Zhongyi ZHAO: We're Dedicated to Specialized Investment
2010-03-22
In his exclusive interview with Zero2IPO the other day, Mr. Zhongyi ZHAO, partner of Jiuding Capital，remarked that professionalism is an important impetus in the rapid development of Jiuding Capital. The concept of professionalism has penetrated through its project development, due diligence, investment analysis and post-investment management, which assure a smooth conversation between Jiuding Capital and enterprises as well as highly enhanced efficiency.
Jiuding Capital Co., Ltd. (“Jiuding Capital”) is a leading investment firm with deep roots in equity investment and management. Jiuding Capital has an early start in China in accordance with the international PE level and is a standard and professional investment company focusing on China with a team that has profound understanding and successful practice in localized equity investment in China.
Jiuding Capital now manages a number of RMB funds including Zhengdao Jodin, Kunwu Jodin, Xiaqi Jodin and Shangqi Jodin. Its focus now is on non-listed companies in growth or mature stage in the field of consumer products, pharmaceuticals & medicines and agriculture. It has made investment in tens of enterprises, several of which have been now listed.
Jiuding Capital has a wide network with branches or representatives spreading over Fujian, Zhejiang, Jiangsu, Guangdong, Sichuan, Shaanxi, Hunan, Shandong, Henan and Liaoning. It is hoping to help those invested enterprises hone a leading edge by way of investment and value added service so as to achieve mutual benefits for both the enterprises and the investors.
Zero2IPO: In the three years from the establishment in 2007 till now, Jodin has invested more than 20 enterprises and developed a number of funds. Its team expands stably from around 20 members to a hundred. How did Jodin do this?
Mr. Zhongyi ZHAO: Our development pace is relying on the past accumulation, diligence, expertise and thoughtful learning. As a matter of fact, before the establishment of Jiuding Capital, our startup team has owned years of investment experience and close collaborations, including some very successful cases. From this perspective, though established in 2007, we had had years of accumulation before this.
Apart from the accumulation, I think we are more industrious and eager to think and learn than others. This is the source of our rapid development. As an old saying in China goes, Plan well before you move. Every step we took is well thought out.
Moreover, professionalism is another important driving force for our rapid development. The concept of professionalism has penetrated through its project development, due diligence, investment analysis and post-investment management. Project development and due diligence are carried out by two different teams because they have different requirements. This is to enhance specification. In due diligence, the investigations over business and finance are also separate. In the meantime, each field is equipped with at least one investment manager to assure the professionalism of business investigation. For example, we have experts in pesticide in charge of the pesticide project.
With regards to the fierce competition among PE firms, it is hard to win if you don’t enhance your professionalism. Professionalism assures a smooth conversation with enterprises as well as highly enhanced efficiency. When you know well about the issues in the industry and you go on to understand the issues in the companies, the case shall be accomplished much faster.
Zero2IPO: What is the corporate culture and investment philosophy of Jodin?
Mr. Zhongyi ZHAO: The culture of Jodin is simple yet steadfast and is penetrating through our work and life. We summarized into nine key principles covering Integrity, Collaboration, Attentiveness, Professionalism, Diligence, Initiative and Innovation, which you might see when walking into the office playing over and over again on the screen at the entrance.
All of the principles have been endowed with comparatively rich connotations relating to our work and life. For example, the principle of Integrity and Sincerity has been enriched as follows: We regard integrity and sincerity as the foundation of our undertakings. We shall adhere to this principle both internally and externally. We shall stick to the spirit of sincerity and shall always choose to communicate straightforward on spot about any issue or opinion. We are committed to our promises and value our word. It is expected that our people maintain high ethical standards in everything they do, both in their work and personal lives.
Those connotations are simple yet strong and firm and we are striving for its penetration into everything our people do and into our blood, as culture is the most important part in the management of quality talents unlike the management of industrial workers.
As for investment philosophy, I think it’s something beyond literal summarization. We have been, are now and will be committed to the philosophy of value investing. I think the understanding of value investing shall differ from each other. It is a question so big that I can write a book about it. Let me give you an example. Jiangsu Huifeng Agrochemical Co., Ltd was the first project of Xiaqi Jodin, our second fund and at the time its investment amounted to more than 70 million yuan, while the total size of Xiaqi Jodin is only 300 million yuan. There had been objections and obstacles from here and there during our investment. Yet after detailed research and analysis, we concluded that the company was worthy and promising overall. Believing in our judgment, we made the investment firmly.
Looking back, the investment was indeed a success. This simple example embodies many of our understanding of value investing:
First, you should conduct a professional research and clear judgment over the project so as to grasp the relative certainties among all the uncertainties lying ahead. This is the professionalism and diligence that value investing calls for.
Secondly，if you set up a clear mind, stick to it. Absorb and analyze the data and evidence in other people’s opinion instead of the opinion itself. To a great extent, determination is an important quality in value investing.
Thirdly, if you have already stick to your own judgment, then stick to your own thought and persist in relatively concentrated investment rather than deliberate dispersion.
Zero2IPO: In the years to come, what do you think is the occasion of China’s PE market?
Mr. Zhongyi ZHAO: Investment, PE investment in particular, calls for a clear judgment of the long-term economic development trend. We firmly believe that Chinese economy shall be better than present in the upcoming ten years and Chinese people shall be wealthier. This is a certain trend and is also the greatest and luckiest context that our generation of PE investment faces.
In this backdrop, two certain trends are looking good: one is urbanization, and the other is consumption upgrade. In those two trends, we make a choice of what we think shall be the most beneficial. This is what I think the most important occasion and opportunity of China’s PE market lying ahead in the upcoming years.
Supported by the above judgment, our investment is concentrated in three fields, namely consumer goods, pharmaceuticals and agriculture. We’ve been making tremendous efforts in those three fields with professional divisions and management, accumulated both experience and achievements.
Zero2IPO: What are the categories of Jiuding Capital’s LP?
Mr. Zhongyi ZHAO: Most of our LP are China’s private entrepreneur，accounting for 90%of our LPs. Besides, there are some large SOEs participating in some of the funds and some venture capital fund guided by government.
It’s our opinion that the capital of private entrepreneurs is both the easiest and hardest to raise. Why easiest? That is to say, so long you give them reasonable logic and abundant confidence, they shall invest even though you have nothing. Why hardest? That is to say, it takes them dozens of years of wisdom and hard work for private entrepreneurs to accumulate their social wealth, which endows them with keen wit. Therefore, if you are not really something in making money and try to persuade them with good stories, you are destined to fail.
China’s private entrepreneurs are indeed the most diligent, insightful and enterprising. We are deeply grateful to our investors, especially those investing in our first fund and honor them sincerely. When we first started, we didn’t even have one office. We just told them what Jodin team was, what we would do, and how we would do it with several papers，and they were convinced under such circumstances and gave us hundreds of millions. This was the wit, vision and trust that only private entrepreneurs hold.
Of course, now we’ve returned them with generous profits. The investors that invested in our first fund are still our firm investors. We are grateful and gratified for this.
Zero2IPO: Is tax still a main concern when institutions set up a RMB fund.
Mr. Zhongyi ZHAO: You raised a good point. For us, it is what we are after to create best profit for our LPs subject to law and regulations.
At some point, tax is the decreasing function of profit. We are always focusing on it and trying to lower the tax burdened our investors subject to the law and regulations. For instance, we are one of the first equity funds to set up the LP format which was to lower our partners’ business income tax.
Zero2IPO: Which does local LP prefer, partnership or corporations?
Mr. Zhongyi ZHAO: From the feedback of our LP now, they prefer partnership, which is flexible, rational in tax and binding to GP. Through practice, we are more inclined to partnership.
Zero2IPO: Most of the funds Jodin develops are small size, investing four to six cases on average? What’s reason for this?
Mr. Zhongyi ZHAO: The size of our fund is not big from the start, normally 300-500 million yuan and we always complete the investment in one year and then start another fund. Subject to the size of our funds, each would invest four to six cases. Meanwhile, we think that it is enough for one fund to disperse its capital over four to six projects for risk diversification purposes.
For diversification，we are stick to the principle of centralized investment with moderate diversification. This is due to that, from the philosophy of investment, deliberate diversification is the excuse of ignorance. We are willing to relatively concentrate our investment on enterprises that we know well about, and enhance afterward management and value-added service so as to obtain better investment returns.
Zero2IPO: Why do Jodin take a good view to consumer goods, pharmaceuticals and agriculture?
Mr. Zhongyi ZHAO: I’ve talked about this earlier. These three fields are the production of urbanization and consumption upgrading with the backdrop of growing macro-economy and enriching life of the Chinese people, and they have something in common：
First, they all conform to the development trend of industrial structure. Segments of those three fields are now dispersed and there shall be a large amount of investment opportunities when they are getting centralized.
Secondly, the demand in these three fields is to some extent rigid, which means no drastic fluctuation foreseen and predictable development track.
Thirdly，the ultimate clients of those three field are general public. Both customers and buying spots are widely scattered. Enterprises in those three fields always boast competitive edges in brand and network, which shows good sustainability.
Zero2IPO: According to our statistics, the number of cases Jodin invested in 2009 more than doubled from that in 2008. Will there be any change in the strategy and moves for this year from that of 2009?
Zhongyi ZHAO: Our investment strategy remains unchanged. This is what we adhere to. The speed of investment will be faster than that of 2009 as on one hand, we’ve got more people than that of 2009, and on the other hand, we’ve had more observations of the fields we are familiar with which enables higher efficiency.
Zero2IPO: According to our statistics, the investment of VC/PE demonstrated a Westward trend. What is your opinion on this trend and the investment environment in the west region?
Zhongyi ZHAO: Your statistics grasps the industrial trend very well. At least we are attaching great importance to the central and western region. However, we don’t make deliberate selection on investment regions. We are more attracted by the enterprise itself, its price and value. Comparatively speaking, we invest less in hotspot like Beijing, Shanghai and Shenzhen as there are too many institutions gathering there. The number of institutions in middle and western regions are much less and there are many good cases waiting to be invested.
Besides, the communication and transportation in China has been greatly improved. The business of enterprises in the mid-west is also nation-wide. It’s not that important with regards to where they register or base under the present circumstances.
As for western region, though its development is still behind that of eastern region, its investment environment is getting better. You should know that China is making unceasing progress and we are seeking opportunities therein.
Zero2IPO: Jodin invested in Gifore in April 2009 and Gifore got listed in October. What value has so fast an investment brought to you both sides?
Zhongyi ZHAO: When we invested in April, we didn’t expect it to be listed in October. When investing, our major concern is the enterprise’s development trend with the changing industrial landscape as well as the management team led by chairman Wang Xin-ming. We didn’t pay that much attention as to when this enterprise would get listed.
We have our office in Sichuan and staff to observe local projects worth investing. We’ve established contact with Gifore since the beginning of 2008 and have done a whole year of research, talking to more than 100 individuals including its suppliers, clients, competitors, employees and government officials. When we invested in Gifore, its profit was only round 20 million yuan, yet demonstrated good growth prospects. Our original intention was to wait for its declaration of listing on the small and medium-sized plate after its profit in 2009 got to another level, reaching 40 million yuan. Yet GEM was launched which was an opportunity for enterprise in the development of Chinese stock market. Out of the development of the enterprise, we wouldn’t surely miss this historical opportunity.
You may also have noticed that after going public, Gifore has seized this opportunity for fast expansion and industrial consolidation, which helped with a large leap forward itself on one hand and made a great contribution to the mechanization of the rural areas in China on the other hand.
Let me tell you a small anecdote of Gifore. Gifore, including their chairman Mr. Wang Xin-ming, didn’t have an air-conditioner until 2006, You can tell from this how difficult their environment was and how diligent and hardworking they were.
On the day we determined to invest Gifore, the Implementation Measures of GEM was launched. As the price and terms were agreed on oral understandings and hadn’t been officially put on paper at that time, we were really worried that Gifore would change their mind or raise the price due to that anticipated time of IPO had been shifted to a much earlier date. The Gifore team kept their oral promise, signed the agreement and strictly complied with it. You can tell the sincerity of Gifore team from this.
Our investment is more of a recognition of their simplicity, diligence and integrity and a belief that they would build up a great enterprise instead of the short-term premium benefit generated from the IPO.
Zero2IPO: What is your opinion of the capital withdrawal prospects of those enterprises you invested and has now been listed on the GEM?
Zhongyi ZHAO: We have internal agreement on the principle of capital withdrawal. The value of investment institutions is to enhance the value of enterprise and share it. If an institution has accomplished its mission, played its role and cannot enhance the value of enterprise any more, this is the time that it exits and withdraws the capital for enterprises with value-up space.
Zero2IPO: Will withdrawal from mainland China become your mainstream moves?
Zhongyi ZHAO: For the selection of listing location, here are our basic ideas. IPO is only a development method rather than ultimate purpose. Going public could bring capital and brand benefit for the enterprise. If the business of an enterprise is in China, its brand benefit would be given a full play if it chooses to list abroad. The selection of strategic method is wrong here. So listing location should comply with the main business of the enterprise. If most of the clients of the enterprise are based in the US, then it would be a better idea to launch its IPO in the US.
Zero2IPO: What is your opinion of capital withdrawal through mergers and acquisitions.
Zhongyi ZHAO: Capital withdrawal through M&A is an important exit way of PE. We hold the opinion that if the next strategic investment institutions could help bringing more value to the enterprise and better the efficiency of resource allocation, we should let them assume this important role. The precondition, of course, is that we’ve had a thorough agreement with the original shareholders of the enterprise in relation to the M&A and this move would indeed better generate the enterprise and social value. We’ve helped Qingdao Sanchuan Juice Co., Ltd. which we invested and German Doehler Group with the successful M&A of Doehler Rizhao Company, which brought win-win benefit.