China International Private Equity Forum by ijs15435

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									    White and Lee
 Silicon Forest Forum:

Private Equity in China
 November 16, 2002



CHINAVEST
                          CHINAVEST
CHINAVEST HISTORY

 First American venture capital fund for China (1983)

 Raised over US $300 million across five funds;
  investments in more than 60 companies

 Backed by major institutional investors in the US and
  Europe - Verizon, IBM, John Hancock, Ford Foundation,
  UC Regents

 Combination of Chinese / American partners and
  professionals

 Offices in Beijing, Shanghai, Hong Kong, San Francisco,
  Taipei
                                              CHINAVEST
 BUILT BY CHINAVEST




SHANGHAI
REEFERCO




                      CHINAVEST
CHINAVEST INVESTMENT THEMES

 China as Producer
   • 1980s: Mfg base for exports to the US
   • Today: Mfg everything to the world
 China as Consumer
   • Consumption, disposable income growing
   • Branding increasingly important
 Horizontal China
   • Provincial, vertical barriers breaking down
   • Beijing evolving as a regulator - government weaning
     itself from owner/operator role
 High Growth Across Diverse Sectors
   • Economic growth linking manufacturing 
     logistics/distribution  branding  telecom and IT
                                                  CHINAVEST
INVESTING IN CHINA
 Do You Need a Partner?
   • Can establish WOFEs in most industries
   • Local partners can become competitors
   • Hire local management

 Managing Government Involvement
   • Horizontal China – Beijing becoming a regulator; moving
     away from owner/operator model
   • Government is Pragmatic – seeking ways to increase
     foreign participation, incrementally more lassez faire
   • Bottom-Up Investing – work with local government at
     municipal and provincial levels
   • As Competition – Prepare against unfair advantages;
     always deliver excellent quality and services

                                                  CHINAVEST
INVESTING IN CHINA
 China Risks Same As US Risks, but Unique
   • Market – Branding strategies key to combating
       hypercompetitive and product saturated environment
   •   Financial – Lack of banking services for private sector
       needs to be managed with careful planning
   •   Management – SOE legacy has created a population of
       unscrupulous executives
   •   Technology and IP – Laws are not strong enough yet to
       protect against IP infringement / reverse engineering
   •   Government – Regulatory / industry changes can lead to
       customer risks or new competitors
   •   Foreign Exchange – RMB will continue to be stable (in
       black market, RMB has higher value that US$)
   •   Economic – Can China insulate itself entirely from
       worldwide malaise (e.g. telecom)?
                                                   CHINAVEST
INVESTING IN CHINA
 Midsized Companies Premature for China Market?
   •   China is tactical, not strategic for midsized companies…
   •   Can better define their purpose in China
   •   Are more flexible and quick to adapt
   •   Easier to approach China as a “producer” and evolve
       operations to take advantage of China as a “consumer”

 Protecting Your Investment, Creating Returns
   • Control your destiny – always assure effective control of
     company through mgmt, shareholding, BOD
   • Repatriating profits allowable through current account,
     but limited means through capital account
   • Effective exits through capital markets limited today, but
     will improve over time

                                                     CHINAVEST
RECENT INVESTMENTS




Precision               Logistics /                  Branded               Telecom &
Manufacturing           Supply Chain                 Prod. & Services      Info Technology

Arima                   Chic Logistics               Virgin Radio          Newtone Comm
i) Leverage Taiwanese   i) Demand for 3PL            i) Consumer market,   i) Tech enhances
OEM/ODM know-how;       Services                     advertising growth    available services
ii) Growth market       ii) Int’l service at local   ii) Demand for new,   ii) Local team creat-
iii) Strong mgmt        cost                         fresh content         ing products for
team from Taiwan        iii) Strong local mgmt       iii) Exp mgmt team    worldwide distribution
iv) Exit in Taiwan      team, local know-how         who built VR UK       iii) Strong local mgmt
capital markets         iv) Trade sale -             iv) Trade sale        iv) IPO or trade sale
                        industry consolidation       for market entry
                                                                           CHINAVEST
TECHNOLOGY OPPORTUNITIES IN CHINA
 Basic Attributes We Look For – Technology that:
   • Delivers an immediate good to real customers who are
     willing to pay for it
   • Does not require substantial capex and has high operating
     leverage
   • Has worldwide applications and built according to
     international standards yet maintains cost advantage over
     foreign competition

 Attractive Sectors
   • Software: OSS, enterprise, logistics mgmt
   • Hardware: IC design, firewall/VPN, biometrics
   • Services: software outsourcing


                                                  CHINAVEST
CHALLENGES
   Longer time to grow revenue and create scale
   Fierce local and foreign competition
   Support infrastructure lacking – HR, Legal
   Reproducing US companies / business models
    without localization fails
 Limited access to domestic and US capital
    markets
 Narrow choice of financial tools
 Foreign exchange controls
 Liquidity for financial investors


                                                 CHINAVEST
    White and Lee
 Silicon Forest Forum:

Private Equity in China
 November 16, 2002



CHINAVEST
                          CHINAVEST
 Appendix Slides:
Macro Information




CHINAVEST
                    CHINAVEST
CHINA – MACRO INDICATORS

 China’s GDP continues to
                                                                                  China - GDP (US$bns)




   grow at a breakneck rate
                                 1,400                                                                                                      1,238.7
                                                                                                                                1,153.3
                                 1,200                                                                               1,074.9
                                                                                                  960.8     991.0
                                                                                        903.0
                                 1,000


    • Consistent year-on-year
                                                                           819.9
                                                                 706.3
                                     800
                                                       564.7


      performance of > 7%
                                     600     418.3

                                     400



    • 2002E GDP – US$ 1.24 bn
                                     200

                                     -
                                           1993      1994      1995       1996        1997       1998      1999     2000       2001       2002E




 China receives a substantial
                                                                            China - Actual FDI (US$bns)


                                                                                                                                            55.0


   portion of all FDI in Asia
                                     60

                                                                                       45.3       45.5                           46.9
                                     50
                                                                           41.7                             40.4      40.8
                                                                 37.5



    • Receives over 40% of all
                                     40                33.8
                                            27.5
                                     30


      FDI in Asia                    20

                                     10



    • 2002E FDI – US$ 55.0 bn    -
                                           1993      1994      1995      1996        1997       1998      1999      2000       2001       2002E




                                                                                                  CHINAVEST
CHINA – BALANCED ECONONY
 China increasing its share                    While demand at home
    of exports to the US                         drives domestic imports




Graphs drawn from CSFB Research Report dated
September 19, 2002                                            CHINAVEST
CHINA – PRIVATE SECTOR GROWTH
 Private sector expanding
   • Number of private enterprises have grown from 90,000 in
     1998 to over 2.3 million in 2001
   • While, the number of SOEs have decreased from 102,300
     in 1989 to less then 43,000 in 2002

 Private sector driving growth
   • Since 1980’s, the private economy has grown annually at
     a average rate of 20%, faster than 9.5% nationally
   • Estimated that private sector contributes about 33% of
     the country’s GDP (the other two thirds from SOEs and
     agriculture)
   • Private consumption expected to grow 6.0-7.0% annually
     for next five years

                                                 CHINAVEST
CHINA – RISE OF THE CHINESE CONSUMER
 Urban population of 350                       Increasing number of
   million with disposable                       Chinese traveling
   income                                        overseas




Graphs drawn from CSFB Research Report dated
September 19, 2002                                            CHINAVEST
CHINA – WTO & FOREIGN TRADE

 WTO will accelerate trade                % of Total Pacific Rim Trade with US
  flows, reduce smuggling, and
  increase tax revenues in China   60.0%               51.3%

                                   50.0%
 From January to October 2002,    40.0%
                                                                             35.3%   33.0%
  China’s foreign trade exceeded                   22.5%
  US$500 billion, up 19.7% from    30.0%                               21.8%

  last year                        20.0%
                                            4.3%
                                   10.0%
 Of Total Pacific-Rim Trade       0.0%
  between the region and the                   1995                        2001
  US, Greater China has                        China       Greater China   Japan
  exceeded Japan

                                                               CHINAVEST
CHINA AND US MARKETS
                                                                                             Cellular Subscribers (mms)
                        PC Unit Sales (mms)

                                                                                                144.8
                                                    47.0            160
  50                                      43.8                                                                                            127.0
                                                             42.5   140
                                                                                                                               109.5
  40                                                                120
                                                                                       85.3                          86.0
                                                                    100
  30
                                                                     80
                                                                     60       43.3
  20
                7.2      8.8                                         40
  10   4.9
                                                                     20
   0                                                                  0
             China                                 US                            China                                        US

                        1999    2000   2001                                                     1999      2000    2001



                                                                                               DVD Players Shipped (mms)
                      Cable Households (mms)


                                                                                                                                           12.7
                         90                                           14
 100            85
       80                                                             12
                                                              74
  80                                          69        69                                                                          8.5
                                                                      10

  60                                                                      8
                                                                                                   5.0
                                                                          6                                               4
  40                                                                                     3.0
                                                                          4
                                                                                2
  20                                                                      2
                                                                          0
   0                                                                                 China                                     US
            China                                  US
                                                                                                   1999    2000    2001
                        1999   2000    2001




                                                                                                                    CHINAVEST
  CHINA – CAPITAL MARKETS
   Markets Developing…                         But Are Overvalued
        • Shanghai and Shenzhen                  • Shanghai and Shenzhen
          Market Capitalization >                  trade at 40-50x P/E
          US$600 million                         • Hong Kong listed stocks
        • Combined liquidity                       still trading at discount
          greater than Hong Kong                   to A share listings




Graphs drawn from CSFB Research Report dated
November 8, 2002                                                CHINAVEST

								
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