New chap­ter for M&A as ‘China growth’ story ends

Slow­ing econ­omy brings more rea­son­able val­u­a­tions for tar­get com­pa­nies, re­ports Xie Yu in­Hong Kong.

China Daily (Canada) - - BUSINESS -

Aslower econ­omy and the gov­ern­ment’s de­ter­mi­na­tion to squeeze out over­ca­pac­ity are of­fer­ing great op­por­tu­ni­ties for merger and ac­qui­si­tion ac­tiv­ity in China, ac­cord­ing to in­dus­try ex­perts.

“The end of the ‘China growth’ story is bring­ing the val­u­a­tion of tar­get com­pa­nies down to rel­a­tively rea­son­able lev­els,” said David Brown, part­ner and greater China pri­vate eq­uity leader with Price­wa­ter­house­Coop­ers.

The val­u­a­tions of Chi­nese com­pa­nies have been in­flated for many years be­cause they al­ways fore­cast strong or­ganic growth. But now that GDP growth is slow­ing to about 7.5 per­cent and growth at the company level is of­ten fall­ing amid in­tense com­pe­ti­tion and over­ca­pac­ity, things have changed.

“It is­a­good­time­for in­vestors like us,” said Hum­bert Pang, man­ag­ing prin­ci­pal and head of China at Gaw Cap­i­tal Part­ners, one of the big­gest off­shore pri­vate eq­uity funds fo­cused on the prop­erty seg­ment.

“Price cor­rec­tions will drive in­dus­try con­sol­i­da­tion and lead to ra­tio­nal val­u­a­tions for us to ac­quire good projects,” he said. Although China’s prop­erty mar­ket is un­der in­tense down­ward­pres­sure, with­some even fore­cast­ing a hard land­ing for the in­dus­try, more econ­o­mists and in­dus­try in­sid­ers said they be­lieve that op­por­tu­ni­ties and growth lie ahead in ma­jor ci­ties and promis­ing sec­tors such as lo­gis­tics.

“There are too many de­vel­op­ers in China, be­cause get­ting land and mak­ing money were easy be­fore. But more and more are strug­gling with slug­gish sales, pres­sure from banks and stretched bal­ance sheets this year,” said Lee Shu Yin, man­ag­ing di­rec­tor and chief in­vest­ment of­fi­cer of Grand River Prop­er­ties (China) Ltd, adding that his company had re­ceived re­quests for co-in­vest­ment.

A re­port from PwC said that in­bound M&As in China reached a record high dur­ing the first half of the year of $12.5 bil­lion, up from about $8.4 bil­lion in the sec­ond half of 2013. Cross-bor­der M&A vol­ume car­ried by Chi­nese com­pa­nies hit $40.8 bil­lion in the first three quarters.

“Cross-bor­der M&A is never easy in any mar­ket. As for China, the trick­i­est part is whether your tar­get company has sta­ble lead­er­ship and if the boss is de­ter­mined to do the deal,” said a se­nior part­ner with a Shang­hai-based cross-bor­der M&A firm who spoke on con­di­tion of anonymity.

The State Coun­cil, China’s cab­i­net, and the China Se­cu­ri­ties Reg­u­la­tory Com­mis­sion is­sued guide­lines in March and July, re­spec­tively, aimed at sim­pli­fy­ing and sup­port­ingM&As.

The di­rec­tives cut ad­min­is­tra­tive pro­ce­dures and bar­ri­ers re­lat­ing to M&As. The gov­ern­ment also urged all par­ties in­volved in M&As to im­prove the con­di­tions that af­fect those trans­ac­tions, such as fi­nanc­ing, taxes, land use­an­dem­ployee re­lo­ca­tion.

The na­tion’s lead­ers have re­peat­edly stressed their in­ten­tion to pur­sue re­form, which in­volves cut­ting ex­cess ca­pac­ity, forc­ing the trans­for­ma­tion of Sta­te­owned en­ter­prises and up­grad­ing the in­dus­trial struc­ture.

De­clin­ing pro­ducer prices sig­nal just how much pres­sure in­dus­try is un­der. The Pro­ducer Price In­dex con­tracted in Septem­ber for the 31st con­sec­u­tive month, an ob­vi­ous sign that theecon­omy is en­cum­bered by ex­cess fac­tory ca­pac­ity.

More than 200 com­pa­nies listed in the A-share mar­ket, or almost 10 per­cent of the to­tal, were in­volved in M&A or re­struc­tur­ing deals as of Septem­ber, the China Se­cu­ri­ties Jour­nal re­ported. Mar­ket an­a­lysts and ob­servers said there are more to come.

SOEs need to spe­cial­ize, Brown said. Many have a very wide business port­fo­lio, and out­side of their core busi­nesses there are nu­mer­ous ar­eas that are ne­glected or un­der­per­form­ing, he added.

The SOEs need to spin off those op­er­a­tions, and “that’s the driver for M&As, es­pe­cially at­trac­tive to over­seas in­vestors. Be­cause they see the op­por­tu­ni­ties of ac­quir­ing (tar­gets) at rea­son­able prices and turn­ing the un­der­per­form­ing busi­nesses around”, Brown said.

“The au­thor­i­ties are urg­ing SOEs to di­ver­sify their share­hold­ings by in­tro­duc­ing so­phis­ti­cated share­hold­ers. That will help trans­form the SOEs into more com­mer­cial, mar­ket-ori­ented en­ti­ties,” he said.

As of mid-Au­gust, 18 provin­cial-level gov­ern­ments, in­clud­ing Beijing, Shang­hai and Guang­dong, had an­nounced mixed-own­er­ship re­forms. In Chongqing, au­thor­i­ties said they will al­low twothirds of the lo­cal SOEs to have mixed own­er­ship.

Not only the large SOEs such as China Pe­tro­leum & Chem­i­cal Corp but some smaller, more man­age­able en­ti­ties, or those­like­ly­tobe­spunoff­from­larg­erSOEs, are in­creas­ingly look­ing to co­op­er­ate with in­vestors such as pri­vate eq­uity firms.

“There is both a gov­ern­ment drive and a com­mer­cial drive” for mixed own­er­ship, Brown said.

“Pri­vate eq­uity firms and for­eign buy­ers are go­ing to ben­e­fit from the eco­nomic tran­si­tion andSOEre­form due to their cap­i­tal strength and business op­er­a­tion skills as more Chi­nese com­pa­nies be­come avail­able for buy­outs,” said Brown.

Michael Weiss, man­ag­ing di­rec­tor and part­ner of Sail­ing Cap­i­tal Ad­vi­sors, based in Hong Kong, said: “The val­u­a­tions are mov­ing from an ir­ra­tionally high level to a fair price.”

“I don’t think peo­ple are com­ing to China to buy things cheap, but they are buy­ing things at a fair price nowa­days,” he added. There are dif­fer­ent rea­sons to buy as­sets in China, which of­fers a vast mar­ket, cheap la­bor and land, suf­fi­cient in­fra­struc­ture, easy prof­its and dy­namic growth.

Although the econ­omy is not grow­ing as fast as in the past, it is still ex­pand­ing faster than ma­ture mar­kets. And the de­mand, cash flow and mar­ket po­ten­tial in China are still very at­trac­tive, Weiss said. Con­tact the writer at xieyu@chi­

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