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

October 31st, 2016 No comments

 

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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.

 

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

October 27th, 2016 No comments

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

 

As published by Fortune

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

October 21st, 2016 No comments

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By Elzio Barreto and Julie Zhu | HONG KONG

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

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

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

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

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

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

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

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

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

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

IN DEMAND

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

October 11th, 2016 No comments

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

As published in the Financial Times

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