Vol. 36 Aug 29 th , 2014 Latest Report Chinese Market Capitalization Management and “PE + Listed Company” Business Mode By Eva Zhang , Zero2IPO Research Center On May 8, 2014, the State Council issued the Opinions on Further Promoting the Healthy Development of the Capital Market (hereafter referred to as the “Opinion”), which clearly stated that listed companies shall be encouraged to establish market capitalization management system. The CSRC is drafting the Guidance on the Market Capitalization Management System of Listed Companies and plans to promulgate it by the end of this year, which is significant for listed companies to raise the awareness on strengthening their market capitalization management so as to increase shareholders’ returns and promote the healthy development of China’s capital market. More than Just Stock Price Management, Market capitalization Management Has Multiple Concepts and Categories Market capitalization management, according to the viewpoints of domestic scholars, refers to the strategic managing behavior, that is, listed companies apply various scientific and lawful methods to achieve corporate value maximization and shareholders’ wealth maximization. Market capitalization equals to stock price multiplied by the total number of shares, and stock price equals to net income per share multiplied by P/E ratio; therefore, net income and stock valuation become the determining factors of market capitalization of listed companies. To achieve intrinsic value, a company needs to increase its profitability and ensure continuous growth, while improving the stock valuation requires effective connection with the market. Only when the company’s intrinsic value is fully recognized by the market can its market capitalization be improved. Scientific strategies of market capitalization management include spin-off, M&A, buyback, additional stock issue, stock option incentive, investor relationship management, etc. Spin-off means the assets of low valuation and with bad profits are spun off from listed companies. M&A refers to the merger or acquisition of a target company to acquire its property right or change its structure into a subsidiary or wholly-owned subsidiary. With the aim of increasing the companies’ intrinsic value, the spin-off of non-performing assets and the introduction of quality assets both belong to the intrinsic value management of listed companies. If the stock price is underestimated by the market, listed companies
Transcript
Vol. 36 Aug 29th , 2014
Latest Report
Chinese Market Capitalization Management and “PE + Listed Company”
Business Mode
By Eva Zhang , Zero2IPO Research Center
On May 8, 2014, the State Council issued the Opinions on Further Promoting the Healthy Development
of the Capital Market (hereafter referred to as the “Opinion”), which clearly stated that listed
companies shall be encouraged to establish market capitalization management system. The CSRC is
drafting the Guidance on the Market Capitalization Management System of Listed Companies and
plans to promulgate it by the end of this year, which is significant for listed companies to raise the
awareness on strengthening their market capitalization management so as to increase shareholders’
returns and promote the healthy development of China’s capital market.
More than Just Stock Price Management, Market capitalization Management Has Multiple
Concepts and Categories
Market capitalization management, according to the viewpoints of domestic scholars, refers to the
strategic managing behavior, that is, listed companies apply various scientific and lawful methods to
achieve corporate value maximization and shareholders’ wealth maximization. Market capitalization
equals to stock price multiplied by the total number of shares, and stock price equals to net income per
share multiplied by P/E ratio; therefore, net income and stock valuation become the determining factors
of market capitalization of listed companies. To achieve intrinsic value, a company needs to increase its
profitability and ensure continuous growth, while improving the stock valuation requires effective
connection with the market. Only when the company’s intrinsic value is fully recognized by the market
can its market capitalization be improved.
Scientific strategies of market capitalization management include spin-off, M&A, buyback, additional
stock issue, stock option incentive, investor relationship management, etc. Spin-off means the assets of
low valuation and with bad profits are spun off from listed companies. M&A refers to the merger or
acquisition of a target company to acquire its property right or change its structure into a subsidiary or
wholly-owned subsidiary. With the aim of increasing the companies’ intrinsic value, the spin-off of
non-performing assets and the introduction of quality assets both belong to the intrinsic value
management of listed companies. If the stock price is underestimated by the market, listed companies
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can boost stock price through share buyback; if the stock price is overestimated, listed companies can
enhance the business strategy through additional stock issue, for instance, the overestimated shares can
be used as a payment method for M&As and the high valuation of M&A targets can also boost the
stock price of listed companies. Another strategy of market capitalization management is stock option
incentive. Choosing stock option incentive means the incentive object has to achieve the performance
assessment of shareholders and the earnings can only be realized through the increase of stock price in
the secondary market, which bounds together the interests of incentive object and shareholders. To
achieve the ultimate goal of market capitalization increase, incentive object has to promote the
performance growth meanwhile keeping a positive interaction with investors. Besides, the merger and
expansion of listed companies requires the fund support from the capital market. Thus, whether
investors recognize the value of a company is decisive for its refinancing and rapid growth through
capital leverage. So it can be concluded that on one hand, good investor relationship management can
provide investors with better understanding of the company’s intrinsic value; on the other hand, their
feedback and suggestions toward the company’s existing problems and future development strategies
can also be delivered. Therefore, positive interaction with investors will help the company realize
rational capital premium and improve market capitalization management.
Cross-industry M&As in Hotspot Industries Are not Market Capitalization Management;
Post-M&A Integration Is Crucial
As an important method for listed companies to rapidly expand and grow, M&A is of great significance.
Compared with internal expansion, M&A needs a relatively long period, while this kind of denotative
expansion can enrich development strategies and strengthen enterprise comparativeness by quickly
scaling up operation, acquiring technologies and resources and lifting up market share. In recent years,
M&As have been increasingly active; especially when a series of policies favoring M&As have been
promulgated since 2013 and the issue of new shares was suspended, M&A embraced a major
development opportunity. Enterprises represented by privately owned listed companies have achieved
successful market capitalization management through M&As.
During this wave of M&As, the cross-industry M&As of listed companies are flourishing, and the
M&A targets are mainly hot subjects in the current capital market, including film & television, media,
games, internet, healthcare, environment protection, etc. For instance, Xiangeqing, a famous listed
company in catering business has conducted cross-industry M&As by purchasing environment
protection and biotechnology enterprises since the end of 2013. In this July, Xiangeqing even
announced the change of its name into China Sciences Cloud Network, entering the fields of network
media, cloud service and big data. In April, Suzhou Hesheng Special Material Co., Ltd. a manufacturer
of color steel plate accepted the transfer of 26.5% equity of Beijing Jinyingma Media Co., Ltd. at the
price of RMB219.00M. In May, the real estate company Baolilai acquired 10.0% equity of PalmJoys
Technology. The main reasons behind the frequent cross-industry M&As are that with weak
profitability of core businesses, listed companies have low valuation and stock price, and by the
acquisitions of the companies in hot industries, listed companies can expand stock concepts, boost
stock prices in secondary market or realize strategic transformation. Therefore, Zero2IPO Research
Center holds the opinion that the short-term increase of stock price by speculation of hot topic is not
market capitalization management in a strict sense. M&A is just the beginning, while integration is the
target and the difficult part. If the businesses and resources of both enterprises cannot be effectively
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integrated after the M&A, synergistic effect cannot be realized, and industrial efficiency cannot be
improved, investors will not recognize the value and prospect of the company, and the soaring stock
price will fall quickly either.
In contrast, the successful market capitalization management via M&A is to extend industrial chain,
enlarge industrial scale and improve industry efficiency so as to realize the sustainable growth of
profitability. Take Blue Focus for an example, its market capitalization has increased through constant
M&As in the A-share market. Blue Focus is mainly engaged in PR service and advertisement and has
purchased the enterprises in such industries as advertisement, consultation, Internet marketing, cultural
communication and software since 2008. After the M&As, Blue Focus improved its industrial chain
and expanded its businesses, so that it was able to share the resources and channels and thus
strengthened its competitiveness. Therefore, after ex-rights in 2012, the stock price of Blue Focus has
increased from RMB14.01 per share to the highest RMB68.69 per share, nearly quadrupled. The
financial report of Blue Focus in H1’14 showed that, the gross revenue of Blue Focus in H1’14 reached
RMB2.63B, a YoY rise of 122.1%; the net profit reached RMB302.00M, a YoY rise of 119.3%. Owing
to the sound operation of original businesses, expansion of business scope after the M&As and
implementation of global strategies, Blue Focus has improved its brand image and competitive edges,
thus achieving sustainable increases in operating revenue, operating profit and net profit.
PEs’ Participation in the Market Capitalization Management of Listed Companies to Explore
Opportunities
Along with the emergence of the concept of market capitalization management of listed company,
some institutions have been attracted to actively engage in the undertaking, including securities
companies, fund companies, PEs, financial PRs and consulting companies. The priorities given by
different institutions in the participation of market capitalization management of listed companies are
varied. To be specific, securities companies mainly help the shareholders of listed companies activate
stock assets, fund companies put stress on co-bank and increases in stock price, financial PRs focus on
the management of investor relationship and public opinions, consulting companies assist in mapping
out the planning for company strategic transformation and industry integration and PEs give a helping
hand to listed companies for implement strategic M&A and industry integration. PEs’ participation in
the M&As of listed companies not only brings industry resources for the listed companies, but
contributes to the selection of quality M&A targets for the listed companies based on its industrial,
accounting and legal advantages, conducive to the implementation of assets integration and increases in
internal value of the listed companies.
The modes of PEs’ participation in the market capitalization management of listed companies include
the joint establishment of buyout funds, growth funds, VC funds by PEs and listed companies,
entrusting capital to PEs by listed companies, PEs’ assistance in the selection, cultivation and
incubation of the enterprises in industry chain for listed companies and integration of the capital into
the listed companies after the cultivation. For example, Zero2IPO Ventures and Yaoji Playing Card
jointly set up Zero2IPO Yaoji Fund, China Science & Merchants Venture Capital and BYD joined
hands in establishing Hong Kong BYD Clean Energy Automobile Fund, and Beijing Sensegain
Investment Management Corporation and Guangdong Qtone Education Co., Ltd. cooperated in setting
up Qtone Sensegain Education Fund in 2014. In addition, both PEs in primary market and secondary
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market play a significant role in promoting the strategic M&As and industry integration of listed
companies.
To take “PE+listed company” buyout fund for an example. The mode of joint establishment of buyout
fund by PE and listed company and implementation of industry chain integration of listed company was
created by Heaven-sent Capital Management Group. According to this mode, PE acts as GP of buyout
fund and contributes 1.0%-10.0% of the total capital, listed company provides certain capital or the
remaining capital. (If listed company merely contributes certain capital, PE shall raise the remaining
funding from other parties.) The main purpose of the joint establishment of buyout fund by listed
company and PE is to promote the integration of upstream and downstream businesses of listed
company in industry chain. The buyout fund shall experience two acquisitions, i.e. two control power
transfers from original shareholder to buyout fund in the first acquisition and from buyout fund to listed
company in the second acquisition. Moreover, by adopting the mode, listed company can find the target
of M&A in advance and is accordingly given sufficient time to have a clear understanding of the target
so as to lessen the risks of information asymmetry in the M&A, while PE is likely to identify its exit
option in advance too to upgrade security boundary and liquidity of the investment and share the
returns from the regrouping of listed company.
To take Heaven-sent Yuanjin Fund set up by Heaven-sent Capital Management Group and Jingxin
Pharmaceuticals for an example. Heaven-sent Yuanjin Fund, established in March 2013, specializes in
the investments in the traditional Chinese medicine and biopharmaceutical related with the core
business of Jingxin Pharmaceuticals. In October 2013, the Fund acquired 100.0% equity of Guangdong
Yihetang Pharmaceutical for RMB120.00M. Guangdong Yihetang Pharmaceutical has been dedicated
in the R&D, production and sales of Chinese patent medicines. After the acquisition, Guangdong
Yihetang Pharmaceutical was jointly held and managed by Heaven-sent Capital Management Group
and Jingxin Pharmaceuticals. To be specific, Heaven-sent Capital Management Group is responsible
for the strategic planning, industry research and analysis and resources integration and upgrading of
Guangdong Yihetang Pharmaceutical, while Jingxin Pharmaceuticals is in charge of operation scheme
of Guangdong Yihetang Pharmaceutical, establishment and improvement of internal control system of
the investees and daily operation and management. Although only after a period of management and
cultivation of Guangdong Yihetang Pharmaceutical can the acquisition be completed, it is not difficult
to find a clear mind of Jingxin Pharmaceuticals in seeking for expansion-oriented strategic M&As via
Heaven-sent Yuanjin Fund. Guangdong Yihetang Pharmaceutical is among the first batch of the
enterprises entitled as the“China’s Time-honored Brands” by the Ministry of Commerce of China and
one of the Top 20 traditional Chinese medicine pharmaceuticals in Guangdong Province, with ten
state-level protected traditional Chinese medicines, such as Shaxi Herbal Tea, Runchangning Intestine
Lubrication Gold Cream and so on, and the majority of the medicines it produced are full of
competitiveness. Furthermore, the acquisition will enrich the existing product line of Jingxin
Pharmaceuticals to change its current growth mode heavily depending on chemicals drugs and generic
drugs and then form a new one focusing on both chemical drugs and Chinese patent medicines. In this
connection, the room for medium and long-term growth of Jingxin Pharmaceuticals has been further
expanded. Since Jingxin Pharmaceuticals released the announcement of the acquisition of Heaven-sent
Yuanjin Fund, Jingxin Pharmaceuticals’ stock price has been stirring up and its market capitalization
has reached RMB4.76B by the end of July 28, 2014.
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Because of the in-depth adjustment of equity investment industry, rising exit obstacles and inactive
fundraising, investment and exit in recent years, the advantages of “PE+listed company” buyout fund
have been given into full play. Moreover, benefited by the encouragement on M&A and regrouping for
industry restructuring, the buyout fund, set up for the integration of industry chain of listed company,
embraces a sound external environment for development. According to the statistics of Zero2IPO
Research Center, a number of PEs have joined their hands with listed companies to establish buyout
funds since 2014 and the number of the buyout funds established as of July in the year surpassed the
total set up in the previous years.
BPEA News
Daibang’s Roadshow successfully held in BPEA
With the support of China Association of Private Equity (CAPE) and Beijing Private Equity
Association (BPEA), Daibang Roadshow successfully took place in Beijing on August 7th. Over 20
local investment professionals attended this meeting.
Fei Yin, the founder and general manager of Daibang gave a presentation about Daibang and
peer-to-peer(P2P) loans industry in China. As an alternative to traditional lending, a P2P loan allows
the borrower to receive funds from another individual rather than a lending institution. Currently, P2P
loan is an emerging industry in China. Daibang is a leading P2P intermediary in China which provides
an online platform for borrowers and lenders and targets its market in second-tier and third-tier cities.
After the presentation, many investment professionals exchanged their opinions with Mr Yin. They also
gave some suggestions for Daibang’s business operation. This well organized roadshow for Daibang
generated good business communication platform through the effective and interactive face to face
meetings.
Jiesen English’s Roadshow successfully held in BPEA
Jiesen English, a leading provider of service for the online English training industry, hosted their first
road show for Chinese investment community in Beijing Private Equity Association on August 20th.
Presenters including the founder of Jiesen English Qijun Ye, who has over 5 years teaching experience
in English education and has 3 years managerial experience in online English training industry,
addressed the advantages and challenges of Jiesen English, as well as the outlook for the future of
Jiesen English.
Jiesen’s English online training program is now used by more than 4500 Chinese English learners,
including students, office workers and others. In order to provide high-quality training service, Jiesen
has long-term cooperation with an English education organization in Philippines, which is responsible
for recruiting and training new teachers.
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After presentation, some local investment professionals shared their opinions and suggestions with Mr
Ye. “I was wondering whether Jiesen English can find a strategic partnership with local travel
companies to provide training service for those customers who plan to travel abroad, with this
cooperation, Jiesen English can stand out in the English training industry.”
The 38th BPEA Monthly Training Program Successfully Hosted in Beijing
With the support of China Association of Private Equity (CAPE), Beijing Private Equity Association
(BPEA) and Fenxun Partners, “the 38th Monthly Training Program—securitization, structured finance
and practical analysis on capital management” took place in Beijing on August 21th. More than 50
investment professionals participated in the training course.
Jianzhao Wang, one of partners from Fenxun law firm gave a conceptual introduction of securitization
and structured finance. He pointed out that Securitization is the method utilized by participants of
structured finance to create the pools of assets that are used in the creation of the end product financial
instruments; structured finance was created to help transfer risk using complex legal and corporate
entities. He emphasized Securitization is a global trend for capital industry.
Another partner from Fenxun, Zhi Bao also shared his views on the current situation for foreign
investment to participate in Chinese capital market. He stated that although in the past few years,
Chinese economy developed dramatically, and the number of financial professionals increased rapidly,
there are still some political barriers for foreign investments to enter Chinese capital market.
This training program ended up with heated discussion on securitization and structured finance. The
monthly training program builds a platform for communication and friendship for the members of
BEPA.
BPEA Upcoming Events
2014 GLOBAL MERGER & ACQUISITION FORUM
SEPTEMBER 9TH
, 2014
The 2014 Global Merger & Acquisition Forum, hosted by the China Association of Private Equity
(CAPE) and Xiamen Municipal Bureau of Convention and Exhibition Affairs (XMBCEA), and
supported by more than 20 PE and M&A associations across the world will be held at Xiamen
International Convention and Exhibition Centre on September 9th, 2014.
We would be honored to invite you to join in this forthcoming big event. It would be a great
pleasure to meet you in Xiamen.
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Date: September 9th, 2014
Time: 15:00-18:30
Venue: Xiamen International Conference Centre
Hosted by: China Association of Private Equity (CAPE), Xiamen International Convention and E
xhibition Centre (XMBCEA)
Supported by: the CIFIT Organizing Committee, Xiamen Municipal Government, Emerging
Market Private Equity Association (EMPEA), British Venture Capital Association (BVCA), Australian
Private Equity and Venture Capital Association (ALVCA), Luxemburg Private Equity and Venture
Capital Association (LPEA), Malaysia Venture Capital Association (MVCA), Brazil Private Equity and
Venture Capital Association (ABVCAP), the European Private Equity and Venture Capital
Association (EVCA), Japan Venture Capital Association (JVCA), Korean Venture Capital Association
(KVCA), the Singapore Venture Capital and Private Equity Association (SVCA), Indian Venture
Capital Association (IVCA), Italian Private Equity and Venture Capital Association (AIFI), Taiwan
M&A and Private Equity Council (MAPECT), Hong Kong Venture Capital and Private Equity
Association (HKVCA), Beijing Private Equity Association (BPEA), Xiamen Venture Capital
Association (XMVCA)
Strategic Partner: PricewaterhouseCoopers (PWC), Jones Day law firm (JONESDAY), China
Going Global: Think Tank (CGGT), Online discussions office with China International for Investment
and Trade
Strategic Media Partner: First Financial Daily
Special Live Broadcast Media: HeXun.com
Supported Media: China Securities News, Shanghai Securities News, Securities Daily, Sina
Finance, www.jrj.com, International Finance, the Enterprise Observer, Global People
2014 Global Merger & Acquisition Forum Committee
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Appendix: 2014 Global Merger & Acquisition Forum Draft Agenda
2014 Global Merger & Acquisition Forum Draft Agenda
Sep 9th
,（Tuesday）
15:00-15:10
Opening speech by
- Ministry of Commerce
- People’s Government of Xiamen
15:10-15:30 Keynote speech: Chairman of CAPE
15:30-16:20
Topic: Ambassadors/ Counselors talking about M&A
Speakers:
-William Zarit, Minister Counselor for Commercial Affairs in the U.S. Embassy
-Ong Chong Yi, Minister Counselor (Economic) to Embassy of Malaysia
-Paul Steinmetz, Luxemburg Ambassador to the People’s Republic of China
-Bheki W.J. Langa, South Africa Ambassador to the People’s Republic of China
-Henry Wang, Senior Investment Commissioner, Greater China, Australian
Trade Commission
16:20-16:30 Release of “Global M&A Annual Report 2014” (by PWC and CAPE)
16:30-16:40 Keynote speech:
Lu Yuebing, Vice President of Siguler Guff China
16:40-16:50 Keynote speech:
To be decided
16:50-17:40
Roundtable1: Development trend of global M&A market and RMB going
international
Moderator:
Lin Hua, Secretary-General of Xiamen Venture Capital Association
Panelists:
-Jack Huang, Chairman of Taiwan M&A and Private Equity Council, Partner of
Jones Day
-Jeff Chi, Chairman of Singapore Venture Capital Association
-HKVCA representative
-Amin Shafie，Chairman of Malaysia Venture Capital Association
-Yi Xiqun, Executive Vice-Chairman of CAPE
-Nicole Lu, Trade & Investment Officer of British Consulate-General
Guangzhou
17:40-18:30 Roundtable2: Opportunities and challenges for Chinese enterprises in global
M&A market
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Moderator:
Bai Hua, Founder and CEO of China Going Global·Think-tank
Panelists:
- Lv Lishan, Partner of Zhonglun Law Firm
- Zhang Ke, Partner of Shine Wing, Certified Public Accountants
- Huang Guobin, Managing Director of Goldman Sachs Asia
- Wang Zhonghe, executive vice president of ICBC International
- Yan Jianlin, Managing Director of CITIC Securities
赵令欢 弘毅投资总裁联想控股有限公司常务副总裁John Zhao, CEO of Hony Capital, Executive Vice President of Legend Holdings
沈南鹏 创始及执行合伙人红杉资本中国基金Neil Shen, Founding Managing Partner of Sequoia Capital China
衣锡群 常务副会长中国股权投资基金协会Yi Xiqun, Executive Vice Chairman of CAPE
李爱庆 董事长北京科桥投资Li Aiqing, Chairman of Beijing Co-Bridge Investment Advisor Ltd.
张懿宸 首席执行官中信资本Zhang Yichen, CEO of CITIC Capital
靳海涛 董事长 深圳创投Jin Haitao, Chairman of Shenzhen Capital Group Co.Ltd
于剑鸣 管理合伙人 新天域资本Yu Jianming, Managing Partner of New Horizon
刘晖 合伙人 太盟产业基金Allan Liu, Partner of PAG Capital
殷荣彦 董事长北京股权投资发展管理有限公司Yin Rongyan, Chairman of Board, Beijing Equity Investment Development Management Company
田溯宁 创始合伙人、董事长宽带资本Edward Suning Tian, Founder and Chairman of CBC Capital
阎焱 首席合伙人 赛富亚洲投资基金Andrew Y.Yan, Managing Partenr of SAIF Partners
熊焰 董事长、总裁北京金融资产交易所
杨向东 董事总经理凯雷投资集团凯雷亚洲基金联席主管
唐葵 总裁、合伙人方源资本
Xiong Yan,Chairman and President of China Beijing Financial Assets Exchange
Xiang-Dong (X.D.)Yang, Managing Director and Co-Headof Carlyle Asia Partners ("CAP")
Frank Tang, CEO and Managing Partnerof FountainVest Partners
何小锋 教授、博导北京大学经济学院金融系Professor and Doctoral Advisorof the Finance Department of theEconomics School at Peking University
熊晓鸽 创始合伙人IDG 资本Hugo Shong , Founding General Partner of IDG Capital Partners
北京股权投资基金协会成立于2008 年 6 月 20 日
协会服务中心 :为会员及相关从业人士提供 : 专业咨询、辅
导，基金注册、备案，商务会议、培训等服务。
协会致力于：
促进行业环境建设 建立自律监管机制
维护会员合法权益 研究行业发展动向
培养相关专业人员 组织内外交流合作
BPEA committed to:Promote the issuance of preferential policies for PE industryBuild the self-regulatory discipline of PE industrySafeguard the legitimate rights of membersResearch development trends of PE industryTrain relevant professional individualsCooperate with domestic and overseas institutions
BPEA Service Center:BPEA provides services for members and relevant industrial individuals: professional consultation and guidance, fund registration and recording, business conference,training and so on.
Beijing Private Equity Association (BPEA) was established on Jun 20, 2008
