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GINKGO TREE ADVISORS FOCUS 1/2016

SUSTAINING MOMENTUM: CHINA UPDATE

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GINKGO TREE ADVISORS FOCUS is a publication of knowledge and perspective-sharing articles by GINKGO TREE ADVISORS. Topics include M&A, private equity, corporate strategy and internationalization with a focus on China and Europe. Authors include partners, employees and external sector experts of GINKGO TREE ADVISORS. The articles contained in the GINKGO TREE ADVISORS FOCUS publications do not necessarily represent the views of GINKGO TREE ADVISORS. We do not take any responsibility for articles and content authored by external sector experts and partners of GINKGO TREE ADVISORS. We welcome any comments and feedback in regard to this publication, which you can direct to: Ginkgo Tree Advisors UG Email: info@ginkgotree-advisors.com www.ginkgotree-advisors.com Published: 08. March 2016 © 2016 Ginkgo Tree Advisors UG

This publication was compiled using the following sources and materials: Icons by freepic used under license from flaticon www.flaticon.com Cover picture: ancient Chinese architecture,,hxdyl, iStock_000040059832Large, Apr.07 2015 used under license by istockphoto.com and edited by Ginkgo Tree Advisors Content sources: International Robotics Federation (IFR), 2016 Chinese National Bureau of Statistics Huaran Investment Consulting Group All data depictions and charts by Ginkgo Tree Advisors UG, except for those marked HICG by Huaran Investment Consulting Group. All rights reserved. This publication does not claim completeness of compiled data nor does it impose the rendering of investment advice. All rights reserved. Re-Publication requires prior written approval of Ginkgo Tree Advisors UG.

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CONTENT

§ EDITORIAL

§ CHINA, AUTOMIZE!

§ CHINA 2015 - 2025: CHINA ECONOMY UPDATE

§ COMPANY PROFILE

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GINKGO TREE ADVISORS - HUARAN INVESTMENT CONSULTING This edition of Ginkgo Tree Advisors Focus is co-authored by Shanghai-based Huaran Investment Consulting, a strategic partner of Ginkgo Tree Advisors in China. Shanghai Huaran Investment Consulting Co., Ltd. was founded in 2008, specializing in offering cross-border M&A strategies and transaction advisory, post-merger-integration. Huaran’s team possesses a proven track record of cross-border transactions, integration & restructuring as well as enterprise management. The strategic cooperation of Ginkgo Tree Advisors and Huaran extends to Chinese outbound transactions as well as due diligence services in China.

GINKGO TREE ADVISORS FOCUS 1/2016: SUSTAINING MOMENTUM

EDITORIAL

Dear Reader, the Year of the Monkey is in full effect and we are witnessing a number of divergent trends in China as projected. In terms of outbound investments, China is on a record spending spree. Since the beginning of 2016, China has been spending about USD 2 billion for outbound acquisitions per day! Most have read about the large-scale acquisitions of Krauss Maffei, EEW or Syngenta. In other countries, like the UK, Chinese companies and institutionals are spending big on technology (TMT) often by means of VC money. We are seeing a similar trend in the healthcare sector, especially life sciences across Europe. On the other hand, the country is continuing its economic reforms resulting in economic adjustments. Tasks on the reform list include the tackling of overcapacity (e.g. in the steel industry), the fight against corruption, which is still ongoing and influencing the behavior of economic actors in China as well as implementing the objectives of the new Five-Year-Plan. One important concept that has been starting to be implemented in 2015 is “Made in China 2025”.

This concept of industrial development and reform is the Chinese complementary to the German “Industry 4.0” concept. While everyone is talking about it, not every CEO has understood what it means and how to lift its full potential. For China, the concept implies a gain in production efficiency, a leap towards an interconnected, intelligent manufacturing process and a global competitiveness. This also means that many companies, especially in China have to leapfrog or get left behind. A good measure for this development is the rise of robotics in China, which we use as one measure for industry 4.0 related industries and development in our article “China, Automize!”. This edition of Ginkgo Tree Advisors Focus is co-authored by Shanghai-based Huaran Investment Consulting Co. Ltd. (HICG), a strategic partner of Ginkgo Tree Advisors in China. Huaran’s article has been authored by James Hao and Hamish C. Zhao, both Managing Partners of HICG. HICG’s guest article „China 2015-2025: China Economy Update“ provides an update on China’s economy and M&A environment as well as insights on trends arising from the internationalization of the Chinese Yuan, Made in China 2025 and M&A activity.

We welcome any feedback regarding this publication and our advisory focus in the TMT and healthcare sectors on M&A, VC, PE and strategy topics. Daniel Koller Managing Partner | Ginkgo Tree Advisors

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CHINA, AUTOMIZE!

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CHINA, AUTOMIZE!

Using industrial robotics as a measure for automizing production processes and ultimately moving towards an interconnected and “intelligent” manufacturing and application environment, China demonstrates that it has been undertaking great efforts in catching up with industrialized nations over the past years and continues to further upgrade its production base. Industrial robot sales have been increasing by an impressive compounded annual growth rate (CAGR) of 40% between 2010 and 2014. In comparison, leading high-tech manufacturing countries such as Japan and Germany have seen increases in industrial robot sales by 8% and 9% respectively during the same period. (Fig.1). One of the reasons for this mid-range, double-digit CAGR is that besides more and more continuing to compete and innovate on a level-playing field with companies from industrialized countries, China’s manufacturing is often still stuck in the transition between industry 2.0 and industry 3.0. Some of the country’s traditional manufacturing still has to overall catch up in terms of automization. On the other hand, a leap to industry 4.0 is possible for a good number of leading companies across relevant industries in the short-term. This brings both, opportunities and challenges to companies from the West. The challenges arise from those Chinese companies that are in the meanwhile leading in innovation and have been building up large-scale, fully-automated operations throughout the last decades. Further, “China 2025” or “Industry 4.0” do bring opportunities for Western companies in the short and mid-term by participating in the technological upgrade and digitalization across sectors in China.

Fig.1: Industrial robot sales growth, selected countries, CAGR 2010-2014 Source: International Robotics Federation (IRF), Ginkgo Tree Advisors

“China 2025”, or leaping from industries 2.0 and 3.0 to “Industry 4.0” is an imperative of China’s economic development policy over the next years. Becoming more efficient in manufacturing, participating in the development of state-of-the-art technologies as well as staying a competitive global player are the rationales behind.

While everybody is talking about “Made in China 2025”, the Chinese counterpart to Germany’s “Industry 4.0” initiative, still not every CEO knows about the status, importance and potentials for German and Chinese companies operating in the relevant sectors. While the concept mostly affects traditional manufacturing processes, it also extends to alternative sectors and applications in healthcare, agribusiness and logistics, among various others. For China, inter-connected and intelligent manufacturing should result in efficiency gains, maintaining global competitiveness and strengthening innovation.

Industries related to this trend will be benefiting in the short- and medium term. Industrial automization, software, robotics and machine vision are all fields of opportunity.

By Daniel Koller, Managing Partner, Ginkgo Tree Advisors

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CHINA, AUTOMIZE!

Fig.2 : Industrial robot sales, selected countries, 2014 Source.: IRF, Ginkgo Tree Advisors

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Fig.3: Industrial robots per 10,000 industrial workers, 2014 (MIIT 2020 for China) Source: IRF, Ginkgo Tree Advisors

Coming back to industrial robots as the indicator for automization and market development, it becomes obvious that China has already transformed into the largest market of industrial robots worldwide. In 2014, the latest available figures as of today, a total of 57.096 industrial robots have been sold in China (Fig.2). What really illustrates the potential for Chinese and Western companies in keeping up with the fourth industrial revolution and participating in the developments in China over the next years is the “industrial robots per 10,000 industrial workers” ratio, often used to compare the degree of automization and robotics in the manufacturing process among different countries.

as well as b) reducing the amount of industrial workers, thus increasing efficiency and competitiveness, but putting more pressure on labor markets at the same time. In the short- and medium term, “Made in China 2025” will bring opportunities for European and Chinese companies who are active in the “Industry 4.0” related fields of industrial automization, robotics, machine vision, sensors as well as in the related sectors of traditional manufacturing, healthcare, agribusiness and logistics. In the long term, China will sustain and increase its global competitiveness and technological base. Companies failing to adapt will be left behind, no matter if Chinese or European.

According to that ratio, Korea currently is the most “automized” country in the world with a ratio of 478. Japan and Germany follow suit with 314 and 292, respectively. Compared to that, China’s “industrial robots per 10,000 industrial workers” ratio was 36 in 2014! (Fig.3) As part of the “Made in China 2025” initiative, the Chinese Ministry of Industry and Information Technology (MIIT) has given out the goal of that ratio to be 100 by 2020. This will be achieved by a) employing more industrial robots (increase levels of automization, thus benefiting related industries as well as advance the “intelligent” manufacturing solutions)

China MIIT objective: 100 by 2020

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CHINA 2015 - 2025: ECONOMY UPDATE

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CHINA 2015 - 2025: CHINA ECONOMY UPDATE

BY HUARAN INVESTMENT CONSULTING GROUP CHINA 2015: THE ECONOMY IS STILL SLOWING DOWN GDP growth adjustments since 2012 China’s GDP growth rate has been declining since 2012. In 2015, the official GDP was CNY 67.671 trillion, the GDP growth rate dropped from what is 7.3% in 2014 to 6.9%. According to the latest official economy indexes of November 2015, particularly the indexes of Industrial/Investment are significantly lower than expectation. The growth of Industrial Added Value is only 5.9%, while the PMI Index has been lower than 50 for the last 5 months. Now, China has entered from High-Speed Development Era (GDP Growth Rate > 9%) to Normal-Speed Development Era (7%> GDP Growth Rate > 5%) and may maintain at this Normal-Speed for the next decade.

Fig.1: GDP Growth Rate in % Source: HICG, National Bureau of Statistics of PRC

Fig.3: GDP Composition Source: HICG, National Bureau of Statistics of PRC

Annual Growth Quarterly Growth

Fig.2: PMI Diffusion Index in % Source: HICG, National Bureau of Statistics of PRC

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CHINA 2015 - 2025: CHINA ECONOMY UPDATE

Fig.5: Export / Import, China, (USD bn, quarterly adjusted) Source: HICG, National Bureau of Statistics of PRC

Fig.4: CPI Index, China (YoY in %) Source: HICG, National Bureau of Statistics of PRC

"MADE IN CHINA 2025" PLAN IS OFFICIALLY ANNOUNCED

On 19th May 2015, the Chinese Prime Minister Mr. Li Keqiang approved and signed the "Made in China 2025" Plan. This will be the action programme for China to implement the manufacturing strategy for the next decade. "Made in China 2025" Plan targets at 10 key sectors to promote the development of our strength and strategic industries. The 10 key sectors are New Information Technology, Numerical Control Tools & Robotics, Aerospace Equipment, Ocean Engineering Equipment & High-Tech Ships, Railway Equipment, Energy Saving & New Energy Vehicles, Power Equipment, New Materials, Biological Medicine & Medical Devices, and Agricultural Machinery. We can predict that the Chinese enterprises will inject significant investments and make numerous overseas M&A transactions in the sectors above in order to penetrate into the market and innovate.

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CHINA 2015 - 2025: CHINA ECONOMY UPDATE

INTERNATIONALIZATION OF CHINESE YUAN On 30th Nov 2015, International Monetary Fund (IMF) announced that the Chinese Yuan (CNY/RMB) will be concluded as the fifth currency in the Special Drawing Right (SDR) basket, sequential to British Pound, Euro, Japanese Yen and US Dollar. This is a milestone for the internationalization of CNY, indicating CNY can be the major deposit currency globally. Soon after, IMF confirmed that the weight of CNY is 10.92% in the SDR basket, exceeding British Pound and Japanese Yen. This is a strong signal as the recognition of the Chinese economy in the last 37 years since the Reform and Opening Up, as well as the beginning of the new era of Chinese economy. Currently, CNY is adopted as the payment and settlement currency among some Asian countries. While the "One Belt and One Road" brings the trading opportunities to the neighbor countries of China, it also injects the new dynamics for the internationalization of CNY. It is widely accepted, that the CNY will be adopted by more Asian countries even some European countries.

M&A TRANSACTIONS CLIMBS TO A NEW HEIGHT IN CHINA As China is now the second largest economy in the world, there are leading players in each industry. With the maturing capital market and flourishing intermediary platforms, cross border transaction is becoming an option for Chinese enterprises in terms of business development. Under the circumstance of the economic transformation, the Chinese government also supports the domestic enterprises to restructure or internationalize via cross border transactions. In the 1st half of 2015, as 4,559 transactions were closed, more than USD 352 billion is involved in the M&A transaction in China Mainland, which increased 57% than what of the 2nd half of 2014. We can expect that the amount of transaction and capital involved shall reach a new height in 2015 in China. OUTBOUND M&A ACTIVITIES SPEED UP In Finance, Mechanical, Construction, Chemistry, Automotive and other sectors, some Chinese giants have the capability to precede a cross border M&A transaction. Meanwhile, the Chinese local financial advisors are rising up to provide comprehensive cross border M&A advisory services and financing approaches with the support of Silk Road Foundation, AIIB, Bank of BRICS and other policy banks. These objective conditions are helping the Chinese enterprises to speed up their cross border M&A activities. OUTBOUND M&A ACTIVITIES SPEED UP In Finance, Mechanical, Construction, Chemistry, Automotive and other sectors, some Chinese giants have the capability to precede a cross border M&A transaction. Meanwhile, the Chinese local financial advisors are rising up to provide comprehensive cross border M&A advisory services and financing approaches with the support of Silk Road Foundation, AIIB, Bank of BRICS and other policy banks. These objective conditions are helping the Chinese enterprises to speed up their cross border M&A activities. For the 1st half of 2015, 174 of cross border transactions were closed, which was 17% higher than what of the 2nd half of 2014. In addition, private companies played an important role during the period. Transactions involved private companies increased 50% while the monetary value increased 148% than what in the 2nd half of 2014.

M&A

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CHINA 2015 - 2025: CHINA ECONOMY UPDATE

SHIFTING LANDSCAPE The landscape of cross border for Chinese enterprises is changing. In the past decade, the proportion of transactions involving energy and natural resource has been declining. By contrast, industrial goods, high-tech, consuming goods and financial services has been souring up for the last 3 years. According to the research of BCG and our analysis, only 20% of outbound transactions were aiming at acquiring energy and other strategic natural resources, while more than 75% of transaction were targeting at the technology, brands and foreign markets in the last five years. Nowadays, the major players for outbound M&A activities are shifting from large State Owned Enterprises to private enterprises and financial investors. Private enterprises and financial investors prefer to invest in the brands and technologies in the mature markets such as North Americas and Western Europeans. Therefore, North Americas and Western Europeans are the core markets for outbound investment by now. However, with the implementation of "One Belt and One Road", the target market of outbound M&A may gradually switch to Mid-Asia, Southeast Asia, Eastern Europeans and other countries along the route. After years of high growth, the Chinese economy has entered into a Normal-Speed Development Era (7%> GDP Growth > 5%). With the maturity of traditional industrial giants and rising of the high tech enterprises, M&A transactions will stay active. Outbound transaction is now a reasonable option as an approach of global business development for Chinese enterprises. Shanghai Huaran Consulting will carry on assisting the Chinese enterprises to set up and implement M&A strategies and realize the internationalization of Chinese enterprises.

ABOUT THE AUTHOR James C. Zhao is Partner at Shanghai Huaran Investment Consulting Co. Ltd. (HICG) and possesses more than 10 years of transaction experience in Japan, Canada and China. He is responsible for global deal sourcing in automation sectors and has successfully completed more than 10 M&A transactions with an aggregate deal size exceeding USD 900 million. Shanghai Huaran Investment Consulting Co., Ltd. was founded in 2008, specializing in offering cross-border M&A strategies and transaction advisory, post-merger-integration. Huaran has a very experienced team with proven track record of cross-border transactions, integration & restructuring and enterprise management. Partners of the firm each have more than 20 years of corporate development experience with major multi-national corporations. Leveraging the experience of its managing partners, Huaran has distinguished itself from its competitors by offering full-services related to cross-border M&A transactions, ranging from assisting its clients with M&A strategy formulation, corporate development organizational set-up, execution of M&A transactions and integration. Huaran focuses on the transaction/investment opportunities in Automation, Automotive Parts, Healthcare and related sectors worldwide. Following the trend of the latest development in these sectors, Huaran is able to offer the frontier insight to its clients. The strategic cooperation of Ginkgo Tree Advisors and Huaran extends to Chinese outbound transactions as well as due diligence services in China.

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COMPANY PROFILE

Daniel K. Koller, Managing Partner Email: dkoller@ginkgotree-advisors.com Phone: +49 (0) 211 3013 2187 OFFICE DÜSSELDORF OFFICE MUNICH LIASON OFFICE BEIJING Königsallee 106 8/F, Fünf Höfe Tower 81, Suite 233 40215 Düsseldorf Theatinerstr. 11 No.4 Workers Stadium North Rd. Germany 80333 Munich Chaoyang, Beijing 100027 Germany P.R. China info@ginkgotree-advisors.com www.ginkgotree-advisors.com

GINKGO TREE ADVISORS Ginkgo Tree Advisors is a strategic M&A advisory firm headquartered in Munich and with offices in Düsseldorf and Beijing. Our firm’s unique advisory focus is on China’s internationalization. Ginkgo Tree Advisors provides strategic and M&A advisory services to corporations & entrepreneurs, institutional investors as well as the public sector from China, Germany and Switzerland, supporting clients with their challenges of internationalization and cross-border activity. Our sectoral focus is on the TMT and healthcare sectors. We possess a deep understanding of the Chinese and European markets, we work solution-driven and implementation-focused and are able to utilize our global partner network, which makes us a trusted advisor to our clients.