inside caltech example of private placement activity in china industrial relations center december...

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Inside Caltech Example of Private Placement Activity in China Industrial Relations Center December 5, 2013 Tom Korzenecki, Principal Managing Director Grand Avenue Capital-Asia Member FINRA (NASD)

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Typical Factors found in Chinese Companies Complex ownership relationships involving private parties and individuals, state ownership and public entities For the most part, exports from China meet or exceed Quality, Product Performance, and Technical requirements, typically at lower cost Banking relations are looser relative to Western practices….credit, number of lenders to individual companies, high leverage…… fast growing companies need equity to ultimately go IPO offshore Tax advantages and 5-year tax holidays for “high tech” industries and those catering to exports: 0% - 15% -15% -30% -30%......new subsidiaries will start 0% tax rate again Labor rates are low: $0.65/hr straight time typical….straight time + overtime ~ 300 hours per month……$0.87/hr blended rate….Shanghai (western areas less) Management typically has strong work ethic, driven, entrepreneurial and much wealth being created laws and regulations favor controlled capitalism but are in flux, changing gradually Growth rates and CAPEX seem to defy Western paradigms….the idea that capital intensive businesses can be perpetually over capacity hasn’t sunk in Inside Caltech

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Inside Caltech

Example of Private Placement Activity in China

Industrial Relations CenterDecember 5, 2013

Tom Korzenecki, Principal Managing DirectorGrand Avenue Capital-Asia

Member FINRA (NASD)

Typical Factors found in Chinese Companies

• Complex ownership relationships involving private parties and individuals, state ownership and public entities

• For the most part, exports from China meet or exceed Quality, Product Performance, and Technical requirements, typically at lower cost

• Banking relations are looser relative to Western practices….credit, number of lenders to individual companies, high leverage…… fast growing companies need equity to ultimately go IPO offshore

• Tax advantages and 5-year tax holidays for “high tech” industries and those catering to exports: 0% - 15% -15% -30% -30%......new subsidiaries will start 0% tax rate again

• Labor rates are low: $0.65/hr straight time typical….straight time + overtime ~ 300 hours per month……$0.87/hr blended rate….Shanghai (western areas less)

• Management typically has strong work ethic, driven, entrepreneurial and much wealth being created

• laws and regulations favor controlled capitalism but are in flux, changing gradually

• Growth rates and CAPEX seem to defy Western paradigms….the idea that capital intensive businesses can be perpetually over capacity hasn’t sunk in

Inside Caltech

Jushi Related Shareholder Profile

Other compositebusinesses

3.7%

32% 41.7%

22.6%James Tang

59.9%100%

15.1%25%

99%1%

43%

57%

Surest Corporation(BVI Company)

Public Shareholders

China Fiberglass Co., Ltd. Public CompanyShanghai exchange

China National Building Materials Co. Ltd Hong Kong Stock Exchange

Zhenshi Group Co. Ltd.(management group)

Jushi Group Company Ltd.

Chendu CityFiberglass

Juijiang CityFiberglass

Typical ownership: state, individuals inside/outside PRC, public companies…..often all together….high complexity

Fiberglass Cost ComparisonsChina Production vs. Western Competitor$USD/mt delivered in the US

DifferenceCost Category Western Competitor CPIC $/mt %

Raw materials $262 $206 $56 -21%

Energy 197 119 78 -40%

Direct Labor 159 23 136 -86%

other manufacturing(includes sizing) 120 100 20 -17%

SG&A costs 196 69 127 -65%

Transportation 0 178 -178 -

Total Cash Costs $934 $695 $239 -26%

CPIC Revenue, $USD

0

20,00040,000

60,000

80,000100,000

120,000

140,000160,000

180,000

Rev

enue

, $US,

00

0

CPIC Revenue 807 1,454 1,187 6,235 6,956 8,723 26,920 40,812 73,696 115,20 169,70

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Elements of China-based private placements

• Private Equity groups seeking 30+% IRR…holding periods less than in West

• How to exit remains primary consideration…..IPO offshore preferred, but IPO inside PRC not unattractive now…..69x average PE Shanghai exchange.

• control investments are less likely desired by investee…..substantial minority investments are the norm…..very unlike PEG in West

• politically sensitive “national treasure” industries or companies are harder to invest in (Carlyle in PRC equivalent of CAT, banks, media, etc.) • PRC trying to accomplish in 15 years what we have accomplished in 100 years…..the Chery is coming to the US in 2009!

Inside Caltech