China 2020 Time to Double Down 2020-Executive... · 2019-11-26 · Estimated CAGR by Category...
Transcript of China 2020 Time to Double Down 2020-Executive... · 2019-11-26 · Estimated CAGR by Category...
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China 2020Time to Double Down
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8 M&A deals to be closed in
2019.
27 Ongoing mandates in our execution pipeline
200Transactions we have closed
50 dedicated staff members, in
Shanghai, Beijing and London.
26 years of doing business in China.
Top 5independent advisory firm
in China.
30 strategy consulting
projects on top-line growth issues in 2019.
Information Sources of our annual Forecast Report Based on 100+ interviews with China-based senior executives conducted over past 2 months, together with our own project work …
“In 2019 we have conducted over 2,000
executive level interviews related to 35 M&A mandates and 30
strategy consulting projects”
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Big Picture for 2020
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01China: Headwinds vs Government Stimulus• Difficult balance: reform (deleveraging) vs stimulus. • Manufacturing: Realignment + consolidation • Consumption: single-digit growth with structural changes.• Services: Double digit and a key driver
02 US-China Trade War: • Manageable• Accelerate China’s self-reliance • Some relocation but not dramatic.
03 MNCs in China: Impacted, but not as much as market noises suggest• FDI with single digit growth, stable numbers.• … Suffering in areas where excess capacity and changes of consumption patterns• … But growing on others: China demand + quality upgrade + consolidation.
2019 Review: Hectic year, uneven performance and MNC forced to change business model.
4Source: InterChina Interviews & Analysis
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2020: Not a crisis, but a slowdown with experienced stakeholders (government, corporates etc.) with the will to overcome
5Source: InterChina Interviews & Analysis
Economic Downturn Cycle: Will belonger than 2008 with only <1 year
Investment Environment For MNC: Much more improved in China now
GDP Growth: No shocking “collapse” now
Policy: Careful policy fine-tuning now vs 4 Trillion of monetary flooding
…?
2008
2009
2019
2020
2007-2008 2018-2020
6.6%↓6%
14.2%↓9.7%
2008
RMB 4 Trillion
2020
Note: *World Bank Ranking Of “Ease Of Doing Business”
2008 2019
Rank31*
Rank83*
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Conclusion- Continuation of positive trends. A more negative scenario is possible in the medium-term if reforms stall
Scenario Possible Outcomes
Reform & Economic Stimulus Progress
• Strong central power• Reform roll outs will continue, but remain
patchy.• Trial and error approach means that
uncertainties will continue. • SOE’s likely to remain untouchable
Economic Performance
Maintaining of Momentum• Limited stimulus (investment, liquidity, subsidies, PPP).• Increasing competitiveness.• Slow but steady financial reform.• Continued consolidation• Maintenance of consumer confidence. • Evolving consumption patterns.• Social reforms.
GDP Growth5.5-6%
Inflation2.5~4%
RMBDepreciation
5~9%
LaborCost
3~6%
Source: InterChina Interviews & Analysis 6
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Estimated CAGR by Category (2017-2030E)
Food Consumption CAGR by Category (2013-2018)
Confidence Driver 1- Higher Consumption higher + better quality... A shift to higher value goods and a broad range of services, with higher e-commerce penetration
Med
. & S
ervic
e
Clot
hing
7.2%
Alco
hol &
Tob
aco
Tran
s. &
Com
m.
5.1%
Recr
eatio
n &
Edu.
4.2%
7.6%9.2%
Source: DBS Bank, EIU, NBS, Kantar, InterChina Interviews & Analysis.
40%
20%
0
30%
10%
50%
70%
60%
2000
2024
F
2006
2004
1990
2028
F
1992
1994
1996
1998
2002
2008
2010
2012
2014
2016
2018
2020
F
2022
F
2026
F
2030
F
Personal Consumption % GDPUrbanization RateE-commerce share in FMCG retail value (%)
Eggs
Beef
Fres
h Fr
uits
Grai
n
Poul
try
-0.4%
Pork
Fres
h Ve
g.
Milk
& D
airy
5.7% 4.7%4.6% 3.3%
2.9%0.9%
-3.1%
7
China Personal Consumption % GDP vs. Urbanization Rate vs. e-commerce penetration (main charts)With Shift From Basic Consumption to Service/Alternative Goods Consumption (two mini charts)
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Market Forces• Higher Demand for Quality & Comprehensive Portfolio of products• Service driven approach is becoming relevant• Price Trend upwards: Excess capacity reduction
Government Reform Open Up• Lifting of JV restrictions (auto, finance,
railway, healthcare). • Compliance will be positive to MNC (ie.
Corporate Social Credit System)• IPR Protection is working better • Foreigners are accessing R&D Subsidies.
Still protectionism… more focused
• Key State Owned Segments (Energy, Infrastructures, Basic Financing, Education)
• China 2025 will continue in different shapes
• Cybersecurity and Data• Social Control
Confidence Driver 2- Levelling the playing field in most segments. Unprecedented restriction lifting + Compliance Reform (Anti Corruption, Green China, Security, Taxes.. Social Credit System) + Consumer Trade Up… all benefit MNC’s.
8Source: InterChina Interviews & Analysis
01Market
02Opening
03Protectionism
“70% of China is being further liberalized, while the remaining 30% will be more protected… in the long run China will further liberalize as it consolidates its role of a
global leader”
- APAC President, Chemical.
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No Easy Access To FinanceA New Industrial Paradigm
Demand Trade-Up• Comprehensive product mix. • Quality & standards.• Higher technology.
R&D And Product
Trade-Up
Need To Build Real
Sales & Marketing
Way To Market Has Changed
Stricter Environmental Protection • CAPEX. • Increasing costs.
Capacity Decrease• Over-capacity situation is starting to bite• Mainly closures of POEs (not SOEs) and “idle”
capacity.• Price spikes, supply problems.
Tax & Compliance • VAT.• Social security.• Anti corruption
Financial Deleverage• Borrowing money is almost impossible
for many non listed companies. • Listed companies have already pledged
their shares at higher valuations.
Network Financing• Cost is +400-600 points higher on
average than normal financial.• Banks refuse non-related cross
collateral, and are revising existing structures.
Source: InterChina Interviews & Analysis
Risk Driver 1- Manufacturing Readjustment (“Industrial Bubble”). Continued pressure leaves manufacturing companies with stark choice: “The end of the traditional Chinese Entrepreneur?”
© InterChinaConfidentialSource: Morgan Stanley, InterChina Interviews & Analysis
Most industrial conglomerates move a small portion of business out of China
(Samsung Electronics only) “Closing last factory in China” (But Samsung announced to have 60mil mobiles via ODM from China late Oct.).
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…with limited cases of significant action
“Move up to 30% of notebook production out of China”
“Move all production of US. bound refrigerators from China”
“Move some production to other countries”
“Moving Kindle e-reader and digital assistant Echo out of China”
“Expanding production elsewhere in Asia”
Many cases with partial operation out of China…
Most of ASEAN and Mexico don’t have faster FDI inflow yet after US-China trade-war
How much gross FDI inflows in2019/2Q have accelerated or slowed down before/after US-China Trade-war
(CAGR is based on 4Q trailing sum in USD bn)
*2019/1Q 4Q trailing sum only
8.22.5
-4.4
5.50.5
-1.1
-3.4
-2.3
-2.7
-4.2
6.63.3
-7.6
0.7
5.2
-3.8
-0.4-4.4
-4.9
-6.3
Taiwan
Thailand
-38.6
Vietam
India
Singapore*
Malaysia
Philippines
Indonesia
Hong Kong
Korea
Mexico
-31.4
vs 2Q18vs 4Q18 2Q19 4Q Trailing Sum
90.1
10.6
13.6
47.9
12.0
27.7
9.8
7.6
55.1
24.2
29.4
Risk Driver 2- New Global Order: “New Normal” Actual impact of the current Trade conflict seems limited… but could change as the underlying geo political conflict escalates.
© InterChinaConfidential 11
Business & Corporate Strategies.
Double Down (The Search for Relevance)
….Or Restructure
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Amcham Shanghai Survey: Which cities does your company plan on investing in or expanding to outside Shanghai?
Demand tops decision-making now,
Amcham Shanghai Survey: Top 3 factors that positively influence the
company’s investment and expansion outside Shanghai
2017 Survey
2019 Survey
Labor Cost Proximity To Target Markets
Proximity To Target Markets Labor Cost
Talent PoolLocal Gov. Access &
Support For MNC
1. Multi China Approach- Geographical PenetrationDiversified regions for expansion, Proximity to markets and ad hoc “County Level” strategies
Source: Amcham Shanghai, InterChina Interviews & Analysis
Harbin哈尔滨 1%
Changchun长春
1%Shenyang
沈阳2%
Dalian大连
2%Tianjin天津
6%Beijing北京
14%Zhengzhou
郑州2%
Xi’an西安
6%
Chengdu成都
13%
Chongqing重庆
7%
Changsha长沙
3%
Kunming昆明
2%
Yantai烟台
2%Qingdao青岛
3%Jinan济南
3%Nanjing南京
8%Wuxi无锡
6%Hefei合肥
3%Suzhou苏州
14%Hangzhou
杭州8%
Ningbo宁波
4%Wuhan武汉
8%Wenzhou
温州2%
Fuzhou福州3%
Xiamen厦门
4%
Shenzhen深圳12%
Dongguan东莞3%
Guangzhou广州9%
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2. Portfolio Revamp & Diversification (“Reinventing Business Model”)China is amplifying this change, due to its Size, Speed, Technology and Competitive Landscape.
Source: InterChina Interviews & Analysis 13
X-axis: More distant away from Comfort Zone (existing products and markets), more new capabilities building are required via in-house and partnership
New Eco-system:
What to Reshape?
Same Step In Value Chain -
What to Revamp?
Movement AlongValue Chain –
What to Create?
Portfolio Expansion (e.g. ICENEV;
various white goods products)
Seek Hidden Customer Base (e.g.
CHN customers)
Backwards Integration (e.g.
raw chemicals material driven)
Tech Re-deployment (e.g. Polymer tech3D;
Filter techAir Cleaner)
Platform Model (e.g. auto aftermarket
model like Michelin and BCH; MRO)
Tech-driven Cross-sector
Diversification (e.g. AI car AD)
Profit-driven Service Biz (e.g. for industrial equipment, machineries, and B2C
like mobile)
Localized Offering For China
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3. Traditional Industries into Digital/ E-Commerce/IoTIoT likely to reach 2% of GDP in the medium term, re-shaping many established sectors
Source: MIIT, InterChina Interviews & Analysis
A shift in ICxC R&D activity towards
disruptive technologies
Start Up Network and Integration Initiatives
China as global basis for new Customer
Engagement Models
© InterChinaConfidential 15
4. Consolidation Times: A majority of companies interviewed have –aggressive- M&A plans for 2020. Scale, Local Technologies and Regional Expansion are top
Source: InterChina Survey of 100 China/APAC CEOs.
Need of Scale a New Growth Drivers• Size is a Key Success factor for profit Protection. • Search of Adjacent growth segments (double digit)
Chinese Client Base • From traditional client base to new high growth client segments• Chinese clients (medium sized, listed, SOE)
B-brand Buffers• Accesing the Medium Quality Segment (good enough, at lower
costs). • Preempt incumbent players to move up on the value chain.
Acquire Local Technologies• Products 100% adapted to Chinese standards. • Cost competitive processes that are difficult to replicate to MNC.
Consolidation & Expand Regional Coverage • Participate in Chinese consolidation process.• Complement Coastal Regions with Inland and West China
presence
Digitalization• Access to Indigious innovatation (ie. Electric car,
Connectivity, E- Commerce) • JVs between Online and Offline players.
Develop Local R&D Teams & Skills• Access to local talent, processes, subsidies. • Patents adapted to Chinese standards and needs.
Service/ After Sales Revenue Streams• Local licenses/practices and models that are very
difficult to replicate. • Acquire captured local client basis.
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Transaction Prices are going down in traditional segments “Chinese Entrepreneur Crisis” and general gloomy mood
Note: Based on disclosed values; Exceptionally high multiples above 60x were excludedSource: Capital IQ
15.8x
21.1x
25.2x
29.5x32.1x
26.1x
12.5x10.4x
2012 2013 2014 2015 2016 2017 2018 2019
Median EV/EBITDA
Chinese Public Companies trading multiples – EV/EBITDA
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Website: www.raas-corp.comEstablished: 1988Headquarters: Shanghai, ChinaEmployees: ~3,000Listed: Shenzhen Stock ExchangeMarket Cap: USD ~5,298 million
Shanghai RAAS is engaged in the research, development, and manufacture of blood products and plasma-derived medical products. It also offers vaccines, diagnostic reagents, and testing equipment and services. It has become the largest blood products company in China and Asia
The company’s products, including human albumin, human immunoglobulin, coagulation factors and others, have been registered in ~20 countries. Currently, Shanghai RAAS is one of the very few domestic manufacturers that are able to export blood products. The company has 41 plasma collection stations in China with an annual production capacity of +900 tons
Website: www.grifols.comEstablished: 1940Headquarters: Barcelona, SpainEmployees: ~18,300Listed: Spanish Stock ExchangeMarket Cap: USD ~16,571 million
Grifols produces essential plasma-derived medicines for patients and provides hospitals and healthcare professionals with the tools, information and services they need to help them deliver expert medical care. The company is the world’s largest maker of immunoglobulin
The three main divisions – Bioscience, Diagnostic and Hospital – develop, produce and market innovative products and services that are available in more than 100 countries. The company has a network of 250 plasma donation centers (U.S. and Europe). Grifols Diagnostic Solutions advances patient care with diagnostic solutions to improve disease detection and management and simplify laboratory operations. As of Sep 30, 2018, GDS revenue was USD 570 million and EBITDA USD 270 million
Trend A - Playing the Stock MarketShanghai RAAS Blood Products to acquire Grifols Diagnostic Solutions through USD ~5 billion share swap
4,367 4,483 4,8782,567
1,295 1,260 1,477 744596 601 646 387
2015 2016 2017 2018 H1
Revenue EBITDA NI
319 348283
150150 183 13977111 138 96 55
2015 2016 2017 2018 H1
Revenue EBITDA NIUnit: USD mil Unit: USD mil
17
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Founded in 1997, Faurecia has grown to become a major player in the globalautomotive industry. A leader in its three areas of business, the Group isbacked by a R&D and production network with sites in 35 countries. It is thepreferred partner of the world's largest automakers, which value itsoperational excellence and technological expertise.
Jiangxi Coagent Electronics is a private Chinese company specialized ininfotainment and interior electronic solutions, including the integration ofdigital displays and HMI technologies. The company employs 1,300 peopleincluding more than 300 engineers. Jiangxi Coagent Electronics is based inFoshan for its Research and Development activities and in Jiangxi Province forits industrial production. The company is a supplier to leading Chineseautomotive manufacturers and is seeing a strong growth in sales, whichreached 148 million euros in 2016 and will rise to 270 million euros by 2019.
In order to expand its product portfolio and accelerate its expansionin China, Faurecia embarked on an acquisition initiative. Throughacquisition of Coagent, Faurecia will be able to penetrate the ChineseOEM market
InterChina served as one of Faurecia’s financial advisor in this transaction. Our Role in this transaction was focused on identification of the target and negotiations.
Trend B - Acquire Local Technologies Faurecia acquires majority stake in Jiangxi Coagent Electronics
• Transaction: majority buyout• Deal Value: RMB 1.45 billion
Transaction
18
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Trend C - Re-Emergence Of JVs: The new JV partner profile offers long-term synergies, and less of the traditional IP (“steal my business”) risk
19
The New JV Profile• Listed or to be listed. • SOE (and listed). • Cash rich. • Critical mass, national sales channels. • Localized products and brands. . • Still led by traditional leaders, but run
by a second tier of professionalized managers.
Source: InterChina Interviews & Analysis
Traditional JV Profile• Privately-owned.• Self-made first generation
entrepreneur.• Very early stage of company
development.• Nothing to lose, everything to
gain.
What synergies are new partners looking for?• Protect its stock price.• Quality technologies and product mix to increase sales channel value.• CAPEX/process to face growing China cost and green compliance. • Investment for growth needs.• Globalization.
© InterChinaConfidential 20
Trend D - Divestments: The number of divestments by foreign companies in China definitely trend up in recent years
• 1,225 divestments from MNCs in China. i.e. ownership is a registered entity not in China
• The number of divestments has increased five-fold since start of 2000
2000
Source: Thomson Financial, InterChina Interviews & Analysis
2013 2015 2019
• Sellers = non China resident• Partial sale• Complete exit• Foreign PE exits• JV restructuring
> 3,0001,225
Management time
Lack of meaningful scale
Deteriorating financial performance
Requirements for continued funding
Relationship with partners (if it is a JV)
Lack of long term competitiveness
Scaling down on capacity
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Industrial/Auto
… Many international companies have opened up their China equity or spun off interests in China over recent years …
Consumer Healthcare, Chemicals, Tech
Source: InterChina Interviews & Analysis
PARTNER SHIFT THROUGH PARTIAL OR FULL DIVESTMENT
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Business With China.
© InterChinaConfidentialSource: Dealogic
Chinese Outbound Investment: Big Shift and Change of Approach. Less, but better quality. Divestments.
23
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One Belt One Road. OBOR already takes 26% of China’s int’l trade, and China is looking to increase trade inflows to USD 2tr from the OBOR countries by 2020
24
China Trade with OBOR Countries(Total import and export value, USD bn)
50
100
150
200
13
14
15
16
17
20162012
15%
%USD bn
16%
2011
15%
16%
2013 2014
13%
2015
14%
Trade Value Share in Total
Eastern Europe
0
50
100
150
200
2
3
4
5
65%
3%
%
2012
USD bn
4%
2011
5%
2013
4%
2014
3%
2015 2016
Central Asia
10
20
30
40
50
0
20
40
2016
%USD bn
28%27%27%
2011 2012
25%
2013
28%
2014 2015
23%
Northwest Asia
0
50
100
150
200
0
10
20
2014
%USD bn
11%
20132011
10%
2012
9% 10%11%
2015
12%
2016
South Asia
456789
10
0.4
0.6
0.8
0.5%
%USD bn
0.7%
2011
0.7%
20142012
0.6%
2013
0.7%
2015
0.5%
2016
East Asia
0
100
200
300
400
500
40
42
44
46
48
2015
%48%USD bn
41%
2011 2013
42%
2012
43% 43%
2014
47%
2016
Southeast Asia
Source: China Customs, ADB, IMF, InterChina Interviews and Analysis
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Conclusion
Slowdown with more experienced stakeholders (government, corporates) with the will to overcome it.
At a corporate level, uncertain times, 2020-2022 period will call for leadership and vision as difficult
choices will have to be made in China.
“I see a fundamental swift in all key dynamics-competitive landscape, consumption patterns, disruptive technologies-.. The China we know today will not be anything close to the one coming in 2025, and I am doing my best to transfer this reality to my HQ, so
we can be part of this process” (APAC President, EU Industrial Group)
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