“Bellwether Plan” of JD Capital: Strategies of Chinese Companies to Earn a Market Value of RMB 100
Source: Shanghai Securities News
Recently, JD Capital (600053.SH), a famous PE institution, has announced to launch its systematic investment plan called “Bellwether Plan”. According to the plan, JD Capital will act as the strategic major shareholder and the enterprise investor of the sub-industries, which means in the next three to five years, through methods such as merger and acquisition (M&A), JD Capital will help service the high-quality enterprises of various industries to become the absolute champions that worth RMB 10 billion or even 100 billion.
China’s M&A surged in 2015 when the global M&A reached 4.5 trillion dollars and the total amount of M&A in Asian-Pacific region led by Chinese companies exceeded 1 trillion dollars. In the first half of 2016, Chinese companies created a new record of 412.5 billion dollars in M&A, home and abroad, with a growth rate of 27% year-on-year.
How to interpret the tide of M&A in the global market? What has led Chinese companies to the journey of global M&A? How will the “Bellwether Plan” of JD Capital help Chinese companies to achieve a market value of over RMB 100 billion? In this interview, Huang Zhen, Board Secretary of JD Capital, gave us this answers.
Q1: What is the “Bellwether Plan”?
A: Simply put, under the “Bellwether Plan”, through sharing or controlling shares in leading enterprises or quasi ones with distinct competitive edges in various industries, we aim to encourage them to utilize the China’s capital markets for funding and to enlarge market shares through horizontal M&A, and obtain bargaining power in industry chain through vertical M&A. In addition, these enterprises should seize the opportunity of cross-border M&A when offered, to realize international operation, and utilize operation tools like the internet to improve their core competitiveness. After reaching the market value of 10 billion from 1 billion, these enterprises will become the real industry leaders of China or even the whole world.
The “Bellwether Plan” will be implemented by three steps. First, competitiveness of the target enterprise in a specific industry will be strengthened through M&A to increase industrial concentration and to achieve economies of scale. Second, after M&A, the target enterprises of single business will grow into a diversified industrial group. During this stage, with the goal of economy of scope, the target enterprises will complete the integration of the industry chain or enter into new business area through M&A. Third, as the M&A market expands, in order to compete in the global market, Chinese companies have to participate in the global resources integration through M&A.
Q2: How can the “Bellwether Plan” help create enterprises worth RMB 100 billion value in various sub-industries?
A: One enterprise grow by two ways: internal growth and external expansion, the latter mainly referring to its M&A of other companies. As early as in 1982, George Joseph Stigler, winner of the Nobel Economics Prize, noted that “None of American big companies could grow stronger without mergers of any kind or simply through internal organic growth”
For instance, many well-known Fortune Global 500 companies like Walmart (the world’s largest retailer), P&G (the world’s largest daily chemical brand) and Mobil Oil (one of the world’s largest petroleum producers) made their way into the first place through multiple M&As. Simply put, M&A has become the key growth drive for Fortune Global 500 companies. Therefore, M&A is the key method in implementing our “Bellwether Plan”.
According to our researches, there are two requirements for enterprises worth over RMB 100 billion (apart from some internet enterprises) to maintain a stable market value: a net asset of 30 to 50 billion RMB and a profit of 3 to 5 billion RMB. In order to meet the two requirements effectively in a relatively short period of time, the bellwethers have to turn to M&A.
Q3: Chinese enterprises have increased global M&A in recent years. What do you think about it?
A: America has experienced five large tides of M&A, including horizontal M&A, vertical M&A, conglomerate merger, leveraged buyout, and global strategic M&A. Although buyout in China is still at an initial stage, instead of repeating the process in America, Chinese enterprises chose to integrate five kinds of M&A at the very beginning and adopt new technologies and trends like the internet.
In fact, Chinese enterprises are beginning to enter the global market and will gradually become main players in global M&A market. Under this background, we will see more and more Chinese bellwether enterprises with a market value of over RMB 100 billion in the future.
Based on the conditions of domestic M&A market, China is now in a key period for industrial upgrading when the real economy is entering a developmental stage characterized by a lower speed growth and excess capacity. A large number of enterprises as well as outdated capacity will be obsolete, and at the same time, some listed enterprises or industrial groups need new industries for their sustainable growth. Therefore there are plenty of opportunities for M&A and integration. As for the global M&A market, Chinese companies have gradually got on the path of super M&A around the world since the financial crisis in 2008.
Q4: How much space and potential is there for the M&A in China?
A: In terms of industrial distribution, among the Chinese enterprises with a market value of RMB 100 billion, there are 10 manufacturing enterprises, and financial service companies occupy a proportion of 50%. As for the nature of the enterprises, there are over 1,600 A-share listed private enterprises, among which only 6 are RMB 100 billion companies, accounting for less than 4%.
By the end of the first half of this year, however, there are 7,391 listed companies in America, 477 of which enjoy a market value of over USD 10 billion, accounting for 8.9%. These statistics show that the overall volume of market value of Chinese enterprises is commonly lower than their American counterparts, leaving huge space and potential for industrial integration and M&A of Chinese companies in the future.
The conclusion would be even easier from a macro perspective. The GDP of China will be nearly equal to that of America by 2020. With such a macroeconomic size, the business scope and market value of Chinese bellwether enterprises should theoretically catch up with those of American bellwethers. Therefore, with the maturity of industries, bellwether enterprises in China will be embracing great opportunities of M&A. In the future, there will be more non-financial private enterprises with a market value of over RMB 100 billion in China.
Q5: What obstacles could Chinese enterprises encounter during M&A?
A: Different from big companies in America, most of Chinese bellwethers in various sub-sectors achieved their success in the market rightly after the ending of an era when shortage of supplies was universal. These enterprises have built their leading positions because of both their competitiveness and the dividends brought by the phased strong market demand. However, the traditionally excellent enterprises have several weaknesses:
The first is the question of figuring out the strategic path for growth. Facing the increasingly fierce competition, traditional leading enterprises would be confused in choosing a strategic path for growth. With the advent of the internet era and the mobile Internet era, new business modes keep emerging, further intensifying the competition.
The second is the limitation on capacity and resources. More and more leading enterprises have realized that M&A is a significant way of development and upgrading, but they have been trapped for the lack of M&A project resources and capacities. Some listed leading enterprises have completed transactions like overseas M&A with the help of capital market, while most companies still lack the experience and capacity of merger investment.
The third is the lack of experience in the capital market. According to our findings, many Chinese leading enterprises, even though got listed, failed to fully utilize the superior resources and instruments in the capital market. We hold the opinion that the capital operation, which requires multi-dimensional abilities in many aspects, is in nature a process of pursuing large amounts of financing in a short time with a low cost and conducting efficient foreign investment. In order to understand the rules of the capital market and utilize the financial instruments, the leading enterprises should first well understand and take advantage of the capital market.
Q6：Regarding the questions mentioned above, do you think the "Bellwether Plan" by JD Capital can offer any solutions to Chinese enterprises?
A：The weakness mentioned above happen to be areas where the strength of PE institutions can be fully demonstrated. PE investment features the combination of industrial property and financial functions. Professional PE enterprises study the layout and progress of an industry so as to understand its rule and future trend, while at the same time, they get deeply engaged in capital operation, and are thus familiar with the rule and skills of capital operation. That is the base for the cooperation between PE institutions and industrial bellwethers.
JD Capital boasts professional research teams. As a third party, JD follows any dynamic changes of the industry, and offers professional strategic suggestions as well as implementation design for enterprises. Meanwhile, JD Capital can identify qualified target enterprises fitting to the M&A strategies with its global business development system, and facilitate M&A processes with its rich experience in capital operation. In addition, JD Capital is familiar with both domestic and foreign capital markets, and boasts enough cases and practices of various capital operations. Given that, JD is capable to assist enterprises in building the linkage with capital market.
Q7：To build bellwethers in various sub-sectors through M&A is a grand plan! How can JD ensure the success of the plan?
A: First of all, JD Capital possesses an apparent advantage on M&A project resources and M&A investment expertise. Around 20,000 target enterprises discovered during the past 7 years, and due diligence data collected from 3,000 enterprises have provided rich industry data and M&A project resources for JD Capital. At the same time, JD Capital has set up more than 100 branches in the mainland of China, Europe, America and other regions, which enables JD to locate M&A targets around the clock, and carry out M&A business with persistent cooperation around the globe.
Second, JD Capital has built professional investment teams in various sub-sectors. The team has thoroughly explored the development patterns of domestic sub-sectors. Up till now, we have built professional investment teams in more than 20 sub-sectors, including consumption, service, logistics, tourism, culture, agriculture, equipment, material, chemical engineering, energy, mining, medicine, medical treatment, information, infrastructure, finance, internet and real estate.
Third, as supporters of the JD Capital ,various business sectors of JD Group can offer one-stop financial services. Apart from JD Capital, other financial sectors, including JiuZhou Securities, Jiutai Fund, Futong Securities, and Jiuxin Investment can also offer one-stop services in assisting leading enterprises to carry out capital operations with the help of different financial instruments.
Q8: Up till now, have there been any precedents under JD’s "Bellwether Plan" or other M&A practice?
A: Well, I should say that all the projects we've invested in are more or less related with the "Bellwether Plan". The most typical ones include UTS Travel, CHSR, Shenzhen International Enterprise, Shanghai Wangsu Science & Technology, and Luolai Home. Take UTS Travel (002707) as an example.
In October, 2010, JD Capital invested in UTS Travel and became its second largest shareholder. In 2014, when UTS Travel got listed, the value of its stock reached incredibly high. After being listed, UTS Travel worked with JD Capital and implemented a set of M&A and integration strategies in both domestic and overseas markets, online to offline. Relevant M&A activities included:
The acquisition of Zhuyuan International Travel Service in September, 2014 brought forth the No.1 outbound tourism service provider. In December, 2014, UTS announced to cooperate with Uzai.com and acquired 15% of the latter's share, marking the launch of its online resource arrangement. In January, 2015, UTS Travel and JD Capital participated in the privatization of Club Med (the largest resort chain in the world) by Fosun Group, marking its formal presence of overseas resources arrangement. In early March, 2016, UTS Travel announced to acquire 100% of the stakes of Beijing Huayuan International Travel Co., Ltd, marking the preliminary completion of integration of wholesaling outbound tourism.
Currently, the market value of UTS Travel has increased from 1.34 billion, the figure after listing, to 16 billion.
Q9: Chinese enterprises have been quite active in the international M&A markets this year. Has JD Capital played a part in it?
A: In fact, JD Capital began its overseas M&A business a long time ago. As I just mentioned, in the second half of 2014, JD Capital, UTS Travel and Fosun Group went to France to acquire Club Med, the largest resort chain group in the world. Apart from that, the recombination of Baihe.com and Jiayuan.com, a case done recently, also serves as representative of JD Capital's involvement in overseas M&A deals.
Now, JD Capital is undertaking a benchmarking project targeting a European enterprise of lightweight auto parts aluminum die casting. This enterprise, for a long time, has served as release supplier and synchronous supplier for world renowned auto manufacturers such as Porsche and Mercedes-Benz. The reason why JD Capital can become the potential acquirer of this enterprise stems from JD Capital’s thorough and profound researches and strategic layouts regarding the lightweight of automobile field.
Q10: Looking at the M&A practices in the past, what do you think is the crucial factor for the success of "Bellwether Plan"?
A: JD Capital holds that to ensure the implementation of "Bellwether Plan", we need to solve four problems, namely strategy, project, capital and management.
In terms of strategy, JD Capital, based on its thorough researches on various industries, will offer a strategic map for endogenous and exogenous growth for bellwethers in their industries so as to guide their capital operation and project acquisition.
In terms of project, JD Capital, with the help of domestic and overseas investment teams and partner institutions, will look for targets suitable for the strategic M&A needed by bellwethers, and implement all M&A investment operations including background survey, risk control, and deal negotiation with due diligence.
In terms of capital, JD Capital will make full use of various capital products, including but not limited to bank capital, security capital, ABS, and internet finance, to provide sufficient fund for the development and M&A of the enterprise.
In terms of management, JD Capital will arrange specialists to follow up and set up Joint Investment Committee for decision making in its effort to judge every investment along with bellwether companies. The Strategy and Investment Committee will hold meetings regularly, where high officials of both sides can optimize M&A strategies and push ahead with cooperation.