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June 2016 | Confidential

Oversea M&A of China Characteristics and Trends

Tommaso Lazzari, Tanya Wen, Bruce Li

• 2015 was a record breaking year for Chinese outbound M&A activities with 382 transactions valuing USD 59

billion. The first 5 months in 2016 have already seen more deals announced than 2015 with a total value of USD

98 billion.

• The prosperity of a sector is in strong relationship with the country’s strategy and government’s development

plan, as detailed in China’s 5-Year Plan; Policy plays an important role not only affecting the economy but also

affect the M&A target preference

• Most sought after sectors are: Industry 4.0 including Robot & Industrial Automation, Healthcare

clinics/medicine/medical equipment, Automotive Companies (especially new energy cars), high tech energy

(e.g. renewable energy storage), environmental and environmental protection

• The number of China outbound M&A deals in Europe has overtaken the ones in North America in recent years.

The most active markets in Europe include UK, Germany, Italy, France and the Netherlands.

• Countries with strong performance in export and manufacturing activities, in both consumer market and

production market, are more likely to be targeted.

Chinese outbound M&A activities have boomed in recent years. However the characteristics and trends are changing. Our analysis sheds light on the direction of these M&A activities going forward.

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Introduction

China Outbound M&A Overview

2015 was a record breaking year for the number of Chinese outbound M&A deals and the trend looks to increase even more in 2016

• Prior to 2013, China outbound M&A were dominated by state owned enterprises investing in large natural

resources and infrastructure projects. In the last two years, more and more private sector businesses are

making acquisitions overseas for strategic reasons.

0

50

100

150

200

250

300

350

400

450

2011 2012 2013 2014 2015 2016 Jan-May*

China Outbound M&A Volume (No. of Deals)

0

20

40

60

80

100

120

2011 2012 2013 2014 2015 2016 Jan-May*

China Outbound M&A Value ($ Billion)

* Announced deals and deal values Source: Dealogic

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Most Requested Sectors

(2016)

Mentioned in

11th 5-Year Plan

(2005-2010)

Mentioned in

12th 5-Year Plan

(2011-2015)

Mentioned in

13th 5-Year Plan

(2016-2020)

Environmental Yes Yes Yes

New Energy Yes Yes Yes

Automotive Yes No Yes

Medical and Healthcare* No Yes Yes

Robot (Industrial 4.0) No No Yes

Automation (Industrial 4.0) No No Yes

Real Estate No No No

Food and Beverage Yes No Yes

• All the current most required sectors are mentioned in the latest China’s 5-Year Plan, while Real Estate

industry was mentioned only for the domestic market. And compared with previous year’s hot sectors, we

find the new sectors are highly inspired by the policy

• Intelligent Industrial (industrial 4.0) are new concept and it is also mentioned in a certain way in the latest

5-Year Plan

All the current most requested sectors are mentioned in the latest Chinese 5-Year Plan except real estate

4

Current Buyer Demand & China’s 5 Year Plan

Mid market deals in the range of €50-€400m are the most active space of Chinese outbound M&A

5

• Middle sized market

is the most active,

from €50m to

€400m, has the most

number of deals.

• Activities in the

middle market are

predominantly led by

strategic and

financial buyers

31 18

32 17

7 3

0 20 40

Computer softwareManufacturing (other)

Consumer: OtherComputer: Semiconductors

MediaComputer services

< €50m

16 14

13 7

3 1

19 15

0 5 10 15 20

Consumer: RetailServices (other)

AgricultureMedical

Industrial automationDefence

ConstructionIndustrial: Electronics

€ 50m-150m

102 23

16 49

72 14 21

9 7

0 100 200

MiningChemicals and materials

TransportationAutomotive

Industrial products and…Real Estate

LeisureMedical: Pharmaceuticals

Biotechnology

€ 150m-400m

3

109

3

8

5

6

17

0 50 100 150

Telecommunications:…

Energy

Computer: Hardware

Telecommunications:…

Internet / ecommerce

Utilities (other)

Consumer: Foods

Over € 400m

Average Deal Size by Sector

Economic Factors Attracting Chinese Capital

Notes: 1) CPI: Consumer Price Index; PPI: Producer Price Index; GDP: Gross Domestic Product; 2)M&A number is the number of M&A deals completed two

years after the base year(2014). Central bank rate, CPI yoy growth, PPI yoy growth, GDP growth, Export and Import Amount, Unemployment rate, and Public

expenditure are the figures of the base year(2014)

Higher levels of Export and Manufacturing are main factors attracting outbound M&A from Chinese investors in advanced economies including Germany and Italy

• We developed a regression model to test the key factors affecting a target country’s ability to attract investment

capital from Chinese investors based on actual historical outbound Chinese M&A data

• Inflation, Export and Producer Price are significantly positively related to investment capital from China:

• Inflation or rising asset prices generally signifies attractive investment destination

• Higher export implies competitive advantages in technology, resources, reputation, policies and etc. In

fact, our model also shows that import is a negative factor for attracting Chinese investment capital

• Most attractive targets for Chinese companies are in manufacturing industries in developed economies

• GDP growth, Central Bank rate, Public sector expenditure are insignificant factors

These factors explain why advanced European economies including Germany and Italy are popular

destinations for outbound M&A activities from China

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M&A number = 𝐶 + 𝑎1𝐶𝑒𝑛𝑡𝑟𝑎𝑙 𝐵𝑎𝑛𝑘 𝑅𝑎𝑡𝑒 + 𝑎2𝐶𝑃𝐼𝑌𝑂𝑌 + 𝑎3 log 𝐸𝑥𝑝𝑜𝑟𝑡 + 𝑎4 log 𝐼𝑚𝑝𝑜𝑟𝑡 + 𝑎5𝐺𝐷𝑃𝑌𝑂𝑌 + 𝑎6𝑃𝑃𝐼𝑌𝑂𝑌 +𝑎7 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡 + 𝑎8(𝑃𝑢𝑏𝑙𝑖𝑐 𝐸𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒)

Analysis of China Outbound M&A Activities

Geographic Perspective

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Major China Outbound M&A Destinations

The number of China outbound M&A deals in Europe has overtaken the ones in North America in recent years

• Both Europe and North America have seen a fast increase in number of outbound deals from China,

reflecting a trend away from natural resource driven outbound acquisition trend from China previously

• Most active markets in Europe include UK, Germany, Italy, France and the Netherlands.

0

10

20

30

40

50

60

70

2009 2010 2011 2012 2013 2014

China Outbound M&A in North America (No. of Deals)

0

10

20

30

40

50

60

70

2009 2010 2011 2012 2013 2014

China Outbound M&A in Europe

(No. of Deals)

8

M&A Deals Number In European Countries

Chinese Capitals are flowing more and more into Europe

• Average deal value reflects the level of deal size

• UK and Germany were among the top 5 target countries in terms of number of deals in all 3 years, which

means there are more large deals in these 2 countries

• Deal size in developed countries are not always larger than that of developing countries. Developing

countries ranked top here are always of ample nature resource

• Other than energy related countries, European countries also attract more deals in recent years.

9

0 10 20 30 40 50

2011

2012

2013Germany

UK

France

Italy

Netherlands

Others

Analysis of China Outbound M&A Activities

Sector Perspective

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Energy, Industrial and Automotive Sectors had the largest deal numbers.

0

10

20

30

2008 2009 2010 2011 2012 2013

Energy

0

10

20

30

2008 2009 2010 2011 2012 2013

Mining

0

10

20

30

2008 2009 2010 2011 2012 2013

Industrial Products and Services

0

10

20

30

2008 2009 2010 2011 2012 2013

Automotive

• Energy, Mining

Industrial and

Automotive

sectors have

largest number of

deals from 2008 to

2013

• The increasing

trend in Industrial

Products and

Services, and

Automotive

sectors is clear

and consistent

• Deal numbers of

Energy and

Mining tend to

fluctuate over the

years

0

10000

20000

30000

2008 2009 2010 2011 2012 2013

Energy

0

10000

20000

2008 2009 2010 2011 2012 2013

Mining

0

2000

4000

6000

8000

2008 2009 2010 2011 2012 2013

Industrial Products and Services

0

2000

4000

6000

8000

2008 2009 2010 2011 2012 2013

Automotive

• Top 4 sectors are the

same as that chosen

by deal numbers

• Total deal value of

Mining sector and

Industrial products

and services sector

are decreasing, and

the total deals value

in Automotive

industry boomed in

2010, but stayed flat

in other years

Million in USD

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Top Sectors by Deal Number and Value

• Based on our current buyer requests

which we collected interviewing over 300

people among investors and

entrepreneurs from China, we identified

the top four sectors as

• Manufacturing

• Medical and Healthcare

• Automobile\Aircraft\Ships

• Energy\New Energy\Mineral

Others, 32%

Over 60% of buyer requests from China concentrates in four key sectors, manufacturing, healthcare, automotive/aerospace and energy/new energy

Automobile, Aircraft, Ships 12%

Energy, New Energy, Mineral 12%

Infrastructure, Utilities 7%

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Medical, Healthcare 16%

Manufacturing, 21%

Current Buyer Requests From China

Industry 4.0 is the largest demand within manufacturing, and in turn Robot & Industrial Automation is the most demanded area within Industry 4.0

Industry 4.0, 69%

Devices & Machinery,

17%

Others, 14%

• Industry 4.0 is a highly sought after area,

due to the need of industrial upgrade

strategy of China.

• Robot & Industrial Automation is the most

important technology of Industry 4.0.

• Devices & Machinery are relative

traditional sectors with some overlap with

Industry 4.0 if integrated into a smart

industrial system

• Industry 4.0 is also emphasized in the

recent 5 Year Plan of the Chinese

government, a series of social and

economic development initiatives closely

followed by both state owned and private

enterprises.

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• Robot & Industrial Automation

• General-Industry 4.0 • Medical & Bio

Automation • Control Software

• Packaging • Military • Material

Buyer Demand by Sector - Manufacturing

Healthcare industry is fast rising in China and there is significant demand for related services, drugs and equipment

Healthcare Services,

26%

Pharma; 22%

Medical Equipment

; 22%

Others, 30%

• With the improvement of living standard

and the development of health

consciousness, Chinese firms and

investors are paying much more attention

to this field.

• In the 5 year plan, China also set

Healthcare as a key objective.

14

• Packaging • Military • Material

• Clinics • Dentist clinics • Plastics Clinics • Nursing centers • Etc.

Buyer Demand by Sector -Healthcare

New energy automotive is becoming increasingly in demand in recent years

Aircraft 6%

• Due to the extremely rapid growing

automobile market in China, this sector

has been and will be hot for a long time

• Within the Automobile sector, a fast

growing trend has been observed in New

energy automobile, this refers to

components for Electric Vehicles such as

batteries, power control systems and

sensors.

Multi-Applications 6%

15

Automobile; 38%

Buyer Demand by Sector – Automobile

High tech energy requests consist of more than half of all the energy and resources requests from Chinese buyers

High Tech Energy, 53%

Clean Energy, 29%

Traditional Energy, 18%

• High tech energy attracts most of

investor’s attention

• High tech and clean energy together

occupy nearly 80% deals in this sector

• This trend is reasonable considering the

volatile oil market in the previous

decades when China set energy as new

development focus in 5 year plan.

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• Hydropower, • Li-battery • Etc.

• Wind • Water

electricity

• Oil • Gas • Coal • Etc.

Buyer Demand by Sector - Energy & Resources

Environmental &

Environmental Protection,

70%

Social Infrastructur

e; 10%

Delivery & Express, 10%

• Environmental related utilities are most

requested for in this sector

• Environmental issues have been

discussed for decades

• Government’s attitude decides if it

become a fast-growing market

• The Chinese government has attached

greater importance to the worsening

environmental problems

Environmental related utilities are most in demand investment area in this sector

Construction Consulting, 10%

17

Buyer Demand by Sector - Infrastructure

• We expect the trend of Chinese outbound M&A activities in Europe to continue gather pace in the next few years.

• European countries with strong manufacturing and export oriented industries, including Italy, Germany and the UK, are most likely to attract investment capital from China.

• Based on our analysis of the current buyer requests from Chinese companies planning overseas M&A activities, it is interesting to note that the target sectors are highly consistent with China’s 5-Year Plan, which shows that the private sector investment direction are highly in line with the Chinese government’s overall development plan.

• Specifically our study found the most requested sectors are

o Industry 4.0 including Robot & Industrial Automation,

o Healthcare clinics/medicine/medical equipment,

o Automotive Companies (especially new energy cars),

o High tech energy (e.g. renewable energy storage),

o Environmental and environmental protection

M&A from Chinese investors in key sectors inline with China’s 5-Year Plan will continue to grow in major developed economies in Europe

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Conclusions

• China Merger March 2016

• Bloomberg: Great Leap Upward: Behind China's $100 Billion Shopping Spree

• Mergermarket: China Outbound M&A Outlook, May 4th 2016

• Dealogic: US Withdrawn M&A Volume at Record Annual High

• Dealogic: Global M&A Review First Quarter 2016

• Seta Capital M&A Survey

• China’s 13th Five Year Plan – Official Policy Document

• China’s 12th Five Year Plan – Official Policy Document

• China’s 11th Five Year Plan – Official Policy Document

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References

SETA CAPITAL S.R.L.S. Via Santa Maria Podone, 3 20123, Milan, Italy VAT No.: 08820030966

info@seta-capital.com www.seta-capital.com

TANYA WEN Managing Partner Email: twen@seta-capital.com Mob Italy: +39 388 8765341 Mob China: +86 152 2119 6726 TOMMASO LAZZARI Managing Partner Email: tlazzari@seta-capital.com Mob: +39 347 1507302

Contact Information

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