Transformation and Integration: Behind the Brilliant Transformation of Listed Companies with JD Capi

2016-10-14

Sources: YANGHANGGUANCHAtMG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司


tMG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Recently, Cathay High-speed Railway Technology Co., Ltd. (CHSR, 000008.SZ), China’s first company to cover the full industry chain in rail transport operation and maintenance, was presented at the 2016 International Trade Fair for Transport Technology (Innotrans 2016) in Berlin with its advanced technologies and new products. tMG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

However, few knows that CHSR was formerly known as Baolilai, a listed company in Shenzhen mainly engaged in five-star hotel businesses. After several rounds of major M&As, the company has shifted from hotel and catering to railway transport — a successful strategic transformation from a failing industry to an emerging one.tMG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

There are yet many listed companies on the secondary market anxiously waiting to transform, just like CHSR. In the “new normal” economy, companies should grasp opportunities as traditional industries upgrade and emerging ones grow. PE institutions, JD Capital as a typical one, may very well be the most powerful hand behind all this.tMG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司


tMG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Transformation from failing industries to high-growth ones fueled by M&AtMG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Before the reorganization, Baolilai was confronted with the challenge to alter its core businesses due to the downturn in hotel and catering industry. It had hoped to create new drivers of profit growth by increasing profitable assets and improving asset quality. In 2014, JD Capital mapped out a two-step strategy for Baolilai: transformation and integration.tMG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

JD Capital noticed that urban railway transport, as an integral part of public transport solutions in large and medium-sized Chinese cities, is an emerging industry experiencing high growth and promising huge potentials.tMG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

“During the 12th Five Year Plan period, China invested an estimated RMB 3 trillion in railway transport; and the figure is expected to maintain a fast growth during the 13th Five Year Plan period. This makes railway operation and maintenance a new growth area. In particular, as the ‘One Belt, One Road’ initiative proceeds, people working in railway construction, supporting facilities and railway maintenance will all benefit,” according to JD Capital. tMG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Based on this judgment, JD Capital recommended one of its shareholders, a quality company named Sheenline, to Baolilai as an M&A target.tMG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

According to JD Capital, “Sheenline is a domestic leader in providing systematic solutions and comprehensive data services in railway transport operation safety and maintenance. Its many world-leading technologies occupy a huge share in domestic market segments and are highly competitive in the global stage. So our recommendation was immediately accepted by Baolilai.”tMG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

On September 19, 2014, Baolilai announced to shift towards railway transport businesses and resumed its stock trading on the market. Its share price soon rocketed to the 10% daily limit, indicating an immediate recognition from the capital market. By the end of 2014, the full purchase of Sheenline marked Baolilai’s official entry into the fields of railway transport and urban rail transit — a successful strategic transformation towards railway transport operation and maintenance. tMG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

In March 2015, the company changed its name on the stock market from Baolilai to CHSR.tMG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司


tMG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Upgrade to an “Internet + High Technologies” Enterprise with Improved Business LayouttMG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Seeing that CHSR (000008.SZ) has changed its overall strategy and is now focusing on railway transport, JD Capital continues to help it expand into new market segments in an effort to build the company into a bellwether in the industry.tMG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

In 2015, by issuing stocks and paying cash, CHSR bought 90% of Jiaoda Microunion’s equities and 100% of Wuhan Leaddo’s. To ensure that the purchase went well, the JD Capital fund acted as a transferee of Jiaoda Microunion’s equities, and then transferred them to listed companies, thus becoming a bridge fund provider.tMG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

These two integration moves represented CHSR’s plan to further improve the industrial layout of railway operation and maintenance.tMG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

According to JD Capital, “Railway transport operation and maintenance mainly consists of six systems, namely, station yard, locomotive, vehicle, signal, line and power supply. At present, through the acquisition of Sheenline, CHSR succeeds in marching into locomotive, vehicle and power supply market. But this is still not enough,” “So what we focus on is to help the company improve its capacities in operating and maintaining station yard, signal and line based on the successful transformation.”tMG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Company profile shows that Jiaoda Microunion, as one of the major providers of railway transport signal systems, mainly produces computer interlocking systems, train control center systems, decentralized and autonomous CTC systems, and centralized signal monitoring systems, which are widely applied in railway transport signal systems, including major railway and high-speed rail lines, as well as urban rail transit and local railway stations in China. Besides, the company boasts independent R&D capabilities and intellectual property.tMG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Leaddo, one of the major domestic providers of rail welding and road maintenance equipment, occupies 30% of the market and a higher 40% in terms of railway safety inspection and monitoring equipment. The company is highly automatic in railway maintenance equipment, making itself a very competitive player in the industry.tMG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Market analyzers believe that after the M&A, CHSR will further improve its layout in signal and rail line systems and also establish its own models in the operation and maintenance of locomotives, vehicles, signal, line and power supply. Its core competitiveness will also improve accordingly. Having improved its capacity in railway transport service, CHSR will be able to further expand its business line.tMG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Also, CHSR will put a new face to its corporate systematic platform. The company is improving its capacity in big data and cloud processing design and service. The purchase of Jiaoda Microunion and Leaddo will only add to the completeness of data and expertise and thus contributes to its transformation from a pure high-tech enterprise into a composite data-backed platform company featuring “Internet + High Technologies”. In the future, CHSR will be able to provide real-time warning, automatic diagnosis and online expert service, thus improving its service capacity in operating and maintaining railway transport.tMG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司


tMG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

JD Capital’s “Bellwether Plan”: A Comprehensive Solution for the “Transformation and Integration” of Listed CompaniestMG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Thanks to two major asset restructurings, CHSR established integrated operation, became an industry bellwether, and gained more recognition from the capital market. Constant share price rise drove the company’s market value from RMB 3 billion to RMB 25 billion, practically making it a leading player in the industry.tMG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Statistics show that by May 12, 2016, only 47 A-share enterprises had a market value higher than RMB 100 billion and the NEEQ had only one. However, among the 7,391 public companies in the US, 477 or 8.9% are worth over USD 10 billion. All this shows that the size of industrial leaders in small market segments are still small. There is yet huge potential for integration.tMG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Under these circumstances, JD Capital came out with the “bellwether plan” this year. The idea is to buy or hold shares of bellwethers or quasi-bellwethers in certain industries, help them raise funds in the capital market, expand market share through horizontal M&As, improve bargaining power in the industry chain through vertical M&As, realize international operation through cross-border M&As, and improve core competitiveness through new platforms such as the internet. All this will allow a company in the order of RMB 1 billion to grow to RMB 10 billion or even RMB 100 billion, thus becoming an industry bellwether in its real sense both home and abroad.tMG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

JD Capital believes that for listed companies like Baolilai, it will be able to help them transform with the “bellwether plan”. Specifically:tMG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

First, implement business transformation through M&A, i.e. allow listed companies to jump from failing industries to promising ones.tMG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Second, carry out industrial integration, i.e. by dint of one’s specific advantages, a company integrates horizontally or vertically and grows into a domestic bellwether with stronger competitiveness.tMG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Third, encourage companies to “go out” and participate in global competition and even engage in cross-border M&A investment. The goal is build the company into an industry bellwether on a global scale.tMG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

China has entered the middle and later periods of industrialization. The trend, structure, and motives of growth have all changed. Many industries such as coal, steel and cement are challenged with the problem of overcapacity. Transformation and integration are the most prominent problems enterprises face today.tMG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

On one hand, PE firms have long been studying various market segments in China’s industrial economy, and so are well aware of their dynamics. On the other hand, they are familiar with the rules and techniques of China’s capital market, and experienced in capital operation. Some market participants believe that PE firms will play a key part in dragging enterprises out of the quagmire they are in now.tMG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Opportunities have presented themselves. JD Capital and their market peers believe that China’s real economy face both challenges and opportunities. More success stories are yet to be written on the stage of capital market.tMG九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

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