Archive for List of companies of the People’s Republic of China

China: No Longer a Hidden Gem

Posted in Chinese Economy with tags , , , , , , , , , on 09/25/2011 by David Griffith

by Anthony Noto Mergers & Acquisitions

Long gone are the days where globetrotting bankers could view China as a wide open playing field for doing deals, according to a panel at ACG’s Business Conference in Los Angeles yesterday.

Like what you see? Click here to sign up for a Mergers & Acquisitions free trial and daily newsletter to get the latest news on deals and issues impacting middle-market M&A professionals.

During PricewaterhouseCoopers LLP’s “Doing Smarter Deals in Emerging Markets” discussion at the Beverly Hilton Hotel Wednesday afternoon, the consensus among the panelists was that even though the middle market has arrived in droves throughout China, and their Eastern counterparts are savvier dealmakers, there are still lingering cultural differences that make M&A in the region difficult.

“It’s no longer a hidden gem,” PwC’s Alan Chu told those in attendance regarding China’s evolution. “Capital is not an issue with many of these companies.”

Fellow panelist Hanson Li of Hina Group agreed.

“Companies in China are much more sophisticated and secure,” he said. “Why should they have a low valuation?”

For that, he pointed to China’s ability to grow its wine and spirits industry, as well as capitalize on the sale of women’s garments, referring to E-commerce lingerie company La Miu as “the Victoria’s Secret of China.”

Chu chimed in, calling aerospace the industry to watch for Chinese dealmakers, adding that M&A is more about “collaboration and globalization” between China and U.S. companies rather than the emerging market stereotype of doing deals quickly.

“What defines success in China is people on the ground,” adds panelist Colin McIntyre, a PwC partner, stressing the importance of cultural adaption as opposed to enforcing the Western way of doing things. “The biggest risk is reputational risk.”

Still, just as the two global economies challenge each other on a broader scale, so do middle market deal pros within the region because of the cultural differences that they face. Between language and dialogue differences, clashing accounting practices and the need for building relationships, wrapping deals up in China generally takes longer than anywhere else, they said.

For example, regulatory issues may differ from city to city, Chu said. Coupled with the growing need for Chinese companies to localize their services, and U.S. partners must make themselves privy to the subtle differences between Shanghai, Beijing and Hong Kong.

Another is structural differences, according to Walt Disney Co. senior vice president of global development Eric Muhlheim, who also spoke on the panel.

Disney looked at numerous acquisition targets in China, Muhlheim said, but in keeping with the integrity of the company’s brand, it “chose to go it alone” and grow organically in the region once it realized the structural differences of those competitors were too steep to integrate.

That differs from its acquisition strategy in another emerging market, Sao Paolo, Brazil, he said, where it is more likely for Disney to do deals because of “specialized assets” that Disney wouldn’t be able to get on its own.

During times like that, challenges are met because emerging markets provide such a wide avenue of opportunity. Even though, as McIntyre puts it, “It’s [never] easy to do business there.”

For more information on related topics, visit the following:
•Strategic M&A
•Financial Sponsors
•Business Services


The End of Cheap Labor in China

Posted in Chinese Economy, Chinese International Trade with tags , , , , , , , , , , , , , , , on 07/05/2011 by David Griffith


Courtesy of TIME.

On May 25, U.S. businessman Charles Hubbs made the short trek to Hong Kong  from his office just outside Guangzhou, a city in Guangdong province in  southeastern China that is known for good reason as the manufacturing workshop  of the world. For the 64-year-old native of Louisiana, it was a trip that may  have marked the beginning of the end of his successful 22-year run as a  China-based exporter of medical supplies.

Hubbs was going to listen to a pitch from the American ambassador in  Cambodia, Carol Rodley, and the president of the American Chamber of Commerce in  Phnom Penh. Their aim was simple: to get foreign investors, particularly those  already with operations in China, to consider setting up shop in Cambodia. Hubbs  was all ears. To hear him tell it, the price of labor is on the brink of making  his firm, Guangzhou Fortunique, which supplies some of the U.S.’s biggest health  care companies, uncompetitive. “We’ve seen our wage costs in China go up nearly  50% in the last two years alone,” he says. “It’s harder to keep workers on now,  and it’s more expensive to attract new ones. It’s gotten to the point where I’m  actively looking for alternatives. I think I’ll be out of here entirely in a  couple of years.”(See “As China Economy Grows, So Does Labor  Unrest.”)

He is not alone. In what is supposed to be a land of unlimited cheap labor — a nation of 1.3 billion people, whose extraordinary 20-year economic rise has  been built first and foremost on the backs of low-priced workers — the game has  changed. In the past decade, according to Helen Qiao, chief economist for  Goldman Sachs in Hong Kong, real wages for manufacturing workers in China have  grown nearly 12% per year. That’s the result of an economy that’s been growing  by double digits annually for two decades, fueled domestically by a frenzied  infrastructure and housing build-out — one that, for now anyway, continues apace — combined with what was for a time an almost unquenchable thirst for Chinese  exports in the developed world. Add to that the fact that in the five largest  manufacturing provinces, the Chinese government — worried about an ever widening  gap between rich and poor — has raised the minimum wage 14% to 21% in the past  year. To Harley Seyedin, president of the American Chamber of Commerce in South  China, the conclusion is inescapable: “The era of cheap labor in China is  over.”

Mind you, that doesn’t mean that labor costs in China, even in the most  expensive parts of the country like Guangdong province, are higher than in most  other places, particularly in the developed world. They aren’t. The average  manufacturing wage in China is still only about $3.10 an hour, (compared with  $22.30 in the U.S.), though in the eastern part of the country, it’s up to 50%  more than that. The hourly cost advantage, while still significant, is shrinking  rapidly. For the vast majority of companies, whether small, medium-size or huge  multinationals, the decision about where to produce a product is always driven  by multiple factors, of which the cost of labor is but one. “For lots of  companies over the past two decades, the disparity was such that labor costs  often drove the decision,” says economist Daniel Rosen, the China director and  principal of the Rhodium Group, a a New York City–based consulting firm. “Now,  increasingly, that’s no longer the case.”(See portraits of Chinese workers.)

The ripple effects of this new reality are enormous, and they flow globally.  Start with China itself. The push for higher wages, constrained for so many  years, sparked a series of high-profile labor protests last year. (Worker  discontent was also reflected by 14 suicides at Foxconn, the large manufacturer  that produces goods like the iPad.) But higher wages have also improved things  in China’s western region, where the government has long tried to encourage  investment. In the past year, many multinational and Chinese companies have  expanded or relocated inland, where labor is still cheap.

From China’s perspective, that’s exactly the sort of trade-off it seeks. As  Andy Rothman, chief China macro strategist at CLSA Securities in Shanghai, says,  “People in Sichuan or Henan or wherever can stay closer to home and find a  good-paying job” instead of having to flood east each year to live in a company  dormitory far away from their families. “How is this a bad thing?”

Read more:,9171,2078121,00.html#ixzz1PxkcIUQZ

Why Do We Fear a Rising China?

Posted in Chinese Economy, Chinese Foreign Relations, Chinese International Trade with tags , , , , , on 06/07/2011 by David Griffith


Courtesy of TIME
by Michael Schuman

It’s hard to argue that the rise of China, taken on the whole, is anything but good for the global economy. New wealth for China’s 1.3 billion people means 1.3 billion more people who can buy stuff from the rest of the world, creating jobs from American research labs to Japanese industrial zones to Brazilian mines. A global economy no longer solely dependent on the U.S. consumer for growth is potentially more stable and prosperous.

Yet few people see China that way. Many don’t acknowledge China’s positive role in the world economy at all. Instead, they focus on the competition China has created, especially for the developed world, or the jobs many believe China has “stolen.” However, even those who realize, or even directly benefit from, China’s advance still can’t but feel uneasy about that advance. But why is that? Why do we fear a rising China in a way we don’t a rising India? Or why is an economically powerful China less acceptable than, for example, a stronger Europe?

The conflicting emotions many have about China’s rise are the subject of my latest TIME magazine story, focused on Australia’s relationship with the Middle Kingdom. What’s happening Down Under is a glimpse into the future for all of us. And for me, reporting there got me thinking about why so many of us – and not just in the West, but out here in Asia as well – are having so much trouble coming to terms with the idea of China as a superpower.

There are few countries in the world that have benefited more from China’s rapid economic growth than Australia. The boom in exports Australia has enjoyed due to surging Chinese demand, especially for raw materials, is a key reason – perhaps the determining factor – why the country avoided a recession after the 2008 financial crisis. Trade with China is also spurring investment and creating jobs. But simultaneously, Australians are becoming uncomfortable about their growing relationship with China. They fret that the economy is becoming too dependent on China for its growth. They worry China will use its economic leverage to put political pressure on the country, or employ its growing economic power to become a strategic threat. They don’t much care for Chinese companies buying Australian assets. Australians worry that what helps their wallets hurts their country politically and strategically, and the more powerful China gets, the bigger that potential danger. Hugh White, head of the Strategic & Defence Studies Centre at the Australian National University, explained the sentiment to me this way: “As China keeps growing strong enough to fulfill Australians’ economic aspirations, it grows more powerful and undermines U.S. primacy and our strategic aspirations. People are conscious that with the benefits we get from Chinese growth, there is a certain degree of vulnerability.”

I think many of us around the world can sympathize with the Australians. As David Pilling of The Financial Times recently pointed out, China’s neighbors aren’t too fond of the way Beijing throws its new heft around in the Asia region as its economic influence grows. It’s no coincidence that political leaders in Seoul and Taipei strive to maintain strong ties to Washington even as their economies become driven more and more by China. Americans are queasy that the Chinese own so much U.S. debt. The Japanese own just about as much, but that doesn’t seem to bother anybody.

Of course, 30 years ago, it might have. The reaction many have to China today is very similar to the one that towards Japan in the 1980s, when the Land of the Rising Sun was the rising economic challenger to the West. In recent years, Americans got all jittery about a Chinese attempt to buy oil firm Unocal; more than 20 years ago, Americans got all jittery over Japan’s acquisition of Rockefeller Center. Why? After the overly emotional response in the U.S. to Sony’s acquisition of Hollywood’s Columbia Pictures, co-founder Akio Morita pointed out that Australian born Rupert Murdoch had previously bought 20th Century Fox, without the drama. He was suggesting the reason was racism.

That may be part of the story today with China as well. But the issues are far more complex than that. In the West, Europeans and Americans have dominated the world scene for so many centuries that they’re uncomfortable with the notion of someone else claiming the throne of global hegemony. The concern Americans had with Japan back in the day was that the Japanese were competitors in the global economy, not partners. The fear was that Japan was trying to undermine American dominance, at least in the realm of business. Even beyond that, Japan was winning with an economic system that challenged American ideals of free markets and free enterprise. For many, the rise of Japan seemed to have something sinister behind it – a competing and unfamiliar economic, corporate and cultural system that was producing superior results to those of the West, and appeared to have only its own interests at heart. The challenge from Japan was not just economic, but ideological.

The reasons many fear China today are very similar. China, too, uses a competing economic model – “state capitalism” – that challenges the economic ideology of the West. In many ways, China also behaves in a mercantilist fashion, which gives the impression it cares little about anyone else. It keeps its currency controlled so its exports can out-compete those from other countries, and it grabs natural resources for itself wherever and whenever it can. Often state-controlled companies are doing the grabbing, making China seem like a threatening monolithic juggernaut. Worst of all, the political ideology behind China’s economic ascent completely counters Western ideals about democracy and human rights. China is not just competing with the U.S. in world markets, but offering up an entirely different economic and political system, one that at times seems better at creating growth and jobs, even as it restricts much-cherished civil liberties. China is succeeding based on ideas that Americans despise.

The concerns many in the world have with China go well beyond even that. No one ever expected Japan to become a military threat to the West, or even a contender for diplomatic influence around the world. Japan wanted to be No.1, but only when it came to its role in the world economy. Aside from that Japan was a part of the global establishment – a member of the G7 and a clear U.S. military ally. China is none of those things. More and more, China is using its economic clout to offer an alternative to the U.S.-led political and economic system. Beijing routinely complains about the primacy of the dollar and wants its own currency to play a greater international role. Chinese diplomats have tried to extend their country’s political pull across Africa and Latin America while supporting countries clearly hostile to U.S. interests (such as North Korea.) And Beijing is becoming a bigger military power as well, something that makes its neighbors, many of which have a history of conflict with China (South Korea, Vietnam, Japan, Taiwan) extremely nervous. Every extra 10% to China’s GDP translates into more money the government can spend on its navy and armed forces.

In other words, China appears to be challenging not just today’s economic orthodoxy and order, but the world’s political and military framework as well. China isn’t content just to sell more TV sets to the world, like Japan. The Chinese want to have more control over the world. And they want to use their economic clout to get it.

Or so we think. The fact is we’re only guessing at what China might do as a superpower. Since China is still a relatively poor nation today, it makes sense that at this stage in its development, its leadership tends to be focused on what’s good for China. Will China’s outlook broaden as it become richer? We don’t know.

When the U.S. took over global leadership from a waning British Empire, the world had a pretty good idea what to expect – that overall the U.S. would continue to hold to ideas of free enterprise and democracy. Now an equally important shift is taking place – the rise of the East – but it’s not so clear what it all means for the direction of global civilization. So maybe that’s what we fear most of all. The uncertainty of a fundamentally changing world

Read more:

Can Chinese companies live up to investor expectations?

Posted in Chinese Economy, Chinese Markets, Chinese Stock Trading on US Markets with tags , , , , , , , , , , on 05/31/2011 by David Griffith


Courtesy of McKinsey Quarterly.

Are Chinese and other companies in emerging markets finally getting the respect they deserve? Historically, they’ve traded at a discount on all metrics of valuation—typically, in the range of 20 to 30 percent.1 Even as the underlying Chinese economy developed and the shares of these companies became a commonly accepted investment option, neither institutional nor retail investors quite shook the perception that such securities were generally risky. Yet if the Asian financial crisis of the late 1990s reinforced that belief, the credit crisis of 2007 may have reversed it. Indeed, companies in several major emerging markets now trade at a premium to their peers in developed markets.

It’s true that in the wake of the crisis and the ensuing recession, investors have taken note of the great rebalancing of economic power, shifting from West to East, and have rethought long-held beliefs about the relative security of asset classes in both developed and developing economies. But an important question arises: have companies in emerging markets changed or just investors’ perceptions of them? The question is apt in a number of emerging markets, including Brazil, India, and Russia, but it’s particularly so in China, where the reversal in premiums is most noticeable. If these valuations reflect investors’ expectations for future growth and returns, are there valid reasons to believe that those of Chinese companies have improved through the recession? Or are investors already assuming an improvement in economic realities? Economic data suggest the latter.

A shift in valuation

In emerging markets, the historical discount of companies was generally in line with their performance. As we observed a few years ago,2 emerging markets may typically have exhibited higher growth but also had much lower returns on capital than their Western peers. This difference almost completely explains the difference in valuation multiples. From 2006 to 2010, our analysis found the average return on equity (ROE) of Chinese companies to be six percentage points below that of US companies—a gap that remained even when the profitability of US companies fell.3 This gap alone would imply a price-earnings ratio (P/E) multiple 20 percent lower. Even if companies in these markets had been growing three to five percentage points faster, their lower returns on capital still warranted a P/E discount of 10 to 15 percent relative to their developed-market counterparts. This discount has reversed in some markets in the wake of the economic crisis. Companies in China, along with those in India and Latin America, now trade at a premium to companies in developed markets (Exhibit 1).

In 2008–09, it was quite easy to write this development off as a temporary, liquidity-fueled anomaly. Investors wanted to be anywhere but developed markets. While companies in developing ones still had less transparent financial reporting and weaker governance, they generally had less risky banking systems as a result of stronger government controls. Also, governments didn’t have to prop up industrial companies, as the United States did in the automotive sector. Some major emerging markets, with their promise of high growth and lower cost bases, were perceived as safer than developed markets—though not all emerging markets were equally favored. Only China and India achieved the valuation premium for a protracted period; companies in Brazil and Russia traded at a discount to those in developed markets throughout the recession.

In China, the shift in valuations has not proved to be an anomaly. They remain at a 20 to 30 percent premium above those in the United States and the European Union—and the gap is not explained by a different industrial structure. On an industry-by-industry basis, the gap is even larger. In 2008, P/E ratios for Chinese companies in the industrial, consumer goods, and financial sectors were 9 percent lower, 22 percent higher, and 33 percent lower, respectively, than those of their US counterparts in the same sectors. In 2010, these companies had valuations 38 percent, 58 percent, and 6 percent higher than those of their respective US counterparts.4

A down payment on growth

If current valuation levels are based in economic reality, we should see evidence to support them—either some indication that operating performance will improve significantly in the near future or data supporting an expectation that growth levels will continue to outpace those of companies in developed economies. The data are not convincing on either point.

In fact, given the relationship between growth and P/E multiples, Chinese companies would need significant operating improvements to justify the current valuation level (Exhibit 2). Their returns on capital haven’t materially changed in the past decade (Exhibit 3), and very few sectors or company types have experienced a major improvement in returns on capital.5 When goodwill is included, the returns of Chinese companies continue to lag behind those of their US and EU counterparts by around 2 to 3 percent on average—about as much as they have for the past decade. When goodwill is excluded, the gap rises considerably: from 1999 to 2004, the returns on capital of US companies were, on average, six percentage points higher. Since then, our analysis finds that the gap has risen to between 13 and 14 percent.6

If valuation levels are not based on improved operating performance, they are, in effect, a down payment on expected growth. And it’s true that in this respect, Chinese companies have outperformed their counterparts in the United States and Europe for the past few decades. Yet since the crisis, there has been a general moderation in expectations for growth in corporate earnings and GDP in both the United States and China.

In fact, the gap between expected growth in the United States and Europe and in China is almost the same today as it was before the recession. This fact should come as no surprise. Chinese companies will have significant opportunities to export to developed markets for years to come; the crisis did not change their potential for growth in domestic markets; and many of them are now past the initial stage of rapid expansion. Over the short term, during the next few years, expected corporate earnings growth is actually about the same in China as in the United States and Europe. In the longer term, the gap between forecast US and Chinese growth is not much different from pre-crisis levels.

Living up to expectations

It’s possible that Chinese companies will make good on these higher expectations. Certainly, it will help if they can deliver the levels of growth that some analysts forecast. But growth alone won’t be enough; companies will need to improve their returns on capital as well.

Chinese managers interested in improving their returns will, in general, have to be more disciplined in thinking about how effectively their different businesses and growth opportunities use capital. That won’t be easy. A few companies are becoming more thoughtful about the way they prioritize investments and are bringing greater discipline to decision making. But when capital is freely available and the size of a company determines the personal importance of its managers—as is the case in China—the motivation for discipline in the use of capital is often weak.

Investors and stakeholders also have a critical role to play. The government is already exerting considerable administrative pressure on state-owned enterprises to improve their capital efficiency: on average, these enterprises lag significantly behind private-sector ones in returns on capital. The government can exert this pressure through the banking system, which remains the principal supplier of capital to the Chinese economy, and also through the State Council’s State-owned Assets Supervision and Administration Commission (SASAC), the agency that represents the government as shareholder in the state-owned companies. SASAC has for several years been working actively with its portfolio companies to improve their discipline in using capital. Public-market shareholders can also play a helpful role. If the importance of an issue like investment discipline is regularly reinforced through dialogue with companies, it will gradually move up the management agenda.

Companies hoping that stricter management of the corporate portfolio will improve returns might also employ a tool underutilized by even Western companies: divestitures and the restructuring of portfolios. Yet domestic M&A activity in China is extremely low by any metric, and divestitures by conglomerates are extremely rare. There is a potentially significant value creation opportunity here: divestitures create more value for the selling company’s shareholders than for the buyer’s,7 and sellers are more likely to get top dollar if they divest while a business is still strong.8 Our perspective is that selling noncore businesses isn’t a mark of failure or poor management—it’s a sign that managers are actively making a practical trade-off between increasing a company’s size and managing it more efficiently, which is what the markets are suggesting.

The Chinese government is mindful of these issues, which underlie much of the SASAC’s work to improve the performance of state-owned companies as well as the plans to create active bond and equity markets, reducing the banking system’s role in capital intermediation. The former creates pressure through administrative measures to use capital more effectively, and the latter uses market forces to encourage a more efficient allocation of capital and, by extension, to impose greater discipline on companies. This has been an objective of the State Council since the 11th five-year plan, in 2006, but events from 2007 onward slowed its progress. It’s likely to be back on the agenda in the 12th five-year plan, and the current focus on controlling inflation and domestic liquidity is also raising awareness that too much freely available capital can have unpleasant side effects.

It’s a critical moment for Chinese companies, whose valuations are high even as many reach the point where growth inevitably slows. Investors apparently remain confident that companies will be able to raise their operating performance, at least for now.

About the Authors

David Cogman is a partner in McKinsey’s Shanghai office, and Emma Wang is a consultant in the Hong Kong office.

Chinese Small Caps Predominate in SEC Investigation of ‘Back Door’ Listings

Posted in China - US Relations, Chinese Markets, Chinese Stock Trading on US Markets with tags , , , , , , , on 04/08/2011 by David Griffith

SEC official concerned with ‘back-door’ listings

By Ronald D. Orol , MarketWatch April 4, 2011, 11:39 a.m. EDT

A top U.S. securities commissioner on Monday said he was concerned about a recent wave in which private companies merge with shell companies as means of going public.

“This is a disturbing trend in capital formation and investor protection,” said Securities and Exchange Commissioner Luis Aguilar at an event hosted by the Council of Institutional Investors.

Aguilar, one of the SEC’s three Democratic commissioners, raised concerns about the trend of so-called “back-door” listings where a private company seeking to go public has its assets injected into a dormant shell public company and new capital is raised.

He noted that since 2007, there have been hundreds of such registrations in the U.S., including more than 150 by companies from China and in the China region. The Nasdaq has recently suspended trading in some of these companies. China Sky One Medical /and China Green Agriculture are among the shell companies that have had stock market slumps in recent months.

“We are seeing increasing problems with shell companies. While the vast majority can be legitimate businesses, a growing number have proven to have significant accounting issues,” Aguilar said.

He added that the SEC has set up an internal task force to look at fraud in overseas companies listed on U.S. exchanges including companies engaged in back-door registrations.

“The task force had yielded and will continue to yield results,” he said.

Aguilar added that Chinese companies employing a back-door approach to listing on U.S. stock exchanges have raised particular issues that bear scrutiny.

”There appear to be systematic concerns with quality of auditing and financial reporting,” he said. “Even though these companies are registered in the U.S., we have limitations when it comes to enforcing U.S. securities laws with them.”

To illustrate his concern, Aguilar said the SEC and private companies may have a more difficult time enforcing remedies and recovering investor losses when it comes to back-door listings.

“The persons to punish and assets that may satisfy a judgment may be located outside the U.S. and be harder to get to,” he said. “Remedies obtained in the U.S. may not be enforceable in other countries where the bulk of the assets are located.”

Aguilar also said there should be more of an emphasis on traditional capital-raising systems, insisting that the traditional system of iInitial public offering in the U.S. “remains the gold standard.”

“The SEC and public receives robust disclosures along with the time to review the material,” he said.