Jiuding Capital: Striving in PE
2010-05-16
From a nameless player in the industry to a rising star, Jiuding Capital only spends three years. Through ups and downs of the capital market, Jiuding Capital completed its metamorphosis in diligence and a low profile. Currently, Jiuding Capital has a full-time staff of more than 100, and established branches in many key cities and regions of China or dispatched staff there. It seems that this team led by people born in 1970s has found out for themselves a development path: do not imitate easily, do not care about ranking, and be themselves.
In the beginning of 2007, Beijing Jiuding Capital Co., Ltd. was founded, and completed several projects including Harbin Guangyu, Guangle Packaging, and Geeya Science& Technology. In the second half of 2007, China capital market surged, and Partnership Law of the People’s Law of China was revised. The favorable external environment and opportunities made the Jiuding Capital team who have tasted the flavor of success unsatisfied with a firm-based small fund. Under this situation, the firm’s first limited partnership RMB fund, Shanghai Jiuding Capital Development Center, was founded, receiving a proceed of 300 million yuan. After three years development and expansion, according to incomplete disclosure, Jiuding Capital further launched 6 RMB funds with a total size of over 3 billion yuan invested in 17 businesses.
Fast capital-raising
Due to lacking of performances and cases, most institutes find it difficult to raise its first fund. That is the reason why a PE that can depend on large enterprises or institutes usually source its first fund from the enterprises or institutes themselves. Compared with this, Jiuding Capital’s first capital-raising is rather easy.
“In this field, you have to depend on mouth-to-mouth praise”, Lei CAI, partner and director general manager of Jiuding Capital said to this reporter, “the proceed we first received was from pervious customers of our team members, because they recognized our altitude of being pragmatic and diligent.” Behind “mouth-to-mouth praise” is many years of work backgrounds and achievements of the main members of GP team previously in financing and securities industries. According to this reporter’s knowledge, among main members of Jiuding Capital partnership level, Xiaojie HUANG used to work in Shanghai Futures Exchange, Center for China Financial Research, PBC School of Finance, i.e., “Wudaokou” which is familiar by everyone; Zhongyi ZHAO used to work in Tomorrow Holding Limited Company, Shanghai Fareast Securities Co., Ltd., etc., and he also graduated from “Wudaokou”; and Lei CAI used to work in the state-owned financial institution China Railway Trust Co., Ltd..
These work backgrounds not only help them accumulate precious practical experience and establish extensive personal relationships, but also provide the basis for establishing trusts and developing cooperation with LPs.
Besides, the mechanism arrangement by Jiuding Capital about rights, responsibilities, and interests between GPs and LPs is very attractive for the initial fund providers. Different from the practice of charging an administration fee on an annual basis conventionally adopted abroad, for the first several funds, Jiuding Capital adopted the approach of charging an administration fee once and for all according to an investment amount. “Actually, for phase I of one fund we can generally invest it within 1 year. If the duration of one fund is 5 years and for the remaining 4 years we still charge a 2% administration fee annually, the acceptance willingness is not high for an emerging China local LP market. Of course, as gradual growth and maturity of the market, our policy may be adjusted accordingly”, Lei CAI said.
At present, LPs’ cooperation relationship with Jiuding Capital is very solid, and particularly some LPs have cooperated with us until now since phase I of one fund. Most LPs of Jiuding Capital are private company entrepreneurs from Pearl Delta, Yangtze Delta, Beijing, Shanghai, etc., which matches perfectly with Jiuding Capital’s localization strategy.
According to the growth trail of common PEs, the scale of one fund usually presents a trend of gradually expanding, while Jiuding Capital’s each fund phase keeps all the time a relatively steady scale. About this, Lei CAI has his own particular view: “The advantages of keeping an appropriate scale are: one, to better control a fund portfolio, and two, to better arrange investment progress. To raise a 1-billion scale RMB fund, we definitely have the ability, but flexibilities in investment scale and ratio will be limited. In fact, our current scale can better adapt to market needs.
Debate on Speedy Investment
Corresponding to fast capital-raising, Jiuding Capital’s investments are also excessively effective. According to this reporter’s knowledge, under normal situations, Jiuding Capital will close one fund phase within 9 to 12 months, with a scale of 300-500 million yuan and a portfolio of 6-10 companies. In other words, averagely every one or two months, Jiuding Capital will add a new case, each project having an investment amount of 40-50 million yuan. Even in the market low ebb, Jiuding Capital still did not slow its investment tempo. During the special period of 2008 financial crisis, many institutes adjusted their investment strategies by throwing away their previous ostentation and pizzazz and starting to stick to conservation and caution, while Jiuding Capital frequently stroke by investing continuously in several businesses including Linoya Electronics, Guangxi Tianyuan, Jiangsu Huifeng, Gifore, etc..
About such a fast investment speed, there appeared some reproaches in the market. Some industry experts once said frankly to this reporter that Jiuding Capital’s investments are a little aggressive. But Lei CAI has a different view: “Effects and efficiency of an investment are not directly connected. Being fast or slow is not the original intention of an investment, and I don’t even think it is representation of a style. Only if the judgment is clear and the risk is controlled, it does not matter whether the investment process is fast or slow. In our portfolio, you can see that the return on investments is pretty good. Take Jiuding Fund Phase I as an example, although shocked by the 2008-2009 financial crisis, this fund still delivered a relatively satisfactory answer to LPs. Our annual and seasonal reports show that even in 2008, both the average sales revenue and net profit of the invested companies by all our funds are growing obviously.”
Gifore is a listed company that has been invested by Jiuding Capital. In April 2009, Jiuding Capital acquired 6.24 million shares of Gifore, accounting for 6.98% of the total shares after its IPO, with an acquisition price of 20.16 million yuan. If calculated according to 0.7134 yuan/share of the company in 2009, the P/E ratio was 4.53 when Jiuding Capital invested in Gifore. At the end of 2009, the static P/E ratio of Gifore reached as high as 123.8. The 6.24 million shares currently are still in the lock-up period, and if liquidity discount is not considered tentatively, the market value has reached as high as 430 million yuan if calculated according to the closing price 69.56 yuan of Gifore shares on April 19th, 2010.
In the current portfolio, only one company, namely Rizhao Sanchuan Fruit Juice, has not achieved the expected goal at its later development stage. Jiuding Capital has transacted the equity to a German company at the end of 2009. Calculated by the transaction price, the internal return rate (IRR) has exceeded 30% which reaches Jiuding Capital’s requirement on divestment.
As can be seen, the portfolio invested by Jiuding Capital is mostly leading enterprises in their respective industries. These enterprises are usually at a maturity period and very few are at a growth period, but all of them have strong initiatives and possess certain conditions for going public. “At present, there are 5 or 6 companies that are under review of the CSRC”, Lei CAI said, “We require a company that has an annual profit of at least 30 or 40 million yuan and in which we can invest 30-50 million yuan one time. Such a company usually has a certain scale and certain capabilities to undertake risks themselves. We require that the investment price is controlled within a P/E ratio of 6-8, and we generally do not invest in companies whose P/E ratio is over 10. Even during the financial crisis, these companies did not have big fluctuations. One reason is that it is not very possible for mature companies to change face greatly, and the other reason is that the investment sectors selected by us are closely related to terminal consumer products, pharmaceuticals and agricultural products that do no fluctuate greatly to external economic cycle. It is true that Jiuding Fund Phase I was invested in some industrial products and was indeed impacted during the financial crisis, but recovery has been seen since 2009.
The reason of being fast and controlling quality simultaneously is not unrelated to the disciplined mechanism of risk control by Jiuding Capital. Besides a risk control team with full specialties and project decision-making committee, specially designated partners in Jiuding Capital are responsible for risk control by establishing a complete project assessment system and mechanism. Every project is assessed by many rounds, and the earnings and risks of the project investment are directly hooked to the awards and penalties of the person being responsible.
View on Pre-IPO
Pre-IPO projects are particularly liked by investors for their characteristics of low risks and fast payback, etc.. Pre-IPO itself is neutral. But nowadays a person enjoying particular resources suddenly becomes a shareholder at a particularly low price before IPO, causes the IPO price of the secondary market to rise crazily so as to obtain a huge profit, and consequently the bill-payer is just the common investors in the secondary market. About this problem, Lei CAI expressed his own view: “Jiuding Capital is also tending to invest in relatively mature and quality companies, but is not simply sharing. Enterprisers are not stupid, purely sharing type funds do not have a large space. We have the professional capacities to deeply understand the rules of going public in China’s A-share market, to solve some difficult and complicated problems of a company, and to truly provide value-added service to the company by concentrating on the topics of growth, competition and going public. If it is only for sharing, this type of projects will be grabbed by many investment institutions, and at last a joint equity investment has to be made and the investment price is not low. But in Jiuding Capital’s portfolio, joint investments are relatively few, because we are able to independently find out a truly valuable company and achieve a truly meaningful cooperation”, Lei CAI said, “The cycle by which we assess a company needs to be at least 5 to 10 years. About whether an investment is finally decided, the value of the company itself is a core issue, and then the issue that whether the company will go public will be considered.”
In fact, in the batch of companies that were listed in the SME Board or Second Board, or reviewed by CSRC, several companies did not pass Jiuding Capital’s internal assessment. “We hold to principles, and have no regrets”, Lei CAI said very positively.
New Strategy for Specialization Funds
PE specialization is a trend and is still more a way of survival. Since common funds can also invest in pharmaceutical industry, what is the meaning of a specialization fund? Jiuding Capital Pharmaceutical Fund president Bo YU said to this reporter: “It is not only for value discovery, but it will bring to companies a series of added values. Although we cannot replace entrepreneurs to be direct trail blazers for entrepreneurial development, we can assist the enterprises in growth by utilizing the platform of excellent enterprises and integrating the resources accumulated by our team over ten years or even dozens of years, and at the same time realize our own value.”
The profession of Jiuding Capital Pharmaceutical Fund can be obviously seen from the personnel constitution of the team. Bo YU is an authority in Chinese pharmaceutical industry, and before joining Jiuding Capital used to work as GM of Haihong, assistant president of Haihong Group, general secretary of China Pharmaceutical Elites Club, etc., and before all these he used to work in Ministry of Health, and China Food and Drug Administration. After joining Jiuding Capital, Bo YU recruited many elites in the sector.
“They are all experts in Chinese pharmaceutical industry, and their respective segmentation sectors are different. For example, Zhang Xiaolong is an expert in the sector of new medicine sales; Cheng Xiaosong and Wu Jiantao are both experts in OTC sector; and there is another expert who is specialized in common medicine sales for pharmaceutical companies. Besides, Jiuding Capital also has a talent tank in the field of pharmaceutical R&D, such as Jin Tao, a doctor form Academy of Military Medical Sciences, and so on”, Bo YU said.
Compared with common funds, the most obvious advantage of a specialization fund is specialized service in the sector. The value-added service by Jiuding Capital Pharmaceutical Fund covers every main links in the whole pharmaceutical industry chain including R&D, manufacture, sales, terminals, etc..
“Starting from the R&D topic of a pharmaceutical enterprise, we will have a specialization team to assess the new products to be developed. For example, for pharmaceutical products developed aboard whose patent right is expected to expire and that possess an investment value, we will make a screening. Take future drugs as another example, we have detailed tracking, and we will provide a list and topics in the weekly topic selection meeting for enterprises to initiate projects and conduct R&D, for many enterprises do not have such abilities.”
At the same time, “a channel between enterprises and research institutes are established”. The research results of research institutes needs the production force of pharmaceutical enterprises to be transformed into products, and pharmaceutical enterprises need good research results to promote their development. However, due to unsymmetrical information the enterprises and research institutes lose chances for cooperation. Just because of a middleman like Jiuding Capital, similar dilemma can be avoided. In the aspect of pricing, “we have deep research of every document related to the price formation mechanism of China’s drug market. Furthermore, because of the experience of our pharmaceutical team, we can help the enterprises make a reasonable pricing strategy.” Last but not least, Jiuding Capital can help enterprises build a complete sales system. Experiences of the above mentioned experts and the strong relationship networks behind are just what a common pharmaceutical enterprise lacks of.
Besides, Bo YU founded the China Pharmaceutical Elites Club. “The best pharmaceutical elites in each province and municipal city of China are all members of this club. We can use this platform to help enterprises for new drug recommendation and academy spreading.”
For specialization funds, Jiuding Capital selects to start form the pharmaceutical industry. After interviews with Bo YU and other professionals in the pharmaceutical industry, this reporter obtains the reasons behind:
First, pharmaceutical industry has a broad market, and possesses very high return of profit. After debut of one drug, all the investments will be recovered within relatively few years. Especially for an enterprise that owns new products or patented products, once the drugs are developed successfully, the enterprise will enjoy a technology monopoly advantage, and the return of profit is astonishing.
Second, the industry is highly growing. In the past 18 years, the compound growth of the pharmaceutical industry reached as high as 18.8%, and in the recent 5 years, as high as 22.7%. After the health care system reform, reduction of the medical treatment expenses has enabled people to be more likely to go to hospital for treatment, thus increasing demand for drugs. “This will generate a rigid demand of 1 or 2 trillion yuan. The scale of the entire pharmaceutical market will represent a trend of increasing by several times in the next few years”, Bo YU said.
Third, the entry threshold for pharmaceutical industry itself is very high. From industry entry, product development, technology accumulation to marketing and distribution, etc., successful enterprises are protected and new entry enterprises are blocked.
Fourth, the national policy supports. “The nation positions the pharmaceutical industry more as a strategic industry and an industry that can bring enormous tax revenues and profits, which necessitates growing and strengthening this industry fast, improving concentration of this industry, and depending on the strengthen of capital. It is possible that the influence by capital on the pharmaceutical industry is higher than a certain specific policy”, Bo YU said.
The integration by capital on pharmaceutical industry has accelerated. As an investor, if he can catch this speed train, it would undoubtedly be a good opportunity. Bo YU divided the capital invested to pharmaceutical industry into three types: “The first type is national merger& acquisition capital, including China National Pharmaceutical Group, Harbin Pharmaceutical Group, Shijiazhuang Pharmaceutical Group, and North China Pharmaceutical Co., Ltd.. These large scale enterprises under State-Owned Assets Supervision and Administration Commission together will have a capital of near 100 billion yuan this year for fast merger and acquisition of high quality assets in this industry. For example, China Resources Group acquired 100% equity of Beijing Pharmaceutical Group.
The second type is input capital. 850 billion yuan will be put into basic medical treatment. Understood from the aspect of policy, it means that the country wants common people to enjoy the benefits, and from the aspect of investment, it means that the country is confident in this industry, thus such scale a capital will be put into the industry to form a rigid demand and stimulate the internal demand. The third type is market capital. This is particularly representative by the numbers of IPOs in A-share market last year. In 2009 there were 4 pharmaceutical enterprises listed in the SME Board and 7 in the Second Board. In January 2010, there were another 4 pharmaceutical enterprises listed in the SME Board. As can be seen, the capital market has been providing the pharmaceutical industry with more and more capital.”
Just because of noticing this huge cake, Jiuding Capital Pharmaceutical Fund has invested in one after another at a very fast speed since its inception. This Fund raised 525 million yuan at phase I last November, and until present has actually invested in three enterprises including Shanxi Pude, and Haikou Qili, with an investment capital of 270 million yuan. Several enterprises that currently have completed their review stage will soon sign investment agreements with Jiuding Capital. “We have in hands several other large cases that are all well-known enterprises in pharmaceutical industry”, Bo YU said.
When asked by this reporter about the reason why Jiuding Capital invest so very fast, Bo YU talked about the recognition by LPs to this Fund team’s professionalism, thus three is no obstacle in financing; the sufficient and effective incentive mechanism of Jiuding Capital, thus this team is hard-working; their expertise backgrounds in pharmaceutical industry, thus they are quick in seeking out enterprises of investment value; and attractiveness of the value-added service to the invested enterprises, thus cooperation is usually just clicks.
Besides, he also talked about a series of detailed works behind the fast speed, e.g., “we are caring about current products structure of our target enterprises, sales ability for one single product, and the field of strength for their fist products. Is it in cardiac and cerebral blood vessel, gastrointestinal tract, or antibiotics? For this issue, we will make a basic assessment. Which architectural level does the product belong to in the relevant field? Is it in the upper, middle or lower? For this issue, we will make a further assessment. We have a team of experts, with Jin Tao as its head, who are specialized in face-to-face communications with R&D teams from enterprises.” By communication, Jiuding Capital can understand whether the enterprises are advantageous or not in their concepts and whether their R&D directions are valuable or not. “Then we will conduct a detained investigation in all the products that are planned to be submitted by an enterprise for review, to know which stage the enterprise is in, being approved or under examination?” This is related to the speed of value materialization. To complete this series of works in a short time, both mechanism and endurance are needed.