to buy more mobile phones than the rest of the world put together, according to China First Capital, an investment bank.

In China growth of 9.6% (recorded in the year to the third quarter) represents a slowdown. China will account for almost a fifth of world growth this year, according to the IMF; at purchasing-power parity, it will account for just over a quarter.

For the first 25 years of its rise, China’s influence was most visible on the bottom line of corporate results, as it allowed firms to cut costs. More recently it has become conspicuous on the top line. Audi, a luxury German carmaker, sold more cars in China (including Hong Kong) than at home in the first quarter. Komatsu of Japan has just won an order for 44 “super-large dump trucks” from China’s biggest coal miner.

The Economist has constructed a “Sinodependency index”, comprising 22 members of America’s S&P 500 stockmarket index with a high proportion of revenues in China. The index is weighted by the firms’ market capitalisation and the share of their revenues they get from China. It includes Intel and Qualcomm, both chipmakers; Yum! Brands, which owns KFC and other restaurant chains; Boeing, which makes aircraft; and Corning, a glassmaker. The index outperformed the broader S&P 500 by 10% in 2009, when China’s economy outpaced America’s by over 11 percentage points. But it reconverged in April, as the Chinese government grappled with a nascent housing bubble.

China is, in itself, a big and dynamic part of the world economy. For that reason alone it will make a sizeable contribution to world growth this year. The harder question is whether it can make a big contribution to the rest of the world’s growth.

China is now the biggest export market for countries as far afield as Brazil (accounting for 12.5% of Brazilian exports in 2009), South Africa (10.3%), Japan (18.9%) and Australia (21.8%). But exports are only one component of GDP. In most economies of any size, domestic spending matters more. Thus exports to China are only 3.4% of GDP in Australia, 2.2% in Japan, 2% in South Africa and 1.2% in Brazil (see map).

 

Export earnings can, of course, have a ripple effect throughout an economy. In Alpha, the prospect of selling coal to China is stimulating investment in mines, railways and probably even policing. But these “multipliers” are rarely higher than 1.5 or 2, which is to say, they rarely do more than double the contribution to GDP. Moreover, just as expanding exports add to growth, burgeoning imports subtract from it. Most countries outside East Asia suffered a deteriorating trade balance with China from 2001 to 2008. By the simple arithmetic of growth, trade with China made a (small) negative contribution, not a positive one.

China plays a larger role in the economies of its immediate neighbours. Exports to China accounted for over 14% of Taiwan’s GDP last year, and over 10% of South Korea’s. But according to a number of studies, roughly half of East Asia’s exports to China are components, such as semiconductors and hard drives, for goods that are ultimately exported elsewhere. In these industries, China is not so much an engine of demand as a transmission belt for demand originating elsewhere.

The share of parts and components in its imports is, however, falling. From almost 40% a decade ago, it fell to 27% in 2008, according to a recent paper by Soyoung Kim of Seoul National University, as well as Jong-Wha Lee and Cyn-Young Park of the Asian Development Bank. This reflects China’s gradual “transformation from being the world’s factory, toward increasingly being the world’s consumer,” they write. Gabor Pula and Tuomas Peltonen of the European Central Bank calculate that the Philippine, South Korean and Taiwanese economies now depend more on Chinese demand than American.

Trade is not the only way that China’s ups and downs can spill over to the rest of the world. Its purchases of foreign assets keep the cost of capital down and its appetite for raw materials keeps their price up, to the benefit of commodity producers wherever they sell their wares. Its success can boost confidence and productivity. One attempt to measure these broad spillovers is a paper by Vivek Arora and Athanasios Vamvakidis of the IMF. According to their estimates, if China’s growth quickened by 1 percentage point for a year, it would boost the rest of the world’s GDP by 0.4% (about $290 billion) after five years.

Since the crisis, China has shown that its economy can grow even when America’s shrinks. It is not entirely dependent on the world’s biggest economy. But that does not mean it can substitute for it. In April the Bank Credit Analyst, an independent research firm, asked what would happen if China suffered a “hard landing”. Its answer to this “apocalyptic” question was quite “benign”. As it pointed out, Japan at the start of the 1990s accounted for a bigger share of GDP than China does today. Its growth slowed from about 5% to 1% in the first half of the 1990s without any discernible effect on global trends. It is hard to exaggerate China’s weight in the world economy. But not impossible.

 

http://www.economist.com/node/17363625

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