china opportunities: as a market and as an investor (jun 10)

8/8/2019 China Opportunities: As a market and as an investor (Jun 10)

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PricewaterhouseCoopers

China Opportunities:

As a market and as an investorJune 2010

PwC


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Section 1

Chinas Economy at a Glance


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0%

2%

4%

6%

8%

10%

12%

14%

2001 2002 2003 2004 2005 2006 2007 2008 2009

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

GDP(RMBinbillion

s)

China myth: continuous high growth (CAGR of 10%) and lessaffected by the global economic recession

Source: IMF, National Statistics Bureau of China

Accessionto WTO

Opening A-share markets

to foreigninvestors

China opportunities: as a market and as an investor

Global financialcrisis

GDP (2001 2009) Chinas Premier Wen Jiabao called 2009 a

scary year as its economic growth in Q1

plunged to 6.1%, the lowest quarterlygrowth for more than a decade

The impact of credit crunch in overseasmarket quickly reverberated in Chinas

export sectors, causing widespread factoryclose downs and industrial layoffs

Thanks to Rmb 4 trillion (US$586 billion)stimulus plan together with massive bankloans (Rmb 9 trillion), the economybottomed out in Q2 and reported around

8.7% growth for the whole year

Chinas 2010 first quarter GDP growth was

11.9% Y-o-Y


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Guangzhou

Beijing

Shanghai

ShenzhenHong Kong

and Chinas growth is still concentrated in the Eastern region

*Exchange rate of 6.82RMB/USD are used

2008 Foreign Direct Investment

2008 Urbanization Rate

2008 Disposable Income2008 Per Capita GDP

Western region:Inner Mongolia, Guangxi, Sichuan, Chongqing, Guizhou, Yunnan,Shaanxi, Gansu, Qinghai, Ningxia, Xinjiang, Tibet

Central region:Shanxi, Jilin, Heilongjiang, Anhui, Jiangxi, Henan, Hubei, Hunan

Eastern region:Beijing, Tianjin, Hebei, Liaoning, Shanghai, Jiangsu, Zhejiang, Fujian, Shandong,Guangdong, Hainan

USD inbillions

% ofTotal

East 78 85%

Central 7 8%

West 7 7%

Total 92 100%

RMB USD*

East 40,509 5,940

Central 20,462 3,000

West 18,421 2,701

National 26,464 3,880

RMB USD*

East 15,526 2,276

Central 7,916 1,161

West 6,720 985

National 10,054 1,474

%

East 56%

Central 43%

West 38%

National 46%

Source: Ministry of Commerce of China, China Economics Weekly



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-10

0

10

20

30

Jan-06

Apr-06

Jul-06

Oct-06

Jan-07

Apr-07

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

-10

-5

0

5

10

15

Sep-00 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09

CPI PPI

Meanwhile, CPI movement triggers some inflation concerns

The global economic slump has so farkept commodity and energy pricesrelatively low. In addition, bumperharvests in 2008 has kept grainprices down. 2009 is on track to beanother harvest year

As a result, CPI and PPI both fell in2009. However, as the execution ofpowerful stimulus economic policy,price index bounced upward in thebeginning of 2010

Any rapid and unexpected uptick in

CPI or PPI in 2010 may cause thegovernment to reverse its expansionpolicies (watch for CPI when it risesabove 3%)

Major Price Indices YoY Growth, Sep 00 Mar 10

%

Source: National Statistics Bureau, Bloomberg

Both CPI & PPI turned

to be positive since theend of 2009

Food Price YoY Growth, Jan 06 Mar 10

%

CPI: 2.4%(Mar 2010)



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-

500

1,000

1,500

2,000

2,500

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

0

20

40

60

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Greenfield M&A

Huge amount of foreign exchange reserves caused China toseek outbound direct investment

Source: National Statistics Bureau of ChinaThomson Reuthers

Chinas current account

surplus was reduced by one-third in 2009. Total foreignreserve asset was USD2.4trillion, a increase of USD453billion from 2008.

Drivers of foreign reserveincreases:

Historical trade surplus High net FDI inflows Speculative capital inflows

Chinese policymakersrealise that parking thebulk of their foreignreserves in the bonds ofover-indebted Westerngovernments will notgenerate the highestreturns

USDinbillions

USDin

billions

Chinas foreign reserve (1990 2010)

Chinas outbound investment (1990 2008)




The current leadership is seeking to take China to the next levelof economic development

Harmonious Society

- Gap between rich and poor getting too wide, social unrest

- Limits of low-cost export model reached

New Labour Contract Law in 2006

Focus on Indigenous Innovation to develop or acquire technology tomove China up value curve

- Combined with economic downturn which highlighted over-reliance onexport model and exposed private companies

- Impact has been to strengthen SOEs as government trusts them more

than private companies to fulfil policy




Section 2

China as a Market



27 25 21 21

244277

316

405

-

100

200

300

400

500

2005 2006 2007 2008

Number of SOEs Number of POEs

State-owned enterprises (SOEs) play a significant role in Chinaseconomy, while private sectors (POEs) have been growing inrecent years

Number of SOEs and POEs in China Output of SOEs and POEs (RMB in billions)

(inth

ousands)

8,3759,891

11,969 14,379

16,787

21,768

28,549

36,350

-

10,000

20,000

30,000

40,000

2005 2006 2007 2008

Output of SOEs Output of POEs

Source: National Statistics Bureau of China Source: National Statistics Bureau of China

5% of Chinese companies are SOEs, which contribute nearly 30% of Chinas total

output POEs, which have been growing in terms of number and size, are playing an

increasingly important role in Chinas economy




Chinas economy is dominated by SOEs

Source: PwC Analyses,

National industries (e.g. petroleum, infrastructure, mining, heavy industry,telecommunications, financing, airline, and etc.) are dominated by SOEs

As a result of historical planned economy and resource allocation

These markets got even more concentrated to SOEs as:

- Regulatory barrier for new entrants via licenses and restrictions;

- Active promotion of consolidation to eliminate capacities with less economy of scale;- Easy in getting resources (e.g. regulatory approval, bank financing)

- Closer relationship with central and local administration

SOEs are believed to be economic stabilizer for the administrator to manage and controlthe economy. A good example is that during the financial crisis, authorities seek tostabilize Chinas economic growth, through the initiative where SOEs are

advancing their stake in the economy while private businesses are retreating



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Fortune 500

Rank #Company Industry

Industy

Ranking

Revenue

(US$billion)

9 Sinopec Petroleum Refining 7 207.8

15 State Grid Utilites 1 164.1

92 ICBC Banking 15 51.5

99 China Mobile Telecommunications 8 70.6

133 China Life Insurance Insurance 5 54.5

170 Sinochem Trading 3 44.5

220 Baosteel Group Metals 5 35.5

242 China Railway Group Engineering, Construction 4 33.8

318 China National Offshore Oil Mining, Crude Oil Production 6 28.0

327 China Ocean Shipping Shipping 2 27.4

359 Shanghai Automotive Motor Vehicles & Parts 21 24.9

426 Aviation Industry Corp. of China Aerospace & Defense 11 21.7

From the 2009 Fortune Global 500 ranking, 2008 results

Actively promoting consolidation in 10 industries including Mining, Steel,Logistics, Automotive, Cement, Banking, Textiles, Pharmaceuticals, Power &Energy

Through consolidation and controls over new entrants, nationalchampions have been built from these large SOEs



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However, the administrator has been encouraging private capitalto previously restricted industries


The state council published Opinions on

Encouraging and Guiding HealthyDevelopment of Private Investment on

13 May 2010 to encourage private sectorcapital entering into six previouslyrestricted industries

Nevertheless, the window is opened

gradually in a managed pace. It could bemany years before we see all marketplayers compete at the same ground

Private companies with ready resourcesor technical knowhow related to the sixindustries may benefit from the emerging

market opportunities and could beattractive investment targets

Participating through M&A in thereorganisation and reform of SOEs inthese restricted industries can be ashortcut to enter

Six industries released to private sector:

Infrastructure: Transportation, water resource,electrical power construction, oil & gasconstruction, telecommunication construction,mining and etc.

Municipal utilities and housing: Economichousing, public leasing house, upgrade ofshanty town and etc.

Community service: Hospital, communitymedical care centres, clinic, rest home for theaged, educational and training institution, andetc.

Financial service: Commercial banks, urban &rural credit union

Wholesale and logistics: Commoditywholesale and retailing, modern logistics, chainstore, e-business, and etc.

Civil defence industry: participation in thereform of military equipment companies,outsourcing of R&D and manufacturing ofmilitary weapons



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Over-capacitated sectors (e.g. steel,cement, coke) have large volume ofmarket demand for infrastructure andhousing construction and are usuallyunrestricted to private capital

Private businesses have limitedselections of investments when national

industries are restricted. These sectorshave been the destination of excessiveprivate capital even they have been over-capacitated

The administration launched initiative toreduce excessive low efficiency capacitythrough promoting industry consolidationand rejecting inefficient new projects

and adjusting economic structure by depressing over-capacitated industries and promoting consumption


Efforts have been made to adjust theeconomic structure:

- Deregulating the national industries

- Upgrading industry to high valueadded with more high technology

- Encouraging service sector

- Develop the western provinces- Promoting low-carbon strategy and

encouraging green energy solution

- Stimulating domestic consumption

Private capital has great opportunity andpotential during the economic structure

upgrade process

Production Demand

Over-

capacity

% of Over-

capacity

Coke (million tons) 3,116 2,716 400 15%

Cement (million tons) 1,870 1,600 270 17%

Steel (million tons) 660 500 160 32%Polysilicon (tons) 20,000 4,000 16,000 400%

Plate Glass (million cases) 650.0 574 76 13%



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850

900

950

1,000

1,050

1,100

1,150

Jan-09

Feb-09

Mar-09

Apr-09

May-09

Jun-09

Jul-09

Aug-09

Sep-09

Rmbbn

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

yoygrowth%

Retail sales value (Rmb bn) yoy grow th

Chinese consumers are arriving with retail sales jumped inSep09 and consumer confidence continue to grow

Seasonal highdue to Chinese

New Year


Retail Sales Jan 2009 Sep 2009

84

85

86

87

88

89

Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09

Consumer Confidence Index


Uptick correspondsto jump in Retail Sales

8,065

2,528

8,856

2,733

-

2,000

4,000

6,000

8,000

10,000

Urban Rural1H'08 1H'09

Urban and Rural Household per capitadisposable income

Yuan




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Consumption structure is in a continuously rapid upgrade stage

Major drivers increasing consumption- Rapid growth of GDP per capita and personal dispensable income

- Changes of spending concept for the society as a whole

- Governments subsidy to rural population

- Fast growing urban population and overall population bonus

Major curbs on consumption growth

- High residential house price

- Underdeveloped social security system

- High education cost

Housing, auto and telecommunications are some of the largest spendingmarkets in China



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Section 3

Chinas M&A Market

Chi t iti k t d i t


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Disclosed Mainland China Deal Values and Volume

-

100

200

300

400

500

600

700

800

900

1,000

1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09

No.ofDeals

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

USDinmillions

Deal Values Deal Volume

Deal volume in China dipped in 1Q'09 but rebounded stronglyduring the remainder of the year

Driven by :

Liquidity through the governmentsstimulus package; Rmb9.6 trillion /US$1.4 trillion of loans were issued in2009

As most industries are fragmented,consolidation continues and'National Champions' are beingencouraged by the government

Go Global, utilizing their significantforeign currency reserves, theChinese government has encouragedthe State Owned Enterprises(SOEs) and private enterprises

(through bank loans) to expand

globally

Source: Thomson Reuters

Chinas M&A market has had a V-shaped recovery



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-

500

1,000

1,500

2,000

Jan-07

Mar-07

May-07

Jul-07

Sep-07

Nov-07

Jan-08

Mar-08

May-08

Jul-08

Sep-08

Nov-08

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

Mar-10

0%

10%

20%

30%

40%

50%

Sep-06

Dec-06

Mar-07

Jun-07

Sep-07

Dec-07

Mar-08

Jun-08

Sep-08

Dec-08

Mar-09

Jun-09

Sep-09

Dec-09

Mar-10

M1 Growth yoy M2 Growth yoy

0

4

8

12

16

20

Jan-07

Mar-07

May-07

Jul-07

Sep-07

Nov-07

Jan-08

Mar-08

May-08

Jul-08

Sep-08

Nov-08

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

Mar-10

as monetary policies of lower interest rates and RRR have

increased lending activities and money supply

Lending interest rate & RRR Monthly Loan Growth Jan 07- Mar 10

Short-term (1-3 year) base lending rate has been kept

at 5.4%Total lending surged in first half of 2009 and thebeginning of 2010 with a slow down in the middle Majority of borrowers are SOEs and large privatebusinesses M2 growth reached 39.0% in Jan of 2010, and thenfell down to 30.0% in March

M1 & M2 YoY growth, Sep 06- Mar 10

Lending Rate Bank RR%

Source: Bloomberg

Source: Peoples Bank of China

Source: Peoples Bank of China

Rmb bn Monthly Avg341

Monthly Avg522

Montly Avg731

16.0%

5.4%


Chi t iti k t d i t


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4%

5%

5%

7%

8%

10%

11%

14%

15%

19%

23%

40%

0% 10% 20% 30% 40% 50%

Textile

Plastic Products

Printing

Food

Raw Chemicals

Paper Making

PharmaElectronic

Beverage

Logistics

Steel

Auto

and continuous industry consolidation occurs in line with

enormous M&A opportunities in the highly fragmented industries

Drivers for consolidation include: Overcapacity

Economies of scale

Geographical development

Market share of top 5 companies:




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Chinese buyers are increasingly active for expansion

Mainland China Deal Volume

65% 66% 67%73%

69%75% 74% 77% 73% 77% 76%

82%

31% 29% 29%23%

27%21% 22% 19% 21% 18% 17%

14%

4% 5% 4% 3% 5% 4% 4% 4% 6% 5% 7% 4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09

Domestic Inbound Outbound


Domestic buyers are becomingincreasingly active as they are

continually focusing on expansion

Foreign buyers were focused ondealing with the impact of crisis andthus have decreased their M&Aactivities in China

Outbound activities are encouragedby Chinese government with its Go

Global strategy, but it is still a small

portion of M&A


Chi t iti k t d i t


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Chinas inbound M&A market - Investment through M&A is oneof the key channels for foreign businesses to enter China

In 2009, foreign buyers focused ondealing with the impact of crisis vs.expanding in China

China is still an attractive market for

inbound M&A activities, especiallywith the global economic recovery

Inbound M&A are diversified acrossindustries

Chinese materials and industrial

products sectors have always beenkey focus area of investment

-

50

100

150

200

250

1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

USDinmillions

Inbound Deal Value Inbound Deal Volume

Disclosed Inbound Deal Value and Volume

Source: ThomsonReuters


Chi t iti k t d i t


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Challenges exist in Chinas Inbound M&A Market

Regulation and enforcement

Industry structure and geographic scale

People versus systems

Partners and alliances

Compliance costs

Potential traps on financial information

Proper structuring

Intellectual property




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-

30

60

90

120

150

180

2005 2006 2007 2008 2009

Numberofannounceddealvolume

-

5

10

15

20

25

30

35

Discloseddealvalue(USD

inbillions)

Disclosed deal value Announced deal volume

Chinas outbound M&A is

evolving in a favourableenvironment !

Chinas outbound M&A market Strong growth to the recordlevel in 2009 but modest in terms of GDP penetration comparedwith other mature economies

China outbound M&ADisclosed deal value and announced deal volume of (2005-2009)


Note: Deal value in 2007 was pushed up by three mega investments to westernbanks, namely ICBC / Standard Bank (US$5.6 billion), CIC / Morgan Stanley(US$5 billion) and CIC/ Blackstone (US$3 billion)

The financial crisis has createdopportunities

Distressed assets

China is staying cash-rich in a post-financial crisis world

Chinas foreign exchange reserve is

used to make direct investment

Seeking to solve economic bottleneckby relocating some industries abroad

Chinese government is promotingChinas outbound M&A in aspects of

regulatory




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Chinas outbound M&A continued to grow in 1Q2010, with disclosed deal

value amounted to USD11.6 billion, a 863% increase compared with 1Q2009

Growing momentums remain

Resources sector will continue to be one of the focus areas, while

investment to auto, healthcare, agribusiness, media, bio-technology, clean

energy will increase Not only SOEs, but also more POEs will participate in the outbound M&A

activities (Geely/Volvo, Tencent/Digital sky, Shanda/Mochi Media, Jiangsu

Shagang/one Australian iron ore, etc.)

Chinese buyers will become more mature and practical concerning

outbound investment

Chinas outbound M&A will continue to grow with more

diversified industry focus




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Access new markets and acquiring resources & technology arethe primary incentives for Chinese companies to go out

Go global is a natural extension of thedevelopment path of Chinese companies

To develop new markets outside China and

intensify international presence

A secure supply of mining and natural-resource assets is a most important purpose

for Chinese companies to go out

Technologies and brands are many Chinese

buyers seek to improve their competitive

position in China (BAIC/SAAB, SergioTacchini, Fila, Kappa )

Making minority interest investment to a

strategic partner to consolidate partnership

and future corporation opportunity

Source: survey of 110 CEO of Chinese companies concerning potentialoutbound M&A plan conducted by Economist Intelligence Unit (The

Survey), A brave new world: The climate for Chinese M&A abroad

Economist Intelligence Unit 2010

What will be the main motivation ofyour outbound investment?

1. Access new markets 48%

2. Acquire resources 26%

3. Acquire technology and brands21%

4. Keep pace with domesticcompetitors

5%

5. Acquire talent n.a.

6. Comply with governmentpolicy

n.a.




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China outbound M&A were traditionally active in resource-richareas like Australia, Canada, while Investments in maturemarkets such as Europe is emerging recently

North America39

South America20

Europe34

Africa7

Asia46

Oceania38

Note: Number of completed China outbound deals (2007-2009)


European countries arefavourite hunting grounds formanufacturing-relatedtechnologies, especiallyGermany and Sweden

Chinese companies are keento buy German machineryand equipmentmanufacturers, as well ascar-component makers(BAIC/Saab, Geely/Volvo)

Chinese financial service

companies are also investinginto European counterpartsstrategic corporation as wellas managerial / operationexpertise (PingAn/Fortis)



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pwc

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