Chinese Investment in European Distressed Assets

Sunday 6 December, 2015

Executive Summary:

This brief investigates current levels of Chinese investment into the EU. The larger macro-economic

perspective of the Chinese government and investors will be analysed and should be viewed in l ine with the

economic and geo-strategic goals of the Chinese government. This will be followed by specific data outlining:

- The countries where Chinese are investing;

- The sectors in which Chinese are investing; and

- Major state-owned enterprises (SOEs) and privately-owned enterprises (POEs) that are investing.

This research suggests that the hypothesis of Chinese firms systematically acquiring distressed assets from

European governments (specifically the PIGS nations) carries weight. Investment into energy, power and

util ities and infrastructure (i.e. the Piraeus port in Greece) seem to be targeted in l ine with the wider economic

and geo-strategic goals of the Chinese government. However, these transactions do not make up the majority,

with the bulk of transactions having been completed by POEs. This is in l ine with the overarching policies of the

Chinese government: encouraging greater involvement of the Chinese private sector in the domestic and

international marketplaces.

A l imitation of this analysis has been the lack of data directly i l lustrating whether assets purchased were

distressed or healthy.

1. Macro-economic overview – China:

- Chinese outbound foreign direct investment (OFDI) has increased from US$12.2 billion in 2005 to

US$116 billion in 2014. In 2014, total M&A transactions accounted for US$50 billion or 40% of all

OFDI.

- The determinants of this increased OFDI are multifaceted, however three major factors are:

1. The Chinese economy is shifting from reliance upon manufacturing, construction and government

spending towards a services economy. This requires specialised knowledge in technology and

services which can be gained from foreign acquisitions (i.e. the sale of Volvo to the Chinese

automotive company Geely in 2010 for US$1.8 bil l ion).

2. More liberalised domestic policies towards OFDI. In 1999 the Chinese government launched its

“Going Out” strategy encouraging Chinese firms to expand overseas to facil itate development of

the Chinese economy. In 2014 the government continued this policy by implementing a process

of registration instead of pre-approval for OFDI, leading to more than 800 foreign subsidiaries and

acquisitions being approved/registered by MOFCOM every month, compared to just 300 less than

two years ago.

3. The “One Belt, One Road” strategy, a key policy of the administration of President Xi Jinping,

which was first incorporated into official Communist party documents in late 2013. Its principal

aim is to boost connectivity and commerce between China and 65 countries with a total

population of 4.4 bil l ion by building infrastructure and boosting financial and trade ties. This

strategy is integral to the future growth and influence of the Chinese government, allowing it to

become more intertwined with overseas markets and to effectively challenge the US for

economic and military influence. A map detail ing this strategy can be seen below:

2. Key Statistics (Sources – ING Sino-Europe Outbound M&A Review and own research, unless otherwise

specified):

i . Chinese FDI into Europe reached US$24.9 billion in 2014, representing a y-o-y increase of 66%

from US$16.6 bil l ion.

ii . Europe is now into the sixth year of consistently high levels of Chinese FDI, with investment

averaging US$10 billion annually over each of the past four years.

Chinese investment into Europe reaches record high in 2014 – Baker & McKenzie

iii . According to the Chinese Ministry of Commerce, 2,000 Chinese firms currently operate in the EU,

employing 47,000 people with a total cumulative investment of US$40 billion (4 out of every 10

US$ invested by Chinese firms in developed countries).

iv. Chinese privately-owned enterprises (POEs) have been more active in Europe, accounting for 147

out of 227 transactions (or 65% of all transactions) between 2013 and 2015 (see figure 1 below).

Figure 1 – Total Volume of Transactions: SOE vs POE

0

20

40

60

80

100

120

140

160

2013 2014 1H 2015 Total

SOE POE Undisclosed

v. However, SOEs have been involved in larger transactions, with the 8 largest transactions over

the same period being completed by SOEs; although in a higher volume as they have greater

financial capacity and undertake operations that are strategic for the Chinese government (see

figure 2 below).

Figure 2 – Top 10 Largest Transactions (2013-2015)

Chinese Company

Period Value of Transaction (US$ millions)

Asset/Company Purchased

Country Sector SOE or POE?

1. China National Tire

& Rubber (Parent Company - ChemChina)

2015 8800 Pirell i & C SpA, Italian-based

manufacturer of automobile tires

Italy Automotive SOE

2. China

National Petroleum Corp

2013 5000 8% stake in the

Kashagan oil project in the Caspian Sea

Kazakhstan Energy SOE

3. State Grid Corporation of

China

2014 2800 35% stake in CDPReti Srl,

operator of the Italian gas and power grid

Italy Power and Util ities

SOE

4. COFCO 2014 2500 51% stake in Dutch

commodities trader Nidera Handelscompagnie BV

The

Netherlands

Agriculture SOE

5. Dongfeng

Motor Corp

2014 2200 28% stake in

Peugeot SA, holding company of French motor vehicle manufacturer

Peugeot Citroen

France Automotive SOE

6. China Investment Corporation

2013 2000 Convertible bonds of Russian potassium fertil izers producer

Uralkali OAO (convertible to 12.5% stake)

Russia Industrial SOE

7. JAC Capital (Parent

Company - Central Huijin)

2015 1800 RF Power business (high performance

RF power amplifier) in the Netherlands-based NXP

Semiconductors NV

The Netherlands

Industrial SOE

8. Jinjiang International Holdings Co Ltd

2014 1500 100% stake in Groupe du Louvre, a France based operator of luxury

and budget hotels in Europe

France Consumer SOE

9. Fosun International

2014 1400 80% stake in 3 Portuguese state-

owned insurance companies: Fidelidade, Cares and Multicare

Portugal Financial POE

10. Cheung

Kong Infrastructure Holdings Limited

(Consortium, all owned by Li Kashing)

2013 1300 AVR-

Afvalverwerking B.V. - a Dutch based waste processing service provider

and waste energy producer

The

Netherlands

Industrial POE

vi. Between 2013 and 2015 Italy, Spain and Portugal ranked 1st, 6th and 7th respectively in terms of

distribution of transactions by deal value. However, Germany, the UK and France remain the

most attractive destinations for FDI in terms of deal volume.

Figure 3 – Top 10 Target Country: Distribution by Deal Value (US$ millions)

Country 2013 2014 1H 2015 Total Percentage Total

1. Italy 169 4123 9386 13678 29

2. France 578 6493 123 7194 15

3. UK 2392 3211 1319 6922 15

4. Netherlands 1679 2976 2182 6837 15

5. Germany 1152 2534 440 4126 9

6. Portugal 123 2652 0 2775 6

7. Spain 1042 611 52 1705 4

8. Switzerland 291 62 1269 1622 3

9. Norway 778 638 0 1416 3

10. Turkey 0 364 385 749 2

Total 8204 23664 15156 47024 100

Figure 4 – Top 10 Target Countries: Distribution by Deal Volume

Country 2013 2014 1H 2015 Total Percentage Total

1. Germany 18 21 11 50 27

2. UK 15 13 8 36 19

3. France 7 9 6 22 12

4. Italy 5 10 7 22 12

5. Netherlands 5 2 6 13 7

6. Spain 3 8 1 12 6

7. Switzerland 3 2 5 10 5

8. Russia 5 1 3 9 5

9. Portugal 3 3 0 6 3

10. Sweden 2 0 3 5 3

Total 66 69 50 185 100

vii. Between 2013 and 2015, the industrial, power and utilities and real estate sectors were the most

attractive sectors for FDI in terms of both value and volume. However, there is growing

investment in the consumer, technology, media and telecommunications (TMT), finance and

healthcare sectors.

Figure 5 – Top Target Sectors: Distribution by Deal Value (US$ millions)

Sector 2013 2014 1H 2015 Total Percentage Total

1. Industrials 4609 5489 9664 19762 35

2. Energy, Power and Util ities

6939 3202 481 10622 19

3. Real Estate 2655 4629 1175 8459 15

4. TMT 269 2236 3236 5741 10

5. Financial 23 3943 324 4290 8

6. Consumer 1397 1194 297 2888 5

7. Agriculture 0 2533 10 2543 4

8. Natural

Resources

0 1297 150 1447 3

9. Logistics and Transportation

770 398 0 1168 2

10. Healthcare 0 0 262 262 0

Total 16662 24921 15599 57182 100

Figure 5 – Top Target Sectors: Distribution by Deal Volume

Sector 2013 2014 1H 2015 Total Percentage Total

1. Industrials 34 24 19 77 34

2. Consumer 16 12 4 32 14

3. TMT 7 8 11 26 12

4. Real Estate 10 9 4 23 10

5. Energy, Power and Util ities

9 10 3 22 10

6. Financial 3 10 4 17 8

7. Healthcare 0 3 7 10 4

8. Logistics and Transportation

3 6 1 10 4

9. Natural

Resources

0 4 2 6 3

10. Agriculture 0 2 1 3 1

Total 82 88 56 226 100

viii . Below is a l ist of the most active investors between 2013 and 2015. The major SOE investors represent aerospace, shipping, energy, finance and construction industries, which are vital

national security industries of the Chinese government:

Figure 6 – Most Active Chinese Investors by Deal Volume (SOEs Highlighted)

Company Sector Total SOE or POE

1. Fosun International Conglomerate (industrial operations, investment, asset

13 POE

management, insurance)

2. HNA Group Aerospace 6 SOE

3. Aviation Industry Corporation of China

Aerospace and Defence

2 SOE

4. BlueFocus Advertising and PR 2 POE

5. China International Marine Containers Shipping 2 SOE

6. China National Chemical Corporation Petroleum and Chemicals

2 SOE

7. China National Petroleum Corporation Petroleum and

Chemicals

2 SOE

8. Henergy Solar Energy 2 POE

9. Pacific Andes International Seafood 2 POE

10. ICBC Finance 2 SOE

11. Sino Construction Construction 2 SOE

12. Haitong Securities Finance 2 SOE

13. Anbang Insurance Group Insurance 2 POE

14. Dalian Wanda Conglomerate (hospitality, retail ing, property development,

tourism, cultural industry)

2 POE

15. China Medical System Healthcare 2 POE

3. Conclusions:

- The hypothesis of Chinese firms systematically acquiring distressed assets from European

governments (specifically the PIGS nations) carries weight:

o The governments of Portugal, Italy and Spain have actively lobbied the Chinese government for

investment.

o Of the 15 largest Chinese transactions between 2013 and 2015, 2 were of distressed assets in

Italy and Portugal (see figure 2).

o Figure 3 above shows that Portugal, Italy and Spain represent large proportions of investment

for Chinese companies. Further investments can be seen below:

Italy - Over the last few years, the Chinese government has acquired minority interests in

landmark Italian firms through the sovereign wealth fund SAFE and the Chinese Central

Bank, enabling the Italian government to dispose of assets at an attractive price. These

investments included a stake of 2.1% in oil and natural -gas company Eni SpA and 2.07% in

util ity Enel SpA in 2014, worth US$2.76 bil l ion.

Portugal - Chinese investment has played a crucial role in the success of Portuguese

privatisations, accounting for 45 per cent of the €9.2 bil l ion the country has raised from

state sell-offs over the past three years, a total that is almost double the target set as part of

the country’s international bailout programme.

o These further transactions are pending:

China Ocean Shipping Corporation’s bid for a majority ownership stake in the Port of Piraeus

in Greece.

Haitong Securities’ acquisition of Banco Espirito Santo in Portugal.

A potential sale of Spanish gas distributor Madrileña Red de Gas SAU to an investment arm

of China’s central bank.

o All of these investments serve the economic and geo-strategic interests of the Chinese

government:

Aerospace, shipping, energy, finance and construction in these countries (see figure 6) are

integral to the “One Belt, One Road” Strategy.

Investment in Spain and Portugal allow the Chinese an avenue to expand their influence

into South America.

- However, the majority of transactions have been undertaken by POEs instead of SOEs. This reflects

the Chinese government’s efforts to facilitate the expansion of POEs overseas to bring advanced

technologies and expertise back to China. This can be seen in in figure 1, with the growing number of

POE-lead transactions in Europe and figure 4, with the growing investment in the consumer,

technology, media and telecommunications (TMT), finance and healthcare sectors.