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

July 10th, 2018 No comments

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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China aims for greater tech independence as the rift with America and Europe widens. Will it work? — Washington Post

May 30th, 2018 No comments

 

 

Under the Radar — Week In China

May 18th, 2018 1 comment

 

When Google launched its email service in 2004, only people who had been invited to join the network could open Gmail accounts. The invite-only system made Gmail appear exclusive, so naturally more people wanted in. But it wasn’t a marketing ploy. Gmail had to limit membership because it didn’t have sufficient infrastructure to provide the service for everyone.

When OnePlus, a fast-growing Chinese smartphone brand, debuted in 2014, it adopted a similar tactic. Co-founder Carl Pei explained: “The invite system allowed us to scale our operations and manage our risks to help us grow more sustainably.” Essentially, it meant the four year-old company avoided overstocking. But, as with Gmail, by keeping the phone ‘exclusive’, it helped generate buzz.

This week OnePlus launched its seventh iteration, the OnePlus Six. Although it ditched the invite-only sales system in 2016, the company still keeps tight control over its distribution, forcing most purchases to be made online. But in India, where OnePlus made 35% of its total $1.4 billion in sales in 2017, the company has opened 10 physical stores to help sales and aftercare.

Vikas Agarwal, general manager at OnePlus India, claims OnePlus is now the “biggest Android premium smartphone brand” in the country. According to Counterpoint Research, the third and fourth most popular brands in India last year were Vivo and Oppo. Despite being competitors, the three brands are all linked to one man: Duan Yongping, the founder of BBK Electronics.

BBK (or Bu Bu Gao) was set up by Duan in 1995. It was the second household name Chinese brand Duan has created.

Born in 1961, Duan joined Zhongshan Yihua Group in Guangdong province in 1989 as the manager of a small factory. He used his position to establish a unit called Subor, which produced video game consoles in competition with Japan’s Nintendo.

The most memorable product made by Subor was an educational console, which featured a computer keyboard with ports for data cartridges and a couple of adjoining game controllers. The cartridges stored video recorded lessons to enable students to learn the English language by responding to prompts using the controllers.

The cheap console gave many young Chinese an introduction to computing and its popularity was reflected in Subor’s finances. When Duan joined Yihua it was Rmb2 million in debt, but by 1995 annual profit had exceeded Rmb1 billion ($157 million).

Despite the success Duan was only earning a meagre salary. He had lobbied Zhongshan Yihua to spin off Subor and give him a stake in the new enterprise, but he was rejected. It became a very public business dispute. The outcome: Duan left and founded BBK, taking a few promising team members with him.

Given his frustrations at Subor, Duan made sure he carved out a sizeable 70% stake in BBK for himself. The company began producing audio-visual products such as VCD and DVD players.

In 1999 and 2000, Duan became the highest bidder on state broadcaster CCTV’s annual auction of its prime-time advertising slots, splashing out Rmb300 million. The huge gamble paid off. BBK became a household name and subsequently the leading maker of VCD players.

Duan was quick to see the potential of mobile phones and later the mobile internet. BBK’s Oppo and Vivo were initially derided as cheap imitations of Apple’s iPhone. But through smart marketing the pair became amongst the country’s best-selling smartphones (see WiC358 for our analysis of Oppo’s rise). In 2016, sales of the two brands actually bumped the iPhone out of China’s top three positions.

More than a decade earlier Duan had spoken to Harvard China Review about his business philosophy: “I am never afraid to follow others. Actually my business has never been an initiator of an industry. Instead, we analyse vulnerabilities of the leading companies in a certain industry and then try to establish our own stronghold.”

This ethos likely contributed to the establishment of OnePlus, which was co-founded in 2013 by Oppo’s former vice president Pete Lau. The company drew comparisons to Xiaomi at its launch, because both produced low-price premium smartphones with sales made exclusively online.

Lau was an early BBK employee, joining in 1998. According to Medium, Lau paid a visit to his mentor and former boss Duan to seek advice before initiating OnePlus. Duan’s pedagogical stature is one of the many reasons he’s sometimes dubbed “the Chinese Warren Buffet” and why Lau looked for his backing.

Peter Fuhrman, founder and chairman of Shenzhen-based advisory firm China First Capital, has followed Duan’s business career and admires what he has achieved. As he points out, “No one has succeeded for so long, or so well, in such a brutally tough global industry as Mr Duan. He’s earned a spot among the business immortals of the past century. Only he and Samsung managed the transition that left Blackberry, Nokia, Sony Mobile, Motorola as roadkill. He rose to the top originally by making simple, cheap feature phones, then more or less chucked that whole business away to create and back three new companies for the smartphone industry, Oppo, Vivo and OnePlus. All are doing outstandingly well. Their success is built on another aspect at which Duan excels as few, if any ever have – creating a hugely-efficient, high-quality manufacturing base in Dongguan turning out phones for all three, backed by what may well be the world’s most efficient global electronics supply chain.”

Duan is evidently happy to be compared with Buffett. In 2006, he paid $620,100 to have lunch with the Sage of Omaha. Duan told media after the charity luncheon, “I had already learned a lot from Buffett, so I was hoping for a chance to thank him.”

Having emigrated to the US in 2001, Duan has been taking a more active interest in managing his own money, rapidly growing his equity portfolio.

An initial investment was a $2 million cash injection into NetEase. The firm had almost gone bust following the dotcom crash and its share price had plummeted to just $0.80. According to China Investor, Duan determined that the company still had potential, so he took the plunge. Within two years he’d made a return of 100-times on his investment.

Duan also made a large investment in GE after its shares slumped following the 2008 financial crisis, buying shares at $6 each and quickly doubling his money.

His steely nerves ensured he held onto his stake in Kweichow Moutai when the baijiu maker’s stock price halved in 2014. Duan entered at Rmb180 in 2012; today Moutai trades at over Rmb700.

“The money I’ve earned on the back of investments is so much more than what I earned from 10 years of doing business,” he surmised. According to the latest Hurun report, Duan is now worth $1.3 billion – but there are some in China who think his wealth could be many multiples of that Hurun estimate, and he might even be one of China’s richest men.

It’s hard to know: many of his investments aren’t public. But in Chinese business circles few would disagree that he is shrewd at finding and backing talent.

For instance, also present at the 2006 Buffett lunch was Colin Huang Zheng, who would later found Pinduoduo, one of China’s 164 unlisted unicorns. The e-commerce platform has been described as the fastest growing app in the history of the Chinese internet (see WiC404), and Huang has long been viewed as a key Duan protégé.

“He is above all a great manager and motivator of people, of putting strong people in leadership positions and then letting them get on with their business, with minimal intervention from him at the top,” comments China First Capital’s Fuhrman. “From hands-on executive to hands-off semi-retired chairman, Duan has excelled across his career in very different roles.”

Despite his successes in the business and investment fields, it seems Duan would rather be remembered for his altruism, claiming “Charity is my business, investment is my hobby.” In 2005, Duan and his wife established the Enlight Foundation, through which they’ve provided scholarships to their respective alma maters. In 2006, Duan and NetEase founder Ding Lei made a $40 million donation to Zhejiang University.

But surprisingly the two people who likely won’t be receiving handouts from the magnate are his children. According to Phoenix News, Duan has said: “So much of my happiness in life has come from the process of earning my wealth. I don’t want to deny my children that same happiness.”

As published by Week in China

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China’s Technology Future and What It Means for Silicon Valley — Bay Area Council Research Report

November 29th, 2017 No comments

 

The Bay Area Council Economic Institute, the leading think tank and public policy organization in the Silicon Valley, has just published a comprehensive and timely research report on Chinese innovation, titled “China’s Technology Future and What It Means for Silicon Valley“. The author is Sean Randolph, Senior Director at the Institute.

You can download a copy of the complete report by clicking here.

Sean was kind enough to seek out my views on this topic and we shared a lively dialogue, both in person here in China, and by email once he returned to San Francisco.

The report does an excellent job contrasting China’s overarching future goals in technology and innovation with the current state of affairs. It takes a balanced view: “While recognizing China’s advances, it would be a mistake to think of China as a remorseless juggernaut sweeping everything in its path. Having a plan doesn’t guarantee success, and not everything works.”

The report looks deeply both at some of China’s leading technology companies — including the “BAT” along with Huawei and car-maker Geely — and more broadly at how Chinese companies, both state-owned and private, regions and universities all align themselves with broader national goals to upgrade the level of China’s indigenous innovation.

What does all this mean for Silicon Valley, the world’s most important and successful breeding ground for high-value innovation? It’s here, in offering answers and perspective, that the report achieves its greatest value.

Here are some particularly insightful passages:

“China’s relationship with the Silicon Valley/San Francisco Bay Area is unique, in part due to the deep historical and demographic ties between the Bay Area and China, but also because the region’s technology sector—the world’s largest—most highly concentrates the assets of technology, investment and expertise that relate to China’s goals to accelerate its own technological development.

Bay Area technology companies, such as Intel, Apple, and Cisco, and venture firms, such as Sequoia Capital, DFJ (Draper Fisher Jurvetson), and Kleiner Perkins, have been active investors in China for decades. Now, reversing the historic trend in which virtually all investment flowed from the Bay Area to China, Chinese companies have started sending investment capital and other resources to the Bay Area through mergers and acquisitions, equity investments, and the establishment of research and innovation centers and accelerator programs.”

The attraction of China’s market can be compelling, but [Silicon Valley] companies also must consider whether their core technology can be protected, and whether their position in the Chinese market can be sustained if that technology is compromised by competitors.While few US companies are leaving China, government policies and weak IP protection have caused many to keep their best technology at home and others to stay away.”

The report appears at an especially critical time in the development of US-China technology policy and investment. Congress is moving to tighten the CFIUS controls on Chinese technology investment in the US. China, meanwhile, is pushing ahead with new and more restrictive policies at home, leading to companies like Amazon selling off assets in China.

Let’s hope the tide reverses. A more open and reciprocal trade and investment relationship between China and the US would benefit both, benefit the world.

 

 

 

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

November 21st, 2017 No comments

 

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

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

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

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

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

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

Turning Inward

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

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

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

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

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

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

The Hum of Consumerism

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

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

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

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

‘You’ll Be Older Too’

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

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

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

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

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

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

October 10th, 2017 No comments

 

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

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

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

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

 

 

 

Venture Fundraising in Yuan Soars as Investors Target Chinese Tech Firms — The New York Times

September 23rd, 2017 No comments

 

HONG KONG (Reuters) – China-focused venture capital funds are increasing their bets on local technology companies and a further opening of Chinese domestic capital markets, raising money in the yuan at the fastest pace in five years.

Fund managers have raised 95.8 billion yuan ($14.54 billion) this year through late September in funds denominated in the Chinese currency, which is also known as the renminbi, compared with 56.7 billion yuan in all of 2016. That puts 2017 on pace to be the biggest year since 2012, when 145.8 billion yuan was raised, according to data provider Preqin.

There are currently 78 funds looking to raise as much as another 1.15 trillion yuan over the next couple of years, Preqin said, most of it coming from mammoth-sized state-owned entities and so-called government guidance funds, which seek to foster domestic innovation in different industries from advanced engineering and robotics to biotechnology and clean energy.

 Those include the 350 billion yuan sought by the China Structural Reform Fund, 200 billion yuan targeted by the China State-Owned Capital Venture Investment Fund and a proposed 150 billion yuan for the state-owned Enterprise National Innovation Fund.

The enormous size of the fundraising ambitions of the Chinese state-backed funds means it may take some time before they reach their final goals. The China Structural Reform Fund, which was launched in 2016, has raised 20 percent of its registered capital and its president said in an interview with Caixin Global that funding will be completed by the end of 2018.

“We’re at the all-time highest of capital-raising high water marks, with a tsunami of government-backed entities seeding incubators, VC funds, locally, provincially, nationally,” said Peter Fuhrman, CEO of China-focused investment bank China First Capital. “China has a lot of money in its government apparatus. It wants to seed innovation and entrepreneurship and this is how it’s doing it.”

The surge contrasts with the slowdown in seed financing for start ups in the United States, which is down for the past two years. It also compares with flat growth expected for U.S. venture capital fundraising in 2017, according to estimates from the National Venture Capital Association (NVCA).

CATCHING ENTREPRENEURS

Firms such as Lightspeed China Partners, Morningside Venture Capital, GGV Capital and investment and merchant bank Ion Pacific that previously only had U.S. dollar funds are launching their first funds in yuan. Others like Hillhouse Capital, Sequoia Capital China and China Renaissance that have raised funds in both currencies are adding to their yuan cash pile with new funds.

Key to those firms is to not lose potential investment opportunities in sectors closed to foreign investors or miss out on investing with the Chinese entrepreneurs who now want to list their companies locally instead of in the United States.

“Catching the right entrepreneurs in the ecosystem is our number one priority, so currencies to us are just tools, those are the tools that I need to catch these entrepreneurs,” said Harry Man, partner at Matrix Partners China, which has funds in both currencies. “That’s why if you don’t have RMB in your hand, ultimately you’ll be missing 50 percent of the deals. Then you’ll be forced to raise an RMB fund and that’s why everybody is doing it.”

Sequoia Capital China, which backed top Chinese technology firms such as Alibaba Group (BABA.N), is looking to raise at least 10 billion yuan for a new fund, while Hillhouse Capital, an early investor in companies including Tencent Holdings Ltd (0700.HK), Baidu Inc (BIDU.O) and JD.com Inc (JD.O), is targeting about 8 billion yuan for its fund, sources told Reuters.

The investment management arm of securities firm China Renaissance is also adding to its yuan reserves with a new fund worth about 6 billion yuan, according to a person familiar with the plans who couldn’t be named because details of the fundraising aren’t yet public. Ion Pacific is raising 1 billion yuan for its debut fund in the Chinese currency, while GGV Capital is about to close fundraising for its first yuan-denominated fund.

“Some sectors don’t allow foreign investors, so for example, in the culture and media industry you need to apply for certain licenses like video licenses and you need to be a local investor,” said Helen Wong, a partner at Qiming Venture Partners.

“Now the IPO window is open for the local stock market, so that encourages a lot of companies to go for a local listing,” she added, in reference to the increase in IPO approvals by regulators in 2017 that is prompting more companies to start preparations to go public. Previously, a slow approval process and long line of companies waiting for clearance dissuaded many from those plans.

The shift would give an added boost to the Shenzhen and Shanghai bourses. China has had 322 new listings this year, raising a combined $22.9 billion, Thomson Reuters data showed. This already surpasses the 252 for all of 2016, even after the country’s securities regulator slowed the number of weekly IPO approvals in May.

It could also reduce the influence of the Nasdaq and New York stock exchanges, where many Chinese technology companies previously flocked when they went public.

“For the RMB side, you see more companies in restricted sectors like healthcare and media and certain parts of cleantech that needs government support to get started,” said Hans Tung, managing partner at GGV Capital. “You also see companies in the fintech space and a lot of them need a license to operate a business in the financial services industry, so they tend to want to list in China.”

 

As published in The New York Times.

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

August 21st, 2017 No comments

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

As published in The New York Times.

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China’s New Plan for Silicon Valley Partnerships — Global Times

August 16th, 2017 No comments

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The once-sizzling romance between China and Silicon Valley has cooled rather dramatically. This has some potentially serious consequences for both sides, but especially for China, which desires to invest in and gain access to some of the hottest new ideas from this cradle of innovation. A new strategy is needed.

Until recently, Chinese investment funds and companies were investing hundreds of millions of dollars every year into promising Silicon Valley start-ups, as part of a strategy to forge closer ties between the US high-technology sector and the large Chinese market. But the flow of funds has largely dried up.

There are two main reasons. First, Chinese regulators imposed new restrictions on large overseas investments. Second, the US government began to take a less friendly attitude toward Chinese technology investment in the US, killing several proposed deals and holding up approval on many others.

There is every sign that things in the US are going to get more restrictive rather than less. As someone convinced of mutual benefits from Chinese investment in US technology, it all seems highly counterproductive. The world needs more deep and extensive ties between the Chinese and the US high-technology world, not just in start-up investing but also in university research and scientific conferences, shared research and development (R&D) labs, and partnerships among large companies working in hot fields like semiconductors, robotics, artificial intelligence and clean energy.

What can China do? Rather than sending money out, it can encourage more US high-technology start-ups to relocate to China. There is a huge amount to be gained, both for China’s continuing industrial upgrading and for innovative US technology companies looking to grow into giants.

China has in abundance the most vital ingredients for technology start-up success:  capital, a market and talented managers and engineers. In many industries, for example advanced manufacturing, robotics and new battery technologies, China often has more to offer technology companies than the US.

China already has lured a lot of Chinese-born scientists and technologists back from Silicon Valley to open start-ups. The next step is to lure some of the best early-stage US technology companies to China. This addresses a big weakness in the US high-technology scene: companies there tend to view the China market as an after-thought. In reality, it is often the market most worth prioritizing.

I’m seeing how well all this can work on the ground. We’re helping a promising US robotics company build its future in China. It is establishing a Chinese company as its main asset and moving some of its core team to China. It expects to add many more staff in China. The breakthrough product it’s now perfecting has a huge potential market in China’s manufacturing industry.

Originally, this company was aiming to find investors in China to help it grow in Ohio. We helped explain why bringing the company to China would make a lot more sense. The company is applying for R&D grants as well as venture capital in China. Within a 100-kilometer radius of its future base in Shenzhen, South China’s Guangdong Province is the largest concentration of potential customers and partners in the world.

We foresee big mutual gains if China can attract many more exciting early-stage technology companies. They  will create jobs, pay taxes and invest in local R&D. The benefits to China should be far larger than just buying some shares in a technology company based in Silicon Valley.

The objective isn’t to evade US rules but to bring start-ups early in their growth stage to the market where the demand is greatest. Technology companies do best when they sit close to the biggest concentration of customers.

The Chinese government has already said it wants to make the country more of a magnet for global technology talent. Shenzhen is a great city for US start-ups to grow big.

The steep drop in Chinese investment in Silicon Valley may actually prove a blessing in disguise. It’s smart to keep more of that capital at home to invest in great technology companies in China. Many US technology start-ups will achieve far more, and far more quickly, if they make China their future home.

The author is Chairman and CEO of China First Capital.

 

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http://www.globaltimes.cn/content/1061519.shtml

 

After Wanda Deal, Chinese Property Developer Faces Debt Risk — The New York Times

July 17th, 2017 No comments

A Dalian Wanda property in Nanchang, China.

BEIJING — The Chinese property developer Sunac China Holdings has turned into one of the country’s biggest white knights, swooping in to help troubled companies with too much debt. The risk: Sunac is amassing its own large pile of debt in the process.

Sunac has more than doubled its debt load in a year to $38 billion. Its deal this week to buy a portfolio of theme parks and hotels from the Dalian Wanda Group, the heavily indebted Chinese conglomerate, will add to the tab. At $9.3 billion, the acquisition is larger than the market value of Sunac.

“The problem for Sunac is twofold,” said Peter Fuhrman, chairman of China First Capital, an investment bank. “They themselves are already rather overleveraged and they are not paying distressed prices.”

Sunac is offering a much-needed lifeline.

For years, China fueled growth by providing easy credit. Chinese companies borrowed heavily, using the money to fund aggressive expansions.

As the economy now slows, companies are increasingly running into financial trouble, with some having to borrow even more to pay their debts. Policy makers are worried that the country’s Passover level of corporate debt could threaten the broader financial system.

Sunac, China’s seventh-largest property developer in terms of sales, has been able to tap into its financial strength to help companies under pressure. Since 2012, Sunac’s property sales have grown at double-digit rates nearly every year, giving it the firepower to scoop up assets and land plots.

Before the Wanda deal, Sunac in January pumped $2.2 billion into LeEco, a tech firm struggling to pay off its creditors. This May, it paid $1.5 billion for an 80 percent stake in Tianjin Xingyao, a property firm known for leaving its projects uncompleted.

In 2015, Sunac made a play to rescue Kaisa, pledging $1.2 billion to take over the troubled property company; it later pulled out after Kaisa did not meet certain conditions for the deal. That same year, it announced a partnership with the cash-poor Yurun Holding Group, which ran a business empire ranging from sausage making to property and finance.

It is a remarkable turnabout for the company’s founder, Sun Hongbin.

Mr. Sun started his career at the Lenovo Group, where he was promoted to run enterprise development. But he had a falling out with Liu Chuanzhi, the founder of Lenovo, over a business dispute. Related to the dispute, Mr. Sun was sentenced in 1992 to five years in jail for misappropriation of public funds.

After his release in 1994, he met with the founder of Lenovo and apologized, according to the website of The People’s Daily, the ruling Communist Party’s official newspaper. The Lenovo founder eventually lent Mr. Sun about $74,000, which he used to start a predecessor real estate firm to Sunac.

Lenovo did not immediately respond to a request for comment.

When Mr. Sun started Sunac in 2003, he focused on the cities of Wuxi and Chongqing and then moved on to China’s most developed cities, among them Beijing, Shanghai, Tianjin and Hangzhou, building apartments with names like Beijing Fontainebleau Chateau. Sunac built its residential projects in good locations near city centers and was aggressive in acquiring land plots — with higher debt.

 Sun Hongbin, the founder and chairman of Sunac China Holdings.

“People who have failed are those who have been defeated by themselves,” Mr. Sun told a newspaper, China Business News, in 2013. “But I often tell others: After you fail, you can start again.”

With the Wanda deal, Sunac is extending its reach into tourism, paying $9.3 billion for 76 hotels and a major chunk of its 13 tourism projects, in the country’s largest property acquisition ever. The purchase will help Sunac diversify its business, which is hurting from government restrictions on home sales as Beijing seeks to cool a frothy property market. It also strengthens the company’s hand in an industry dominated by bigwigs like the China Vanke Group and Country Garden.

“Within the housing industry, the powerhouses are really strong,” said Lu Wenxi, an analyst for Centaline Properties who is based in Shanghai. “If you don’t gobble up the fat ones, it is easy to be eaten up by others. Taking on more projects will prevent you from being eaten.”

Investors have rewarded Sunac for the deal. Shares of Sunac rose 14 percent in Hong Kong on Tuesday after they resumed trading after the deal announcement.

But the deal will add to an already significant debt load. In 2016, the company’s net gearing ratio — a measure of total debt to shareholders’ equity — rose to 121.5 percent, from to 75.9 percent in 2015. Fitch Ratings recently downgraded the company’s credit rating to BB-, saying Sunac’s acquisitive approach had made its financial profile “more volatile.”

Wanda is helping finance the acquisition. Sunac, in a statement to the Hong Kong Stock Exchange on Monday, said Wanda would procure a loan for the company worth about $4.4 billion.

Seller financing is not uncommon, both in China and the West. But Wanda’s role means that Sunac doesn’t have all the money upfront.

“In my experience, I’ve never seen it anywhere,” said Lester Ross, a Beijing-based partner with the law firm WilmerHale, who has advised deals in China for the last 20 years. “No client that I represent would accept a deal like that where you’re responsible for raising the money to pay for somebody else.”

Sunac did not return multiple calls for comment. The company said in a statement to the Hong Kong Stock Exchange on Tuesday that the deal with Wanda “will add a large number of prime land reserves and property assets for the company at a reasonable cost.”

The LeEco deal is also prompting concern.

Sunac invested $2.2 billion in LeEco, buying minority stakes in three of the conglomerate’s more stable businesses, including the smart TV affiliate Leshi Zhixin, Le Vision Pictures, and Leshi Internet. The two companies don’t have many overlapping interests, and LeEco’s finances have continued to sour. Before the Wanda deal, shares of Sunac were falling on fears that LeEco’s problems would spread.

In a January news conference, Mr. Sun said many people had tried to dissuade him from investing in LeEco, adding that several were “resolutely opposed” to it.

“I seriously considered their views, but I don’t think their opinions are sufficient to change my mind,” he said.

Article as published in the New York Times

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China’s depressed northeast is down but not out – if officials can fix its ailing state-owned firms — South China Morning Post

December 1st, 2016 No comments

I’m delighted to share the OpEd essay written by my China First Capital colleague Dr. Yansong Wang and published in today’s South China Morning Post. Her piece is titled “China’s depressed northeast is down but not out – if officials can fix its ailing state-owned firms”. It offers up her analysis on the disappointing economic conditions and vast untapped potential in her home region, China’s Northeast, formerly known as Manchuria, and in Chinese as 中国东北. I agree with her policy prescriptions as well as prudent optimism the region can be transformed just as America’s Rust Belt.

Her final paragraph notes a paradox familiar to me as well. In Shenzhen, we’re lucky enough to know two of China’s most consistently successful listed company chairmen, Mr. Gao Yunfeng , the founding entrepreneur of Han’s Laser Group  (大族激光集团), the world’s largest laser machine tool company, and Mr. Xing Jie, of a highly innovative and successful publicly-traded SOE, Tagen Group (天健集团).

Both, like Yansong, come from Jilin Province and all three have found success far from where they were raised, in Shenzhen. Yansong puts across her final point with conviction: “We need to create the conditions where the younger versions of these two successful entrepreneurs choose to stay in the northeast and build an economic future there that we can all take pride in.”

 

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Dongbei Yansong Wang

Over the course of my 35 years, China’s northeast has gone from being the country’s economic powerhouse to its most systematically troubled large region. Much of the region’s enormous state-owned industrial complex is in difficulty, while gross domestic product growth continues to lag. The deepest and most poignant signs of the economic malaise are a falling population and the fact that the northeast’s birth rate is now one-third below the national average.

The concern about how to revive the economy animates not only the highest levels of the central government, but also many people who recall the key role the region has played leading China’s modernisation. The concern is warranted. It now needs to be matched by some fresh thinking and new policy initiatives. I’d like to see the northeast become a laboratory for bold ideas about how to restructure state-owned enterprises in China.

I care deeply about what happens in the northeast. Though I now live and work in Shenzhen, I was born and raised in Jilin (吉林) province. My parents and 95-year-old grandmother still live there. I owe a lot of my life’s achievements up to now – undergraduate study at the University of Science and Technology of China in Hefei (合肥), followed by a PhD in physics from Princeton, to my current role in an international investment bank – to the mind-expanding public education I received growing up in the northeast.

The climate and its mainly landlocked geography are a challenge. But there is no reason the northeast should be a victim of its geography. The part of the US with the most similar conditions, the states of Minnesota, Michigan and Wisconsin, has successfully moved away from a focus on heavy industry to being a world leader in all kinds of advanced manufacturing and food processing. Great companies, including 3M, Cargill and Amway, all hail from this part of the US.

Could my home region produce its own world-conquering companies? I believe so.

Step one is to reorient investment capital away from the tired and often loss-making state-owned enterprises towards newer, nimbler private-sector firms. At present, too much investment goes to one of the most unproductive uses of all: new loans to companies that can’t repay their existing ones. This kind of rollover lending generally does not produce one new job or one new increment of GDP.

The central government is stepping up, announcing in August plans for 127 major projects, at a cost of 1.6 trillion yuan (HK$1.8 trillion). The problem isn’t so much that the northeast has too much heavy industry; it’s more that it has too much of the wrong kind. Basic steel is in vast oversupply. But the northeast could shine in developing speciality steel for advanced applications in China. One example that strikes me every time I ride on China’s high-speed rail network: too much of the special steel used on tracks is imported from Japan and Europe. We can make that.

How do we go from being a tired rust belt to a rejuvenated region pulsing with opportunity? The central and provincial governments should encourage more experimentation to push forward the scope and pace of state-owned enterprise reform. A starting point: banks could shoulder more of the cost of restructuring state firms. That will allow for new forms of mixed ownership, asset sales, and bigger and more effective debt-for-equity swaps.

I would also like to see the northeast become the first place where service industries, now mainly restricted to state firms – including banking and insurance – are opened up to private competitors.

There is no shortage in the northeast of the most important facilitator of economic development: a well-educated population. For now, sadly, too many of the entrepreneurially inclined leave the region. Indeed, two of the most visionary listed company chairmen I know are, like me, Jilin natives now living in Shenzhen, Gao Yunfeng of Han’s Laser and Xin Jie of Tagen Group. We need to create the conditions where the younger versions of these two successful entrepreneurs choose to stay in the northeast and build an economic future there that we can all take pride in.

Dr Yansong Wang is chief operating officer at China First Capital

 

http://www.scmp.com/comment/insight-opinion/article/2050099/chinas-depressed-northeast-down-not-out-if-officials-can-fix

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The Big Sort — The Economist

November 11th, 2016 No comments

 

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

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

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

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

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

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

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

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

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

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

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

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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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Can Xiaomi Reverse Its Slide in China? — CNBC Interview

September 28th, 2016 No comments

 

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From King-of-Mobile to possible also-ran in two short years, China’s Xiaomi is struggling to reclaim its spot at the top of China’s domestic phone market. Here’s my interview on CNBC on the tough challenges Xiaomi faces. Nerves are starting to fray among investors who put money into the company less than two years ago at a $45 billion valuation.

To watch the interview, please click here.

 

Fresh Ideas For Making Money in China Private Equity and Venture Capital

September 21st, 2016 No comments

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2016 is looking like it may be another year to forget for PE and VC in China.  The problem, as always, is with exits. For years, IPOs in China for PE-backed deals have been too few and far between.  There was initially a lot of  hope for improvement this year. But, prospects unexpectedly turned bleak when the Chinese securities regulator, the CSRC, suddenly reversed course. Not only did they put on hold previously-announced plans to liberalize IPOs by opening a new “strategic board” in Shanghai and to shift to a registration-based IPO system, they also began clamping down hard on the two main exit alternatives, backdoor shell listings and trade sales to Chinese listed companies.

IPO multiples remain sky-high in China. The IPO queue sits at 830 companies, with at least another 700 now lined up to get provincial approval to join the main waiting list. The CSRC did finally announce one liberalization of the IPO regime in China, but it will likely be of little help to the hundreds of PE and VC firms with thousands of unexited deals. Companies based in China’s poorest, most backward areas, the CSRC announced earlier this month, will now get to jump to the head of the queue.

Not for the first time, it looks like PE and VC portfolios may be mismatched with IPO regulatory policy in China. PE and VC firms have of late invested overwhelmingly in two areas. First is healthcare. The industry in China is growing and reforming. But, entry valuations have been bid up to astronomical levels.

In terms of number of deals closed, Chinese tech startups are getting the lion’s share of the attention. China’s online and smartphone population as well as e-commerce industry, after all, are the world’s largest. What’s missing at most of the funded startups are profits or a high-probability path to making money one day soon. Many are using PE money as part of a “last man standing” strategy to win customers by subsidizing purchases. Loss-making companies are still barred from having an IPO in China.

The main building blocks of China’s corporate sector, manufacturing companies and bricks-and-mortar businesses, are both highly out of favor with PE firms.

Amid so much misfortune, where should the PE and VC industry look next to invest profitably in China? What seems most clear is that any strategy linked to short-term IPO exit-chasing, or seeking to intuit the next flux in CSRC policy, has proved fundamentally risky. Some fresh approaches may be in order.

One priority should be on backing companies that can deliver sustainably high margins and positive cash flow over time to support regular dividend payments. Invest more for yield and less for capital gains.

There are such investment opportunities in China. I want to share six here. There are certainly many others. Looking outside the current China PE investment mainstream has other pluses. A troubling term has entered the Chinese financial vocabulary in the last two years, called “2VC”. It means a Chinese company started and run primarily for the purpose of attracting PE and VC money and less about making money from customers. 2VC deserves a detailed analysis of its own, how much it may be warping the investment landscape in China.

GPs and LPs looking for durable margins, scaleability, and a dearth of competition in China could start their search here:

  1. Robotics gearbox. China’s robot industry is hot. By now, about everyone has read the stories suggesting China’s robotics market, already the largest in the world, will boom for decades to come. For now, the investment money in China has gone overwhelmingly into companies that are making simple robots, rather than the robot industry supply chain. This overlooks perhaps the best opportunity of all. Robots rely on sophisticated gearboxes to make parts move. Making and selling gearboxes, rather than the final robot, is where the big margins and demand are. The technology has been around for a while, but the industry is dominated by two big foreign manufacturers, ABB of Switzerland and Rexnord of the US. They make a ton doing it. A Chinese robotics gearbox maker, assuming they get the product right, could immediately roll up sales in the hundreds of millions of dollars, both to Chinese robot makers as well as US, European and Japanese ones. From conversations I’ve had with C Level execs at both ABB and Rexnord, this is the Chinese competition they fear most, but which to their surprise has yet to materialize.  —————————————————————————–
  2. Hospice and specialized late stage care. PE investment in healthcare, especially into biosimilar pharma companies, hospitals and clinics for plastic surgery and dental care has been abundant, averaging well over a billion dollars a year in China. Competition is rampant in all these areas. Late stage critical care, however, has largely gone unfunded. The unmet need in China is almost unfathomably large. There are basically no hospices in China, though some 10 million Chinese die every year, including a surging number from cancers and long-term chronic diseases. There are also 30 million Chinese with Alzheimers and virtually no places offering specialized care. The number of Alzheimers sufferers is rising fast as Chinese longevity surges. Make no mistake, it’s harder to provide this kind of medical care than to do Botox injections. But, anywhere money is easily made in China, it’s getting harder to make any money at all. The biggest provider of specialized high-end late stage care in China is the French company, Orpea. They are doing a great job. I’ve had a close look at their business in China. They too are awed by the scale of the untapped market in China. A big plus: pricing freedom. The business doesn’t rely, as most conventional hospitals and drug companies in China do, on state reimbursement. —————————————————————————————————————————
  3. Dog food and other pet items. When I first came to China in 1981, it was basically illegal to keep a dog or cat as a pet. There was barely enough food to feed the human population and food was rationed. To say the growth in pet ownership since then has been explosive would risk understating things. China is now the third largest dog-owning market globally, with 27.4 million dogs (behind the US with 55.3 million dogs and Brazil with 35.7 million), and the second largest cat-owning country with 58.1 million cats, behind only the US with 80.6 million. China’s pet market will soon blow past that of the US. Everywhere this is presenting great opportunities in pet care, pet food, pet hotels. The US pet food giant Mars has a large chunk of the dog food market here. But, there are still many opportunities to carve out a niche in pet food, both via sales at veterinary clinics and online. The other vast uncharted market: pet insurance.   ——————————————————————————————–
  4. Server storage. Chinese law mandates that the country now has and will continue to have the largest ongoing demand for high-end servers, as well as the software that powers them. The reason: all the major sources of online traffic — Alibaba, Tencent, JD.com, Baidu — must permanently store virtually everything that runs across their network. In the case of Tencent’s Wechat business, that means keeping billions of text, audio, video and photo messages generated every day by its 600 million users. Tencent’s ongoing investment in servers is almost certainly larger than any other company in the world, with the other big Chinese internet companies following closely behind. The growth rate is dizzying. This has created a wonderful profit-center for otherwise troubled chip giant Intel. Its Xeon chips power virtually all high-end servers. No single domestic company has yet emerged to build a sizeable business in storage software, maintenance and integration tailored to the regulatory needs in China. In parallel, there’s also a large market for similar made-at-home software solutions to sell to the Chinese government. They are the reason all this server storage demand exists.   ————————————————————————————————————————————————
  5. Mall-based attractions. Shopping malls in China are in a fight for survival. Clothing retailers, which just two to three years ago took at least half the floor space in Chinese malls, are disappearing. They can’t compete with online merchants offering the same products for one-third to one-half less. The going has proved especially hard for Chinese domestic retail brands, quite a few got PE money back when this sector was hot. Chinese malls need to change, and fast. Their main strategy so far is increasing the floor space allocated to restaurants and movie theaters. Another area with huge potential, but so far little concrete activity, is “edu-tainment” attractions. A prime example is a mall-based aquarium. I was recently shown around one-such mall aquarium in a major Chinese city by its owners, a large Chinese real estate developer. Though they initially knew nothing about aquariums, their design and selection of fish are mediocre, the owner is coining money with over 45% margins. Tickets sell days in advance, not just on weekends, for average of $15 for adults and less for kids. It’s been open and thriving for three years. Every mall they are building now will have a similar attraction. A better operator should be able to push margins higher and roll out nationwide. On average, 55 million Chinese go to the mall each week. —————————————————————————–
  6. Indoor LED vegetable growing.  China has a big appetite for vegetables, about 100 kilos per person per year, or seventy billion tons. Many Chinese, especially the 55% living in cities, have concerns about where and how the vegetables are grown and how they get to market. The worry rises in lock step with per capita income.  Catering to worried Chinese consumers could keep a company in profit for decades. One good idea that’s not yet in China but should be: growing vegetables indoors, using LED lights.The cost of LED lighting has fallen by over 90% since 2010 and will continue to decline, thanks in large part to over-investment in this sector in China. LED efficiency has also nearly doubled over that time. It now costs about the same to grow vegetables indoors with LEDs as it does in well-irrigated farmland. Supplying vegetables to urban China this way has a lot of other advantages, including the ability to provide a secure chain of custody, from the place where the food is picked all the way to the customer’s hands. Lots of models would work in China — large growing areas inside abandoned urban factories to supply better Chinese supermarket chains like Walmart, Carrefour and China Resources, or smaller-scale packages home-delivered or sold through vending machines placed inside high-end residential complexes in China. Organic or non-organic, catering to Chinese picky consumers could keep a company in profit for decades.

 

Since PE first took off in China in 2005,  China’s economy has grown by almost four-fold. Few GPs in China have done as well in DPI terms. It’s likely not going to get any easier to make or raise money, nor to rack up IPO exits. More than ever, PE firms need to back or incubate ideas to catch and hold some of the new wealth that’s getting created every day in China.

As published by SuperReturn

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