[The 16th Review of JD Business School] Company’s M&A Models Amidst Economic Transition

2016-09-14

Since 2014, China’s economic growth pattern, which had lasted for 30 years, has been facing with the requirement of transformation; and the aftermath of the fiscal stimulus package delivered during last financial crisis has emerged. In this new stage, the Chinese economy features overcapacity and low-speed growth. Currently, although a few industries and businesses are still growing rapidly, the economy with traditional manufacturing and service industry as its pillars is in need of profound restructuring. 
EgZ九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

It is emergent for Chinese entrepreneurs to forge synergy of resources based on the characteristics of an industry so as to achieve comprehensive upgrade. After rapid development over the past 30 years since China opens its economy to the world, Chinese businesses are now faced with brand-new strategic upgrading and transformation under the current macro-economic situation. Therefore, how can Chinese businesses occupy the new commanding height during the shifting from survival-oriented development to dream-driven growth?EgZ九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Merger and acquisition has provided a solution to this question. In recent couple of years, China’s M&A volume has been constantly setting new highs. In the first half of this year, China’s M&A both at home and abroad reached a new high with the transaction amount increasing by 27% year-on-year to $412.5 billion. The era of M&A has come. How can Chinese businesses get engaged in it? And how should businesses respond to new challenges in this era? EgZ九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

In August, JD Capital invited representatives from many invested companies to join the 16th Session of JD Business School successively held in Beijing, Shanghai, Shenzhen and Chengdu. Together, they discussed about how to grasp the systemic historic opportunity to forge multiple billions yuan worth of leading businesses in the new wave of M&A.EgZ九鼎投资(600053.SH)_上交所私募股权投资领域上市公司


EgZ九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

ChinaNetCenter @ Shanghai: A strong industry can nurture businesses worth tens of billions of yuan, but those worth hundreds of billions of yuan should be developed by capital and M&AsEgZ九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

ChinaNetCenter (stock code: 300017) got listed on the NEEQ in 2009. As a professional provider of integrated services of CDN and IDC, it now has more than 3,000 clients and over 500 CDN accelerating nodes in China. A fund managed by JD Capital invested in this company in 2015. EgZ九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

The development of this industry usually follows a pattern of “S”, i.e. spiral acceleration. EgZ九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

ChinaNetCenter is a leading company in the segment of network acceleration, taking up almost 50% of the market share. It has completed the first “S pattern” escalation. Next, the company is to carry out new strategic deployment from two dimensions – to expand the business horizontally and become stronger vertically. On one hand, ChinaNetCenter will integrate other leading companies in this industry through M&A so as to horizontally enlarge businesses. On the other hand, it plans to improve product diversity in this segment. Since single product will be faced with greater risk, we still need to further explore comprehensive and integrated solutions. EgZ九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

At present, the market value of ChinaNetCenter has exceeded ten billion yuan. We will think about the strategy of capital plus industry seriously for the company’s market value to increase to ten billion yuan. In 2015, ChinaNetCenter raised 3.5 billion yuan through private placement, the first financing activity after its IPO. It did a good job under sound market conditions and increased its net equity with relatively less dilution of shares making use of the high premium in secondary market. Recently, its investment strategy has been made clear which is to conduct M&As and capital operation with the capital reserve. We are to integrate some companies via means like buyout fund during the subsequent M&As and industry integration. EgZ九鼎投资(600053.SH)_上交所私募股权投资领域上市公司


EgZ九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Jiangsu Jiuding New Material Co., Ltd. @ Shanghai: Industry plus capital can transform rare listed company into a platform of resources allocationEgZ九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Jiuding New Material (stock code: 002201) went public in the Shenzhen Stock Exchange in 2007. It plays a leading role in textile-type fiberglass industry specializing in the production and sale of glass fiber yarn, fabrics and final products, and FRP products. A fund under JD Capital’s management invested in it in 2015. EgZ九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Jiuding New Material has undergone an industrial cycle since 2000. The company was hard hit after the financial crisis in 2008. At present, it has re-occupied the commanding height again in major business. However, as a listed company, it has not fully utilized the platform of capital market in terms of capital operation. The major business has not generated the maximum yield given the capital input. Therefore, we are considering looking for the second and third major business. It is safe to say that the path we have proposed is in line with the “leading company plan” and the concept of industry integration raised by JD Capital. We will follow a route featuring industry plus capital, looking for a sizable and sustainable industry and entering this new industry through industrial integration by investement.EgZ九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Jiuding New Material decided to establish strategic cooperative relations with JD Capital because spotting projects and raising funds are some of the strengths of JD Capital. The function of capital market is to optimize the allocation of resources. Listed companies, always seen as rare resources, are the most important players in this market. Under the guidance of national policies, JD can integrate all listed companies it has invested in into a platform of resource regulation and allocation. Through this platform, it will be easier to conduct M&A and look for proper projects. Otherwise, something might go off track. EgZ九鼎投资(600053.SH)_上交所私募股权投资领域上市公司


EgZ九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Baihe.com @ Beijing: Forward-looking operation strategy is a prerequisite to obtaining capital support and becoming an industrial leaderEgZ九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Baihe.com (stock code: 834214) was listed on the NEEQ in 2015. As the first dating service provider with real-name registration system in China, it aims to help hundreds of millions of Chinese find their happy marriage and family. It is also a member on the panel of “Marriage and Family Expert Consultants” organized by the Ministry of Human Resources and Social Security. In 2015, it was invested by a fund under JD Capital.EgZ九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

The integration of Baihe.com and Jiayuan.com was unexpected to many people. First, it was the first case when a NEEQ-listed company (Baihe.com) acquired a NASDAQ-listed company (Jiayuan.com). Second, it was a case in which a smaller company bought out a bigger company. There were several key points in this acquisition.EgZ九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

To begin with, it is an example of making full use of domestic capital market. After the NEEQ was launched, both Baihe.com and Jiayuan.com realized that it was a feel-good factor. Jiayuan.com went public on NASDAQ, so it shifted its strategy slower than we did. Baihe.com was listed on the NEEQ when the development of the NEEQ was at its peak in April and May last year. As a result, we received financing soon, which put us in a more advantageous position than Jiayuan.com. EgZ九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Next is the importance of developing sound industry eco system. Although the business revenue of Baihe.com was lower than that of Jiayuan.com, Baihe was more well-known than Jiayuan. Besides, Baihe.com launched the strategy of dating and marriage eco system covering the whole process from dating and establishing relationship to wedding and marriage consultancy services. This strategy was widely recognized by domestic capital circle, which helped it exceed Jiayuan.com in terms of market value.EgZ九鼎投资(600053.SH)_上交所私募股权投资领域上市公司


EgZ九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Jiuqiao Medical Service @ Beijing: Proactive industry integration is an important way towards industrial leaderEgZ九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Jiuqiao, with its major business being medical healthcare service, boasts six general hospitals, one specialized hospital, one nursing home, nine community health service centers, one medical equipment company and one drugs purchase center. It was invested by a fund under JD Capital in 2016.EgZ九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

We must have an accurate positioning for our development. It is rather difficult for a single company in medical service industry to go public. Only by forming a unity or following the development pattern of corporation can it keep going forward. EgZ九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Currently it is critical to figure out the underlying laws of medical service industry when investing in this industry. The majority of practitioners in this industry all have a medical background, so they do not know about capital market well. And so do I. We are thinking about going public with the help of JD Capital, in the hope of integrating the medical service industry and thus becoming a bellwether in the industry.EgZ九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Next, we will probably run a chain in this industry. Although sometimes the integration might be challenging and it takes time to communicate and fit together, we believe we can get things done through concerted efforts.EgZ九鼎投资(600053.SH)_上交所私募股权投资领域上市公司


EgZ九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Hongming Electronics @ Chengdu: M&A can help a company develop its new business before long EgZ九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Hongming Electronics is a large-scale comprehensive company mainly engaged in the development and production of electronic components. It is the leader in the niche market of MLCC and has been listed among the top 100 companies in electronic components industry in China for 29 years in a row. A fund managed by JD Capital invested in it in 2015.EgZ九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Generally speaking, there are four types of M&A-driven growth of new business. EgZ九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

The first type is the additional investment for projects from within the company; the second is external small-scale investment through project incubation and cooperation with other institutions; the third type is to acquire mature companies; and the fourth one is to buy out larger-scale companies like multinationals. Many operators in traditional industry tend to limit their focus on organic growth. In fact, external growth model such as M&A can help the company achieve certain business growth within shorter period of time.EgZ九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

I want to talk about the significance of M&A to the business growth of a company with capacitance industry as an example. We reviewed the development of this industry over the past 25 years since 1990. We found that, within the past 25 years, the M&A value among major electronic component producers amounted to $64 billion. Through these M&As, large companies have strengthened their original competitive edge in this industry and at same time, gained new business they used to be unfamiliar with. This is of great strategic significance to companies.EgZ九鼎投资(600053.SH)_上交所私募股权投资领域上市公司


EgZ九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Longerpharm Group @ Shenzhen: Specific and accurate M&A strategy and like-minded capital partner are core elements of success EgZ九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

As a group integrating medicine R&D, production and sale, Longerpharm was awarded as “Company with the highest investment value in China” in 2010. In 2013, it was invested by a fund under JD Capital.EgZ九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Our group specializes in pharmaceutical industry and has done some M&As. Here I want to share with you three points in terms of M&A.EgZ九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

First, M&A should be product-oriented. We have acquired four companies with different product lines, namely a pharmaceutical factory of heat-clearing and detoxifying herb medicine in Guangxi, one of maternity and children drugs in Yantai, one of high-end oral medicine in Nanjing and another of narcotic and psychotropic substances also in Nanjing. There are almost 20 kinds of exclusive products, which largely enriches our product system.EgZ九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Second, try to get things done with lower cost. Here is an example. We acquired a company in the old district of Xuzhou. However, the cost of its site renewal was quite high. Therefore, we, in collaboration with JD Capital, chose to buy land at another place and set up a new factory there. This company has good products, but it needs packaging, just like an uncut jade that needs grinding. Therefore, during the negotiation of payment methods, we proposed that it should pay off in five years. In this case, on the one hand, we bought the company, but were not restricted by its original hardware infrastructure. On the other hand, we were bullish about its products and factories lacking packaging were usually in disadvantaged positions in negotiations. Based on these two factors, we achieved desired results with less money input. EgZ九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Third, be quick and resolute. What you buy in M&A is opportunity. So to speak, once you find the opportunity, you need to make decisions decisively. When we acquire companies, we usually finish due diligence procedures within 30 days in case that our competitors gain the advantage. EgZ九鼎投资(600053.SH)_上交所私募股权投资领域上市公司


EgZ九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Huangting International @ Shenzhen: Value judgment ability and integration capacity is essential for an industrial leader EgZ九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Huangting International (stock code: 000056), listed on the Shenzhen Stock Exchange in 1996, deals in integrated businesses of real-estate management, business operation management and high-end commercial tourism. It was once among “Top 300 biggest corporation in China”. A fund under JD Capital invested in it in 2015.EgZ九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

As an old-hand listed company, we want to share with you our experience of M&A. EgZ九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

First, M&A is very important after the company goes public. There are many M&A opportunities in the market after the IPO, and investors tend to have higher expectations on listed companies. M&A presents itself as a good way for the company to bring returns to investors.EgZ九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Second, the judgment of the price of M&A should depend on the yield the buyer can obtain afterwards, which means there should be a synergy effect of “1+1>2”. If the price proposed by the other side is 5 billion yuan and the synergy effect can extend its value to 10 billion yuan, then it is not expensive for the buyer. However, if the price from the other side is 1 billion yuan, but it is a pointless purchase and its value could drop to 300-500 million yuan a couple of years later, then it is worthless to make the deal although it seems to be cheap now. All in all, the standard of value judgment should be whether the company can help us improve current business and industry chain.EgZ九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Third, the management and the upgrading of corporate culture after M&A is crucial. As a company with a history of 20 years, a series of corporate culture might have emerged, but the new teams that join us through M&A may not accept this culture. So, our company needs to adjust the culture accordingly and welcome newly merged business departments with receptive and open attitude.EgZ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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