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Hong Kong IPO Today for China First Capital Client Hydoo

October 31st, 2013 No comments

Hydoo Prospectus

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

Private Sector Capital for China’s SOEs — China First Capital Press Release

October 27th, 2013 No comments

China First Capital press release

Hong Kong, Shenzhen, China:  China First Capital, an international investment bank and advisory firm focused on China, today announces it has received a pioneering mandate from a large Chinese State-Owned Enterprise (“SOE”) holding company to manage a process to revitalize and privatize part of the group by bringing in private capital.

“The investment environment for SOE deals in China is undergoing a significant and exciting change,” commented China First Capital chairman and founder Peter Fuhrman. “We are proud to play a role as investment bankers and advisors in this change, by working with some of China’s SOEs to complete restructuring of unquoted subsidiaries and then raise private sector capital to finance their future expansion. We see these SOE investment deals as the next significant opportunity for institutional investors eager to allocate more capital to China.”

By some estimates, China’s SOEs account for over 60% of total Chinese GDP. Yet, up to now, they have only rarely done private placements or spinoffs to access institutional investment, including from private equity firms. But, according to China First Capital’s internal research, an increasing number of China’s SOEs will face a funding gap in coming years. SOEs, in most cases, have ambitious expansion plans fully supported by the Chinese government. Yet, the SOEs are restricted in their ability to raise large amounts of new bank loans. They are under pressure from Chinese government to maintain or lower their debt-to-equity ratios.

More…

Neue Zurcher Zeitung Interview

 

Better and Worse Investment Ideas For China’s Future

October 16th, 2013 No comments

tablescreen Where is China headed and how to make money by getting there first? If you were to ask professional China investors, almost without exception you’ll be offered an identical vision of the China of 2020 and beyond:  retired Chinese in their tens of millions living in assisted-living housing spending their days on their smartphones buying clothes, playing games and booking European vacations.

It follows, the pros will tell you, that the best places to put your money today are with Chinese companies building retirement and assisted living housing, mobile apps and online shopping websites. Indeed, these are the sectors getting by far the most attention and seeing the most substantial flows of new investment capital these days.

I happen to think the “smart money” is wrong and here’s why. First, in my experience across 30 years of business life, whenever you get so much agreement about where the future is headed and where money should be staked, the predictions usually prove wrong and the money usually lost.

In this case, the basic analysis is fine. Yes, China is getting older and yes it needs more places to house and care for the elderly. And, yes, Chinese will buy more stuff online since prices are often much lower than in shops. But, only a fraction of the projects now receiving funding will be successes.

The assisted living, online shopping and mobile services businesses already seem over-invested. And yet the money keeps pouring in. It reminds me very much of the last “can’t miss” investment idea in China: group shopping. Two years ago, PE and VC firms poured billions into at least a dozen different group shopping sites in China Most, if not all of that, will be lost.

There are formidable hurdles in the way of all three of the currently-favored business models. For assisted living and retirement housing, it’s not clear Chinese retirees in significant numbers will want to move into these kinds of places, even if their kids are paying. Nor is it clear how these projects will make equity investors money, since Chinese banks remain loathe to lend money to any kind of real estate project.

Online shopping? Great business, but all the companies getting investment have to compete with a few powerhouses with huge market shares. The list includes Alibaba’s Taobao business, Yihaodian (part-owned by Wal-Mart), Amazon China, 360buy.com. I see little reason to believe these newer PE-backed entrants will make any serious dent against these competitors.

As for mobile services, yes Chinese have all switched en masse to smartphones. And, yes, they use the mobiles to do lots of stuff online, including shopping, chat, games. Problem is, in the overwhelming number of cases, Chinese don’t pay for any of it. In my view, they never will. Any investment predicated on the theory that eventually Chinese will start paying fees to mobile service-providers is usually based on not much more than a hope and a prayer. Nothing solid.

So, where else to put money now to be best-positioned for the China of 2020? I can think of two places. One is organic foods and the other is health supplements and what are called “functional foods” in the US.

As of now, both are tiny industries in China, a fraction of their size in the US and Europe. My guess is that the market in China will eventually dwarf those two other places. I’ve read about a few PE investments in these industries. But, in general, the so-called “smart money”  has stayed out.

So, why do I think organic, “functional foods” and supplements will become huge businesses in China? In general, the same forces will prevail in China that have propelled the growth of these industries in the US and Europe: a wealthier population, more interested in their health, more distrustful of traditional commercially-prepared foods, and also more interested to improve their health, fitness and life expectancy by exercising, eating well (including vitamins and supplements) while keeping away from doctors.

In China, this distrust of commercial foods and commitment to a more healthful lifestyle, though still in a comparatively early stage,  is already strong, deep and widespread. So is the lack of trust in the quality of medical care received from doctors.

As anyone who lives in China can attest, there are very good reasons for all of this. Food scandals are common. There seems to be a lot of unhealthy and unhygienic food circulating.  Doctors don’t enjoy a very high standing any longer. They are often seen as fee-grubbing predators, ever willing to make phony diagnoses as a way to put more money in their pockets from their share of fees paid for tests, medicines, surgery, hospital care.

In short, the conditions couldn’t be riper for the development of organic foods, and health supplements of all kinds. Chinese traditional medicine shares quite a few principles in common with the OTC health supplements sold in the US. Chinese, in a way Westerners generally do not, have always accepted that Western pharmaceuticals should often be taken as a last resort. They worry greatly about side effects. If there’s a more “holistic” way to treat a condition, Chinese will often prefer it.

China, as of today, has no vitamin and supplement shops like GNC in the US, nor do mainstream pharmacies give such products any shelf space. When you can find them, vitamins are sold at very high prices in China, usually at least double the US level. There are no good domestic brands, no winning products or packaging formulated specifically for Chinese consumers.

One data point: it’s more and more widely known in China that fish oil is beneficial for digestion and circulation. And yet, it’s hard to find the product anywhere in China. When you do, it is usually stuff imported from the US, in old-looking packaging, with English-language  labels, and prices three to four times higher than in America.

Whether the world has enough cod livers to meet future Chinese demand for fish oil is another story. But, I’m confident the China market should eventually rival the US’s in size.

As for organic and healthy foods, China has lots of conventional supermarkets. But, so far no one has tried to follow the path blazed by Whole Foods Market in the US. Nor are there large, established organic food brands like Organic Valley, Applegate.

It will all happen. When, and which investors will make the big money is hard to say. Even now, the demand for genuine organic fruits, vegetables and dairy outstrips the available supply. There’s yet no real standard in China for what can be called organic, and so Chinese consumers often view products labeled that way with suspicion. That too represents a business opportunity in China — providing standards and credentials for the organic farming industry.

The lesson here: in China, the best business opportunities are often hiding in plain sight, often unseen by professional investors. Nowhere is contrarian investing more warranted and more potentially profitable.

Mongolia: Investment Banking Adventure on the Grasslands

October 8th, 2013 No comments

 

Mongolian grasslands

Investment banking isn’t meant to be particularly fun.  There’s too much pressure, too much market uncertainty, too much money on the line. You toil in a big urban office tower, dressed in a suit and tie, and spend sixteen hours a day moving commas around in an Excel spreadsheet.

This may be true for some, or even most, investment bankers. But, it is decidedly not the case for me. My working life is a delight. Occasionally, it’s better than a boyhood dream of adventure and discovery.

Take this recent workday: out the door and on the road by 6am to beat the traffic. In 15 minutes, we’ve left the city behind and cruise south on a two-lane highway. The sun is rising over stubby hills, more like scattered lumps of clay.  Gradually the land flattens, narrow valleys open into broad vistas of low willowy bush turned a golden autumn color.

I’m in Mongolia, and we’re driving straight across the grassland. For two hours, we drive down a straight paved road, hugging close to the single track railroad line that connects Mongolia’s capital Ulan Bator with Beijing to the south and Moscow to the distant northwest.

The train from Beijing chugs by at around 9am, moving slowly, at around 30mph (50kph). I took the train once more than thirty years ago. It’s a six-day trip from Beijing to Moscow. From this brief glimpse, nothing much has changed. Same green-colored carriages, dual diesel locomotives and a restaurant car. I remember eating well the first day, when the train was still in China. After that, the kitchen crews changed and little or nothing edible came from the restaurant car kitchen. I ate mainly Chinese preserved duck eggs (皮蛋)and small snacks bought on the platform as the train crossed Siberia.

Today I’m in a comfortable new Lexus four-wheel drive jeep. We stay on the paved road for 120 miles (200km) and then turn left onto a dirt road. It’s really just a narrow path worn in the grass. We pass a small abandoned Soviet era air base, presumably once meant to be a secret facility 250 miles from the Chinese border. All that remains are 30 fortified hangars, a crumbly old runway and miles of barbed wire fencing.

We take this dirt road southeast another 100 miles or so and then pull into the iron ore mine I’ve come to visit. The whole way along the dirt road we pass nearby huge herds of grazing animals  — sheep, cashmere goats, Mongolian horses and cows. We see few vehicles along the road. Every ten miles or so, set back about one mile from the dirt path, we pass a small grouping of white Mongolian yurts.

I ask the driver to stop at one, so I can have a closer look and meet the nomads. The driver is Chinese, but was born and raised in Mongolia. He translates. We get a very warm welcome from the three people living in the two yurts, one of which has a solar panel. It’s an older man together with his son and daughter-in-law. This is their summer encampment. They have hundreds of sheep, horses, cows roaming around.

Mongolian yurt

The wife urges me to help myself from a bowl of, well, I don’t know what. It’s a small heap of brownish solid irregularly-shaped tubes of different lengths. Something home-made. I prepare myself for something sour and strange. Instead, it’s sweet and chewy, a preserved candy made from yogurt.

Next, the men pour me three cups of their home-brewed alcohol, a slightly-sweet not very alcoholic drink distilled from cow milk. The flavor is crisp and dry, like a slightly-corked chablis.  By the time I’m back in the car, the younger man is atop a horse and riding quickly off towards a distant ridge.

I first learned about the iron-ore mine from its owners, a Chinese SOE, about four months ago. They bought the mining rights four years ago, built the mine, hired the local workers and began producing high-grade iron ore two years ago. It’s an open-cast mine working a particularly high-grade seam of iron ore. The rock is over 30% pure iron.

As mining operations go, they hardly get any simpler. Caterpillar backhoes scoop up rock, which is then put on a conveyor belt for a simple mechanical sorting operation. This doubles the grade of ore. From here, the ore is trucked seven miles to a railroad platform the company built. It is loaded on to open freight cars and sent by rail directly to supply a large steel mill in China’s Hebei province. Even though the iron ore price has fallen over the last several years, the Mongolian mine makes very good money. It is probably the lowest-cost and highest-quality ore supplier in or around China, the world’s biggest market for iron ore. They dig money out of the ground.

Iron ore Mongolia

The owners were eager for me to visit. They want to retain China First Capital to act as their investment bankers. They are considering a possible sale. While the mine is making very good money, with almost 40% net margins, the SOE is considering a sale for two reasons. The parent company is huge, one of China’s largest mining businesses. Their main business is coal mining. This is their only iron ore mine and only project in Mongolia.

Chinese companies were among the first to secure mining rights in Mongolia after that country’s 1990 democratic revolution. But, over time, Mongolian policy has gradually shifted. Chinese companies are less welcome. The Mongolians have grown more and more anxious that their tiny economy will become too dominated by China. (Mongolian gdp is $15bn, or less than 0.2% China’s $8 trillion.) They know their abundant low-cost mineral resources — coal, copper, iron ore — will almost all end up being sold to China. But, they seem to prefer when the mines are owned by companies from elsewhere. North America, Europe, Russia are all preferred.

In the two years since it began operating, the mine has made excellent progress. It should keep producing for another 30-50 years. Its stated reserves are probably less than one-fifth of the actual total. It’s all surface-mineable, all high-grade. There are bottlenecks. The company would like to increase the number of loaded train cars it sends south to China. But, it’s so far been a hassle to negotiate with the Mongolian state railroads. A non-Chinese owner would likely have more luck. Also, the equipment is not winterized, so they produce and ship ore only about six months a year.

After a lunch of boiled Mongolian beef bones (tastes much better than it sounds), we begin the drive back, stopping first to visit the rail platform. After that, I jump out of the car once, to climb a small hill topped by a pillar of small stones one-meter high. It’s a simple Tibetan Buddhist stupa. Everywhere, in every direction, the scenery is breath-taking in its simplicity and grandeur.

Mongolian stupa

I’ve only once before made a car trip across such a large expanse of largely-unpopulated and rarely-visited land.  That was 24 years ago, back when I was working as a foreign correspondent for Forbes. I was in Namibia, and drove the 200 mile length of the fenced-in diamond mining concession jointly owned and operated by De Beers.

In general, no one except De Beers senior staff is allowed to enter this huge 10,000 square mile pristine piece of Africa. That day I recall seeing a few ostriches running across the sandy desert. The De Beers team mentioned seeing packs of wild elephant.

This day, on the Mongolian grasslands, animals are plentiful. All are fattened by a summer of plentiful grazing, and look remarkably healthy.

The nomads these days are selling fewer and fewer of their herds. They sell just enough to supply the demand in Ulan Bator, a city of about 1 million. So, their herds grow larger every year by about a net 20%. They have more meat on-the-hoof and more milk than their ancestors could dream of. It’s never been a better time to be a yurt-dwelling Mongolian herder.

But, their lives are still tough, especially during the long winter, when they huddle together in their yurts, with their animals sheltered nearby. Temperatures can reach minus 40 centigrade. More and more Mongolians are leaving the grasslands and migrating to take salaried jobs in Ulan Bator. That city has more than doubled in size in the last 20 years.

I spend a few hours of my free time back in Ulan Bator visiting the city’s largest Tibetan Buddhist monastery and the Zanabazar Museum, which has the most remarkable collection of 19th century Tibetan thangkas, painted and applique, I’ve seen anywhere. To my knowledge, there’s nothing comparable left in Tibet or elsewhere in China.

Mongolian thangka

I’m fortunate to own a small collection of antique thangkas. I’d been waiting twenty years to visit the Zanabazar Museum.

I should have a chance to come back to Mongolia next year, once the frigid winter passes. Maybe this next trip I’ll be bringing along some potential buyers for the mine. I’m doing exactly the kind of work I most enjoy, for clients that are a pleasure to work with. Every place I travel for work I’m welcomed with the greatest degree of hospitality, fed and housed royally.

Two other positives of my job: I need to open Excel only occasionally, and I almost never have to wear a jacket and tie.